Kathryn House
Hello and Happy New Year. If you're a regular Talking Property listener, welcome back for our first episode of 2025. If you're new to the program, I'm Kathryn House, CBRE's Talking Property host, and to kick off the year, I'm excited to be sitting down with four Australian property leaders to get their thoughts on where they see the best market opportunities this year, what the potential game changers could be for our industry, as well as the biggest opportunities for industry transformation.
Deb Coakley
You can say it's a bit of a COVID hangover, but it's really an environmental impact to how we drive value out of our investments and what the true cost of developing is going to be now and into the future, and we need to adjust for that because I personally don't see it going backwards. It may stabilise, but I don't think those costs are going to go backwards.
Kathryn House
That's Deb Coakley, Managing Director of QIC Real Estate.
Ross Lees
The underlying growth trend in Australia just comes back to population. Driver one, two, and three is population growth, population growth, and population growth, and that really, I think, is going to support all forms of real estate.
Kathryn House
And that's Growthpoint CEO, Ross Lees. We did a similar property prediction series last year, but we are changing it up in 2025 by speaking to some of the new guard after leadership changes in the past 12 months at some of the country's top property platforms. We're packaging these up into two episodes, today's featuring Deb Coakley and Ross Lees. Then, stay tuned for our next episode on January 23 featuring GPT CEO Russell Proutt and Dexus CEO Ross Du Vernet.
To lead us off, I'm delighted to welcome QIC's Deb Coakley to get her views on the 2025 outlook. Deb joined QIC's $112 billion alternatives platform in October as Managing Director of QIC Real Estate. This followed 11 years with Dexus where she was responsible for managing the group's Funds Management business. QIC manages a significant portfolio of real estate with core and core plus exposures to retail, office, and industrial and has a continued focus on evolution and growth.
Deb, when you took on your new role, you noted that it was an exciting time for real estate, but that the landscape was changing. Against this backdrop, where do you see the best property market opportunities in 2025?
Deb Coakley
Hi, Kathryn, and thanks so much for the question. Look, I think there is a lot of change happening in the industry. Some of it we're right in the middle of and others are still on their way to come, and part of it has been driven by what I'd call environmental factors, so where interest rates and government settings, those sorts of things have landed over the last couple of years. We've certainly seen a shift in how we've had to think about real estate and real asset investing, so those things have...There's been a bit of a collision of them, and lots of people point to the post-COVID timeframe as kind of the start of that change. I think that's very true that COVID was sort of a catalyst for a lot of it but so has been the change in investor sentiment. So if you think about our investor groups, a number of our investor groups have gone from being, say, small to medium investors in the real estate and real asset space to actually very large behemoths with a lot of capital and therefore the ability to invest in really different things. So scale has become very important in real estate and much more important than our single asset style acquisitions and opportunities. But thematic investing as an example is what's really driving a lot of the investments and investment decisions we're seeing from capital partners globally, but particularly here in Australia.
Kathryn House
And how is QIC approaching that thematic piece? Are there certain thematics that you're particularly interested in at the moment?
Deb Coakley
Yes, absolutely, and that won't be surprising to the audience at all when you look at some of the headwinds that governments are facing around housing, for example, and generally in that living space. When you think about the need for us to all lean into things like AI and technology and therefore the impact on the investments in data centres, those sort of thematics are alive and well, and everybody's talking about them. But from a QIC perspective, we're really in a position where here in Queensland, but also around the country, we have some fantastic opportunities to unlock those themes but within precincts. And I think this precinct concept is, it's a really important one for us to explore because you don't again want single assets sitting out being orphaned. You want to be able to create precincts where you can have multi-asset style investments and get the scale that investors want and need from the investment opportunities that they have.
Kathryn House
And I guess a really great example of that is the Cross River Rail project that QIC is working on.
Deb Coakley
Cross River Rail is absolutely spot on for that sort of mixed-use and multi-sector style development opportunities. But I would say some of our regional and sub-regional shopping centres are equally ripe for that sort of investment, and part of the reason is they hold a lot of land. When you look at some of the larger shopping centres that are within the CBD or within the confines of some of our inner suburbs, they are generally landlocked. Whereas when you do head out a little bit further, you are actually looking at really large tracts of land. And so, the ability to combine things like those sectors that we just talked about in living, when you look at distribution and you look at education, healthcare, all the sort of needs that we know the communities have, some of these land holdings really give investors an opportunity to unlock a multi-sector precinct and really to benefit from the creation of communities.
Kathryn House
Yes, and that's probably a really good segue to a second question that I wanted to ask you around industry game changers. So I guess these precincts can be a real game changer for property and how we develop property, but do you see any other real industry game changers in the year ahead?
Deb Coakley
Well, I think what's changed for us all has been the drive for liquidity that a lot of our funds have faced, which has made us all reassess the assets that every fund should be owning. It puts a really strong performance lens then on the assets that you continue to hold in a fund. So I think most of us as fund managers have really had to scrutinise our portfolios because we have had to provide some liquidity, and I think some very good assets have traded in the market as a result. Equally so, I think one of the game changers for us all is really how we look at future investments and what technologies we need to be putting into assets going forward. And whether that's the sort of leasing CapEx to get a building up to standard in a commercial tower, for example, to re-lease it or whether you're in a brown or greenfield site and looking at the technology and the environmental credentials that you want to build into your base building to sort of future-proof it. Those sorts of things are really important and are featuring in the investment case. So yes, the dollars still need to stack up. No one is suggesting that there's a free ride here or anything like that, but equally so, that conversation about the technology and the types of assets that we're building are becoming more and more a daily conversation.
Kathryn House
And I suppose it's such a challenge because technology is advancing so rapidly and how you stay ahead of the curve must be an incredible challenge.
Deb Coakley
Look, I think that's right, but I'd suggest that's always been the case. You've always seen, whether it's been building materials or fit-outs and things like that, people's tastes change, technology changes, those sorts of things. What's important for us now though is to not put ourselves in a position where the asset isn't agile and agile enough to adapt to the fact that technology is probably changing much faster than they have before and so are the requirements of our tenants and our occupiers. So that agility that you can build into an asset does come at a cost, but I think it's equally important to maintaining the long-term investment value of that asset. So look, I think that's vitally important. I mean, if we think about an investment in industrial, go back 10 years ago, you certainly weren't talking about that being an investment in technology. I think if you're talking about industrial sheds these days, you are talking about an investment in technology and in the fit-out of that asset, so it is very much part and parcel of the ongoing conversation. I just think it's playing a more dominant role in those conversations.
Kathryn House
Yes, absolutely. If we are looking at the industry and areas that you think are ripe for transformation in the current market, what are your thoughts? Where do you see those key transformational opportunities?
Deb Coakley
Most of our cities are growing, and so we are transforming the city landscape. We are densifying a lot of the cities. We are needing to put in new transport corridors, which cause disruption in the short term, but opportunities from a real estate perspective generally in the long term. We are looking at the creation of new communities and precincts around the country. I think that's generally exciting. I think these are opportunities which are sort of generational and allow for generational development. So that's exciting for us in real estate, and it's exciting for our investors because I think those opportunities exist. Part of what comes with that though is the requirement to have a whole of community solution. So you do need government, you do need investors, you do need developers, and you do need managers all to come together to make sure that these new precincts and new ideas and opportunities do flourish. So to transform the industry, we've kind of got to be stitched together and do it together. And we've seen where that hasn't worked in the past where we've been looking at great ideas and great tracts of land where we just can't get services to it, or we've been looking at the opportunity because it's demand driven, but we can't get the supply there. And I think healthcare is a great example of that. We all know the demand for healthcare is there, but can we actually staff it? Can we get the doctors, the nurses, the specialists, the practitioners to where we think the hospital demand is? And so, that's why I say it sort of takes everybody coming together to create these new precincts and to really make some of these opportunities come to fruition.
Kathryn House
Yes, because we have had all of these issues such as the skill shortage, such as construction costs. Definitely, that demand is there, but it's how we deliver on it.
Deb Coakley
Well, you've hit on a great topic there, which is construction costs. And I'm sure you won't go through any of these conversations with any of your speakers without hitting on that one. It's sort of, again, you can say it's a bit of a COVID hangover, but it's really an environmental impact to how we drive value out of our investments and what the true cost of developing is going to be now and into the future, and we need to adjust for that because I personally don't see it going backwards. It may stabilise, but I don't think those costs are going to go backwards.
Kathryn House
Yes, particularly when we've got so many infrastructure projects that are happening around the country and particularly in Queensland where QIC is based.
Coakley
Yes, I think that's true, but I would just say it's overall demand. I mean, if you think about the requirements, and we've just talked now about what are some of those tailwinds really driving developments. We're talking about in healthcare. We know we've got population growth. We're talking about in education. We're talking about it in living and housing. You add the requirement for infrastructure to be able to create these precincts, to be able to make cities more livable, to cope with those demands. Whilst everyone says, "oh, it's all about infrastructure. That's where they're sucking up all the resources," I think what's actually happening is you need the infrastructure to then build the precincts to allow the people to get there so the hospitals have staff like that whole... It's about bringing everyone together to really plan as well as we can, to invest where we can, to sequence things where we can to ensure that we actually can get really great projects up and running.
Kathryn House
I love that idea of us all being better stitched together. I think that's what everyone in the industry would really love to see moving forward. I think there are so many exciting projects that QIC is working on, so I'll be really interested to see how that all plays out. I hope you have a great 2025 and exciting to have you in that role. So thank you so much for joining me on Talking Property.
Deb Coakley
Thanks, Kathryn.
Kathryn House
So I'm now joined by Growthpoint CEO Ross Lees. Welcome Ross to Talking Property.
Ross Lees
Thanks very much for having me, Kathryn.
Kathryn House
So Ross, you commenced with Growthpoint mid last year as CEO and Managing Director, bringing over 20 years of real estate investment management experience, including your role as head of Funds Management at Centuria Capital Group. At Growthpoint, you're overseeing about $6 billion of assets under management and a group which directly owns and manages around $4.4 billion of office and industrial assets as well as assets for wholesale syndicators and institutional investors. Through this lens, I'd love to hear your outlook on where you see the best market opportunities in 2025.
Ross Lees
Well, there's a lot to choose from in 2025, and I guess the menu of real estate opportunities just keeps getting broader and broader, and we've seen a number of new asset classes come in over the last few years in which to think about where the best opportunities may come from. I think from the perspective we're looking at the world into, I guess, into calendar year '25 is what are the opportunities going to provide growth underlying the assets? And I think there's a lot of noise that's going to come around the interest rate cycle and where we are in that interest rate cycle, and that's largely out of our control. As much as we want to manage gearing and get debt costs down, it's really at the behest of the RBA. So that really then turns us to what are the assets going to provide good quality growth coming through those underlying cash flows and what's the most positively disposed to those growth trends? And the underlying growth trend in Australia just comes back to population. Driver one, two, and three is population growth, population growth, and population growth, and that really, I think, is going to support all forms of real estate. And I think when you look across the spectrum where we sit from operational real estate, we're in a pretty good place.
Kathryn House
So against that backdrop, where will Growthpoint's focus areas be?
Ross Lees
I think for us, we're probably a little countercyclical to some others on this. We're really optimistic about the office sector coming into calendar year '25 and probably more so the year beyond that, calendar year '26. I think it's a sector where we've seen yields come off and across the asset classes we've probably got the highest yield coming out of office today relative to all other opportunities that exist. There's the widest spread, if you like, to the borrowing cost, so you can actually positively gear an office asset, and it's much harder to do that in some other asset classes at the moment. And then, from a growth perspective, we do believe that there's still one to two years of difficult leasing to come in office, but if you can buy the assets and be invested in the assets that get you through that next two years, we think there's a pretty optimistic pathway ahead.
Kathryn House
Talk us through the logic behind that.
Ross Lees
If we look at office vacancy in Australia today, it's about 15%. That's the number we're working with. And if you go to the Property Council stats, that tells you it's about four million square metres vacant. Sounds like a lot, and it is, and it's probably too much for where we need to be. But in office markets, we tend to work with an equilibrium vacancy rate of 7 to 8%. So we need to halve that vacancy rate before we start seeing growth. And when you start breaking down the numbers and you say, "okay. Well, we've got four million square metres vacant, we really need that to look like two million. So two million's got to get taken up." You then say, "well, what's the workspace ratio of an employee in an office building in Australia today?" And we usually work with that one to 10 square metre rule. So it says 200,000 bums on seats, and you're back to a growth environment in office. Now, we've just had 500-600,000 people come into the country last year. Our population growth forecast is the highest in the developed world. So over the next five years, we can foreseeably have three million people in the country that weren't here yesterday. A number of those would be white collar workers. When we look at the white collar employment growth numbers for calendar year '24, we added about 130,000 white collar workers in calendar year '24. So two years of that, and our vacancy rates are back to 8%. And the supply side is just so hard to bring on, and the cost of where that supply has to come on is so much further above the in-place rent. You're talking a 50 to 60% lift from where rents are today to bring that supply on. And I think when you look across all the other asset classes, that's the widest gap.
Kathryn House
And are you seeing much divergence between the city office markets?
Ross Lees
The office sector macro, there's going to be pockets of it that are harder and pockets of it that are easier. I'm doing this podcast from Brisbane today. Brisbane's got single digit vacancy rates already, and particularly markets like the Brisbane Fringe, there is no supply under construction. So that's an acceleration of that trend. Melbourne, on the other hand, is going to be much slower. They have too much vacancy. There's been an undisciplined creation of new supply down there by some developers over the last few years, and that's going to take a bit longer to soak up. So they're the bookends, but there's a macro perspective. Our view is that office late '25, '26, '27 is going to look very different to what it did in '24 and earlier.
Kathryn House
I was interested to read a story where you were talking about offices in city fringe locations and that you see that as a really kind of positive investment opportunity. Can you talk us through that? Because I guess I would've always thought CBD as opposed to fringe.
Ross Lees
I think the two major themes that we pick up on is flight to quality and flight to value. And the fringe or the metro markets can easily be poorly described and thought of as sort of ramshackle buildings with a mum and dad accounting shop and a ground floor retail tenancy and that sort of short-term, low tenant quality asset, where the reality is over 70% of Australia's office stock is outside of the City of Melbourne CBDs. And we're in markets like Fortitude Valley here in Brisbane. In Sydney, it might be Crows Nest, Macquarie Park, and St Leonards, those kinds of markets. They're deep markets that are very relevant to tenants that can get A Grade space much more affordably than what they can in a CBD market. In Sydney, for example, you're in, let's call it Crows/Nest St Leonards for, say, $700 a metre for A Grade space. That equivalent space in the CBD is double the price. So for tenants that don't need that CBD location, but they want a high-quality corporate offering, they're usually getting larger floor plates. It's very attractive to those occupiers. In the markets we're invested in, we typically own A Grade buildings, so we're seeing in the current market tenants trading up the quality scale, and then they're also looking for value. So the other statistic we find quite interesting is about 80% of tenants when they relocate stay in the same market. So there's not a huge example of people saying, "okay, we're now a CBD tenant, and we weren't yesterday." The reasons they're in these markets are typically for their customer base, their workforce, and as I said, getting very high-quality stock at a price that's lower than CBD. And if you actually go and pull the data out, and in the four years since COVID, the two best performing office markets in Australia are the Brisbane fringe and the Melbourne fringe. They've had the greatest amount of net absorption in the four years post-COVID. The two markets with the worst net absorption post-COVID have been the Sydney CBD and the Melbourne CBD. When you go to the non-CBD, you tend to find we've got a huge proportion of government tenants. We've got major corporates that are much more stable businesses. The rent isn't as high, so they don't need to flex it as much, and we see less volatility through those markets. And I think something I commented on there is government, and government's a huge occupier of these non-CBD markets, and they're a fantastic payer of rent in a business where ultimately, we want to be driving cashflow out of our assets.
Kathryn House
Well, it's good to hear some positivity coming through on the office front. I think we've all been looking forward to that. So another thing that I'd be really interested to hear from you about is industry game changers. Do you see any game changers this year?
Ross Lees
Look, I think there'll be a cliche, I guess, of AI and what that means for everyone in real estate. And I think it's got a few downstream benefits beyond just how it makes you work a little better. We're going to see increasing requirements for data centres, and they're not a part of the market that everyone can access. The price to play there is huge. In assets, probably at least a billion dollars to play in that space, so getting access to the asset class is tricky, but what we will see is those data centre groups taking land out of the market that was otherwise used for industrial. So when we're seeing some land sites come up for sale, it's the data centre group that's getting it. So it's going to put pressure on the supply side of our markets going forward. So rather than the building becoming a shed, it will be a data centre, and that's going to put pressure into the markets. And then, I think there's the other general questions around from a real estate operational perspective, how AI's going to make life easier, and that's going to be everything from how we're looking at reviewing leases and doing lease administration into how you're thinking about tenant interfaces and tenant portals. So I think there's a lot of pieces are going to come out of it. The tricky thing is going to be how you govern it, and the governance piece on that has a lot of implications, but I think the efficiency potential of it is pretty significant. I kind of jokingly look at it and say, "yeah, when the calculator came in, people didn't keep using the abacus," and we now have this at our fingertips. And when people start harnessing it, I think there'll be some great efficiency advantages to come through.
Kathryn House
Yes, and some real productivity gains.
Ross Lees
Yes.
Kathryn House
So a good segue then to where you see opportunities for innovation. So clearly, AI is one of those, but are there any other areas where you see that there are some real innovations that could come in?
Ross Lees
The innovation piece, I think what I'm hopeful to see is in the environmental space, and we've got a plethora of ratings out there that are quite hard to keep up with, which one is meaningful to whom. There's endless surveys and scores we're trying to get to. But the one for me that's probably frustrated me over time is you've been rewarded for building new, and the Green Star rating has been a rating you can get for a brand new building. And if you have existing assets that might be getting the NABER scores or whatever they might be getting, you're not able to get that Green Star certification for really an existing 40 or 50-year-old asset because it's a certified as-built rating. And it's probably encouraged some corporates to go to a new build rather than repurposing an existing building. And when we're looking at carbon emissions and a net-zero world, that embedded carbon or embodied carbon, however people want to describe it, that sits within the asset. That's not being factored in when people are moving out of the old building and going to the new. So I think the more that comes in around how we're now measuring embodied carbon, office is the classic of a new fit-out is good for five years, and then it's back into landfill. How can we repurpose fit-outs? How can we reuse existing buildings, not create the new supply, use what's there, and find ways to put scores around that so people can actually go into those buildings? So I think that's the piece of innovation. I think we're seeing more on it, a few more brown to green strategies as they're called. We've just invested in an asset for our high net worth investors, and our two key value-add initiatives are what we're calling brown to green through a net- zero pathway at the asset level, full electrification of the asset, and ultimately then feeding into what we're seeing as federal government requirements through getting the NABER's rating up to 5.5 stars. And that way, we can take an existing 40-odd year-old asset and say, "this is actually fit for purpose for federal governments into the future. We've got a five and a half star NABER's rating, and we're not having to cannibalise an existing building to get to those levels." And that should make some of those assets more enduring into the future.
Kathryn House
Yes, and I think it's that incentivisation piece is so important. So how can we better incentivise landlords and owners to be recycling assets?
Ross Lees
That's right. And I think one thing that tends to happen over time is often the government does front run these things, and it's their own requirements that then start pushing through when they’re a major occupier of office space, and then that starts permeating through the market. So we've seen some new Federal Government guidelines come out. They're quite positive on, again, the office space and how they're evaluating the footprint, not just the new build score. And I think that's going to be quite good for people to have to adapt and then be pushed through the industry.
Kathryn House
Well, thank you so much, Ross, for taking the time out to join Talking Property today. I think it's going to be a really exciting year. I look forward to seeing what you're doing on that brown to green front. I think that is really exciting and looking forward to a lot more positivity in the office sector this year.
Ross Lees
So are we. Thank you very much, Kathryn.
Kathryn House
And thank you to our listeners. I hope you enjoyed part one of our Property Prediction series to kick off '25. If you like the show and want to check out more, you can visit cbre.com.au/talkingproperty or follow us wherever you get your podcasts so you don't miss the second part of our prediction series featuring GPT's Russell Proutt and Dexus' Ross Du Vernet. Until next time.
