Talking Property | The Reporting Season Scoop

KH:
Hello and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host and today I have three of Australia's leading property journalists here to discuss the recent reporting season. Hundreds of Australian companies have just posted their half year results for the six months to December, including a swag of ASX-listed property stocks. I'm excited to be joined by Australian Financial Review columnist Robert Harley, The Australian’s Commercial Property Editor Ben Wilmot and the Sydney Morning Herald's Commercial Property Editor Carolyn Cummins, to cut through the stats, discuss the trends and get a view on what's next. So, let's get right into it. Give me your take on whether there were any surprises this reporting season on the upside or downside, or did you notice any key trends? Rob, maybe I could start with you. 

RH:
Well, I think the upside was in those retail stocks, the shopping centre malls. Ben wrote a really nice piece about that. That they are getting more rent even though the sales have moderated a little bit, they are getting more rent and people are paying. I was out at Chadstone recently and all those big box retailers want more space. So it's not just that the market is going better, the retailers are actually expanding. 

KH:
Yes, Sameer our Head of Research, was doing the numbers on the REIT stocks and obviously they have better market portfolios, so their metrics are healthier, but their occupancy is sitting at around 99%. 

RH:
Yes, and you can see in the return that, for example, Scentre is paying out, this distribution’s 5% up for the year and they're forecasting another increase for next year. 

KH:
Carolyn, what came out of it for you? 

CC:
Yes, well I agree with Rob. I think it also shows, to use that awful word curating, but I think Westfield particularly have done it so well. Shopping centres are now experiences and I think the retailers that are going well are the ones that are interactive. The ones where you can, JD Sports, you can, what is it? Do hoops. Lego, you can go in and play with Lego, and I think also people are shopping beauty, the sort of instant gratification. Lipstick wars, people go to Mecca, which is always packed. But I don't think many people like apparel, that is still struggling. And that sort of goes across the board of people aren't working as much in the office so you're not needing as many work clothes. The casualisation of work has meant that fashion shops are really struggling. But in doing that, I think these other retailers are taking that space up. So, to use the Scentre Group, the destination centres, it's what a shopping centre is. Something like Chadstone, which has got a hotel, it's got office towers. They're becoming their own little eco-environment. They're not just a shopping centre with a big box at the end, which is a new trend I think. 

RH:
And remember a lot of these guys we've just talked about the destination centres, a lot of the convenience centres, their leases are inflation linked and they've actually gone very well in a period of high inflation. 

CC:
Yes. So you wonder if those start to do like a turnover rent soon because a lot of them are trying to get into the online sales, which they can't get into their data because they can't track it. So, I think shopping centres are talking about more of a turnover rent in the lease. 

RH:
Carolyn, I think some of them have actually learnt how to do it. 

CC:
Right. Okay. 

RH:
So that's another twist to the way that their rent is looking better. 

CC:
Yes. A lot of them now fashion themselves as sort of a showcase, a front store and then if you want to buy something you can get it online. I mean back in the day we used to go in and take a sneaky photo on your phone and they used to shoo you out of the store. Now they kind of welcome you and say we've got this dress that's in five different colours, it's in five different sizes and you can order it online. 

BW:
I think the local retailers have cracked the code a little bit, omnichannel retailing. I'd been worried about the continual rise of Amazon, which is obviously helping the logistics and industrial sector, but looking closely at some of those retail results, and I think it's flowing through to their leasing demand as well, there is online only retailers now going into malls and there is expansion of traditional retailers as well. So I think Australia perhaps is looking pretty good on a world stage in doing that. 

CC:
And I think also GPT were talking about, and Scentre Group mentioned it as well, is a lot of the traditional, like the department stores, particularly David Jones, which they've documented they are shrinking their stores or closing them. Back in the day, that would probably cause fear in their hearts as a retail landlord, but now they can just slot something else in straight away. Which again makes the shopping centres more interesting because you don't just have a big old Myer up, David Jones up one end and you get a bigger retailer with more rent. 

KH:
And on that omnichannel front, I was looking at one of our research reports recently and a lot of the retailers are taking space just for that whole click and collect solution. So, it's benefiting centres in some way, the rise in e-commerce. 

BW:
One interesting thing is at the same time they don't seem to be obviously building many great big new centres, but even with their existing stock, they're very cautious about larger expansions notwithstanding their conversions of some space to more productive uses. Just interesting, I wonder whether there'll be a tipping point as to when they actually start building more? 

KH:
Yes. So maybe we should talk about office. Is it still a dirty word? And has any more light been shed, do you think, this reporting season, on the outlook for asset values, maybe not just in office but across all sectors? 

RH:
A lot of the commentary was about the fact that we were further into the valuation declines than the beginning. Or to quote, was it Churchill? It's the end of the beginning. And so there was a lot of that commentary, even people beginning to think that the next results would be about the end of it. That might be premature, because the valuations are a lagging indicator. So we're going to have to see some transactions to prove that we're actually at the bottom of it. 

KH:
Yes, it was interesting I saw Steinberg saying in Dexus’ results that they're seeing a lot more interest from global and local investors in this first quarter and a lot more people flying down to look at assets here. So it will be interesting to see when the transaction activity finally starts to pick up 

RH:
There seems to be two different views about that international interest. One is that Australia's looking good. The other is that there are a whole lot of really good buys elsewhere around the world. I don't know whether Ben, Carolyn, you got a feeling about that? 

CC:
Well, I think it's a Mexican standoff, isn't it? I think that the assets are good to buy, but what the owners want and what the buyers are willing to pay, that gap just doesn't seem to be narrowing.  

BW:
I was listening to David Harrison of Charter Hall during this reporting season and some of his comments around this kind of thing. I think that global interest exists to that extent. But you know, part of the story is the difficulty of buying in some of the other markets in the Asia Pacific. So perhaps that does see some of that capital funnel to Australia. And perhaps an important distinction to make is the portfolios of REITs are perhaps different from the general market where there are perhaps concerns about some of the metropolitan assets and their values. There's been very few transactions in those markets. So we simply don't know what some of the values are of a lot of those things. 

RH:
No, I think that's right. I mean that's David Harrison's bifurcation, whereas if you look at that core part of the CBD, particularly in Sydney, that's fine. Go out to Parramatta. What's the layer outside, you know, in B and C class is 40% empty. So I think that you're absolutely right Ben. 

CC:
And places like St Kilda Road in Melbourne is just dying. Because they're saying that Cremorne, the Melbourne Cremorne, not Sydney Cremorne is draining people out of St Kilda Road and they're all such old buildings that nobody wants to go into them. If you can get a nice rent in a good shiny building. Like Docklands is the same in Melbourne. That's tumbleweeds apparently. 

BW:
I was going say they did address the valuation things I think reasonably well, all these large listed companies, but they didn't really have much poor, and in fact some of their news was reasonably good on leasing, which surprised me a little bit. And there wasn't much negativity about that. Notwithstanding the overall elevated vacancy level seen in say the PCA figures. There wasn't necessarily from the listed companies in this last reporting season, much sharing of problems around that. Many of them just seem to be determined to lease up the spaces that they had. 

KH:
And I think if they've got premium space, our data's showing that because people are trying to get people back into the office. Those premium spaces, they're prepared when they're moving, they're paying up to sort of 10% more for the space as a way to get their people back into the office. 

CC:
Well I think if you can go into a nice shiny new office as opposed to something that's falling to bits the office managers are opting for that. 

RH:
There were some numbers about people taking less space, same space, no one's taking more space. So maybe they move into a better space, take less space and be prepared to pay the same figure for it. But also, the incentives are huge. If you look at that, I mean GPT included some stuff from, from another agency, Kathryn.
 
KH:
Oh, heavens! 

RH:
The incentives, it's over 40% of the total lease in Brisbane. 

KH:
Yes, in some markets. Absolutely. And I think Melbourne would probably be in a similar situation. 

CC:
Oh, very much. Although I was in the city the other night, and it was pretty busy. I mean, there's still people in the office, but I think they're dreaming if they think we are coming back five days a week.

KH:
I call it the bus indicator. Getting on the bus in the morning and getting a seat. And from where I come from, it's really hard to get a seat these days. So maybe we should talk about industrial and logistics. That has been one of the powerhouses for a while now, particularly when it comes to rental growth. But what's your take on the outlook moving forward, following these results? I know Goodman, there was plenty of chat from them about data centres. What's your take on the I&L landscape? 

CC:
Well, the data centres are the growth engine they all talk about. I think that all the internet of things that we all use, that won't decline. So I think they can reimagine what is inside the shed as opposed to just being things whizzing around on a conveyor belt. I think they're now looking at where they can use these big boxes for new use, adaptive reuse. 

BW:
Do you think also the way they're looking at it, as you say, they're moving to this very modern style thing. And again, I think David Harrison and Charter Hall brought this out, was there's a split between say the very latest ones and the older ones and the companies that have done well to curate, that word. The more modern ones could be the beneficiaries, going forward, if we have companies that are probably not in the listed sector who have the older ones, they're the ones that if anything's going happen in a negative sense, would be exposed. Whereas the modern ones, perhaps less so. 

CC:
Yes, well it's a bit like office, isn't it? People go to the nice shiny new things as opposed to the old because it would take a lot to re-adapt these things. 

RH:
So there was a sense that perhaps some of the really strong growth, and people were still talking about 20% growth in industrial rent in Sydney. Very, very, very low vacancy in Sydney out in that western suburbs area. But there was a sense that perhaps some of the really strong growth was beginning to moderate in logistics. 

BW:
Rob, I know last year you wrote about some of the supply challenges and I didn't necessarily follow you through each of the REITs, but I wonder whether they'll be able to build all they've said they're going to build, some of those projects meant to come out of the ground in the next couple of years, whether they'll actually eventuate. 

RH:
Well, yes, I think there are two things there. One is do they have the financial capacity to do it? And is the planning provided. I mean, I was quite interested in a comment, there was a question asked at the Stockland release and it was, Mr Gupta, do you think you've got the capacity to do everything you want to do? Which was a way of saying, have you got the money to actually do everything? And I think that will start to play on a lot of people's thinking. We see it in retail, people aren't building, you see it in office, people are going to stop building and you'll also see it slowing a bit. I mean, I think they're still trying to build a lot of industrial, but you're going to see across the sector things slowing down a bit. And that's both planning and having the money to do it. 

KH:
Which will keep the vacancy rates low. 

CC:
Yes, certainly in places like South Sydney where it's just so tight and obviously where the new airport's coming up in Western Sydney. But again, if they're going to build it all. 

BW:
I was going to say we've talked about tough times and down cycles and things, particularly for office and you know, to a lesser extent, obviously retail's come down already, but one thing we didn't see, well, perhaps there's one or two, but we didn't really see many equity raisings in either this half or at all perhaps. I just find that interesting that these companies managed to survive this cycle without doing that. Whereas in previous times, they've actually been forced into equity raisings. 

RH:
The GFC told them how bad that was for their stock, their investors. Their existing investors doing capital raisings at less than NTA, people really disliked that. So there was an aversion to that. And there's also, unlike the GFC, there is some capacity, there is some financial capacity out there. There will be raisings, but it'll have to rely on the metrics looking better. 

KH:
Well, perhaps we could jump into the residential sector now. It's clearly been in the spotlight given Australia's current housing shortage. Do you think residential developers are in a sweet spot right now? And what are some of the emerging trends? I did see a few groups this reporting season talking about land lease estates and obviously build-to-rent does still seem to be high on the agenda. 

CC:
Yes. Well, land lease is becoming the big thing. Talking about Stockland, that's where they're focused on. And I think if you've got the capacity to still own the land and then rent the building on top, I mean, they're not all trailer parks. I think people are going towards that and some are in great locations and they're beautiful views on the coast and things. 

RH:
I mean some of these houses sitting on leased land actually sell for over a million dollars. I think the attraction is affordability, community and also, not for those buying at a million dollars, but there is some Commonwealth rent assistance for the leasing. So it stacks up. There's over a hundred thousand people living in these things. It's actually bigger than build-to-rent at the moment. And it meets two key things, affordability and downsizing. So it ticks both boxes and it's no wonder that people are planning to do it. 

KH:
We just brought on someone to head up valuations just for that manufactured housing, caravan park sector. And I was talking to someone today saying, we've got someone just to do that. And it's like, it’s actually a really growing sector, but I think it's not as well known. 

RH:
Partly because it's out in places that none of us ever visit and it's a long way away. So you don't see it, but there is a lot of it and there's a strong demand for it at this moment. 

CC:
Yes. Well Ingenia have been doing it for years, you know, they're buying up all these caravan parks and converting them and as you say, if you're retired or semi-retired and you don't have to go anywhere, it's a probably great proposition. 

RH:
Yes, if you went out there, you would see morning teas around the pool, or the bowls. People actually like living this way. 

CC:
Where do you sign up? 

KH:
I was about to say that myself. 

BW:
At the other end of the market there's been some successes as well. I mean, I guess it's a bright spot for Lendlease. The things like Barangaroo where they're starting to settle some of those apartments and obviously One Circular Quay where they're selling apartments. So it'll be interesting to see also the success of some of those projects, whether that sparks any activity from some of the other listed companies. I think Mirvac has a project also in Darling Harbour, so it'd be interesting to see how some of the stuff that we all now write about will flow through, if at all, to the listed sector. 

CC:
One point that Mirvac made, they were saying that given all the concern about the building and the contractors that they're now finding people will come and buy something when it's built. So they're doing the big thing at Willoughby, the old former Channel Nine development there. And they said that people are actually coming and seeing it built and buying it instead of off the plan because they're concerned if it's off the plan, it won't get built. So that's alright for a big listed group, but if you're a smaller developer, that must be a concern if you're trying to get these things sold before you build them. 

RH:
I think 'sweet spot' might be a bit too optimistic for the developers at the moment because the metrics are still a problem. The metrics of what you pay for a site, what you build for a project, and what people are prepared to pay. I mean, as someone said, you are getting, and it might be true of the project on the North Shore, but we need more housing in bulk and just having people retiring, people buying this stuff isn't going get us over the line. So I still think there is room, you know, we are going to need more housing and what we're into at the moment isn't quite there. 

KH:
Yeah, it was interesting, I was looking at what Qualitas was saying at its result that Australia needs $115 billion in capital to build enough new homes over the next four years just to keep vacancy rates steady. So that's not, you know, to worsen, it's just to keep things steady. 

BW:
And interesting. Some of the more commercial companies like GPT have plans in this sort of field. Definitely Vicinity, which is quite advanced in putting up schemes of various mixed-use projects. And even in this last result, Westfield or Scentre Group said that it would be part of those conversations as well around urban planning. So, I think they're all really well aware of it, but how do we see this, I suppose, over the next few years. 

CC:
Well, it's the planning, isn't it? I mean, all the densification around transport nodes, I mean, Woolworths buy land just to keep it in case they want to build a block of flats. They've got something out at Ashfield, there's a big Woolies there and there's a big block of land next to it they own and they're trying to get planning through for apartments. But, you know, that takes years. 

KH:
So maybe one final question. I think we could talk all day. There did seem to be a growing focus on alternatives that emerged from some of the groups. Not everyone obviously, but is this something you expect more REITs to focus on in the future? 

RH:
If you went to the US, you'd find REITs in all sorts of different property sectors or sectors that we have outside the traditional office, retail, industrial. There's lots of opportunities in the property space that aren't covered at the moment in Australia. 

CC:
Well healthcare, obviously that's a big one. Hospitals. Centuria talking about, they've got glass houses for tomatoes. Agriculture, that's coming up. Student accommodation. Well, that'll be interesting. 

KH:
We did a podcast on student accommodation. It's a really interesting sector. 

CC:
Yes. Because I mean, they're building stacks of the stuff, but all the kids have now got visa issues, you know, what's going to happen there? 

RH:
That comes back to the fundamental problem of price and the cost of putting these things up and it has a limit of people who, whilst they need the space, can't afford it. But that applies across to all these sectors. Childcare, all these extra property sectors that we'll see money flowing into. 

CC:
Yes. Well, they're all talking about it, you know, they're diverting things out of office development into these alternatives that will give them a sort of a steady income stream. 

KH:
Well, it'll be interesting to see what changes between now and the next reporting season. Thanks so much for your time. It's been great to cut through the financials and get your take on what the results highlight for the sector, as well as some of the emerging property market trends. 

Thanks for tuning in to this latest episode of Talking Property with CBRE. If you like the show and want to check out more, visit cbre.com.au/Talking-Property or subscribe through Spotify, Apple Podcasts, or your favorite podcast hosting platform. I'd also love to hear from you with questions, feedback, or ideas for future podcasts. You can email me via talking [email protected]. Until next time.