Kathryn House
Hello and welcome to Talking Property. I'm Kathryn House, your podcast host, and in this latest episode, we'll be examining how investor attitudes could shift as interest rates fall and inflation is tamed.
Avi Anger
Where assets are strategic and tenants are prepared to take long leases, those assets are very primed for sale and leaseback opportunities.
Kathryn House
That's Avi Anger, Charter Hall's Diversified CEO. Avi joined Charter Hall in 2003 and has over 20 years of experience in property funds management. This includes the establishment of the $5.5 billion Charter Hall Long WALE REIT, which he continues to lead.
Chris O'Brien
Groups are still looking at short WALE. It's not a shift away from short WALE. Our investable space is getting larger again because capital is coming back into long WALE.
Kathryn House
And that's Chris O' Brien, the Executive Director of CBRE's Industrial & Logistics Capital Markets business. I'll be chatting with Avi and Chris about whether long-leased assets could swing back into favour as core funds seek greater income security amid ongoing global economic uncertainty. In tandem, are we likely to see more occupiers pursuing long-term sale and leaseback opportunities? I hope you enjoy our conversation.
Avi, thanks for joining Talking Property.
Avi Anger
Thank you, Kathryn. I'm a keen listener of your podcast, so it's great to be here today.
Kathryn House
That's good to hear. And Chris, so glad you could join, as I know you've been on the road and are currently in Singapore.
Chris O'Brien
Oh, thank you for having me, Kathryn. Looking really forward to this and looking forward to a great conversation with Avi.
Kathryn House
So perhaps we could do a bit of scene setting to start with. Avi, could you give us your thoughts on the current market environment and your expectations moving forward? I know that's a big question, so maybe a high-level view.
Avi Anger
Yeah, sure, Kathryn. Look, I'd say the current market environment is positive this year in 2025, especially compared to the two years before that. So over the two years before that, we probably saw across the board, valuations were falling as a result of some cap rate expansion driven by higher interest rates. But now in 2025, we're seeing valuations troughing. Interest rates are starting to fall, which is resulting in a far more positive sentiment in the market. So my expectations are that valuations have generally bottomed and we'll see a few more interest rate cuts this year, which will be very positive for real estate. You know, in terms of the Australian economy more broadly, I think that the reduction in interest rates will stimulate the economy over the next year. I think Australia screens really well compared to the rest of the world in the near term. And we're seeing that our global investor interests that we see in our business are very positive about Australia. When they think about Asia, it's really Australia and Japan and Australia screens really well from a growing economy and positive population growth. So I'm very positive about the year ahead.
Kathryn House
It's good to hear and interesting to know that Australia is screening well. And Chris, perhaps that's a really good question for you, given you're up in Asia at the moment. How are you seeing investors viewing the Australian market at the moment and, you know, what are your thoughts on the current environment?
Chris O'Brien
Yeah, good question. And look, it is positive. I completely agree with Avi on that front. And I mean its day two of my trip in Asia and certainly Australia is still seen as a safe haven. Quite positive. There's no doubt there's some uncertainty in the market right now. There is some disruption. But I think to that point it means that groups are looking for safety and security and income. And I'm a big believer that we are seeing long WALE coming back in a big way this year because, yes, it's positive. Yes, there's good engagement, but there are certainly some quirky things in the market right now, whether it's foreign owners land tax, whether it's tariffs, whether it's a slowing of rent growth. Yeah, I think the market's really seeking safety this year in my view.
Kathryn House
Yes, on that. And this wasn't a question that we discussed before, but we recently had the election. Is there any change? Is that something that Asian investors are focused on? You know, are they looking at that result and saying that that will make a difference to their investment strategies?
Chris O'Brien
Yeah, good question. I think there's a macro answer and a micro answer. I think the macro is Australia is going to come out looking good. I think the micro is you will see just a few groups pausing over the next month or two as they work out what's happening. But the upshot is industrial and logistics in Australia is on point and on trend with the market. It's just that the next month might be a little bit slower as everyone takes a pause, which is fair enough. I get it. There's a lot going on in the market right now. It makes sense to have a pause and observe.
Kathryn House
Yes. So Avi, you've talked a little about interest rates and we've got the latest rate decision coming quite soon on May 20th. CBRE's Pacific head of research thinks a 25 basis point rate cut appears highly probable. What are your expectations? Are we going to get a cut do you think, on May 20th? And what impact do you think that'll have?
Avi Anger
Yes, Kathryn, I think we will. That's certainly our expectation as well. So that will have a positive impact, and I think we'll probably see two more cuts at least. We're expecting two more cuts this calendar year. So, I think all that combined will have a very positive impact on the market. You're already seeing that in terms of the longer-term rates. So, you can borrow three-year fixed money now, three-year swap rates are now about 3.2%. You add a margin to that so your all-in cost of debt might be over, for a three-year fixed, say 4.7 and you can buy high-quality, long lease assets well north of 5. So, you're starting to see a positive spread emerge which we haven't seen for some time, which will be very positive for property prices, and property yields will probably come down and it'll be positive for valuations and also give investors a lot more confidence when they see rates coming down. That will give them more confidence to invest in the market. Whereas previously with much higher inflation and raising rates, it was a lot harder to have that confidence about what market you're investing into.
Kathryn House
So Avi, if we zero in on assets with long weighted average lease expiries, known as WALEs, you oversee Australia's largest listed REIT with a long WALE focus. But in recent years we've seen many buyers chasing assets with short term leases, particularly in the industrial sector. Why do you think that's been the case and do you see that changing as interest rates reduce?
Avi Anger
Yeah, that certainly was the case. I think, you know, we were in a higher rate environment previously and there was a bit of uncertainty around about where rates were going and where inflation was going. And as a result investors were seeking out higher returns on their capital. And we did see rental growth in industrial of sort of 20% per annum for a couple of years and investors were trying to capture that. So they buy a property with a short lease, reset the rents and then realise the upside. I think that is now changing. I think the rental growth in industrial is still positive. You know, we saw 7% last year over the last 12 months, but, but it's certainly slowing from the 20% per annum and we're now entering into a lower rate environment where I think long lease assets will come back into favour as Chris was mentioning earlier. You know I've mentioned, the positive spread is positive between what you can borrow at and what you can invest at and the features of long WALE assets provide investors with, you know, defensive cash flows over a long period with annual increases either fixed or CPI or CPI plus in some instances. And generally, at least where we look, you know, high-quality tenants, good underlying real estate. So, in a low rate environment where investors are prepared to accept more core type returns, I think long WALE is definitely an attractive place to invest.
Kathryn House
So Chris, what are your thoughts? I know you've already touched on it, but are we in that space now or are we just on the cusp of investors really looking hard at these long-leased assets?
Chris O'Brien
Yeah, good question. I think we're on the cusp. We won't have a lot of data points as we speak today, but we're certainly seeing a shift back into long WALE. So I think by Q4 and certainly Q1 next year, you'll see a backlog of transactions that are now back from a long WALE perspective. The thing that's probably worth noting though, Kathryn, is groups are still looking at short WALE. It's not a shift away from short WALE. Our investable space is getting larger again because capital's coming back into long WALE. So I don't want people to listen to this and go, okay, short WALE’s gone, long WALE’s back. It's both. It just means that we've got a more investable market now. More capital's looking core capital's back and core capital like long WALE. There's always short WALE though, there's always interest for that. So as a whole, the industrial market is in a really healthy position in Australia.
Kathryn House
So by extension on that long WALE conversation, do you think that we're going to see more long-term sale and leaseback opportunities in this current environment?
Chris O'Brien
Definitely. Just looking at the conversations we're having with corporates, corporates are looking to monetise their balance sheets and looking at what they can do. It was a very big trend probably three to four to five years ago and we're expecting that to come back. The one thing that we're just assessing now is what's defined as long term. Now the sale and leasebacks that Charter Hall have done, some of them have been 30 plus years. Are they going to be 30 years or are they going to be 15 years? That's one thing we probably just aren't sure on yet. But certainly, the conversations we're having with corporates, it's back on the table and it'll be back even more so in our view in 2026.
Kathryn House
Are there industries do you think that are likely to be more active than others when it comes to pursuing these?
Chris O'Brien
Sale and leasebacks, I think so, I think what's going to happen is its groups that have strategic assets and they're often specialised or infrastructure based where they know they're going to be there long term they'll look to monetise those assets. A market where we probably won't see it is probably the 3PLs given contracts are getting shorter. We probably won't see a lot of long term sale and lease back with 3PLs but certainly traditional industrial logistics, cold storage, infrastructure-based groups and the alternatives market that's where we see there'll be probably the most activity on the long WALE front.
Avi Anger
I might add Kathryn, we also see a lot of activity as well on the retail side of things. So, you've got tenants where they're happy to commit to long leases because those properties are an important part of their operations and they want to, as Chris said earlier, monetise some assets that are on their balance sheet. So, you know we've done a lot of deals with the likes of Bunnings, BP Ampol, Endeavour Group in the pub space, Coles and Woolworths, Telstra, that was more telephone exchange properties. But yeah, you get that. Where assets are strategic and tenants are prepared to take long leases, those assets are very prime for sale and leaseback opportunities.
Kathryn House
And makes sense for them not to have their cash tied up in the real estate but to be able to reinvest that back into their businesses.
Avi Anger
Yeah, exactly.
Kathryn House
So to give our listeners a bit more of a feel for what these sale and leaseback deals look like, perhaps we could have a chat about a deal that happened a few years back. It involved private equity giant KKR selling three Arnotts facilities in Queensland, New South Wales and South Australia. Chris, how did that deal play out?
Chris O'Brien
Yeah, it was a growing trend at the time where private equity groups were getting heavily involved in M&A and corporate activity. It's a good thesis. You take on the Propco, the Opco, so you take on both parcels and then sell out. A sound leaseback from a real estate perspective it was a proven program for probably a three-year period there and a lot of the private equity groups capitalised on it. There was Arnott's, there was Inghams, there was a number of ones. We're expecting that to come back. It's just whether it's going to come back in the same scale as it previously did. That's one thing to kind of monitor Kathryn, the big lumpy sale and leasebacks that we were doing three or four years ago when there was a premium for scale and size. It's just whether that's the case now where at the moment it feels like there's probably stronger value in some of the smaller deals. The sub $200 mil at the moment, there's just more money around for that type of deal size. So interesting to see if there's going to be the larger ones. I'm fascinated to hear what Avi says about that and whether he's having high level conversations already with those groups because we're certainly seeing it now.
Avi Anger
Yeah, I mean the Arnott’s deal was a great deal. We participated in that with Chris and his team. We purchased the Huntingwood facility in Sydney on a 32-year leaseback. That was a triple net lease as well. So, the tenant is responsible for all costs associated with the property, including capital expenditure. It's a great big piece of land in western Sydney, very well located. Arnott's, it's their main processing facility for Tim Tam biscuits. So, it's a very exciting facility to go and visit.
Kathryn House
Do you get free Tim Tams out of that?
Avi Anger
On my site inspection we did, which was very exciting. We saw the whole manufacturing process, which is really very interesting to see and it's a great facility, great business. So, we were really happy with that deal and Arnott’s were too because the private equity group were able to monetise the value of those assets as part of the deal and drive their IRRs as well. So, it was a good deal all round. And you know, we've been very active. We also participated in the Inghams portfolio that Chris talked about earlier as well as many other sale and leaseback opportunities. You know, it's a very large part of the Charter Hall business. So, both from corporates like the Telstra’s and BPs that want to monetise assets on their balance sheet as well as working with private equity groups who want to realise assets from properties or companies that they're acquiring. So, they're both good sources of deal flow for us and we have been very active in that space. So, we've been still active all through recent years, even though the volumes in sale and leaseback have been a bit less over the last few years. But as Chris said, it will pick up and we're already seeing signs of that and we're very active and have been all the way through the last sort of 10 plus years across a number of those opportunities.
Kathryn House
So without revealing too many secrets, are you talking to many people right now?
Avi Anger
Yeah, always. Yeah. There's a number of deals on the go at the moment for some portfolio type leaseback opportunities which are really good, really exciting.
Kathryn House
So we'll have to wait and see.
Avi Anger
Exactly, yeah.
Kathryn House
Chris, so that was a private equity sale we talked about with KKR, but are you now seeing more private equity capital on the sidelines waiting to be deployed?
Chris O'Brien
Yeah, we are, we certainly are. Just a watchful eye at the moment. The private equity groups are very active right now, I guess with a lot of them. They do require high returns, Kathryn. So, the private equity groups over the last couple of years have probably been playing in the short WALE space, given the high returns through the rent growth that Avi was mentioning earlier. Given their cost of capital, we don't expect them to be as aggressive as some of the more traditional sovereign wealth funds looking at sale and leasebacks, but certainly they're looking. But at this point they're probably still focused on the shorter WALE, but we are expecting that to change relatively quickly.
Kathryn House
And Chris, I've also heard you talk about more core money coming out of countries like Japan and Germany. Are they chasing long WALE assets?
Chris O'Brien
Absolutely. Yep, absolutely they are. Long WALE certainty, fixed reviews, all the hotspots that Avi mentioned earlier, the type of investments where you just own it and you never really hear from the tenant, that type of stuff, which is what Charter Hall's been doing for a very long period of time. But that's the market that they're playing in and that's the market we're expecting to be super aggressive over the next 12 months.
Kathryn House
So, Avi, the Charter Hall Long WALE REIT has a diversified portfolio. Owns pubs and bottle shops, service stations, telecommunication exchanges and so on. Where are you seeing some of the best opportunities at present?
Avi Anger
We're seeing opportunities across the board. You know, we really are active on the sell and leaseback front as I discussed earlier. You know, a lot of those deals are more retail in flavour and industrial in the office space. Selectively there are some long lease assets that are interesting and attractive that we're actively looking at in social infrastructure. You know, that's been a big area for us at Charter Hall across whether it's childcare or medical, health, universities. I think the government space, we've spoken about this for some time, but I really do think government sale and leaseback is going to become a bigger part of the market. You know, governments are going to be spending more, particularly the new government that's coming in. They're going to want to monetise some assets given their growing debt levels and I think that's going to be an interesting area. So, I think across the board we're seeing really good opportunities. You know it's a very large part of our business. We've been buying long WALE throughout the last few years when a lot of other groups were focused on other areas of the market. We’ll continue to be very active in the long WALE space. In the US, the net lease sector is a very large part of the market and in Australia we've been driving that, and we'll continue to do that. But it's definitely a growing part of the market and we see some very exciting opportunities in that space going forward.
Kathryn House
So, Chris, CBRE's H1 Lender Intentions Survey was recently completed with responses from 34 commercial real estate lenders across local banks, international banks and non-banks. It shows that industrial and logistics assets are still the preferred asset class for new investment by a considerable margin despite weaker leasing growth in that sector. What's your view on why I&L is still outpacing the other market sectors?
Chris O'Brien
That's a good question, Kathryn. And you mentioned that the rents have slowed somewhat, but they're still highly outperforming most sectors. I just think we've had such a good run that we became apologetic about 7% growth. Most sectors would be delighted with that. So, I kind of need to have perspective. When you're talking about the industrial market, we sound a bit flat sometimes about it. But 7% growth is really, really good and the sector's proven to be highly defensive through really difficult economic conditions over the last five years. So, I think it's still a relatively new asset class from an institutional perspective. I know that sounds ridiculous, but it's really only since COVID it really elevated allocations across the globe for institutional. So, I think unapologetically it's still doing really well. It's probably just not growing at the pace that it was last year. But that was impossible to maintain, to be honest with you, Kathryn. So that's why everyone loves it still. It's still a wonderful sector and is going to continue to grow and outperform most sectors.
Avi Anger
Yeah, we're very positive on the industrial sector as well, Kathryn. I think vacancy rates are still very low. It's sort of 2.5% nationally. Supply will probably be lower going forward than it has been over the last year. We did see record supply last year, but most of that was pre-leased by the time of completion anyway. And I think given the pressures on construction costs across all sectors now the existing industrial stock continues to perform well and the new supply that we're involved with is still getting a lot of interest. So, we're very positive on the space.
Kathryn House
Because we still have those vacancy rates that are some of the lowest in the world, aren't they Chris?
Chris O'Brien
Absolutely, they are the lowest in the world. So, it's incredible metrics that you're talking about, like sub 2% in some markets, and we have favourable leases, we have net leases, we have a transparent market in Australia, and we sometimes underestimate the fact that we are primarily a freehold market as well. We're competing across APAC with a lot of Asian markets in leasehold Kathryn, so there's a lot of long term thematic that really make sense for Australia logistics. So, it's just great to see more diverse capital coming back in now with long WALE, you're going to have greater volume because you become less restricted to geographies. When you're looking at long WALE, the market's been very focused on the Eastern Seaboard in logistics for the last two years. Melbourne, Sydney, Brisbane. When you start bringing Long WALE into it, it becomes about the covenant, the infrastructure, the actual fundamentals of the business. So, all of a sudden Adelaide's back, Perth's back because you're looking at it for different drivers. So, the investable space of Australia gets bigger,
Kathryn House
And Avi, turning away from I&L. Maybe ask you a question about office. It was very unloved the last couple of years, but you mentioned that office was on your radar. Why are you more positive about office?
Avi Anger
Look, we're definitely seeing the market as a lot more positive this year on office. Definitely strengthening occupier interest. Particularly in Sydney and Brisbane markets has been very strong. Investment activity has definitely picked up. The rental growth's the highest since we've seen since before the pandemic. So that all bodes very well for office, I think. Particularly, well-located prime office we think is a really attractive asset class. I think that to construct new office now we've seen a more than 30% increase in construction costs from prior to the pandemic and that means that the cost of constructing new office and the economic rents that are needed to support new office development will set a floor, I think, for prime well located, good quality office and I think that really will be very positive and is being very positive for the market for really good quality well located prime office, particularly in Sydney and Brisbane. And we're seeing that at the moment.
Kathryn House
So as we wrap up any closing thoughts, Avi on, you know, what we're likely to see this year?
Avi Anger
Well, I think we're likely to see higher transaction volumes across the board. I think that there's been good transaction activity. Industrial, shopping centres have been having a good run, but I think office is definitely picking up. There'll be longer WALE transactions, as Chris was alluding to earlier, which will also stimulate volumes and as rates come down, I think that volumes will improve, pricing will improve, there'll be more people willing to trade because they can get more pricing in line with their expectations. So, I'm very positive about the year ahead.
Kathryn House
And Chris, what about you? Are there any hurdles or roadblocks out there?
Chris O'Brien
There are always roadblocks, but nothing that the market can't get through with good fundamentals. I just think we're going to get back to a more normalised market where core assets are, you know, there's a gap between core and secondary from a yield perspective, and fundamentals start coming back and groups start focusing on quality. We've come out of a market where, mysteriously, long WALE was a softer yield than short WALE. That's going to pivot back to more traditional metrics over the next 12 months.
Kathryn House
Well, it looks like there are interesting times ahead and let's hope that we do see that 25 basis point interest rate cut on May 20th. So thanks so much for joining Avi.
Avi Anger
Thank you Kathryn.
Kathryn House
And thanks for joining Chris. I hope you get to enjoy some chilli mud crab while you're in Singapore.
Chris O'Brien
I'm actually having that tonight, so you must have my diary.
Kathryn House
I'm very jealous. So we've got some great episodes coming up, so make sure to follow Talking Property wherever you get your podcasts. That way you won't miss an upcoming episode on Australia's emerging Co-Living sector and a behind the scenes look at some of the key themes to emerge from the upcoming Property Council Leaders’ Summit. And if you get a chance rate or review Talking Property to help other people find us. Until next time.
