Sam Tarascio
Opportunity passes you by every day, it's just a question of whether you see it and whether you grab it.
Kathryn House
That's Sam Tarascio, the Managing Director of Salta Properties, who's joining us on our latest Talking Property episode. Thanks for tuning in, I'm Kathryn House, your podcast host, and today, I've cast the net. After chatting to a range of institutional investors, we're going to get some perspectives from the private side of the fence. For a bit of quick background, Salta is one of Australia's largest privately owned property companies. The diversified group was founded in Melbourne more than 50 years ago by Sam's father, Salvatore Tarascio, and has grown from having just one warehouse to owning and managing a large Victorian portfolio of commercial, industrial and retail properties, including major master-planned Melbourne precincts, such as Victoria Gardens in Richmond and Nexus Corporate Park in Mulgrave. Salta currently has more than $5 billion in projects underway, including plans to roll out a $3 billion build to rent business. So, very exciting times ahead, Sam, and thanks so much for joining me today.
Sam Tarascio
Thanks, Kathryn.
Kathryn House
Sam, Salta had humble beginnings. Your father was an Italian migrant who started the business buying what was essentially Melbourne swamp land at the time. Tell us a little about the company's evolution.
Sam Tarascio
Yes, that's right, Kathryn, that first purchase that my father made over 50 years ago now was his first lesson in how to improve the value of land. Buying swamp land back then was a reasonable risk to take with what little money he had at the time. There was a lot of road work going around the area at the time and he was able to convince those civil contractors to put their fill into that swamp land, and that's what revalued the land. As I say, it was his first lesson in how to revalue land and use that to leverage into a broader development. So that was the early beginnings, a very entrepreneurial start. Then from that point, I think there was a moment where after that first warehouse was up, he thought, " Great, I can retire." Which is what he did for six months, and very quickly he realised that most of his friends who were obviously deep into their early careers, started to stop returning his phone calls, were not interested in going to lunch anymore or were not interested in going to play squash or whatever it was that they were doing at the time. So he said, "This is no good, I'm getting back to work." If you ask him now, he'd say, "I'm never retiring." Although, I do jest with him at times and tell him that he is retired, because you choose to come to work, you don't need to come to work, but you choose to do so because you love it and you're passionate about it. That does upset him a little bit when I tell him he's retired because he says I'm working and I'm coming to the office every day. When you've got the luxury of choosing to do so because that's your passion, some would say that's like being in retirement.
Kathryn House
Absolutely. In his blood and in your blood too. You took the reins as Managing Director back in 2005, but your involvement with the company goes right back to your childhood. I've heard a story about you spending weekends with your father on site and that you were driving excavators from the age of five?
Sam Tarascio
I'm not sure whether driving excavators is really a bit of a stretch of the truth. Definitely riding in excavators. Back then, 1980, early 80s, things were very different. My father was a lot more hands-on. We were builders at the time as well as developers. He would often go on site on the weekends, so spend the week in the office and go on site on the weekends and I'd trail along with him. Things were very different. I couldn't imagine taking a five- year-old onto a construction site nowadays with all of the rules, OH& S rules that would prevent such a thing from happening. I was probably a bit of a troublemaker on site, probably getting in everyone's way and then finding things for me to do to keep me interested. Because as a five-year-old, your interest probably wanes after an hour or two. Nevertheless, it was a great exposure being out on site. I remember taking a day off school to watch the first precast concrete tilt panels that were actually manufactured in situ, on site, and I think that was one of the first buildings to ever do that back in the early 80s. It was a big moment, I took a day off school to watch the crane lift those panels off the ground and put them in place. Again, the sort of things you wouldn't be doing today, but it was a great background for me.
Kathryn House
Absolutely. Part of Salta's success seems to have been about picking the trends early. You were one of the first groups to develop fully managed business parks, ahead of the Goodman Group, and you set your sights on the build to rent market well before it started making headlines in Australia. Tell me when, and why, you first identified that sector as an opportunity.
Sam Tarascio
Well, probably around five years ago, it was becoming fairly obvious to us that we were going to have a problem in the housing market. Government, particularly in Victoria, were increasingly making things difficult for the build to rent sector through a series of changes they were making to tax settings in particular and it was making it difficult to get through for sale projects. We could also see though that Melbourne as a place to live was increasing in desirability. I mean, we've always been ranked amongst the top cities in the world and people were still wanting to come to Melbourne and we just weren't producing enough housing. We've seen this happen now, but it was mooted that Melbourne would become a bigger city than Sydney by population. That, combined with the fact that our cost of occupancy, our rental costs, our sale prices were still significantly and still are significantly below that of Sydney, so that was playing into our thinking. The other thing was the rental market has traditionally been supported by what really you can describe as a cottage industry, small mum and dad investors investing in property that has continued to become increasingly difficult. Regulation around management of tenants has become really tough. Cost of holding and maintaining property has become really, really hard. It's become an asset class that's no longer really something that a cottage investor can invest in because there's just too many complexities. Unfortunately, also, too many changes that can really impact a small investor's thesis around the investment scenario for residential property. We could see that there was a need for an institutional play. We saw that it was happening overseas, we saw what was happening in the US and multi-family, as they call it there, had been going for a long time. The UK had successfully got the multifamily sector up and running. It just seemed obvious to us and even more obvious now that I'm talking about it. Strong population growth, more complexity building in that segment of the market. The other thing was the rental experience for tenants is a poor experience as a result of smaller investors using smaller agents really singularly focused on their one asset and not necessarily providing the right service that a renter would want. Then the final thing for us was being an owner of a diversified portfolio at the time, commercial and industrial and some retail properties. Those asset classes are always exposed to vacancy risk. You get a large tenant move out of an office or a sole tenant move out of a warehouse building, your exposure to vacancy is obviously greater than if you've got a building of say, 300 tenants and you have an ongoing rolling vacancy, but you're never going to have these massive vacancy rates. From our point of view as a long-term investor, it also provided a really stable income stream that offsets the peaks and troughs that you see in the commercial and industrial sectors. For us, it just seemed obvious. Also, prime sites that we had that if you're doing build to sell, you would obviously need to sell out of those sites. We felt that these sites were really well-positioned to provide that institutional grade, rental proposition that I've been talking about. It ticks a lot of boxes for us. It gives us the ability to hold those sites, provide a really good product, help solve the housing market issues and deliver to tenants a really seamless rental experience.
Kathryn House
You have established a rental housing platform Est to back what you're doing and you're about to welcome residents to your first project, Fitzroy& Co. Have you learned any lessons so far on your build to rent journey? I've heard you talk about what you see as the secret sauce.
Sam Tarascio
I think the biggest thing that we've realised, and we realised this really early, is that build to rent is not build to sell that's just being leased. It's a different asset class and it's a different asset class in terms of how you design the product, how you position your amenities. It's a different asset class in terms of how you curate the community, how you create people feeling like they belong to part of a community of like-minded people, the ease with which you allow them to make applications and move in or move out, security of tenure. There's a whole variety of factors that go into making build to rent a desirable place to live for our clients. And it's not to be confused with a build to sell product that is now available for rent. I think in the current market, there's probably examples of build to rent product out there that have been delivered, very early-stage projects. We've got half a dozen of them spread around Australia at the moment and with lots more in the pipeline. There's probably also examples of projects that would otherwise have been built-to-sell that have been converted to build to rent. I think it's those ones that potentially will not provide the right rental experience for tenants because they weren't set up for it from the start. It's not just the property side you need either, it's the whole management capability around it, how you provide the concierge services, how you provide support to your clients. We call them clients, not tenants. It's a completely different attitude towards renting and it's not something you can create quickly. We've been working on our platform for about five years. It's about the brand positioning, it's about the resources that you have and the training that they have. It can be often compared to the way hotels view hospitality, bringing some of that into the residential offer and making sure that you're not providing just effectively an apartment for people to live in. You're providing a community for them to thrive within, and that's probably the key difference.
Kathryn House
I was reading about Fitzroy & Co, and I love the idea, you've got a music lounge with a collection of vinyl records and an open-air pet park, that would get me into the building, and a chef's kitchen and entertaining area. So, it's a whole different experience.
Sam Tarascio
Look, one of the things we realised when we looked at overseas build to rent product, particularly in the US, was that there was this difference between what they call condominiums, which are the sale market, and multifamily, which is the build to rent market. We did some study tours over there and the multifamily operators are proudly telling us how much better the amenity is compared to a condo building. In Australia, actually, our build to sell buildings or the equivalent of their condos already are very highly amenitised because that's what the market expects. But it's more about how those amenities are positioned within your build to-rent-building, how they're designed to create interaction between our clients living in those buildings and how they're designed to enhance the community experience. It's no longer that the lounge or the residence, cinema or the gym are in the back parts of the building. They're really front and centre and they tend to be aggregated together to create incidental opportunities for residents to come across each other and meet each other and create relationships and build communities. That's the key difference, I think.
Kathryn House
So, we've touched on this a little already, housing supply, or really the lack thereof, and it has been dominating the headlines, and I know it's something you’re very passionate about. I've seen some of your recent comments about the fact that it's never been harder to deliver these large housing projects in Victoria due to new and increased government taxes. What needs to change do you think, at both a Victorian and even a national level to stop the bottlenecks?
Sam Tarascio
Look, I think if I'm being honest, I think governments around the country, and in particular here in Victoria, have really treated the housing market with contempt. I think they've finally realised or understood now that we have a crisis in housing in Australia and in Victoria because we're just not getting the levels of supply through that we need to sustain our population growth. You look back at the reasons as to why that's occurred, particularly here in Victoria and I often describe it as a bit of a death by a thousand cuts. It started back really in 2017, and this was also part of the reason why we identified build to rent as a good opportunity because we could see these things starting to happen and we could see it making it difficult for individual investors to buy. Back in 2017, they removed the off-the-plan stamp duty concession. That was a key driver for people buying apartments off-the-plan. If you've got no benefit for buying two or three years out from when you need to relocate, then why would you do it? The off-the-plan concession did that, it also leveled up the difference between buying a house and land package because when you buy a house and land package, you pay your stamp duty on the land component and then you put a house on top. The off-the-plan concession essentially replicated that situation and bought apartments into a more competitive environment with house and land packages. The reality is, to solve the housing prices, we need both. We need greenfield development, and we need apartment development. We've seen over the last five years or so, just how much the market has swung towards house and land. That's largely because of that issue around the stamp duty concession. We also had a number of taxes introduced on foreign buyers in terms of additional stamp duties and land tax. One of the things we explained to government at the time, which they didn't understand, was that foreign buyers were underpinning the early stages of large, medium and high- density projects through off-the-plan sales, allowing a developer to get to their financial close, allowing the developer then to put the building into construction and sell the balance of stock to locals. What we explained to government was, if you don't allow those foreign buyers to underpin those projects, you don't get the project going and you don't create the stock for locals. They just didn't believe us. In fact, the comment was, politically, this is a good message. We're stopping foreigners from buying product and it's an easy message to sell. Well, that's come back to bite them because we've got very few foreign purchasers now in the system. We've seen that flow through to a lack of projects getting off the ground and government are now lamenting the fact that they've actually improved their track record in planning approvals. There's quite a lot of projects now that are sitting on the sidelines undeveloped, and there's multiple reasons for why that is the case, but one of those reasons is the fact that it's just very hard to get the pre-sales necessary to get those projects up and going. So that was another example. Then we've just had incremental changes, increase in stamp duty, increase in land tax. It's this constant hitting of the housing market that's virtually made investment for individuals into residential property impossible. That's what's driven the shortage because we're just not getting the demand, even though we've got a housing shortage. So it's a very strange set of circumstances. We have a housing shortage, yet we're not producing enough stock and the stock, it's hard to make it viable to produce because we can't get the pre-sales and costs have risen, all the reasons that I think most people would understand. So a very difficult set of circumstances. That's what is, at the end of the day, also driving build to rent because when you've got a larger player, an institutional player or a large company like ourselves who are prepared to invest upfront in getting a project going, you don't need to rely on pre-sales. What you're relying on is your ability to rent in the future. Once the project is completed, you can start to build more scale in the system and start to get more homes on the ground more quickly. So that's the situation. We're really encouraging government very strongly to review some of the settings that they've changed over the last five to six years because as I said earlier, it's been a death by a thousand cuts of the housing market. I think that the response we always get is the government has to tax, they have to earn revenue, and we completely agree with that. But what we think is better is a higher number of transactions at a lower cost to generate the same income rather than strangling the market with higher transaction costs and having a lower transaction volume. A higher transaction volume is going to make the market a lot more competitive, a lot more effective for probably helping keeping prices down. It's a message we're constantly pushing, and I think it's a message that hopefully government is starting to hear, just create more velocity in the market, more transactions, more transaction stamp duties at a lower cost to create overall a higher revenue stream. That's the theory we're pushing and trying very hard to get government to listen
Kathryn House
Hopefully, they do. Is it something that's making you broaden your focus and look at more opportunities outside of Victoria?
Sam Tarascio
Yes. Look, Victoria has unfortunately, made itself for the more traditional housing market, significantly less competitive than other states. We're probably from a planning point of view, we're leveling up. I think you hear about New South Wales and how difficult it is to get planning there and consistently, I hear that's the worst state for planning approvals, so Victoria has an edge there. But our cost of holding property here in Victoria is just escalating and it's creating real difficulties for smaller investors. So you need that institutional strength to try to manage and maintain those costs in a way that make projects viable, and that's why build to rent is a really good asset class. But from our point of view, we have to diversify interstate, which is for a business born and bred in Victoria is a bit of a lost opportunity. I would say for Victoria to have a parochial Victorian company saying the risk in Victoria is such that we must diversify interstate. I think that's a loss, unfortunately, for Victoria, and I'm hearing that that's an attitude that's coming through loud and clear with a lot of capital looking to invest in Australia. They've got a choice, they don't have any emotional connection to Victoria. They're just going to look at the facts and they're going to look at where it's easier to get approvals. They're going to look at where tax settings are most advantageous. They're going to look at states that have a lower track record for surprise changes. And unfortunately, recently in Victoria, we've just had a series of changes that have been detrimental that have not been flagged and have changed investment thesis really quickly. It just creates a lot of uncertainty. That's why we have to be very careful here in Victoria. We've got all of the right attributes to make sure we have a strong and vibrant housing market, but we need a very firm commitment from government that they're not going to make any more detrimental changes. Luckily, at the last state budget, there have been no further increases in property taxes. I think they heard the message loud and clear. Unfortunately, they did not unwind some of the things that they've done in the past. So that's the next step. We need to get them to really look at those settings and see how they can tweak them to make sure that we become an attractive investment destination again.
Kathryn House
So we've talked a lot about residential, maybe we could turn to the office sector. It's been hard hit by investor uncertainty. How do you see that sector evolving and what's key to bringing more people back into offices? I've been looking at one of your latest projects, Industry Lanes in Richmond, which I've heard you describe as a new world workplace for the new world employee.
Sam Tarascio
It's very different across the sectors in Victoria, and the office sector is clearly the most challenged, but I would say, clearly the sector with the most opportunity. The reason I say that is that, and this is a comment that applies actually across the board, across all sectors. We're in a period of time where we're trying to adjust the relationship between property values, property rents, cost of delivery, and we're in a reset period because we had interest rates come right down through COVID and then they've rapidly increased, probably to a cash rate far higher than everyone predicted when the rate rising cycle first started. That impacts the cost of capital and it impacts property valuations. Because at the end of the day, all property valuations have a relationship to the cost of capital. So we're still trying to find our balance and what we've seen in other sectors like industrial is that we found that balance a lot more quickly. The reason for that is that there's been a lack of supply and high demand, but an ability to raise rents to counteract the cost of capital issue. So, we've seen that market re-level. Office has suffered from very soft occupancy and high vacancy rates. Most asset classes and office in particular are effectively trading well below their replacement value. Now, that can't last very long. The issue with office is that there's been this reluctance obviously to return to office, and so companies have been trying to find the sweet spot for how much office space they need relative to what they needed pre-COVID. Look, I think in reality, the aggregate demand for office space has probably dropped from what it was pre-COVID. But what I'm confident in is that the need for office we've proven is still there. Office is not going away, but what we're doing is finding a new level. Ultimately, as the economy grows, we'll soak up the vacancy in the system. When we do that and when we need new office buildings and we've positioned ourselves with a number of future pipeline office projects, those projects are not going to be done at rents anywhere near what they're currently at. Because at the moment, we're not pushing rents up because the demand is still fairly soft. Most rents that are being done at the moment, and you referenced Industry Lanes, we averaged rents there between somewhere around $600 to $650 a square metre. The last deal we did was at $700 a square metre. If we were doing that very same project today, no change to anything other than cost of debt, cap rate and construction costs, which are the three things that have changed, we'd need to be getting $800-900 a metre. So there's like a 50% increase required to make office projects viable. You can't get there at the moment because there's vacancy in the system. But what we're starting to see now is that the prime office precincts are actually getting towards a vacancy level that's quite low. Certain parts of the CBD, East End, you look at the Cremorne precinct where there's been a lot of supply delivered, but there's still very low vacancy. Those types of areas where companies want to be in highly amenitised locations with great quality buildings, really good facilities, great tenant care, ESG, all of those things that companies are looking for now. Those buildings and the availability of those buildings are starting to thin out. Once we need more of those types of buildings, they're not going to be built at rents that resemble current day rents. So the opportunity in the office market is to find those locations or find those buildings that can be repositioned to deliver those types of attributes. I think we'll find, looking back five years from now, that now is probably one of the best times to be looking at the office sector because it's been on its knees, it's starting to stumble back into relevance. As a counter-cyclical play, it's probably the most obvious one I can see at the moment.
Kathryn House
So moving on to industrial & logistics, that's always been Salta's bread and butter. What's the next evolution there, do you think?
Sam Tarascio
Well, I think industrial & logistics has been well-supported over the last few years as a result of the heightened requirement for companies to, initially through COVID, hold more stock. Now there's this shift to online retail, which by the way, I think has also supported bricks and mortar retail, but we've had a massive growth in the need for industrial property. What we've seen there is that the rent levels in industrial have really pushed up and they've probably gone up in net effective terms over 100% over the last three years. So significant increases in rents, and a lot of that's driven by lack of supply of land. So one of the things that starts to happen when those rent levels start to escalate is you start to look at alternative forms of industrial buildings that might use more automation. I know in New South Wales where land costs are really high, we're starting to see multi-level warehousing as well, which we don't think in Melbourne is necessarily something that is justified quite at this time. Our rent levels and our land value levels are not quite high enough to justify multi-level warehouse, but it will come at some point in time. So I think that's the next evolution. It's finding efficiency from buildings how to best utilise buildings through either automation or as I said, multi-level. I think that's the next thing. Also, I think there's more and more focus for industrial buildings around ESG as well. ESG has been big in office for a long time, residential, similarly, and now really the attention has turned to industrial and how to ensure that those buildings demonstrate the right ESG properties.
Kathryn House
Absolutely, I think that really is one of the next frontiers for industrial & logistics. So another question on evolution, and I think I probably know the answer, but would Salta ever look at listing given the size of the group's portfolio?
Sam Tarascio
We have looked at it in the past. One of the issues with a property investor and developer such as ourselves is that it's a capital-hungry business, we're always needing capital. And listing is one way that you can access the capital markets. But when we've looked at it, we've fairly quickly realised that the market struggles to understand businesses such as ours. It has peaks and troughs. We don't see consistent earnings. We do from our portfolio, we see rent levels consistently year-on-year gives us stability, but from a development pipeline point of view, we're up and down. We need to have the ability to say, we think office is too hard for the time being and we're going to put those projects on hold. It's very hard to explain that to an investor market who, at the end of the day, value stability and predictability and certainty. And so I don't think that listing for us is necessarily the right pathway. We are increasingly looking at strategic partnerships in parts of our business. Predominantly, we've used our own balance sheet. Most of our developments are our own capital. But for things like build to rent, we are currently in market seeking strategic capital to come along the journey with us to build an at scale platform. It's probably more around specific opportunities that we will be seeking capital, but we won't be doing it via a listing. We just don't think that the market understands a business of our nature.
Kathryn House
Yes, and I guess you still have that ability to be quite nimble and entrepreneurial as a private.
Sam Tarascio
Look, I mean most of what the decisions we make are backed up by analysis and understanding the market and getting the right information, but there is always in a private business, an element of pure gut feel and market knowledge. I'm not sure how you explain that to a shareholder.
Kathryn House
Yes.
Sam Tarascio
That's really what gives us our entrepreneurial edge, we're able to back our experience and our analysis up with what our gut is telling us, and we find that our gut is usually right, even when we back up our gut with doing the analysis, the analysis generally backs up those initial impressions that we might have of an opportunity. We don't want to lose that.
Kathryn House
Yes. Well, that's probably a really good segue to my final question. I understand that your father is still very much a business mentor. What would you say his best piece of advice to you has been?
Sam Tarascio
Probably a couple of things. One, and he's of the old- fashioned type who doesn't like to sell anything, so he's constantly saying, don't sell. Now, we do sell from time to time, I mean we have to because we need to keep our business running. We need to recycle capital and keep moving on to the next thing, but we do sell reluctantly. I have to say, and I know this is a public podcast, so he might hear this, but I have to admit that generally, when you're a multi-generational business like ours and you're looking at 10 to 15 years out, we look back at the properties we've sold and we look at the returns we probably would've generated had we not sold them, and the decision to sell usually is not the right decision. That would be one. The other one is he's constantly saying, "Look, opportunity passes you by every day. It's just a question of whether you see it and whether you grab it." He, over the years, has been a master of identifying new trends and opportunities and seeing things and going for things that might seem at the time a little bit farfetched. But to his credit, he's seen them and he's stuck with them and he's chased them down. Our involvement in intermodal terminals that is now starting to come to fruition is a perfect example of something he saw over 20 years ago now. He positioned ourselves for our business to take advantage of some strategic moves in that direction towards intermodal logistics terminals and that's now starting to come to fruition. I have to say, over the years, I'd said to him, "gee, Dad, this is a long way out. It's hard to see. This land is prime industrial land, let's just do standard industrial." And to his credit, he's stuck with it. He sees those opportunities and he really believes in them and trusts his judgment and backs himself in. Usually, when he does that, it proves to be a good outcome.
Kathryn House
Yes. Well, it sounds very much like you've been doing the same since taking over as Managing Director. I can't see that you've missed too many opportunities. So, thank you so much for joining today, I really enjoyed our chat.
Sam Tarascio
Thanks, Kathryn. It was great to talk.
Kathryn House
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