KH:
Hello and welcome to CBRE's Talking Property podcast series. I'm Kathryn House, CBRE's Australian Communications Director, and I'm your host for this special outlook series to kick off 2024. I'm excited to be sitting down with eight of the country's leading property players to get their thoughts on where they see the best market opportunities this year, as well as the biggest opportunities for industry transformation. Last week I spoke to Charter Hall’s David Harrison, CBRE Investment Management's Alex Crossing and Lendlease’s Dale Connor. And today I'm welcoming ISPT, Brookfield and Investa. Make sure to also tune in next week as we wrap up the series with Aware Real Estate and Aliro. I'm pleased to now be joined by ISPT'S CEO, Chris Chapple. From its establishment in 1994 by some of Australia's leading industry superannuation funds, ISPT now oversees a $21.5 billion portfolio of 140 office, retail, industrial, education, health and residential properties. The group is also committed to taking a leadership position within the property industry to create a more sustainable future. Chris, you took over the CEO role in 2022 and have since developed a transformation plan for ISPT. So, I'm really looking forward to finding out your views on where the best opportunities lie in 2024.
CC:
Thanks Kathryn. Great to be joining you today.
KH:
So, talk me through it. Where are the opportunities do you think?
CC:
Well, Kathryn, 2024 is actually shaping up to be a year of opportunity. Yes, there are challenges, and I think we hear lots about that in the media. But certainly, what we have is a number of high conviction thematics on our radar, including health and life sciences, living - specifically build-to-sell - and also industrial. And what's driving that? There are several mega-trends that underpin our high conviction thematic but in particular what we're watching is the demographic shifts within Australia's population growth, particularly the ageing population, which is obviously a big trend we've seen with that baby boomer part of our population. So, when you look at the stats and you know, Australia's population is due to grow by about 20% over the next 13 or 14 years, and that's certainly a big key driver for the property sector and underpins a lot of demand in those high conviction thematic sectors I mentioned.
And so, when you look at those three, and if we kick off with health and life sciences perhaps, we're actively investing in that sector, and we believe there's more opportunity to come in 2024 and beyond. And when we talk about healthcare and life sciences, what we talk about is investment in assets like private hospitals, medical precincts, innovation districts and seniors living in care. And the sector fundamentals are good, they're actually really good. They're underpinned by, as I said before, ageing demographics, population growth. And when you also look at the fact that 70% of the funding for health goods and services come from both federal and state governments, complemented by funding through private means, there's such a stable base of income that comes into that sector. And so, given that healthcare costs and expenditure are going to continue to keep increasing, we also think that the innovation around this and the partnerships is where we see the huge potential.
And when we look at the things and the opportunities that we're investing in at ISPT, like the Health Translation Hub at Randwick alongside our investment partners and partnering with University of New South Wales, we definitely see more of those opportunities coming to light next year and beyond. So, the outlook for that sector is strong, the health care and life sciences sector is strong. It's got defensive growth characteristics that are unmatched by other sectors of the economy. Secondly, if we look at the supply and demand fundamentals, we see some really interesting opportunities in the living sector. In particular, we're talking about the build-to-sell sub-sector of living. As I mentioned at the outset, Australia's population growth is really one of the key macro trends that we're looking at that underpin this high conviction thematic for us. Our total population is forecast to grow by over three and a half million people over the next decade, which is a huge increase on our existing population.
And that means that we need to deliver over one and a half million new dwellings just to house those new people coming into Australia. So, we couple that long-term demand growth story, which we're seeing through the population growth. And we couple that with the likelihood of supply shortages over the next three to five years and it really represents a great opportunity for us to deliver new supply into the market. And in addition, when we look at the nation's vacancy rate, which is currently sitting around 1%, we believe that's indicative of the early phase of expected above average annual rental growth. So, there's really a perfect storm there at the moment of the underlying demand with population growth. What we're seeing is shortage of supply and then also where we're seeing vacancy levels at the moment. So, we really see that living sector as an exciting area that we’ll look to really invest more in through 2024 and beyond.
And then lastly, the industrial and logistics sector, I mentioned at the outset. Yes, that sector is starting to come off a little from unprecedented highs, from demand, from cap rates, from rental growth. But again, the underlying demand fundamentals, we believe, will continue to make that industrial and logistics sector a strong performer. Online retail, e-commerce drivers, the growth from 14% currently to 20% is forecast. That in itself is a huge driver for demand. Also, population growth, the need for more goods, more products, more services, the shipping of those goods, the manufacturing, the onshoring of manufacturing that we're now starting to see here. And the implementation of automation is definitely starting to enable more advanced manufacturing process of being more viable and economical being onshore. We also see cold storage demand, the cold storage facilities, particularly around the food and the pharmaceutical areas of cold storage. We're investing in that. We've got three of those cold storage facilities already under construction across the eastern seaboard. And so we definitely see demand for those kinds of uses in the industrial space. So, all up, yes, 2024 will no doubt have some challenges and we've heard lots about that across various forms of media, but we definitely see some really significant underlying demand fundamentals that will drive health and life sciences, industrial and, also, the living sector.
KH:
Yes. It's interesting you talk build-to-sell because we just seem to see all the headlines about build-to-rent, but clearly still a lot of opportunities in the build-to-sell side of the market too.
CC:
Yes, there is a captive audience there. There's obviously a growing proportion of the population that is looking to rent and we're offering now a different product in that build-to-rent product. We've seen lots of groups in that space offering a range of different products that matches that demand for the renters. But we also have a growing cohort of people that want to own their own homes still. And so, it's about how do we offer that product diversity that does cater for various requirements in that space.
KH:
And industrial and logistics, it's obviously been the real powerhouse in 2023 and we've just done the numbers on rentals for the second half and what's happening with vacancies, and while vacancies are starting to edge up, we still have some of the lowest industrial vacancy rates in the world. So, I think a lot of strength still in that particular sector.
CC:
Yes, when you look at the vacancy rates that historically we've never seen before, you know vacancy rates sub 1% in some of the markets, year-on-year rental growth over 44%. I mean they're unbelievable numbers. And so yes, we are starting to see some of that, as your research is also showing Kathryn, but you know, what we are coming back to is more normalised, more stabilised levels in those key fundamental metrics. But ultimately the demand will be there and what we're going to see is continued interest from capital in that space.
KH:
Chris, I know ISPT is focused on being one of the most progressive players in the market, so keen to also hear your views on the best opportunities for industry transformation.
CC:
Kathryn, so firstly we think there is a really big opportunity to look at the use of technology in our space. I think that property traditionally has been tagged with a bit of a laggard reputation in the technology space. And then we've come a long way in property, particularly in the commercial sector, but I think there is, particularly in some parts of the property sector, a lot more catching up to do. When we look historically, in the property space we've had a tendency to rely on our expertise to lead us to a solution as opposed to really being led by what's possible. And so, the conversations we’re having here internally is, let's be curious about what's possible. So, when I sit down with our Chief Technology Officer to talk about what that possibility looks like, what we've established and what we realise is there's actually a significant cultural component that's associated with getting people to think differently and be more innovative in the way they work.
And so, it involves a shift in mindset and a recognition that the risk appetite and how we think about innovation needs to be fundamentally different to the risk appetite that we apply to normal business operations. And so, when we look at technology companies, they have a very different approach to that. So it's about how do we actually adopt that mindset in the areas that are safe and able to be managed within the broader landscape of the business, but also then take a different mindset into normal business operations. We definitely realise that we don't have all the answers. And so, for us as an organisation, we've formed a key strategic partnership with Google who are working with us on our current innovations, and we've also partnered with a number of other technology firms as we've required their support to enable and roll out various innovations across our business.
KH:
I think that partnership piece is so important because there's so much that's changing and it's changing so rapidly so getting those right partners on board. And I guess too, looking at what's happening overseas, looking at best practice, are you seeing things that are happening overseas that are a little different to what we're seeing here?
CC:
I think we often underestimate our own ability here in Australia. I think we always look offshore in terms of what everyone else is doing. And yes, there's lots of work that's being done in different markets, whether it be Asia, the UK, Europe or the US, where we are definitely seeing different innovation technology coming to our market, but we're also seeing a lot of ideas being generated out of our local market here. And so we are, through various partnerships as I mentioned before, looking to incubators and startup companies that are domiciled here in Australia, but also offshore. And also our key strategic partnership with Google not only enables us to understand the research that's happening here at an Australia level, but also that they can tap into offshore. So, it's using both the domestic knowledge base and expertise and skills here to understand our market, and the nuances of our market here in Australia, but also then drawing across the global sector.
KH:
Yes, it's going to be really exciting to see what happens with technology, and I think that is one of the key enablers for our industry. So, really exciting to see what plays out in 2024. And thanks so much for joining me today, Chris.
CC:
It’s been a pleasure Kathryn, thanks for having me.
KH:
I'm now joined by Brookfield Senior Vice President Leoni Wilkinson. Leoni, you’re responsible for working with Brookfield's local and global teams in overseeing portfolio management for Brookfield's Australian core and core plus real estate investment strategies, including fund and asset performance, return profile and the pursuit of acquisition and disposition opportunities. So, having a look at all of that, where do you see the best opportunities in 2024?
LW:
Thank you, Kathryn. We are seeing a lot of really good investment opportunities in 2024 and really the main reason you alluded to during the introduction is that I have the privilege of being part of a global team. So, Brookfield is a large asset manager. We have over $850 billion of assets under management globally and that includes over $270 billion of real estate across 30 countries and 30,000 people. So, we get to see a lot of what's going on around the world. And what we're seeing globally is that real estate fundamentals are in quite good shape all around the world, particularly for high quality assets. But on the other hand, what we're seeing is capital markets that are quite disrupted. And so, for us that equals very good investment opportunities and we think that 2024 is going to be a good vintage for us in terms of the specific sectors that we're looking at in the real estate industry.
We've got a couple of themes that we really like that are secular and apply across all sub-sectors of real estate. So that's changing demographics globally. We also really think deeply about the new normal and the way that people are using real estate now that we've come through a period of enormous disruption. And also deglobalisation are some of the themes that we're thinking about that apply to real estate all around the world. And so here in Asia Pacific and in Australia specifically, we're seeing some of the disruption but not quite as severe as other parts of the world. So that gives us very good opportunities to enter into a time when there's less capital coming in and less certainty around investment returns. And what we like about that is, because we have a large operating capability, we can underwrite the returns always predicated on what we can deliver at an operational level.
So, our business plans and the way that we intend to generate returns are always from the ground up. Certainly, looking at those big secular themes but coupling that with how we can drive value on the ground. So here in Australia we really like the living sector, we like logistics and we like office, and so I'll just talk to each of those in turn and what we like about each of them. So, in living generally all around the world we're seeing housing shortage and a lot of housing affordability issues. So, we want to be a part of that. And here in Australia we can see the supply and demand fundamentals are very, very strong in favour of people that can get access into the living sector. So, we're seeing a lot of activity in what Australians refer to as build-to-rent and globally it's referred to as multi-family.
So, we think that that will be a very good sector in time and a good place for an institutional investor to get exposure into growing rental income streams. We think right at this moment in Australia it's quite crowded. We're not overcommitting into that particular sub-sector of living, but we are going to be active across other sub-sectors of living and you'll see us investing in places like seniors housing and student accommodation. Turning to logistics, the fundamentals again are very, very strong and a lot of that's underpinned by e-commerce demand. A little bit more onshoring of manufacturing into Australia given the supply chain disruption that we saw during Covid, but very strong fundamentals and we've seen tremendous rental growth which we don't think will continue forever. And we're already starting to see some bifurcation between demand and rents that will be paid for the best quality assets and lower quality assets.
So that flight to quality is already starting to play out in the logistics space despite the supply demand fundamentals still being very, very favourable to asset owners. So what we're going to be focusing on there is making sure that we have exposure to the very best quality assets and then curating them in the way that we can tap into a flexible way of offering the logistics accommodation to users in the future as they have an opportunity to become a little bit more selective about what they would like to do. And the last sector that I'll talk to in terms of our particular area of focus for 2024 is office, and specifically premium office. And I'm not saying that to be deliberately contrarian. It's when we're perceived sometimes as contrarian at Brookfield it's not that we deliberately want to do something that's different to headlines, it's that we are seeing something in the data by virtue of the scale of the platform that I referenced earlier.
And so, what we're seeing in our operating platform around the world is that the flight to quality, we've seen, has played out very strongly in the office sector. We're seeing demand for premium office increasing all the time. But the interesting dynamic at this moment from 2024 and then over the next couple of years is that the supply coming into premium office will start to become more muted we think. And that's a combination of the uncertainty in the sector at this moment, and also rising construction costs. So, what we think that's going to mean in the next say two, three, four years is that there'll be continuing demand for the very best office assets but less new office assets available for workers to come and enjoy as they're doing the work during the day. So, they're the sectors of real estate that we're focused on in Australia for 2024, Kathryn.
KH:
Yes, that's really interesting you say that, it's really coming through in our research as well that flight to quality. And I know people have been talking about that for a long time, but we are seeing it really come through in the rental numbers that we're seeing, people still prepared to pay a higher rent to relocate to better quality accommodation. And I think, in the order of 10% given some of the numbers that we've done. So that bifurcation is really something that I think a lot of people are focused on. And living is obviously such an exciting sector, there's so much happening in that space, but I think we just need more stock is one of the big issues. So, looking at all of that, I'm really interested to talk to people on this podcast about areas for transformation and I guess where are the areas that we're most ripe for that in the sector. I'd love to get your thoughts.
LW:
Oh, thank you Kathryn. It's, I feel an area where you can become very passionate, and forgive me if I start to sound evangelical, but I really believe that our sector can play a huge part in reducing carbon emissions and decarbonising our total economy. So real estate as an industry, people will be familiar that as an emitter we play a very, very large role. We're around 40% of global emissions. So that's a challenge and an opportunity for our sector. What's exciting to me about this is that we've had a lot of focus on Scope 1 and Scope 2 emissions, but to really solve this, we need to be working into Scope 3 and thinking about embodied carbon. And what we believe that is genuinely going to require is for all of us to come together as an industry and combine and conquer, because none of us are going to be able to do this on our own. Each of us has responsibility in certain areas of expertise and we can control things to a certain point, but to work through managing our Scope 3 emissions, we are all reliant on each other. So, what I'm personally really excited about is being able to come together as an industry and help solve these very complex issues together and really take a leading position globally, as an industry.
KH:
Yes, it's interesting on that embodied carbon front, I was talking to an architect the other day and they said, I guess one of the issues when you're looking at repurposing existing office buildings is there's no real sort of established value for embodied carbon and that if we can actually nail that, that that could be one of the real incentivisation pieces.
LW:
Yes, architects are a great place to start because smart design is a really big part of it. So we can't at this moment see an immediate compensation for investing the money into reducing carbon from an asset during the building, during the operations, but we can already see it playing out very clearly in the data and part of the flight to quality that we were talking about earlier is absolutely a flight to low carbon emitting buildings, high ESG standards across the entire building. And we’re seeing that demand come from our tenants, from our capital partners, both debt and equity, and from ourselves as an asset manager. So, the good thing is everybody's ultimately looking to achieve the same thing. So even if you can't point to monetisation right at this moment, it seems to me there’s going to be quite clearly a discount if you’re not there within a reasonable amount of time or have some pathway to get there. And the big opportunity for transformation to your point is to be able to come together and solve these things so that we're all taking each other on the journey that genuinely everybody wants to be on over the next couple of years.
KH:
Yes, it's going to be a great journey and the property industry certainly has a huge role to play. Thank you so much for joining me Leoni, I really, really appreciate it and good luck with 2024.
LW:
Thank you so much Kathryn.
KH:
Joining now is Pete Menegazzo, a 17-year Investa veteran who took on the CEO role in 2021. Investa is a $16 billion real estate investment manager, developer and industry innovator with a focus on creating spaces that help shape our future cities. Pete, I've been reading some interesting articles about Investa’s future strategies, including your plans in the BTR sector and for repurposing ESG obsolete assets. So, I'm really pleased that you could join Talking Property to share your outlook on where you see the best property market opportunities in 2024.
PM:
Hi Kathryn, it's great to be with you today so thanks very much for having me along. Look, I think the Australian real estate market has been a tale of different directional headwinds over the last few years, which have continued to shift around to make life pretty interesting. Some sectors like living have experienced mostly tailwinds but other sectors such as office have experienced significant headwinds. In 2024 we expect to see a further evolution in those underlying conditions led by interest rates peaking and inflation continuing to moderate, which we expect will open up some compelling opportunities in different sectors. If I start in the living sector, I think we’re pretty excited about what's happening there, namely build-to-rent and the co-living sector, which is a bit of an adjacency. The living theme is a really attractive theme for investors right now, right around the world, and with investors really focused on strong and growing underlying cash flows given the higher interest rate environment.
The fundamentals of low vacancy, low supply and strong population growth are really supporting a positive outlook in that regard. There are really some headwinds as well, which I will acknowledge, such as the cost of construction and funding, but being disciplined on underwriting and getting early builder coverage on building costs and ensuring we've got plenty of contingency in the underwriting are ways we’re mitigating those risks. And you know, importantly the sector continues to mature. More assets are scheduled to be operating in the next 12 months, including our project Indi Sydney here in Sydney. So, a combination of the maturing market, investor interest and increased flow of investment opportunities all bode well for the sector outlook.
KH:
Yes and co-living that's an interesting area. It's one that's probably not as evolved as BTR as yet, but I think a lot of opportunities there.
PM:
It is. We've been doing work on that sub-sector for about 18 months and what we're finding is it's very difficult to find compelling BTR opportunities, particularly in Sydney. And what we're finding is the different planning regimes that the co-living sector operate under are really helping drive returns to an acceptable level for investors.
KH:
Yes. And I guess another sector that's really been on people's minds in the last 12 months has been office. It's been one of the more challenging markets, but how are you seeing office going into this year?
PM:
Yes, thank you for that question. I knew it was coming. We're feeling pretty optimistic about opportunities in the office market and we do expect 2024 to be a turning point. It has been a rough few years for the sector coming off the highs of late last decade where we saw a strong period of net absorption and low vacancy and low cap rates. So obviously the structural changes to the way people work, which are really still playing out I might add, with the dust I think really not yet fully settled, impacting on demand and vacancy along with valuation impacts and the changed interest rate environment have seen the sector face some pretty significant headwinds. It's obviously impacted investor confidence and with valuation uncertainty there's also been a significant reduction in liquidity in the sector over the last couple of years.
Having set that scene, I will say though that we firmly believe the worst of the sentiment is behind us, particularly in the prime grade space. You know, as an office landlord I would say it's been really pleasing over the last, particularly 12 months, to see the significant push from corporate Australia to get their people back in the office more regularly. And you know, we feel that and see that every day as we're walking through our CBDs. And I think this momentum combined with the expectation that interest rates will peak, will continue to support improving sentiment and provide some stability for investors’ confidence. So, I guess when it comes to opportunities, we really see themes emerge in two areas. One is in the prime office area, where the need for liquidity will drive some compelling risk-adjusted opportunities, for early movers in particular. And I liken that to what we saw in the couple of years post GFC where some of the best buying opportunities really emerged and it really required a strong level of investor conviction to move with confidence.
And the other area we see is pretty compelling is this brown to green theme via adaptive reuse. And what that means is buying ageing or obsolete buildings and seeking to reposition them into boutique, high quality office buildings with leading ESG credentials. You know, for us this is a win-win situation. Obviously great for the environment because you're not knocking down existing buildings, so great for embedded carbon. You're repositioning it to be a really strong, ESG performing asset, and equally too you're delivering a compelling return to investors. And I think the last point I'd make is that both of these opportunities play into what we've seen over the last couple of years. And I know it's been spoken to death, but this flight to quality by tenants is real. We are seeing it through our portfolio, we're seeing it through our development assets, and you know, importantly as I say those play into that.
KH:
Yes, we've been seeing that through our data as well. So, there definitely is that ongoing bifurcation I think, which will make it a really interesting year next year. So, I'll look forward to seeing what comes out from the brown to green strategy. I know Investa’s always had a focus on innovation, so the other thing I'd really love to hear your thoughts about is where you see the best opportunities for innovation in our industry.
PM:
What I would say is innovation has been an area that Investa has been particularly focused on across our portfolio for a number of years now and it's one of our strategic pillars of our business strategy. And I think it's within our DNA, we've continually looked at ways to innovate to help drive operational and investment performance. A couple of areas that are probably worth noting and you know, the first I think has been spoken about quite a bit, and that is leveraging data for decision making. So really helping enhance decision making across many areas such as leasing, cap trans, budgeting and building maintenance. So, providing better insights. But I think what's significant is the impact is now being really significantly driven by the improvement in both the quantity and quality of data sources and also the strong emergence of AI that is allowing us to better synthesise and take on and review that data that is available to us.
The second area is a really interesting one we've been working on over the last 12 months, and that is investigating opportunities for adaptive use of space within existing buildings. You know, we hear a lot about things like, once we move to autonomous cars, what's going to happen to our car park? So this is an area that is definitely playing on our mind and one of the areas we've been working on is, we've been working with an Australian cloud services provider on a testing simulation facility for a space efficient, immersion cooling data centre unit within the basement of one of our buildings, which is really quite interesting as we continue to operate in this high data capture environment. And so, it's being used in ancillary space, really some unused space. So, it's helping us drive returns, but we're also interestingly looking at how we can potentially scale it up and make that a portfolio-wide initiative or even, you know, if you take it to its fullest extent, the broader adaptive reuse of whole buildings around different uses. So, probably just a couple of areas that we've been actively working on.
KH:
Yes, the tech aspect is really interesting. I know the recent Property Council Tech conference, I think there was a really interesting panel that had an Investa speaker on it talking about what you were doing in that area. So, I think that's where there's going to be a huge amount of focus this year.
PM:
Absolutely.
KH:
Pete, thanks so much for joining. It was great to have you on the show and I really look forward to seeing what Investa does this year.
PM:
Thanks so much Kathryn. Thanks for having me.
KH:
So that's part two of our Outlook series to kick off 2024. If you like the show and want to check out more, visit
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Apple Podcasts or your favourite podcast hosting platform. And make sure to tune in next week to hear from Aware Real Estate and Aliro. Until next time.
