Kathryn House
Hello and welcome to Talking Property. I'm your host Kathryn House, and thanks for tuning in to the second installment of our 2025 Property Predictions Series. To kick off the year, I'm chatting to four industry leaders who've recently taken the helm of some of Australia's top property platforms.
Ross Du Vernet
We like sectors where there's noise because that creates different views between buyers and sellers and that creates investment opportunities.
Kathryn House
That's Dexus CEO, Ross Du Vernet.
Russell Proutt
The move toward private capital, the activity and role of private capital in our markets, which will be actually transformational for the industry. There's other considerations for AI and digitisation is absolutely relevant as far as investible opportunity, but again, that will also be driven largely by private capital as we've seen already with some large transactions last year.
Kathryn House
And that's GPT CEO, Russell Proutt. I chatted to Ross and Russell following our first 2025 Property Predictions episode featuring the Managing Director of QIC Real Estate, Deb Coakley, and Growthpoint CEO, Ross Lees. You can find a link to that episode in our show notes. Leading us off is Dexus CEO, Ross Du Vernet. Dexus manages a high-quality real estate and infrastructure portfolio valued at $54.5 billion, directly and indirectly owns $14.8 billion of office, industrial, healthcare, retail, infrastructure, and alternative assets, manages a further $39.7 billion of investments in its funds business and has a huge real estate development pipeline. Ross took the helm last year after more than a decade with the group, succeeding long serving CEO, Darren Steinberg. Here's our conversation.
Kathryn House
So to kick us off, I'd love to hear where you see the best market opportunities in 2025.
Ross Du Vernet
We can't tell the listeners all of our secrets for 2025 but we'll give you a bit of a flavour at a macro level. I think big picture, this is a great time in the cycle to be investing. For those of us who have been around, we appreciate that these markets move in cycles and how the conditions are lining up right now and the fact that capital is a little bit harder to come by right now. I think that actually presents some really interesting opportunities. So I think macro level, it is a good time to be investing. You've got to sometimes cut a little bit against the herd, so to speak. If we take the Australian context, Australia, we've got some fantastic assets. It's usually pretty contested to get access to these high-quality assets, but right now we find ourselves in a bit of a unique circumstance that you can get these high-quality assets that I'm talking about, the best assets in each of their categories at pretty fair prices. In a normal market cycle, these assets just simply don't trade. Why? Because they're so tightly held and the capital structures for a lot of our entities that own these core assets don't create distress and you compare to what's happening in maybe some of the other markets, you are getting a bit more distress in those areas. But I think in the Australian market, that's not so much the case, but that does present some interesting opportunities for people to buy these great assets at fair prices. So, I'd say macro level, it's a good time to be investing and I think that particularly those high-quality assets are what is going to set investors apart in this next part of the cycle. And for us, we really do see across each of the sectors that we're investing in, our expectation is that these top quartile assets are going to really differentiate from a performance point of view. So, ensuring that you get your hands on those would probably be a priority if I'm an investor.
Kathryn House
How much are you competing with offshore capital at the moment? I know I looked at our numbers on capital flow this year and there seems to have been a creep up in offshore investors buying these assets. Are they your main competition?
Ross Du Vernet
There's competition everywhere. I think we're very fortunate as a platform, we do have a lot of institutional capital that supports us. We have more than 150 institutional investors on the platform. They're both domestic and offshore. For the offshore investors, I think Australia does screen really attractively. If the baseline fundamentals, given the population growth, GDP outlook, rule of law, et cetera, et cetera, all puts Australia in a really solid position for those global allocators of capital. And as I said earlier, the fact that in a normal market cycle it's very difficult for these pools of capital to get invested in high quality assets. So I think that is why Australia's screening very well. I do think you will see a greater influx of offshore capital coming in this next part of the cycle. And I think that's exciting particularly for platforms like ours who have those relationships offshore.
Kathryn House
And as one of Australia's largest office landlords, it would probably be remiss of me not to ask, office has been that sector that has probably been hit hardest in this cycle. What's your view on office right now?
Ross Du Vernet
I think certainly office valuations across the board are down anywhere between 25% to 30%. But what I would say is that all of the sectors I think right now are presenting interesting opportunities because they've all got their own, I won't say headwinds, but there's things happening in each of those sectors. So whether it be the work from home trend and how that's affecting office demand, whether it be industrial’s had a dream run for the last decade, but we're now seeing after record low vacancy, certainly here in Sydney, we are seeing some supply coming back to the picture. So that's creating some interesting dynamics as well. Retail's had some long-term headwinds in terms of online sales penetration and pressure there. So I think all of the sectors have got their headwinds. Office is really interesting for us right now because the "office is dead" argument is certainly over. And I think the return to the CBDs, the return to office and a lot of employers really recognising that the labour market's still tight and what most business wants to do is actually drive productivity and people are a big part of that. And so what's that secret source of how each business wants to work and what's the role of the workplace is evolving. But the trends that we certainly see, and this is an interesting thing for office, is that productivity benefit is more than just building grade. And I think we've been through a period where investors probably rated a building based on its PCA grade definition and not necessarily where it's located, what's the amenity of it? And you're going to see some interesting performance metrics I think come out of the next few years as you see, you could have the best premium grade building in the wrong location and it's not going to perform that well compared to maybe a good A-grade building located in a very core location with good transport infrastructure, and amenity around the building. It doesn't have to be all in the building itself. So, I think offices, we like sectors where there's noise because that creates different views between buyers and sellers and that creates investment opportunity, and I think office has certainly got those characteristics in it. But as I'd say, I think all of the sectors have things going on which make it an interesting time to be sifting through that and investing and, as a platform, as I know a lot of the other groups you're talking with on this podcast with deep local expertise, that really does enable you to identify those trends and hopefully pick the winners.
Kathryn House
So Ross, I'm also really interested to hear what you think could be an industry game changer.
Ross Du Vernet
Industry game changers, I think...
Kathryn House
I know. It's a tough one.
Ross Du Vernet
That's a big question. Look, I think rates turning, and probably a bit simple, but I do think change of the rate cycle is going to see capital markets, which have been locked up really since COVID, I think they're going to unlock and I think that's going to create more capital flow, more transactions, and I think that's going to be interesting where prices really settle for a number of these assets. And as I had mentioned earlier, we had really record low rates and investment supply was really quite constrained for a long period and that meant that you got mispricing of risk. You had B and C-grade assets demanding similar cap rates to some of the best assets in the city and you saw that across all the real estate sectors, whether it was in retail, office, industrial. That's all unwinding very quickly, but I don't think anyone really knows where those prices are going to settle because the capital markets have not been functioning normally because buyers have been sitting on the sidelines. Rates turning, I think you'll see that start getting deployed and we'll see where prices hit. I don't know if it's a game changer, but I think it's going to certainly see more transaction activity, which I think everyone will be quite pleased with.
Kathryn House
Absolutely. I did see you quoted in a story in The Australian recently about interest rates, and you were saying that you're expecting we'll probably be in a long-term higher interest rate environment. You would hope maybe not, but that maybe looks like the outlook?
Ross Du Vernet
You can't build your business around bond yields being sub 2%. I just don't think that's realistic. I think all investors globally are resetting their return expectations from all their asset classes, not just real estate, from infrastructure and what they expect out of fixed income, equities. So, I think we are in a high return environment moving forward. The thing for real estate investors and real asset investors is, what component of your return in this last part of the cycle was driven by, let's call it, cap rate compression as opposed to fundamentals. And I think if everyone's honest with themselves, a lot of the returns were driven through metric compression, not through good fundamentals. So for us, we are really focused around, we can't rely on that. That's nice if it happens, but we've got to ensure our business is set up in a way to drive that performance through the assets. So good leasing, good OpEx management, good CAPEX management. Asset selection is going to be really important in this next phase of the cycle. All the assets are not going to perform the same. And so, I think that's really how we've reorganised our business to ensure we're set up to drive that type of performance in this next part of the cycle.
Kathryn House
So Dexus has always had a focus on innovation. So last question, I'd also love to hear your thoughts on where you see those innovation opportunities for our industry.
Ross Du Vernet
There's opportunity everywhere. I think this is the great thing about working in our industry. Look, I think at the asset level, and this is true for all sectors, there's great opportunity to get more connected with your customer, the end user, and how do you understand what role the real estate or infrastructure asset plays in their business? And all of our customers, their businesses are going through enormous change as well. And so how you get a better customer orientation and you really understand what's the role or the purpose of that piece of real estate or that asset in their business and, how can you service your customers better? And to be fair, retail as a sector has probably done this the best and been forced to do this with all the changes in disruption with online. But I think there's more opportunities in retail. There's certainly understanding from a logistics point of view. Arguably in a world where vacancy rates have been zero, at least here in Western Sydney, hasn't forced you to be that disciplined around really understanding your customer's supply chain. I think when there's a bit more vacancy in the system, actually understanding, how does your asset fit into your customer's supply chain? What are their actual costs? How do you think about what's important to them is a good example. So how you use data, analytics, how you get closer to your customer. And office as well. I think that's an easy one to sit there and say, "well, if you're trying to work with your tenant customers and think that you're leasing them long-term empty space and you don't have any regard to actually how that space is going to help your customer to drive a more productive workforce for them to achieve their business outcomes, I think you're going to be in a pretty limited position." That whole customer orientation, I think is a huge opportunity for all of us, no matter what sector you're in. The other one is actually, just from an investor's perspective, I is it real estate? Is it infrastructure? Those worlds are going to meld into a real assets approach. And we can certainly see that with how a lot of our institutional investors are organising themselves from a team's point of view. And I think they're not trying to allocate it out of one bucket or the other. They see that as being an allocation to essentially illiquid assets. And I think that's quite exciting for us as to,what opportunities does that create? And certainly, with our business we've set ourselves up as being a real estate and an infrastructure investor, and I think that's going to create some interesting opportunities as well.
Kathryn House
And I think you've certainly seen that with the data centre space. If you turned back some years ago, people would say that's infrastructure. Now people are saying it's a combination and you're getting investors from both sides of the fence who are buying into those types of assets.
Ross Du Vernet
Yes, I think it's one of the best examples. I know some of the participants in that process. They had their real estate teams working with their infrastructure teams to essentially underwrite a data centre business, which is an asset rich business. So, I think it's true in data centres, student accommodation. Even things like airports, at least in the Australian context, about a third or thereabouts of the earnings out of those airports is real estate related. So, I think that's quite interesting. Again, when you come back to what's going to drive investment performance in this next part of the cycle, it's more likely to be those asset management techniques, those strategies, that asset selection more so than just relying on a re-leveraging assumption or a metric compression assumption. I think all those things are pretty exciting and interesting for us.
Kathryn House
I had one last question on that innovation front, and it's based on an article I read in AFR's Chanticleer. And you did a bit of a Sydney walk around with them of some of your office towers and you were talking about your plans to shake up the way that tenants, landlords, and investors think about office space and particularly fit outs. Is that something you could quickly talk me through?
Ross Du Vernet
I can't reveal all our secrets in advance. No, look, I think this is something I'm quite personally passionate about, but the waste that exists in fitouts is extraordinary and it's something that the industry as a whole has not owned up to, whether it be the financial waste or the environmental waste. And we see it as a landlord because we own these assets for let's call it 20, 30, 40, 50 years. So, we see what happens at the end of it, at least when a customer leaves. And often the customer, at least in the old model, has been responsible for making those decisions around design and delivery of fit out. And as I say, that comes at enormous financial cost, but it comes at enormous environmental cost as well. So, there is a better way to do it, and it does actually play to these trends around how customers want, they want more turnkey type solutions. They don't want decision makers. And businesses today, they don't want to sit there, and I think have a really elongated purchasing process and they don't want all the hassle that goes with appointing an architect, appointing a project manager, appointing a builder, going through the detailed design. That's not their core business. And I think they've been forced into doing that because the options available to them and the preparedness of landlords to roll up their sleeves and deliver solutions as opposed to vacant space hasn't really been there. Now, all of the landlords in this space I think are alert to this issue and I don't think we're going to be on our own in this space, and I think it's good for customers and it's good for our investors and it's good for the environment. So, it seems like an obvious place for us to lean into and certainly encourage all of our peers in the space to do the same as well.
Kathryn House
Well, it sounds like there's lots to keep an eye on. Thank you for joining Talking Property, Ross. I really appreciate you taking the time out.
Ross Du Vernet
Thanks Kathryn.
Kathryn House
To complete our lineup, I'm joined by GPT's Russell Proutt. He's a 30-year veteran of the property, finance and investment banking sectors who was at Brookfield Asset Management for 12 years as a Managing Partner in Canada, then Australia, before joining Charter Hall in 2017 as Chief Financial Officer. He started in his new GPT role last year, taking the reins of a property business with more than $32 billion in assets under management. Russell, welcome to Talking Property.
Russell Proutt
Thanks Kathryn.
Kathryn House
So Russell, it's been almost 12 months since you took the GPT helm. I'd love to get your insights on where you see the best property market opportunities in 2025.
Russell Proutt
Maybe I'd start with, we think this year will mark the return of a more balanced competitive dynamic in the Australian property market, and we expect this will see the removal of the first mover advantage and more competition and normalised process for assets. So, our view is that by the third quarter, there's going to be much more transaction activity pretty much across all sectors. Now, as far as where we think there's specific opportunities, I'd probably highlight two areas. The first one is the current environment still offers the rare access to high quality trophy or forever properties that have strong through cycle cash flow resilience and enduring capital value. Typically, these assets aren't really available without a strong premium during normal market conditions or become available at points of dislocation through the economic cycle, which we're starting to come out of late into '24 and into this year. And we're starting to see early indications of these assets being available, but the window will close quickly and will close until the next cycle turns again. I think the second area where we think it's very interesting is really taking a contrarian view where there's some temporary externalities that get in the way of some of the underwrite and pricing of risk. And if you can look through this noise and price that risk, we think it creates tremendous opportunity. So maybe two areas I'd point to would be the uncertainty and the changes around government migration policies. The obvious impact is around the student accommodation market, which we're involved in, but also there's knock-on effects throughout the sectors including logistics, office, and retail, all in which we operate. And I think another example and is one I think everybody in the sector is more than well aware of is what's happened in Victoria where the absentee owner surcharge tax has damaged return profiles for investors and effectively sidelined many foreign investors, if not all. But it's created a capital vacuum, which we think could be seen as more of an opportunity than a challenge. We see this as presenting a strategic opening for domestic buyers and partners of ours to capitalise on reduced competition in the market despite really no long-term change in the underlying property fundamentals, if you believe these influences are temporal.
Kathryn House
Yes, it's interesting because we have seen offshore investors being a little bit more active maybe in 2024 than domestic, but really interesting to see that point of view that there is still that real opportunity for domestic capital where you can find the right partnerships.
Russell Proutt
And that offshore capital has been more active, or was more active last year, and we expect it to be more active in '25, but it's really manifested itself in New South Wales as typically Victoria, New South Wales represents the first stopping off point for foreign capital, and with Victoria seeming to be challenged from a returns perspective and almost sovereign risk perspective makes New South Wales that much more attractive.
Kathryn House
Absolutely. So Russell, I'd also be really interested to get your take on where you see the biggest opportunities for property industry transformation.
Russell Proutt
Yes, they talk about transformation in the property sector. It usually doesn't change that quickly.
Kathryn House
Yes.
Russell Proutt
However, more the typical or obvious answer is to speak around digitisation and the impact of AI, what that's doing to operational efficiencies, data centre demand. But I think the area where we see more transformational influence is what we see in the private institutional capital sector. Private capital is already the dominant form of institutional property ownership globally, far outpacing the scale of publicly traded or listed real estate companies. And this year and beyond, we will see further innovation and strategies, structures that private capital employs to achieve their investment objectives. In recent years, during this global real estate industry reset, as I call it, we've seen private capital's role increase in areas like private debt, but we are now starting to see that shift back to real estate equity as relative returns become more attractive and scalable for investors. We see the industry opportunity and challenges in how we respond and engage with private capital as their needs vary and the sophistication of their investments evolve. We're all familiar with open and closed pooled funds, non-traded REITs, partnership and club structures, but we've seen more investors move toward direct property ownership, either managing internally, if they have the sufficient teams and resources, or using managers through mandate agreements. However, within each of the structures there's variance across terms in every market, whether it be liquidity, fee structures, investment styles, return requirements, and within each of those elements are components. There's also constant evolution. So ultimately our success will be relying on being able to respond and match capability with those investors. So, I think it's the private capital, the move toward private capital, the activity and role of private capital in our markets, which will be actually transformational for the industry. Those other considerations for AI and digitalisation are absolutely relevant as far as investible opportunity. But again, that will also be driven largely by private capital as you've seen already with some large transactions last year.
Kathryn House
Yes. And you're setting up those capital partnerships, that's quite a focus for GPT, isn't it, in how you're going to grow your business?
Russell Proutt
Absolutely, and we already have about a $22 billion funds management business in addition to our assets directly owned on balance sheet. But going forward, it's a key element of our strategy to align our capital and invest alongside our partners.
Kathryn House
So, I'd also be really interested, and this is a bit of an extension to the last question, but to hear what you think could be a real industry game changer.
Russell Proutt
I think if you look at the influence and impact on what we think is going to be a revitalisation of the central business districts that have taken a hit post-COVID to reshape the market, not just this year but beyond. I think I would draw parallels to what happened in the retail sector and its resilience during and through the recovery of the last cycle. And we believe, similarly, the predictions of the office sector's demise have been greatly overstated. The sector is currently stabilising and adapting to a new normal based on good old real estate fundamentals, whether it be location, quality, and amenity. And whilst we all have seen the flight to quality, we all see a potential for a period of structural under supply lifting the broader market and as development economics impede new construction. There's also a positive influence. I mentioned government policy impacting investability of sectors. Governments are also supporting this revitalisation by investing in urban renewal initiatives that transform CBDs into more mixed-use environments. These programs integrate residential, cultural, green spaces, and they boost livability and redefine the urban landscapes. And you've seen that not just in Australia but around the world. We think this evolution will recalibrate the value of both new developments. but also existing assets in built form. The challenge really lies in the pace of capturing the economics and realising on the true underlying economic rents for your assets.
Kathryn House
And I think that's something that our Head of Research, Sameer Chopra, has been looking at, is the economic rents and when you delve into that, there's a real boost for the industry looking forward if you focus in on what those underlying rents show.
Russell Proutt
Yes, just like it always is through cycles, it's a matter of timing and being able to capture those rents and the relative balance between supply and demand. So again, a lot of the hyperbole that we saw coming out of COVID and the end of office, not dissimilar from online purchasing and the end of retail, you essentially have natural environmental dynamics that are going to define what the economic return profile will be of pretty much every asset class. And right now, the focus now is on office, and how that absorption works going forward.
Kathryn House
And I think we're certainly in a different position to some other markets. If you look at us versus the U.S., we've certainly seen a stronger return to office profile and it'll be interesting to see how that plays out this year.
Russell Proutt
Yes, the U.S. has such a variety and difference of CBDs and city profiles, but as you've seen in New York, for example, which is obviously a financial centre or the financial centre, you've seen a much better return to work profile. Cities though like New York and London have a different value equation on commuting. It really is city specific, but the Asia Pac region generally has a very high return to work profile for varying reasons depending on country. And Australia actually is compared to, like you said, North America and even a good chunk of Western Europe, looks very much back to a more normal environment.
Kathryn House
Well, thank you so much for joining Talking Property, and all the best for 2025.
Russell Proutt
Thank you Kathryn.
Kathryn House
So that's a wrap for our Property Prediction Series to kick off 2025. If you like the show and want to check out more, follow us wherever you get your podcasts. That will ensure you don't miss our Q1 episode of The House View, which will go live on February 6, featuring CBRE's Pacific CEO, Phil Rowland, and Pacific Head of Research, Sameer Chopra. Until next time.
