Henry Chin
I have to say now the crown of La La Land has passed on. Australia is no longer a La La Land. The La La Land this year will be Hong Kong and Singapore, and that the price has shift quite substantially over the past 12 months in Australia. I am very happy to say for the commercial real estate market, I think Australia is either closer to the bottom or in the bottom already, so therefore, I can see the sentiment has shifted. 12 months ago, no one wants to look at Australia, but now people starting to get more and more interested to look at Australia’s commercial real estate markets.
Kathryn HouseThat's Henry Chin, the leader of CBRE's Asia Pacific research team who also guides investor thought leadership for CBRE globally. And I'm Kathryn House, your podcast host. Henry, thanks so much for joining me today.
Henry Chin
Thank you, Kathryn. It's it great to be back to Australia.
Kathryn House
Yes, we always love having you in town. And to give some background to our listeners, Henry is based in Hong Kong. He has over 20 years of research experience and is both a visiting professor at Oxford Brooks University in the UK and an assistant professor at the National Taipei University in Taiwan. Henry, you've been presenting to many of our major investors while you're in Australia. I'd love to know what's the top question you've been getting in those conversations?
Henry Chin
Well, the number one question people want to ask, "When are we going to get the first interest rate cuts? And how many cuts are we going to get in 2024? When are we going to see the real estate industry recover?" I think those are the top of the agenda. Of course, some investors are also asking me, "Can you tell me, where can I put my money in 2024 into 2025?"
Kathryn House
And I know you haven't been sugarcoating it. When you come to your view on the interest rate trajectory, you very much are higher-for-longer.
Henry Chin
I am definitely higher for longer. I am kind of very aligned with what a lot of people are saying. Personally, I do not believe we are going to see substantial rate cuts in 2024, because the labour market is so hot, and inflation is trending down, but Kathryn, it's not low enough. So, therefore, I just don't see how the Central Bank can cut an interest rate in an aggressive manner. But I really want to highlight people had a fetish talking about how many cuts they're going to face in 2024. I think it’s become irrelevant. The most important thing that we should talk about is the timing of the rate cuts, because after the start of rate cuts, the following 12 months, the rate cut could be quite substantial.
Kathryn House
I mean, so with it being higher for longer, how much is that weighing on investment activity?
Henry Chin
Well, it is definitely top of everyone's agenda globally and within Australia, I think because higher for longer environments, does make the investors very cautious of deploying the money into real estate and also hard for the fund managers to raise capital globally to put money into real estate. So, that's why we are thinking about this year, the growth might be relatively muted. And at the backend of the year, we're going to see some recovery in terms of investment activities, but the widespread recovery probably is likely to happen in 2025.
Kathryn House
And so when you were out here last year, you also didn't pull any punches and said that we were in La La Land in Australia when it came to asset pricing. How much has that shifted since your last visit?
Henry Chin
I think I have to say I was right. Australia was La La Land in 2023, and I have to say now the crown of La La Land has passed on. Australia is no longer a La La Land. The La La Land this year will be Hong Kong and Singapore, and the pricing has shifted quite substantially over the past 12 months in Australia. I am very happy to say for the commercial real estate markets, I think Australia is either closer to the bottom or at the bottom already. So therefore, I can see the sentiment has shifted. 12 months ago, no one wanted to look at Australia, but now, people are starting to be more and more interested in looking at Australia’s commercial real estate markets.
Kathryn House
Yes. So, you've been talking in your presentations about the fact that selling pressure remains high in Australia but is strongest in Hong Kong and Mainland China. Can you talk me through that?
Henry Chin
Okay, we are asking our clients, our brokers, over the past every single month whether it is buy or sell inquiries. I think for Hong Kong and China, it's a given because I can give you the terms that we call A, B, C, "anything but China". I think all the global investors do not want to touch China and Hong Kong, because of all the issues we are facing. But Australia is very, very interesting, because we did a survey in April, and people were still thinking Australia hasn't come out of La La Land. But now after Q1 number comes up, after repricing coming through, I think the selling pressure continues, but we also start to see more and more buying intentions coming to the Australian market. But you can see Australia is such a big country, and the cities are very different. All the state governments are very different. As of now, Sydney is the only market people are very excited about. I was in Melbourne over the last few days. I have to say people are not coming back to the office. It's bad. And also, the state government got so many taxes on real estate investments, it is killing the market. So, therefore, I have to say looking at Australia, people are looking at that closely getting more and more interested but Sydney certainly seems to be the number one focus for a lot of investors.
Kathryn House
So, you talked about tax, that's obviously one of the challenges for investors. What are the other big challenges in Australia, do you think?
Henry Chin
I think higher for longer is definitely something everyone that has been very, very mindful of, and Australia is higher for longer, Kathryn. I don't think we are going to see an interest rate hike, but the interest rate cost of borrowing is not trending down. So, that's the biggest challenge we are seeing. And also, in other parts of the world people are worried about the pricing between buyers and sellers being quite wide. think the gap in Australia is narrowing down. So, for the other regions, it's a big issue. In Australia, it's less so because we do see deals are closing. The asset owners are being realistic, and they want to realise the return, they want to dispose. So, this is something that's great for the Australia market, but nevertheless, interest rate is number one on the agenda.
Kathryn House
So, let's get a bit granular now. I know you have a view on retail versus office. Talk me through why you think the pendulum might be swinging back to retail.
Henry Chin
Well, with CBRE, we have so many leasing brokers. We are talking to lots of international, regional, and domestic retailers. I can quite honestly tell you this is the first time in so many years that every single retailer is telling us, "I want bigger spaces. I want to spend more money. I want the core locations. I want the better-quality assets.” The leasing sentiment from our retailers has never been so strong for the past five years, because they understand, over the past few years, their business has been hit so bad and the real estate fundamentals are on the weaker side. But now their sales are slowly, gradually coming back. It's perfect timing for them to look at their portfolio for leasing, for the better-quality assets. So, good quality assets in the good locations - I think the rent is going to hold well. The second point from the investor point of view, I think two, three years ago retail was a dirty word, but now, retail is a buzzing word, because it's getting so attractive. For Australia, regional shopping malls, you can get your cap rate around 7%. That's attractive. With the rental growth upswing, with a high enough cap rate, investors are getting more and more excited to come into retail. But again, Kathryn, retail is not for everyone. Retail, you need to have managerial experience, you know how to manage it, the retail bones, but more and more people are finding it very interesting.
Kathryn House
Oh, good. And in your presentation that I sat in on this morning, you also talked about the fact that 2024 could be a vintage year for select prime offices, particularly in the Sydney CBD. What's driving that?
Henry Chin
Okay, I need to put a caveat here. When we are looking at any investment strategies, we need to look at the one, is play the cycle, one is looking at structural changes. I think the office market is highly cyclical. From a cyclical point of view, we do believe Sydney's office, prime CBD office incentives are going to drop. Flight-to-quality will continue. So, if we enter in 2024, hold for three, four years, I think you are going to enjoy the upswing in terms of total returns. That's from a cyclical point of view. However, if you overlay the structural point of view, what occupiers want, what you and I want, we want core, we want CBD offices, we want offices with ESG features. We want our offices near transportation hubs or easy to park. If you overlay all those situations, I think Sydney prime office in the CBD, to be honest, in my mind, across Asia Pacific, it ranks as number one.
Kathryn House
Oh, number one.
Henry Chin
Number one in my mind and people are starting to look at the spaces very, very closely. Also, Kathryn, I was running the correlations for Sydney and Melbourne offices for the past 20 years. Putting Sydney and Melbourne offices in global portfolios gives investors a great diversification benefit. So therefore, personally, I really like Sydney prime offices.
Kathryn House
But you see some real challenges in the suburbs.
Henry Chin
Oh yes. Funny enough, before COVID, we talk about hub and spoke. The hub is office, and the spoke was a decentralised office, but now hub and spoke. We still have the hub. We don't have a spoke anymore, because the spoke is our bedroom. We don't need to come to the office. We just work from home. So, that's why I think decentralised office is going to have tough challenges.
Kathryn House
Yes. So, you wouldn't have that spoke in your global portfolio.
Henry Chin
Selective markets will have a spoke as, for example, if we are in Tokyo, the spoke market, decentralised market will work, because the market is big enough. For Hong Kong, it works because the price, the rental differences is 70 to 80%. So, I go to the decentralised offices, I can save my cost. For Sydney, I just don't see that.
Kathryn House
Yes. So, you also seem surprised in your presentation this morning that we're still talking in Australia about the future of office, and you think that that's an outdated concept?
Henry Chin
Yes it is so outdated, because most of our people are back to the office in where I've come from in North Asia. And then, we all know the future of offices need to have amenities. They need to have all the different features, digital, and also have the human features, the ESG component. I have to say Hong Kong and Singapore seem to get it right. The smart landlords put all those features together well before COVID, and then, in Australia, I think because return-to-work is lagging behind Asian cities. Sydney is great. I think Melbourne has tough challenges. And so therefore, the landlord is still trying to think hard about how to bring people back to the offices. And I had the privilege of talking to the government officials in Victoria. I said to them, "You have to mandate people to come to the office, two to three days a week, because only when the government public sectors are encouraging people to come back, nothing's going to change." And on a global scale, Kathryn, you don't want Melbourne to be associated with American cities, because they seem to have a reputation now. So, we want everyone like Sydney, Monday to Thursday, we are in the office, we collaborate, and therefore, you don't need to worry about future of offices.
Kathryn House
Yes no one likes talking about mandates down here. People get very sensitive.
Henry Chin
It's not the mandates, it’s all about encouraging people to come here three days a week. And I was with my friend this week in Melbourne. It was crazy. He was telling me he was working from home five days a week.
Kathryn House
Yes, I don't know how people do it anymore. At the time, during COVID, I was quite productive. But then coming back into the office, you just realise you miss that buzz. You miss the bump moments. You miss just being able to get things done so much more quickly where you can go up and tap someone on the shoulder.
Henry Chin
Yes, you can banter with your client or with your colleague. Each other is quite fun, and the energy you generate in the office is just fantastic. We need a culture.
Kathryn House
Yes. So, we've chatted about retail, we've talked about office. Let's chat about the industrial & logistics sector. It has had its time in the sun in the past few years, but what's your view on the outlook there?
Henry Chin
Well, number one, I think in 2022. I was in Australia after COVID. I was the one of the lonely voices to tell people to sell logistics.
Kathryn House
I do remember that.
Henry Chin
Right, in 2022. And then, two years after, I think I was right. 2022 probably is closer to the peak in terms of capital values, but things are changing now. We talk about logistics. Also, we need to talk about a cycle. We should also talk about the structural changes. First of all, let's look at structural changes. In the old days, all the leasing demand was largely coming from e-commerce, 3PL. But nowadays, the leasing demand is largely coming from manufacturing companies. Their margins and their operating model is very, very different. It's no longer anywhere, any facilities. They target what they want. So, the structure changes what they want. They want to have modern facilities. They want to be closer to the transportation hub. They also want to be closer to the market and closer to the consumers. And also, the most interesting thing is that they want green logistics facilities. Green is so important for their mindset. Offices is a given in an Australian context, but for logistics, it's not happening just yet. So, if you have the features, your logistics will outperform. And in terms of the cycle, the reason I say good to sell is because over the past three years, since '21-'23, we do have more than 50% rental growth in nearly every single market in Australia, but the rental growth is moderating, it's slowing down. So, therefore, it's time to continue to realise your return, let the other person manage the process. But if you have a good portfolio, I think you will continue to do well.
Kathryn House
Yes. And then, there is a lot more subleasing happening in that industrial market at the moment, which I think is a sign of where we're at, and vacancy rates are starting to rise, so it is a new phase for that sector.
Henry Chin
Yes.
Kathryn House
One thing that I was also interested in listening to your presentation was that you seem to be much more of a fan of build to sell rather than build to rent. And build to rent, every property conversation, seems to revolve back to build to rent at some stage, but you're a build to sell man.
Henry Chin
Well, I always have to say, given the current political environment, the living sector is always at the centre of the policy for the politicians. Okay? And if you want to win an election, you have to address the current affordability issues. The reason I am very skeptical for build to rent is number one the operating model. Number two if you are to enter in the market in Australia, probably it's a little bit too late, because of the pricing you get there, it is four plus percent cap rate. It is just simply crazy. And on the other hand, thinking about the students coming here, migration, migrant people are coming here. You think about, what are their needs? So, their need is number one, build to sell. I think when the interest rates start to cut, when the construction costs start to fall, I think the demand will be in build to sell. So, I'm more in the build to sell camp. Number two, if you want to do build to rent, students much prefer to live in purpose-based accommodations, because I want to mingle with my peers. Kathryn, for my generation, I'm old, so I really-
Kathryn House
So am I.
Henry Chin
So, can you imagine, I don't want my neighbour to be a student, so my build to rent, if my neighbour is a student, I will complain. They're so noisy, they're so dirty, put it away, right? So therefore, I much prefer to purpose build the student accommodation, because you get an easy target. The second point I want to make for that, given the current construction costsu, current level of labor costs, you want to do the greenfield development, the smaller units will make your underwriting a lot easier. Student accommodation tend sto be a lot smaller units, so therefore they will make your underwriting work. Also, the government policy won't pay attention too much for the student accommodation. They will pay so much attention to the residential build to rent. So, this is something we cannot underwrite the policy intervention, but something we need to be mindful.
Kathryn House
It really did come through. We did a lender intention survey recently, and the lenders are in your camp as well, Henry, because build to sell went right up the charts to be number two on people's list, and build to rent dropped back, so yes.
Henry Chin
Wow. So, I wasn't crazy, right?
Kathryn House
No, you're right again. So, I had one final question for you. If you had $200 million to invest, where would you be parking the cash?
Henry Chin
Kathryn, if I had $200 million, can I retire?
Kathryn House
We wouldn't be having this conversation.
Henry Chin
Yes, exactly. And I have to say, if you are looking at the broader asset allocation, I’m still going to put quite a large chunk of my money into the liquid assets, such as cash, and the cash still can generate four plus percent of interest rate per annum, because of a higher for longer environment. And then, I also want to look at fixed income. Fixed income, the bonds. Given the higher for longer interest environment, fixed income makes perfect sense, but things will change when interest rates start to fall. Therefore, thinking about the real estate spaces, I have to say, I would be looking for the best quality of asset in all those gateway cities and the developed economies. Of course, London is number one. I really like London. Repricing interest rates is going to come first. In our region, I probably would look at Australia very, very closely. It's not because I am here, because fundamentally, I do believe such a liquid, transparent market office, retail definitely has room to grow, logistics I'm still not sure, and purpose-built accommodation. I would do it. And then, the other one I didn't mention is doing the credit, because given a bank is relatively reluctant to lend it in a massive way, but provide the credit will give you around 12% returns. It's a no-brainer. So, I'll do credit as well.
Kathryn House
Well, it's so good to have you in Australia, Henry. I'm so glad that you could take the time out to talk to me today. I know you've been all over the city. I think you said you'd done 8,000 steps by 2:30.
Henry Chin
Yes.
Kathryn House
So, thank you for being so generous with your time. To our listeners, thank you so much for tuning in. If you like the show, you can subscribe through Spotify, Apple Podcasts, or your favorite podcast hosting platform, which will mean that you don't miss our next podcast, our quarterly House View, featuring our CEO for Australia and New Zealand, Phil Rowland, and our Pacific Head of Research, Sameer Chopra. We'd also love it if you could rate or review Talking Property to help spread the word. And if you have any questions or feedback, you can drop me a note at any time via
[email protected]. Until next time.
