KH:
Hello and welcome to Talking Property, our CBRE podcast series where our team of experts, our clients, and our industry specialists share insights into the way we live, work, and invest through the lens of commercial real estate. My name is Kate Heaney. I am CBRE's Pacific Head of Client Care and I'm your host for this latest Talking Property episode. Today I'll be talking to Henry Chin who leads CBRE's Asia Pacific research team as well as CBRE's Investor Thought Leadership globally. Henry has over 20 years of research experience and is both visiting professor at Oxford Brookes University in the UK and an assistant professor at the National Taipei University in Japan. He is a sought-after industry speaker and his views on the market and what to expect are always in demand, which is why I'm really pleased to have him join me on this latest business trip to Australia. So welcome to Talking Property, Dr. Henry Chin.
HC:
Thank you, Kate, for having me here to share with you my thoughts with you guys.
KH:
So I've had the pleasure of just the first of these weeks walking at least 15,000 steps a day with Henry Chin around the markets of Sydney. And during that time, I've been doing a little bit of crowdsourcing ahead of the podcast, just chatting with our clients, listening to the most pressing questions that they have, particularly in this really challenging market. So, Henry, I'm going to do the impossible task of whittling that down to, I don't know, five, six questions. Are you ready?
HC:
Yes, I am ready.
KH:
So let's start with your trip and your view of the Australian market. You obviously had a view before you arrived on our shores. Can you give me a little quick snapshot has your view changed since you've walked the streets of Sydney?
HC:
Actually my view has changed. It has turned into a lot more positive. Number one, people are coming back to the offices and the city is very, very buzzy. And number two, the real estate professionals, they do have very realistic views about how Sydney is going to sit in the global real estate market. Number three, we do have a deep pool of equities, ready sitting on the sideline to invest. So overall I'm coming to Australia a little bit anxious in terms of where pricing is going to go. But actually, when I came here, I felt a lot more comfortable because it's not as negative as I thought before I came here.
KH:
Does that mean eventually when you return you might be talking to some of those investors and talking about investing back in this market?
HC:
Definitely. Kate, I can quite honestly tell you because before I came here everyone was telling me, "Actually I loved investing in Australia" but the biggest hurdle for them is they can't justify the underwritings in terms of pricing. But after going back to Asia, I will be able to talk to the client. The pricing gap is not as big as they thought. Actually, we are probably going to see some interesting deals to close in the second half of this year.
KH:
The interesting thing, as you say as well Henry, that your views on the market and what I love hearing the way in which you talk about any of the , certainly the Asia-Pacific markets, but you have both a conformist and a contrarian view and actually what I've seen for the first time as well, you have a bit of a vintage view. So can we break down a little bit around sort of the definition and your positioning as far as maybe conformist first and then we'll move on to the contrarian to get a bit deeper?
HC:
I think in terms of the conformist investment strategies, it is definitely suitable for most of those core investors. And what I like about the conformist strategies is number one, it's all about alternatives. I think alternative investment is definitely going to go through the strong structural changes to underpin the demand for the conformist alternatives, the number one I really like, I really like the life sciences market. I think life sciences markets, particularly in Melbourne and Sydney are going to outperform the rest of the region. Second one, the conformist one is all about logistics. I think logistic fundamental in Australia is just so strong, the vacancy rate is well below 1%. For occupiers, unfortunately they just need to pay for higher rent to secure the spaces. For the investor point of view, probably it's a good time to think about greenfield development because we do not have enough supply into the market. The leasing demand is simply very, very strong. The rental forecast is equally very strong. As a result, Australian cities on the regional or global context, outperform. The third one is all about living sectors. Built-to-rent and build to-sell is going to be outperforming as well. And given that Australia is going to be probably the number one G7 economy in terms of the demographic changes, because there is so much immigrants coming to Australia, as a result it's going to be underpinned by living sectors. Now giving you some anecdotes, all of my friends want to move out of their home country. Kate, the number one market they want to come to is Singapore. But Singapore is getting too expensive. Therefore they say "Okay, I'm coming down to Australia, Sydney and Melbourne. This seems to be their top choices. So watching out, I think the flood of immigrants is definitely coming to Australia, which is going to underpin the living sector.
KH:
But going back to also that comment about the, you know, the living and the influx. We walked the street the other day and you were telling me figures about Singapore, that actually really drives, I can now see that demand into Australia. Talk me through that.
HC:
I can tell you that I think Singapore has interesting dynamics because you are, if you are talking to any other people renting the properties, the typical leases is around two years and over the past 12 months, I think if you want to renew your leases, normally the rate is going to increase by double. Okay, so if you pay $100 a month, you have to pay $200 now. It's largely because there's a huge amount of foreign workers who are looking for a place to rent. I think two weeks ago they just added additional buyer stamp duty to 60% - six-zero-percent, Kate. If I spend a million to buy properties, if I'm not a Singaporean citizen, I need to pay $1.6 million. And you'll love to recall about Crazy Rich Asians - we love to spend money to buy property but we are not that crazy. As a result, I think a lot of the capital will divert from Singapore into Australia, Sydney and Melbourne particularly even Brisbane.
KH:
Yes, brilliant. And this obviously then drives, everyone knows I've been a little bit of a passionate BTR multi-family junkie, this obviously is really playing into the fundamentals of the potential strength of the BTR market here.
HC:
Definitely I want to highlight here, BTR market is in the infancy stage in Australia. While I do see the huge potential going forward, but one thing we need to make sure we do right is when we did a global live, work, shop study, the consumers, particularly in Australia, sent out a very, very strong signal that it's about all about placemaking. So if you have a good quality BTR project, I think placemaking is going to be important. Number two, property management is going to be important. People want safety, people want better services in order to demand for higher rent. I think this is something we need to be mindful of, but to be honest with you, I am quite positive and very positive for the BTR initiative in Australia.
KH:
So here we've concentrated a little bit in our conversation really on the beds and sheds story. Before we head into your, well I do love the contrarian views, I don't want to leave this conformance view for a moment because that means, okay we're going to be amping up on the build-to-rent positioning. But what's the position on sheds? Are we going to sell?
HC:
Well I have to say to you, if you are and if you have been in the market, probably two, three years ago, even four or five years ago, you were in the market, only in the logistic facilities, probably it's a time to sell because you are entering the market a few years ago. You enjoyed the strong cap rate compression; you also enjoy the crazy rental growth for the last 24 months. Your total return is going to be fantastic. Why don't you just realise your returns in that space? But if you really still enjoy logistics, it's probably time to look out for the greenfield development - you can generate the next generation of facilities and redeploy your capital again. I think in one way you realise the return and the other way you put the money into the logistics, to the development. I think that's going to be a win-win situation for smart investors.
KH:
Brilliant. Let's talk into some retail before the more extreme. I remember this time last year you were talking incredibly positively around retail. I have not seen a change in your views in this trip, but I did hear some better figures to really justify it. We were obviously coming out of Covid before; drop me through your retail lens.
HC:
I have to say revenge consumption continues. I think last year when I was here a year ago, we do not have a return for overseas students, we do not have the return for the international tourists and now things are changing. I think the student arrivals is around 75% of pre-Covid levels, which is fantastic. We do have a reopening of the Chinese border. So you are going to see more and more Asian tourists, the Chinese particularly coming to this part of the world. So therefore rearranging consumption. We were lagging compared to Europe and US but it's coming through. And then when we were talking to the retailers across Asia Pacific, particularly with Australian retailers, surprises, surprise Kate, 84% of them, they're telling us "I want to expand further in 2023" and the number one choice is not in the suburban neighbourhood shopping malls. The number one choice is all about high street - prime high streets in the city centre locations. What this means, it means they are betting on return to the office is so real in Australia. Tourists are coming back, students are coming back, they can get the best quality premises and the lower prices for future expansion. So a flight to quality happened there. And as a smart investor, pretty much we should start looking at retail in a more serious matter.
KH:
I see internationally the diversification, say of a retail shopping mall et cetera, and the linkage far better with transport, living and work as such, we don't seem to have really embraced that as much as we could. Talk about what we should maybe really think about here at a local level on that combination.
HC:
Nowadays the boundary between live, work and shop is getting more and more blurred and that's why I keep telling people it's a good time to think about placemaking for your built environment a lot more sustainable and then make sure everything is in a vertical or in a nicer presentation on that part. I think Hong Kong, Singapore, in my mind did a fantastic, good job. We do have a fantastic world-class infrastructure. On the top of infrastructure, we do have a business district, we do have retail making. We also all have our complexes above those spaces. I think given the demographic changes what we are seeing, Australia with the inflow of Asian demographic, I think there's further room for us to grow. So therefore, I was talking to so many developers, I think that they do recognise that placemaking is one way to go forward and they do realise that Australia has got a huge upside potential. You have plenty of land, you do have people coming here and you do have a nice living environment. Your infrastructure in investment is getting a lot better compared to 5, 10, 15 years ago. So therefore, I think more and more investors and developers are looking at our spaces very, very closely. Trying to build a new town, trying to build a new environment to attract people to live there.
KH:
So Henry , you're saying that you are walking these streets and you're seeing a lot more people back in the office and you've told me absolutely that it's hard to get a seat in Hong Kong these days in the office with so many returning, but is office from an investment point of view on the nose?
HC:
Well investment in the office is funny enough, when I was talking to American investors, it is so bloody hard to ask them to invest in Asia Pacific offices. Because they were very bearish for the US office markets. However, I have a very, very different strong contrarian view. Number one, we are back to the offices and then North Asia, without a doubt we are leading return to the offices and numbers within Australia, before Covid, you guys have never been to the office five days a week and your flexible working is here to stay. I think that the hybrid working is likely to continue and then flexible working will be a new normal for all of us. But one thing we did look at a historical performance is a fascinating look at total returns in the office spaces on a global scale. By adding Sydney and Melbourne offices into your global portfolios, it will enhance, it has enhanced, your returns and reduced the risk. That's for the past 15 years of performance. Going forward based on our forecast, Australian offices continue to offer better return and reduced risk. But I also want to highlight one particular point. If you want to invest into the offices, it's all about the cycle. If you're coming to the market in the right time, you make a ton of money. I think we are in an interesting time. I am advising investors to look at Sydney office buildings. The Sydney office market because we are expecting to see the stronger bounce back in 2024. As a result, this year is a good time to enter the market. In addition, I also need to recognise the fact that not every single office works and talking about hub and spoke, I see decentralised offices will have some challenges because when you are in the decentralised offices, we need to compete with my bedroom - I can work in my bedroom. But the best quality buildings in the centralised locations are going to outperform and then the outperformance is going to be super, super strong and that's why I think 2023 is a good time. Centralised offices, good quality. Sydney is my number one pick.
KH:
We obviously talk about you know, quality office a lot and a fantastic part of the market to invest in. But should we be concerned about the B class and B grade? Should we be looking at the sustainability credentials that we've got to meet with this sort of thing? What areyour thoughts there?
HC:
This is a brilliant question, Kate. I have to say grade B is definitely going through some tough challenges. I think given the current construction cost, if you want to do the upgrading probably as an investor the number doesn't really work. If you're talking to the occupiers, they do not want to occupy the grade B stock. And as a result I think grade B is going to go through the tough challenges going forward. I think once the construction cost is back to normal, I do feel like there's a good time to enter in the market, but not now. I think now we should really focus on the grade A spaces but in our case, pricing is another topical issue when it comes to the offices. A lot of people talk about “I want 25% discount on those grade A stocks”. My dear, it is not going to happen. Probably they are going to see some price dislocation by five to 10% of those grade A basis stock. I think at that time it could appear to be 5% discount, 10% discount for those good quality assets. Probably investors should act fast because those types of assets will recover very, very fast.
KH:
Well in talking about those markets, everywhere we go, there's this constant conversation actually about the difference in the markets and particularly you and I have heard the difference between the US and Australia. And we've seen anything from a couple of flailing banks in the US, we've seen office more on the nose in the US and no one returning et cetera. How do we get out of this comparison when they seem so incredibly different?
HC:
Funny enough Kate, we are also trying to do a lot of comparison study between Asia Pacific, Australia offices against American offices. I think there's fundamental differences. I think American offices, they are facing two different challenges. Number one, we are having the economy headwinds so therefore not many occupiers are going through the expansionary mode. So demand naturally is on the softer site. That's number one for the American market. Number two is structural changes. I think when we did this global live, work, shop studies, all the consumers tell us they do not really want to spend 90 minutes commuting time one way into the offices. So that is something the structure changes that people will need to recognise and figure out. For me, I was in the US last year for four weeks and the biggest challenge for me is their office environment is probably a little bit dated. It's a sixties to seventies product but when you walk into our Australian offices building, it's a modern style, it is collaborative, it is clean, bright, so therefore America needs to go through a lot of structural changes to figure it out and what the future of office asset will look like. They're going to go through some pain for sure. The final point I want to highlight here is we are looking at the space per person in the office environment. In the US it's around 16 square meters per person in the office. It's a luxury, right? I wish I had that space. Australia, you guys are very nice. You have 12 square metres per person, which is fantastic. In Hong Kong we only have seven square metres. In Japan, Tokyo, it is five to six square meters. We are not going to think about America reducing like a Hong Kong or Tokyo standard. Just thinking about from the American standard, 16 square metres to go to the Australian standard of 12 square metres. Not giving you the ideas about the structural changes on that part as well. So, I have to say we cannot compare to American office spaces compared to our region, and that gives them the fact that we are back to work and that infrastructure is first class here as well. As a result I think office is here to stay, good quality office will outperform, people are back. That's the fact.
KH:
Does that mean though if the Americans see our office or can't see or can't draw the comparison, does that mean we're not going to see their money investing here? Then who is going to invest?
HC:
Okay I think for the American investors, definitely office is in the penalty box. They really hesitated to invest into the office assets. I'll give you another anecdote. The Korean office market is the strongest performance market on the global scale. Their current vacancy rate is sitting around 2%, they're still demanding double digit rental growth. There's assets coming to the market but the American investors are saying I don't want to touch it. That should just tell you the sentiment for the office markets for the Americans. But don't worry, we are in a global capital market situation. Americans don't want it, Asian investors, Chinese, Korean, Singaporean and the Hong Kong investors, Japanese - we all realise, you know, office is here to stay. Office in the Asia Pacific is very, very different. So as a result, you are going to see more and more Asian investors coming here to buy office assets when the price is right.
KH:
Are there any other kind of hallmark, either asset class or observations you've made and that could go anywhere from healthcare to education, et cetera? Well, what do we need to look out for here or should there be a bit of re-weighting of some of these portfolios to areas that you think are really going to drive this economy?
HC:
Kate, I think it's fascinating. While I was talking to the capital allocators globally and then I think Asia Pacific we do have a little bit of a problem because of all the relative pricing. And I'll give you the anecdote. I think before I came to Australia, I put some of my money into HSBC and for six months term deposit they were offering me 4.9% interest rate, which is fantastic. And then I think all the capital allocators things happened. Certain issues, they love the real estate. They think real estate is definitely inflation hedge, definitely diversifier. But as of now it doesn't really seem to make sense in a global scale and also compared to the other asset classes. But we are not expecting to see any sort of distress in our region. But we do need to be realistic when it comes to repricing. So, we are going to see a little bit of repricing pretty much across our region, but repricing is not going to be as aggressive as what we are seeing in the west. But nevertheless, I think a little bit of repricing is healthy, it's going to reset the price. I think that investors are coming to our region because fundamentally Asia Pacific, Australia, we are not expecting to see any recessions. And the growth might be slow, but we will bounce back and negative GDP growth as of now is not the question for us.
KH:
So that reinforces even some of those questions I've heard about drawing a comparison to GFC. You're saying that we're nothing in that space?
HC:
Yes, we are nothing in those spaces. We are going to see some slowing down reseller prices, but now that GFC, I am a lot more positive on that part.
KH:
Brilliant. Henry, you've got a trip now to Melbourne then you're going to chilly Canberra to speak to all our industry leaders. Any final words from you before we close out on something for us to leave before your next airplane ride?
HC:
Actually, to my surprise, I really enjoyed my time in Sydney talking to so many people in the industry. I think the fundamentals is relatively strong and the only one thing we just need to be mindful of is about valuation-related issues. I think before I came here I was very negative about the cap rate needing to blow out on the same scale as the US, but I don't think the scale will blow out as severe as what we are seeing in the US and the UK. And Kate, you guys were telling me Sydney was so cold, you need to bring a coat. The weather has been so nice to me. It's not cold at all. It's so nice and the air is so clean. Actually, I enjoyed myself so much at this time in Sydney.
KH:
Brilliant. Thanks so much Henry. I absolutely love having you here. You've got to come more often than annually, I think. And the market is so hungry for knowledge right now and I've watched everyone just eat up everything that you've spoken about, even those contrarian views. It's going to be a really interesting second half and a lot for us all to consider from both local and global perspective. So, thank you to everyone for tuning in for our latest episode of Talking Property with CBRE with the delightful Dr. Henry Chin. If you'd like the show and you want to check out more, visit
cbre.com.au/talking-property or subscribe through
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Apple Podcast. But until next time, it's goodbye for me.