Carmel Hourigan
To solve this housing crisis, we are really going to have to put intense capital in for long periods of time. This is not going to be a short fix. And so we do need stability from both Federal and State in terms of the way the legislation, the taxes, and so on are working so people can understand them.
Kathryn House
That's Carmel Hourigan, who joined me on CBRE's latest Talking Property podcast to discuss key outtakes from the Property Council of Australia's recent Property Leaders’ Summit. Carmel is the Property Council's Capital Markets President, alongside her role as the office CEO of Charter Hall.
Antony Knep
The US Inflation Reduction Act is also creating further competition for global private capital because of the generous incentives for renewable energy, and this is something Australia needs to be mindful of to attract that foreign capital that we so desperately need.
Kathryn House
And that's Antony Knep, who led the Summit as Executive Director of Capital Markets for the Property Council. The Summit is the hottest property ticket in town. Staged each year at Canberra's Parliament House, it gives select senior leaders in the Australian property industry the opportunity to dissect the future of investment, capital markets, and the economy. And so that everyone can be very frank, all the discussions are governed by the Chatham House Rule. Getting a read on those discussions, all under the Chatham House Rule, of course, is what we'll be focusing on in this latest Talking Property episode. I'm Kathryn House, your podcast host, and I'm delighted that Carmel and Antony could join me to share some of their observations. Carmel, thanks so much for taking the time out today.
Carmel Hourigan
Thank you, Kathryn. It's great to be here again and with Antony.
Kathryn House
Antony, great to have you on the podcast. You did a fabulous job of steering the Summit, which featured a huge line-up of futurists, economists, researchers, politicians, and investors.
Antony Knep
Thanks, Kathryn and Carmel. Appreciate being here. Look, this 2024 Property Leaders’ Summit was the most successful by far in attendance, diversity, and the program, and we're really thankful to our sponsors and particularly the principal sponsor, Commonwealth Bank of Australia.
Kathryn House
So much of the discussion was about, surprise, surprise, housing, housing, housing. The challenges in that sector are clearly front of mind for everyone in the industry, given we need to deliver that targeted 1. 2 million new homes nationally. On the affordability front, I must admit to learning a new slang term from the summit, which was KIPPERS - kids in parents' pockets, eroding retirement savings - something that I can certainly relate to. So Carmel, did you leave the Summit with any key takeaways on the housing front? I was interested to hear that the average age for people to be buying a first home in Sydney is now around 38.
Carmel Hourigan
Thanks, Kathryn. I must say the KIPPERS acronym was something that I found quite amusing as well, because I think I have two of those at home. But yes look, housing is obviously the biggest issue from a political viewpoint in Australia, and you don't need to go very far in terms of your friends and in terms of your family to understand this is hitting every single person in Australia. So my key takeout after leaving was I think both sides of politics, both the Government and the Coalition, do recognise that supply is the answer, how we increase supply. I think everyone is in agreement there. I think each party has got a plan, it's just very different to the way we get there, and I think part of this whole conversation at the conference was, "let's understand each side of politics, let's understand how they're going to get this plan." I think you saw, or you would've heard that, through some of the conversations at the conference, where we met with various politicians. We actually interviewed Peter Dutton on the day. We met with Anthony Albanese the day before, and it was really interesting to see such a concentration of politicians on both sides really wanting to talk about this issue, which they know that our group is so focused on. For me, I would say if we just look at the two groups, I think the fundamental with starting with the government issues or structure that we're seeing is they have a more structured policy at the moment. They are the political power in government so as a result they do have those policies in place. One of the things that they talked about, of course, was the $32 billion which they've put in place in terms of housing. There's a whole structure and infrastructure around that if you like, and that includes things like the HAFF, the Housing Australia Future Fund, changes in terms of BTR which they made over the last few years. Of course, they just recently announced the $1 billion in infrastructure. So all different components, so they will actually be able to increase supply. The Coalition very much focused on enabling people in Australia to buy their own home. That is the fundamental basis where they're setting their policy. So I think they were the differences there, and a lot of conversation about the future of new housing opportunities, such as build to rent, the role of land leases, affordable housing. It was certainly the topic of conversation at the conference.
Kathryn House
I was really interested to hear that figure around, that they're saying that the residential property sector is going to grow to $10.3 trillion and be the country's largest property asset class, which is why there is so much focus there.
Carmel Hourigan
Yes and if we look around the world, institutional investors, global pension funds, sovereign wealth funds are the big investors in the residential housing sector in many countries, and, of course, most notably in the US market, where I think it's something like 20% of allocations can go into that housing residential market. They have very sophisticated residential housing stock, investment stock, and we've also seen that grow in Europe. We saw that grow in the UK out of the Global Financial Crisis, as well, very successfully. So I think naturally, we are turning our attention to things like build to rent in Australia, very much in its infancy, but we do think it's part of the solution, and that was one of the conversations that people were having, part of the solutions to the problem. It's not the only solution, it's part of the solution.
Kathryn House
I think one thing that I took away from it is that there was a sense that we need to make this more of a level playing field, and maybe this is a good segue to you Antony, that there did seem to be a sense that some other countries are providing easier investor pathways. Do you think that we've got the right policies in place to facilitate this?
Antony Knep
I guess my read of this is yes, we definitely need to be more competitive globally in terms of attracting capital partners into Australia. We need this to help achieve our industry objectives and, I guess more importantly, to work with government in helping deliver the real estate that's required to achieve these housing goals. So I guess to that note, from a capital markets perspective, for a level playing field, an example is the recent thin capitalisation rules, which make capital partnering more expensive from a tax deductibility perspective in Australia compared to other jurisdictions, like the UK and the US, who have a carve out for real estate. I guess from that perspective, it does make us a little bit more uncompetitive when we're competing for capital for build to rent projects, for example. There's other legislation such as Foreign Investment Review Board fees and regulation, timing delays, inefficiencies. These are all the things that make Australia more expensive to do deals, and I think a freer flowing, more transparent, and better regulated environment would be advantageous for us.
Kathryn House
Absolutely, and I guess feeding into that whole housing discussion, particularly when it comes to affordability, I was interested that there still doesn't seem to be a consensus on when we might need some rate cuts, which is one of the things that will start to stimulate more activity here. One view was that we could still see a cut. Another was it won't be until 2025. One panelist was saying that Canada has had a 100 basis points cut and could be a test case for Australia, or is our labour market here proving to be too resilient? Any views from either of you after that panel discussion?
Carmel Hourigan
Yes. I mean, I would say look, I think we all started the year thinking that we would see, consensus was there would be a rate cut this year. I think none of us really are economists, and even economists can't get it right. We've seen that consensus forecast change quite a bit and one of the things that we probably would say is that if we are going to get a rate cut, maybe that comes much later in the year if not into 2025. It is going to be incredibly important to get a stabilisation of rates for the property market across all the sectors, so even not just housing, because housing affordability is critical, and there's obviously this correlation with the cost of building, and interest rates, and all that other stuff. But to get equity to flow at the moment, we really do need to see rates stabilise, and as a result, we need to see valuations, of course, this was a topic, stabilise across all of the sectors. If we think about why would rates cut early, then you would need to see those changes coming through the economy. So we'd need to see unemployment increase. You'd need to see some real sort of negative data and a pullback in inflation as a result starting to come through earlier. It just feels at the moment that inflation remains very sticky, that we basically continue to have quite a strong labour market. But I do think there is some thought processes out there, or people are starting to think that maybe that could actually get a bit softer earlier, but I think we just have to wait and see. But I would say from a capital perspective, a lot of the investors that we spoke to at the conference were saying, "look, we're somewhere near that bottom, if you like, and it may be six to nine months. But we are getting to that point where rates are going to stabilise, if not start to come back." You're right. Canada and markets like New Zealand have had higher rates, maybe starting to see some rates come down. They have, in some ways, some similarities in their economies, which could be interesting, and there are a number of economists out there that are looking at those, saying, "could we see a similar pattern?" But I think rates have got higher in those markets than where we are.
Antony Knep
Yes, and if I could just add to that, you're always going to get a conflicting view on timing and extent of monetary policy intervention. Obviously, Canada has moved first with their stimulus, however, I feel post-budget, there's continued inflationary pressure across the board on materials, labour, and construction, insurance, energy. So from discussions at the Leaders Conference, I believe the expectations of a rate cut have been pushed out and agree with Carmel on that. So from that perspective, we just need to see some of these inflationary pressures come off.
Carmel Hourigan
But I think the other point that was raised at the conference was there is an enormous amount of capital sitting on the sideline building up globally. So I think once we do see the benefit of Australia, when you look at Australia on the global platform, and maybe this comes to another point of the conversation, we've got great population growth. We stand out. There's not a fund manager who doesn't talk about population growth as their opening line when they're going to look for capital. It's true, we do stand out in that way, we've got, from a geopolitical risk point of view, lower in terms of the global scale, and we've got very low unemployment and so on. So, the characteristics that, potentially, some that are driving inflation are actually a real benefit for us in terms of capital wanting to come to this market. So, I think once we do see the stabilisation, we'll see that start to flow.
Kathryn House
Yes, and the transparency, as well, in these markets.
Carmel Hourigan
Oh. Totally. Totally. Yes. Exactly.
Kathryn House
It's interesting, because there was a lot of talk about Australia being still that attractive investment destination, but a sense that not all cities and states are equal, so Australia as a market, but that it does vary in terms of how people view the different cities and states. Any thoughts on that front? That's a tricky one. It's a tricky one.
Carmel Hourigan
Oh. No. I'm happy to go first, but Antony, you go first, Antony.
Antony Knep
Look, I agree. Australia is clearly very attractive for international investors, but to that extent, commentary has come through that Australia also represents a risk. That's got to do with a lot of factors, and one of them, from a capital markets perspective, is restrictive legislative introduction into this country. But yes some states are faring better than others, and that's got to do with a lot of measures, but introduction of prescriptive tax regimes such as absentee surcharge, multiplication of stamp duty, and property taxes such as increasing land tax rates. But additionally, planning delays, their inflationary, and development projects are getting priced accordingly. So yes, the capital is lining up to enter into this market, but we've got to make it easier for it to enter Australia, but also, then, to be spread evenly across the states.
Carmel Hourigan
Yes, and I would totally agree with that. I think the main issue here is the change, constant change in terms of what investors and owners, if you like, are expecting throughout the course of an investment cycle. It's very difficult to outlay capital and have some of those things change every two years, three years. At the same time, trying to navigate an uncertain cycle, property cycle and economic cycle, as well, so that potentially makes people sit on the sideline. I think where it comes to one of the biggest issues, which is housing, to solve this housing crisis, we are really going to have to put intense capital in for long periods of time. This is not going to be a short fix. And we do need stability from both Federal and State in terms of the way the legislation, the taxes, and so on are working so people can understand them. I think it was interesting, the $1 billion in infrastructure, I think it was, wasn't it, Antony, that the Labor Government announced in the last budget? Even committing that type of capital, you need to have just stability in terms of what the legislation is looking like. Unfortunately, in many situations, it has been changing, and maybe there's been good reason for some of that, particularly coming out of COVID, different states trying to obviously address issues in terms of debt and so on because of what we had to do during COVID, which was the right solution. To really solve this problem, we need people to work together. The private sector is part of the solution, and the government needs to work closely with them and part of that is stability, and legislation, and taxes, as well.
Antony Knep
The other thing, Carmel, if I can just add to that, clearly, in one of the panel sessions with the investors and asset owners, your future, your super came up and RG 97. Ultimately, it is more restrictive for super funds to invest in housing and living communities if it's not included in the index, it increases their risk and tracking error. So, from that perspective, we need amendments to that legislation to encourage investment from the super funds more meaningfully into the sector.
Kathryn House
Yes, and I think that's been one of the hurdles for the PBSA sector, as well, that they're not rated in the index. That makes it very difficult for your local superannuation funds to invest.
Carmel Hourigan
Yes, and I think just on that sector and particularly coming out of the budget, just a lot of questions on how the policy that was introduced by the Government and the Coalition in terms of university funding and student accommodation and so on, there was a lot of just trying to understand what all that meant. So that was another part of this conversation, which is incredibly important, and then how that relates to overseas students, and migration, and so on. That was obviously on everyone's mind, as well. It's a very important sector.
Kathryn House
Absolutely, and I guess it's that broader discussion around alternatives. It was interesting to hear one of the speakers at the summit talking about alternatives as being a very broad church. And if we cast our mind back a few decades, the core sectors in Australia were just office and retail. Industrial wasn't even on the radar, whereas now, it makes up 30% of some fund managers' portfolios. What would you sense, both Carmel and Antony, of how the Summit attendees are viewing alternatives at the moment?
Carmel Hourigan
Generally, investors at the moment, whether they be global or domestic investors, are very interested in alternates. I suppose that started off in the infrastructure space, that real asset space, but we are definitely seeing appetite, particularly in housing, I think, for different types of alternates. You can see that in affordable housing, for example, student accommodation, where they can get exposure to global thematics, that we think there's going to be real growth. I think we agree that housing densification, some of those thematics that we're seeing, population growth, energy transition, people are just generally very interested from a capital perspective. We're seeing strong demand from everyone who comes into this Australian market looking at some of those opportunities. I think one of the points that that panel was also making was quite difficult to get scale in some of those sectors at the moment. And so there's some early movers coming into the market, I suppose hoping that they will grow much larger, and that could be the case, versus what you see in markets like the US, where you're seeing significant scale. You've seen companies and REITs in the US just run some of these specific strategies. We're obviously a much smaller population, but there is big opportunity in some of those.
Antony Knep
Yes, I completely agree with you, Carmel. I think the key here is scalability, and it's one thing. Obviously, we've seen a lot of interest in data centres that requires significant energy transition. It's critical for the development of that sector, and I think from that perspective, real estate value-add and repositioning is going to be critical. That's where, potentially, data comes into the picture, for higher and better use for your asset. There's also discussions around childcare, aged care, healthcare, and life sciences, but as Carmel said, it's just not scalable at the moment and we need to find a way around that. So from that perspective, clearly, there's a lot of demand. We've just got to position the capital and have the opportunities and the liquidity to make it work.
Carmel Hourigan
I think what it's saying is, just back to your first point, Kathryn, that we have these traditional, more traditional sectors, but in Australia, they are very large institutional sectors. And so to be, I suppose, fully invested in this market, you do need to have some exposure to some of these. So it'll take some time, I think, to build up the alternate sectors within Australia, but is definitely on the mind. What it'll do is you'll end up seeing maybe, potentially, less in some of those traditional sectors. Maybe, historically, the way we've seen those sectors, where office has been the greatest component, maybe that comes down, and you're seeing retail, that was out of favour, now moving back in favour, and industrial is very, very popular. There was a discussion that people probably still, and maybe some of the domestics are still not set in logistics and industrial, and there will be still more money flowing into those sectors.
Kathryn House
Yes, and that came through really clearly. We just did our latest debt survey of lenders, and industrial is still almost double every other sector in terms of where the lenders want to put their money. But what was really interesting was to see student accommodation come in at number three. So there's obviously a lot of interest in those alternatives, as well.
Carmel Hourigan
I think with the student accommodation, I think the only thing I would add there is it's obvious now as a market we've got some really good operators in that space, and so there is good opportunity to invest with institutional- quality operators who've got good pipeline, as well. Yes, so I think that's another growth sector.
Kathryn House
So, I guess we touched on it a little before, that energy transition that was clearly top of mind at the conference and the challenges that are there. Because I guess time's clearly not on our side, unfortunately. The IMF has noted that the global step- up in capital spend has to go from US$1.5 trillion annually to US$5 trillion by 2030, and for Australia, we need a $100 billion spend per annum in energy efficiency infrastructure to get to our net- zero goals by 2050. Antony, what was your sense from the summit about whether we're on track as an industry?
Antony Knep
Look, Kathryn, I agree a lot of money needs to be spent with regard to this. I don't think we're there, and clearly, if we're going to have a meaningful transition into the growth of the data centre real estate, there's a lot of work to be done. But from my perspective, the Australian property sector punches well above its weight in sustainability due to NABERS and Green Star. I mean, the sector bides by this, and as a result, it's an attractive investment opportunity internationally. That's reflected in global ESG ratings, such as GRESB, which Australia companies have topped for the past 13 years. So, I mean, from our perspective, electrification, energy efficiency, I mean, this is a priority, and there needs to be significant retrofitting. So energy efficiency, it delivers emissions and operational cost reductions, and we're behind the US. So really, a lot more needs to be done with additional government funding and support, clearly. I can point out that the US Inflation Reduction Act is also creating further competition for global private capital because of the generous incentives for renewable energy. This is something Australia needs to be mindful of to attract that foreign capital that we so desperately need.
Kathryn House
Any thoughts on that front, Carmel?
Carmel Hourigan
Yes. Look, I totally agree with Antony saying we're pretty good as an industry, right, in getting this and the environmental standards right across our assets. I would say my experience in office would be we're leaders, and the GRESB results across a lot of the core wholesale funds would definitely show that. I think what's interesting for me as a fund manager is the conversations we're having with capital and with tenant customers, and that has fundamentally changed in the last five years. If I look back a decade, we're streaks, miles and miles ahead of where we were. Because what was happening there is it would've been maybe number nine on the list when you had a conversation about come and invest with me. Now, it's number one or number two, and in many instances with customers, tenant customers, it's number one. We've had some tenant customers, as an example, at Charter Hall who've chosen certain buildings because it has the highest rating in a market, and you want to see more of that, particularly those corporates that may be global, that may be based in Europe, which feels like it's actually, from a legislative point of view, much further ahead in terms of the way they're enforcing. But Australia is going to see more of that, and we've seen that in New York, in Manhattan in terms of leasing and the type of standards assets need to have to actually be leasable. Also, we're seeing some of that in London, as well. So, it's only going to get more and more critical to decisions. I totally agree with electrification, and it's very difficult to see a lot of brand new buildings being built now without that. But that does mean it feels like we're falling short in terms of the amount of energy that we need and our transition to renewables and so on. So still a lot of debate, I think, to come.
Kathryn House
So, one other thing that did pique my interest at the conference was in relation to AI, and I guess we read about that every day, as well. One of the speakers was commenting that early adopters of AI will find that to be a differentiator, and, indeed, that this AI boom represents the beginning of the fourth industrial revolution. How do you both see that playing out in Australia for the property industry?
Antony Knep
Well, I can say, Kathryn, this was clearly a very interesting session, and I think there'll be a lot more of this going forward. But AI will reshape the way that humans work, live, where we work, and what roles will be in demand in the future. So, I mean, effectively, yes, this is a disruptor or revolution, if that's the way you want to describe it. So that speaks to investing into alternatives or what provides the best risk adjusted return given the environment that AI presents, so, for example, a huge shift in data requirements, and we've seen that. So, from that perspective, I think that this will also depend, as we said before, on the level of energy transition and the availability of the critical infrastructure that's going to support wherever the industry goes as driven, potentially, by shifting AI.
Carmel Hourigan
Yes. Look, I loved that session. We had three great speakers talk about different topics, but they were related, one on cyber and data, one on AI, which scared me, and one on data centres. They are all related, as Antony just said, but it just blows my mind when I see people talk about AI. We had a great speaker who spoke for, I think it was seven minutes on AI, and showed us, effectively, what AI could do in deepfakes and some of these things, right, so I think it will, and I think one of the things he did say in that speech was, "Yes. It will transform things, but Australia is not an early adopter by any stretch of the imagination." So I suppose the infiltration into corporate Australia is very low at the moment, was what I took from that seven minutes of fame. But it did scare me, it does make you really think about, what is the future of space usage? How could this affect space usage, and, as Antony just said, how much data requirement do we need? What is that critical infrastructure? Then, of course, following up, one of the other seven minutes we had after that was on cyber risk and, what are the implications for cyber risk, and AI, and all of that together for Australian corporates and for real estate? But look, I think the future's... My take on it generally is the future's bright with AI. There's a lot we could be doing. I think we just need to spend some time testing on AI, and I don't think...a lot of us haven't done enough of that yet, but maybe the next generation will, Kathryn. Maybe we're all getting a bit too old.
Antony Knep
Yes, I think, and, if I could just say, this is going to be critical real estate infrastructure that needs to be secure and supported by government, as well. So, a very interesting asset class that's going to, as the speaker mentioned, grow in dimensions.
Kathryn House
Yes. I think it's going to be a brave new world in the next few years.
Carmel Hourigan
It certainly will.
Kathryn House
I really enjoyed listening to all the Summit conversations. I think great to see that there is that bipartisan support for what needs to happen in the housing sector. I think good to see that there is that focus around the energy transition, a lot of great things that people are focusing on in that alternative sector. So it's going to set the stage very well, I think, for the upcoming Capital Markets Forum in October. So thanks for joining to chat through it all, Carmel. I really appreciate you taking the time out today.
Carmel Hourigan
Thank you, Kathryn. No. It's been great, and look, I really enjoyed it, particularly really having an opportunity to have... Antony, how many people were there, 200 and something?
Antony Knep
220.
Carmel Hourigan
220?
Antony Knep
A significant growth on last year. So happy to say that.
Carmel Hourigan
Yes. I think having that mix of global investors, domestic investors, and managers in Australia, and very senior managers, and the heads of agency, was... It's a good mix, and it's worked well. I think this is, gosh, is that 22nd time or something?
Antony Knep
I think that was our 21st birthday, so...
Carmel Hourigan
There you go, Kathryn.
Kathryn House
Did you have a cake?
Carmel Hourigan
No. We didn't have a cake, but we are looking forward to next year. We're going to make it bigger than Ben-Hur, so we've just got to work it out.
Kathryn House
Well, I think you did a fabulous job, Antony, of steering the ship, and look forward to seeing what comes out of the Capital Markets Forum.
Antony Knep
No. Absolutely. Thank you, Kathryn. Appreciate that, and the data and energy transition will be a big topic at the Capital Markets Forum 1st of October. So thanks so much, Carmel, and Kathryn, appreciate it.
Kathryn House
Well, thanks, also, to all of our listeners for tuning in. I hope you've enjoyed the episode, and if you like the show, you can subscribe through
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