Kathryn House
Hello and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host, and for this latest episode, I'm joined by two of Australia's leading property journalists to get their key takeouts from the recent reporting season.
Rob Harley
I think the thing to look for with the listed trusts, and this is quite hard to do, is to look for those that are going to get a boost as interest rates stabilise or even come down.
Kathryn House
That's Australian Financial Review columnist, Rob Harley.
Ben Wilmot
This is sometimes the conditions in which mergers and acquisitions happen, if there is stabilisation and if people are willing to take a position on where the market's going.
Kathryn House
And that's The Australian's Commercial Property Editor, Ben Wilmot. I hope you enjoy our conversation. So let's get right into it. Rob, thanks for joining Talking Property.
Rob Harley
A pleasure to be here again, Kathryn.
Kathryn House
And, Ben, great to have you back on the program.
Ben Wilmot
Thanks very much, Kathryn.
Kathryn House
So hundreds of Australian companies have just posted their half-year results, including a swag of ASX listed property stocks and it seemed like there was a lot more positivity coming through these results compared to last year. Rob, did you get that impression?
Rob Harley
Yes, absolutely. In fact, the buzzword of the moment is inflection point. So this is a reporting season which shows a change in the market. I mean it has been building, but you can see it this time around.
Kathryn House
Yes. So, Ben, was that your sense of it?
Ben Wilmot
I think that was backed up by companies just announcing a whole variety of initiatives, be it in funds management or property. They really want to put that sentiment into action this year.
Rob Harley
Yes.
Kathryn House
So I think the RBA's much anticipated rate cut was clearly top of mind for many of the managers and it happened right in the midst of reporting season. Dexus' Ross Du Vernet said the cut would be important to the psyche of investors while Tarun Gupta said more cuts were needed to drive housing demand. Ben, how important do you think this cut will be for the sector?
Ben Wilmot
Look, I think it's a huge swing factor for a lot of those companies that are exposed to the residential market. You called out Stockland and Mirvac similarly opined on that, and even AV Jennings when they were reporting as well. I think what will probably need to happen is we'll need to see activity in this half of people releasing stock and then hopefully conducting sales and also at the same time settlement rates also holding up strongly as well. So I think we will really need to see that action happen before we know whether that's actually going to flow through fully.
Kathryn House
And, Rob, what's your view and any bets on when these additional rate cuts might come through?
Rob Harley
No, I think-
Kathryn House
Are you a betting man?
Rob Harley
I think there is some more to come, but one of the things is that we are not going back to the very low interest rates that we had post-COVID and I think we've got to build that in. There does seem to be some talk residentially. There does seem to be some renewed activity in the market because of it and perhaps because of it, the market can see that interest rates aren't going up further. But I think Tarun from Stockland is right. In reality you actually need more cuts for more people to be able to afford the current prices. For commercial property, it's a sort of psychological thing. It actually doesn't have any impact on the lending that goes on behind commercial, but it's psychological. It's an inflection point.
Kathryn House
Absolutely, and I think most of the managers had already built this into their forecasts, but as you say, it's just the psychology of it.
Rob Harley
Yes. Yes.
Ben Wilmot
I think there's also an element, probably the property companies didn't talk about that much in this half, but also the election’s going to be held in this next half year or in the next coming months and that could be influential, just partly from a timing point of view as it takes out a weekend or also from a policy point of view, if there's either a change of government or there's further policy announcements by either of the opposing sides. It could have an influence on the market.
Rob Harley
That's right. There's going to be even more talk about housing crisis and the two lead parties actually have very different views, and the Greens a third view, on how housing should be handled. So you're going to see a lot of debate about it. It's actually quite interesting though. There does seem to be some renewed interest in residential, when normally before an election it dries up. Normally before an election, things slow down. Now perhaps in the past that's been because of some sort of tax initiatives floating around, but normally things slow down. At the moment we are actually seeing the market actually seem to improve even though we are going into an election.
Kathryn House
Yes, it's really interesting because people have typically sat on the fence when they know an election's coming up, but hopefully we won't see that this time around.
Rob Harley
But we are going to see an almost sickening number of people talking about the housing crisis.
Kathryn House
That's been the same for the past 12 months.
Rob arley
[laughing] Other than that.
Ben Wilmot
In saying that also there does seem to be elements of progress. Even on the front pages today, there seem to be just even the list of projects that were being either proposed or coming forward. At least there is activity. I think whenever you pick up the state newspapers, there's a housing policy announcement or expansion or something, which maybe is a bit of a change from a sort of a static thing where nothing was happening.
Rob Harley
That was one of the results was Andrew Schwartz from Qualitas who was talking about now the start of a new cycle and then said, "we haven't had a super cycle in housing for some time." So it is possible that we get a very big cycle of house building. He then said, "well, but we need to make sure that they're feasible." So there's a little bit of work yet to make all this housing feasible, but once someone tweaks that, I think there will be a lot of housing activity.
Kathryn House
So we've talked a lot about residential. It'd be interesting to get your thoughts on the office sector. It's been the sector that has been hardest hit in this whole COVID, post-COVID era, but I did really get the sense that people feel the market is on a lot more positive track. So, GPT's Russell Proutt noted that the sector was either in a trough or troughing and CBRE's latest figures certainly do highlight stronger return to office numbers. Rob, do you think these latest results will give investors more confidence on the office front?
Rob Harley
I think the confidence was building on the office front. I mean, we saw more transactions last year than the year before, then more leasing. The amount of leasing last year was actually positive for the first time for a couple of years. I just think it needs, to use the term from last year, which is bifurcation. There is a difference between where you are. I mean, one of the funds has got space to lease in St Leonards and Docklands and Parramatta and they've actually said, "we would not expect any income from this for this year." So there is still lots of space to be leased.
Kathryn House
Yes. So, Ben, what was your take on the office side of things?
Ben Wilmot
Pretty similar. And I'd add to that also, I think it was David Harrison of Charter Hall was talking about the prohibitive cost of building some new projects. So we might not see a lot of new competing supply coming in to compete with some of those existing assets, probably giving them time to fill up again and readjust to the market as well. I think that that'll probably go for, even in the CBDs, but certainly in the somewhat undercovered fringe markets, there's been a lot of projects that are either not going anywhere or not going ahead. So maybe those markets, even though, as Rob says, there's still plenty of space to be leased, there won't necessarily be new builds to add to the pressure of empty space.
Rob Harley
That's right. And that's a theme for commercial property as a whole. It's very expensive to build now. In fact, it's prohibitively expensive unless rents rise a bit.
Kathryn House
It's that whole, people are talking about economic rents a lot now, so there is such a gap between what you need to charge on new space versus existing space. So I think that's going to be interesting to see how that plays out in this next cycle. And do we think the office write-downs, are they over? Are we done? No more write-downs?
Rob Harley
[Laughter]
Kathryn House
[Laughter] Maybe? Depends?
Ben Wilmot
Well certainly from the commentary they don't expect any more and even if there's various scattered sales, I think some of them will probably be distinguished quite easily by the valuers if there's any movement. And I do think, probably, the rental story will come through. The people who are looking to prepare to sell assets this year aren't talking about write -downs, they're talking about getting non-core assets away so they can then put the money back into their main operations. So I don't think they're doing that on the basis that they expect further write -downs. I think they've probably held on through the worst of it actually. And so the fact that they're going to market potentially now means they're a little bit more confident, in the demand for stock.
Rob Harley
Yes, I think that's right. I mean what have we seen 20%, 25% right back on these figures. I think that's probably standard. The thing we're assuming is that the world economy stays as it is, which probably is a big assumption.
Ben Wilmot
And even locally, there's the Victoria question. If you look through the surveys conducted by firms like CBRE, the buyer intentions towards some parts of Australia are pretty low for a variety of reasons.
Rob Harley
Yes.
Kathryn House
Yes. I mean, and that came through when I was talking to some of our clients at the end of last year and there still is that perception of potential sovereign risk in Victoria.
Rob Harley
No, I was talking to someone in Singapore the other day that had been talking to people in Southeast Asia and that the point about Victoria was being reinforced there as well.
Ben Wilmot
Can I ask you guys, does that take you back to other times in Victoria? I grew up in Melbourne, and it does take me back a little bit to the 90s frankly, when people were avoiding investing in Victoria.
Rob Harley
Well yes, but this is almost like self-inflicted in Victoria. By the same token, I've noticed a couple of analysts picking stocks which have exposure to Victoria and saying they have more upside. It's quite interesting. So the analysts are saying that Victoria will move, it's just going to move behind everybody else.
Kathryn House
If you take that longer term view?
Rob Harley
Yes, if you take the long- term view. That was one of the land lease stocks, which has a lot of exposure to Melbourne and has been hammered by problems within itself, but the analysts have a view that Victoria will pick up.
Ben Wilmot
That gives us some hope yet.
Kathryn House
It's interesting though. I think people seem to quite quickly jump on the bagging Melbourne bandwagon. I know we put out our return to office figures and every time we put them out we can demonstrate that the return to office is happening at the same pace as other markets, but it's just coming off a lower base and the headlines that you always see are, "Melbourne in the doldrums," "Melbourne lagging behind."
Rob Harley
But some of the tax policies that they've introduced are punitive and that's reflected in what investors think. "Why do I invest here if I'm paying so much more in tax?"
Kathryn House
So, changing tack. Data centres. They were really in the spotlight this reporting season, particularly after Goodman announced its monster $4 billion equity capital raise to accelerate the growth in its data centre operations. I was interested to see that represents the ASX's largest ever real estate deal and the sixth largest ever. Ben, do you think we're going to see more property groups targeting data centres? It was interesting to see Charter Hall mention it's got eight sites identified that are suitable for data centre developments.
Ben Wilmot
And I think Stockland called it out as well. Their own achievements so far in Sydney and their keenness to look at other sites and Centuria is also talking about its operations. I think everyone's talking about how they can get exposure to this. I mean almost nobody will be able to get the same exposure as Goodman has, but I think a lot of them will be able to participate in some way in that data centre revolution. And I think if nothing else, they sort of have to. It's not only getting the best use out of your property, say, your industrial properties, but just across your broader operations, just the importance of having a strategy in relation to AI and other things like that. I think that's probably where some of the thinking comes from the large corporations, a lot of them, and they really do want to have a proper strategy in these fields.
Rob Harley
Yes, I thought it was very interesting that David Harrison from Charter Hall, a very astute property guy, and they have, as you said, they've got the potential, they've got a lot of industrial land, but he said, "we may play the data centre thematic in a different way." So they could be taking advantage of it in a way that... I mean Goodman are going to build and they're going to develop, but Charter Hall could do something else. I think that was a very interesting comment.
Kathryn House
But keeping his cards close to his chest at this stage. [Laughs] What about on that broader industrial and logistics front? Stockland, as part of its results, unveiled two major partnerships with KKR and M&G Real Estate. Are we going to see much happening, do you think, in that I&L space this year?
Ben Wilmot
I do think that there'll be more activity. It's probably the most liquid sector at the moment in terms of being able to buy and sell property. And maybe there'll be a shift, a little bit, where a lot of them are focusing on this last mile logistics and also infill strategies. That seems to be going perfectly well. But maybe there'll be a little bit of pressure on some of the outer suburban big box developments. It doesn't seem quite as easy to make those stack. But that said, there's plenty of opportunities for those land parcels on the fringes of the big cities.
Rob Harley
That's right, Ben. I think there is a view that the post-COVID, the huge increase in rents that followed COVID has sort of run its course and you're beginning to get normalised. There's still a lot of catch up to do. I mean, GPT argue that their portfolio is 15% under rented, so there's 15% upside there already, but in the past it's been a 50% upside. So it's just beginning to slow down. There is more development. But, Ben, you're also very right, it's that middle ring industrial that is showing up well, whereas the big box out in the fringe is a bit slower.
Kathryn House
So turning to the retail sector, in a similar vein to office, there seemed to be more positive news flowing through. Vicinity Chief Executive, Peter Huddle, noted that the group's investment strategy was anchored by their conviction around premium fortress-style assets in great trade areas and that they have the potential to deliver these superior returns and value growth over time. Anthony Mellowes of Region Group said its business was at an inflection point and Scentre Group said that population growth had underpinned a revenue boost, delivering them higher visitation and better sales metrics. Rob, what are your thoughts around this? I was interested, Vicinity talking about premium assets, that those were providing about 150 basis point better net property income relative to the average across their portfolio. Is building bigger better when it comes to retail? What did you take away from this reporting season?
Rob Harley
With Chadstone they have some of the best retail in the country, extraordinary retail and it's only going to get better because they've got some new elements of Chadstone that have opened this year. But overall, there's actually a post-COVID return to the mall. People are out there looking, they're out, they're busy. I go to Westfield Bondi Junction a bit and it's always busy and there's always people there. So I think there is a bit of a post-COVID return to the mall. They are getting increases in rent. What Vicinity, well they're both doing, they're finding that the good retailers want perhaps less stores but bigger stores. And so in Chadstone, in the Westfield portfolio, you find that the good retailers are taking the bigger space and as Westfield pointed out, some of their stores actually have no space to lease at all. So I think you couple that with a view, and I think this is the CBRE view, isn't it, with population growth, the amount of retail space per person is actually coming down and quite rapidly. And again because you can't build new space but then make it stack up.
Kathryn House
Yes, it's the supply equation again and that seems to be driving rents in that positive direction. Ben, were there any key retail takeaways for you? There was an interesting comment from Citi aAnalyst, Howard Penny, who said, "the negotiating power remains in the hands of the landlord." What are your thoughts around the retail space?
Ben Wilmot
Yes, I think there has been that switch that Rob's talking about as well. And I think also in terms of the management of them as well, they... I've forgotten how many years ago it was that Westfield announced its living strategy or its strategy to bring more people into malls for a whole variety of reasons, and that seems to have really paid off. It's not just the shopping, it's a whole variety of services and experiences that they're offering. Anything from seemingly putting together Lego to various personal services. And I think that along with the initiatives they're doing and things like anything from co- working spaces to all kinds of things, has really helped them. It's underneath the return to the mall. There's also this other story of how they've actually put quite a lot into getting you to go to them. Talking to the CEO of Westfield, that was very important. And at the risk of dragging it back to housing, the other big point Westfield made, and I think it's quite deliberate on their part because they've said it now for about a year, and they emphasised it again now, is that they definitely want to be part of the housing debate. They specifically called out a couple of big developments in Sydney and Canberra and plenty more that they want to be part of the solution to the housing crisis. And whether it comes this year or next year, they definitely have a seat at the table now.
Kathryn House
Well, they could build thousands of high-rise apartments around their malls. So, there's so much scope there and I read their thinking is that gives them even more of a captive market.
Ben Wilmot
And I think from their arguments as well, and certainly in terms of where various pieces of infrastructure are being built around the country, only more people will probably end up going to these places. So you end up with this sort of virtuous circle where, whether it's for work or whether it's for living or whether it's for shopping, these are going to be the places that we end up going.
Kathryn House
It was also interesting to see Charter Hall signal a potential foray into the residential sector. So saying they've got a land bank where they could build around 5,000 BTR or build-to-sell apartments. So you've got these non- traditional residential players now piling in.
Rob Harley
Yes, it won't be that non-traditional because it becomes an investment sector. I mean, the living sector, there is an investment part of that and Charter Hall can be part of that. And one of David Harrison's things is making sure that you are a leader in your sector. So he would want to be a leader in whatever he does in the living space.
Kathryn House
And I think it's interesting because we talked a little bit earlier about cost and feasibilities. Land is the name of the game. So these groups that have been sitting on this land for quite a long time have got a bit of an advantage in terms of the feasibilities.
Rob Harley
Yes. And that land, the Charter Hall land, is already paying for itself. It's in pubs or all sorts of places. So it's already paying for itself. It becomes a very good platform if you get the living sector right.
Ben Wilmot
This is probably the only real estate discussion where the words HMC haven't come up. Capital, their ever- expanding ones and I'm not quite sure whether they actually did mention the living sector, but there's another example of a company that is really taking off along with a bunch of fund managers in this reporting season.
Rob Harley
Just on that, the managers of funds did very well out of it. Both HMC and Charter Hall did very well out of this reporting season because people can see that there is going to be more money, more equity for property, then the fund managers will have more opportunities.
Kathryn House
I think it was interesting too to see some of the strong performances from the groups that are invested in more alternative sectors. So, say, self-storage, some of those trusts have performed very well.
Ben Wilmot
That's been the story of the morning with Centuria Capital. The way they're playing their funds is to talk about debt and talk about data centres, just the rollout of some of these things. And alternatives make up roughly a quarter of their $20 billion of funds under management, which is a bit of a change because certainly when they started it was obviously an office and industrial type company. And I wonder whether, over time, more of the companies that are on the listed market will look more like that with more alternatives either on their balance sheet or under management.
Rob Harley
You can make an alternate into a listed sector as people have done with childcare.
Kathryn House
Yes, and it's interesting. People seem to have a different view on what actually is an alternative. So we're actually doing a piece at the moment just putting out the view of, this is what we call an alternative, but that doesn't necessarily align with what some other people consider as an alternative.
Ben Wilmot
And there's some great performing assets like agriculture and other things like childcare and storage. They seem to produce pretty solid results each time round, which is not always the case for some of the more traditional asset classes, which have obviously been hit by a whole variety of influences in the wake of the pandemic, be it interest rate things or just lack of demand for their space.
Rob Harley
Curiously, Andrew Parsons, who runs Resolution Capital, pointed out that despite all the hype about data centres, the things that had done really well in the US was healthcare and retirement. And they had shown that more than double-digit rental growth this year, double-digit rental growth next year, and that plays through to their valuations. So yes, if you get the sector right, there's lots of upside.
Kathryn House
So, we've covered a lot of ground. Final call out. Were there any other key trends that either of you picked up on? Rob, perhaps I could start with you.
Rob Harley
No. Another trend,. I don't think so. I think we've covered the big trends, the inflection point. I think the thing to look for with the listed trusts, and this is quite hard to do, is to look for those that are going to get a boost as interest rates stabilise or even come down. And that's not always easy to see because some of them sitting with the hedging, some of them are hedged at a relatively low figure, which is actually going to be below the cost of funds. So as the hedges roll off, their cost of debt is actually going to go up. But that's a bit of an egghead point to finish with, Kathryn. I'm sorry.
Kathryn House
Not at all. Ben, any final thoughts?
Ben Wilmot
Well, maybe not dissimilar in a funny way, but I thought one of the things we've talked about is stabilisation. There's now talk of some IPOs and also this about alternatives. One thing they didn't actually really talk about, but they would certainly be watching very closely, is this is sometimes the conditions in which mergers and acquisitions happen. If there is stabilisation and if people are willing to take a position on where the market's going, then that's the kind of move that we can expect. We've already seen it from Charter Hall in taking out a small pub landlord and we could see it in plenty of other stocks as the smaller end of the sector gets cleaned up.
Kathryn House
Yes. Well it was interesting. Amy Pham, as the reporting season was kicking off, said she believes managers who position their portfolios and have done their research will be able to generate alphas. Could alpha be another term alongside inflection? Do you think we're going to see some alphas emerge?
Rob Harley
[Laughs] Next year.
Kathryn House
[Laughs] Next year?
Ben Wilmot
There's plenty of them in property.
Kathryn House
Yes, you are not wrong. So thanks, Rob, it was great to have you on the show.
Rob Harley
It was a pleasure, Kathryn. Always a pleasure and good to see you, Ben.
Kathryn House
Yes, Ben, it was great to have you on the show as well. I always love talking to you both.
Ben Wilmot
Thank you.
Kathryn House
So it's clearly going to be an interesting and hopefully much more positive year for the REIT market. To our listeners, thanks for tuning in to this latest episode of Talking Property with CBRE. If you like the show and want to check out more, you can follow us wherever you get your podcasts and we'd love for you to rate or review the show, which will help other people find us. Until next time.
