0:09

Hello and welcome to Talking Property,

0:12

our CBRE podcast series where

0:14

our team of experts, our clients, and industry

0:16

specialists share insights into

0:18

the way we live, work, and invest

0:20

through the lens of commercial real estate. I'm

0:24

Kathryn House, CBRE's Australian Communications

0:26

Director, and I'm your host for this latest

0:28

Talking Property episode. Today

0:31

we'll be talking about capital flows and investment

0:33

trends. It's clearly been

0:36

a challenging year for Australia's commercial property

0:38

investment sector with ongoing funding

0:40

constraints, rising interest rates,

0:43

and downward pressure on asset pricing. While

0:46

some sectors have attracted continued demand,

0:48

the hotel sector among them, Australia's

0:51

office market has been under increased scrutiny

0:53

and many investors have turned their sights

0:56

to new and emerging opportunities in

0:58

build-to-rent and alternative asset classes. So, what

1:01

does the future hold? Will 2024 be

1:04

a turning point, particularly for the

1:06

office sector? Will debt funding be more

1:08

readily available, and will investors increasingly look

1:11

at new capital structures to drive

1:13

their property investment strategies? To take

1:17

us through the outlook I'm delighted to be joined by CBRE's Australian Head of Office and Capital Markets Research Tom Broderick, the Pacific Head of CBRE's Debt and Structured Finance team Andrew McCasker and by one of CBRE's newest recruits, Paul Ryan, who recently joined us from Goldman Sachs to head our Investment Banking business in Australia and New Zealand. Thanks for joining me today. So perhaps to set the scene, Tom, could you give us a feel for how this year's closing out. While we still have a few weeks to go, what are the stats looking like in terms of investment activity and the key trends you’re seeing, and I guess any likelihood of an end of year sales flurry?

2:00

Yeah, look, we've got the data through

2:02

to the end of November and

2:04

what it's showing us is that currently

2:07

we're at $19.2

2:09

billion worth of transactions across

2:12

office, retail, industrial, and

2:14

hotels. That sits around

2:16

45% below last

2:19

year's number. We do still have

2:21

a month to go, so we'll probably

2:24

still be circa 40% below

2:27

2022 levels for the year.

2:30

The kind of difference between sectors

2:32

has been interesting.

2:34

So, hotels has by far

2:37

been the bright spot. It's currently sitting

2:39

15% above last year's

2:42

level at $2.6 billion. And

2:45

in fact, it's likely to

2:47

be the highest level for any year

2:49

for hotels transactions since 2015. So

2:52

that's certainly a

2:54

positive. Every other sector is down

2:56

on last year, industrial’s down around 22%,

2:59

retail’s down 45%, and

3:02

then, as you mentioned,

3:04

office is down significantly, down 65%.

3:11

Yes, so office definitely has been one of the sectors that's

3:13

been under the most scrutiny and I

3:15

guess there continue to be ongoing hurdles to

3:18

new investment. Andrew, I was particularly interested

3:20

to read the findings of CBRE's latest Lender

3:23

Intentions Survey, which shows that

3:25

office had slipped below retail for the

3:28

first time since you began doing that survey, on the

3:31

list of sectors that lenders are keen to participate in. Can

3:33

you talk us through that and the overall survey

3:36

findings and what some of your key takeaways were from

3:38

that?

3:39

Look, it was interesting but not unexpected

3:42

that we saw the appetite for

3:44

office being affected as

3:46

a result of the cycle that we're in at the

3:48

moment. What we are seeing is that the global platform

3:52

is certainly being impacted by office prices

3:54

and capital allocations into

3:56

lending in the office and that's flowing

3:58

into Australia. And the Australian lenders are

4:01

cautious about participating in office, still have

4:03

an appetite, but at a much-reduced level. And what

4:06

we are seeing is that capital that they do

4:08

have is being allocated into asset classes

4:10

like build-to-rent, data centres, childcare

4:12

and retail and hotels, as

4:15

Tom mentioned. So, we're sort

4:17

of looking at the assets

4:19

which have been early affected by Covid and had a

4:22

repricing event happen that are attracting the investment

4:24

into that space now. If

4:26

I look at the overall report that

4:28

we had out, the interesting part was

4:31

that the market is still looking for opportunities

4:33

to invest in via debt platforms and

4:35

the alternate space has definitely given

4:37

that opportunity to be

4:40

able to do it and expand their concentration

4:42

outside of office and industrial, which is what we're

4:44

seeing out of the surveys. Interestingly,

4:50

there's not a really big push from the responders in the

4:53

survey about increase in margins and we're

4:56

seeing a bit of a spread across each of

4:59

the lenders that participated in the

5:01

survey as to when we start to

5:03

see interest rates fall and it spreads

5:06

everything from the back end of 2024

5:08

to halfway through ‘25

5:11

and potentially some lenders saying

5:14

2026. So, it's very much

5:16

a wait and see in that space as to what

5:18

happens with the cash rate and how that flows

5:21

through to the official lending rates. tes.

5:23

Yes, I keep seeing so many different points

5:26

of view on when interest rates are going

5:28

to, you know, stabilise. Some people were

5:30

saying we're going to see more increases. Now

5:32

people are saying this will be the last rate

5:34

rise that we've seen. Do you have a view?

5:37

My personal view and full disclaimers against

5:40

CBRE. So, my personal view is

5:43

I think we'll start to see official cash rates ease

5:45

in the back end of ‘24. We potentially

5:48

have one more rate rise in us, and

5:50

I think that'll be driven off the back

5:52

of retail sales figures through the Christmas

5:54

period. The government's done what

5:57

it needs to do to manage inflation and there's

5:59

a few extra things that need to

6:01

happen for that interest rate to come down. But I think

6:04

by the end of ‘24, we'll definitely see it.

6:06

I'm not sure if Tom agrees with

6:08

my approach, but certainly from the data we're

6:10

seeing from each of the lenders, a large number of them

6:13

are pointing towards 2024.

6:17

Yeah, I think certainly the

6:19

inflation figures last week were

6:21

relatively positive, negative for one

6:24

month and probably lower

6:26

year on year than people were expecting, which

6:29

helps. But look, we've

6:32

been wrong before on interest rates.

6:35

Yeah, and I think too, Tom, where it's

6:37

such a dynamic market at the

6:39

moment, like we've got low unemployment, we've got

6:41

really low vacancy rate, property prices

6:44

continue to push through, everything's contradictory

6:47

to what should normally happen in an economic environment.

6:50

And so, we talked briefly about

6:52

office. I was interested in another

6:55

one of our surveys, Tom, which was our office

6:57

occupancy survey, which has attracted

6:59

a lot of attention and showing that

7:01

the return to work is gathering,

7:04

I shouldn't say return to work, I should say return to office,

7:06

is really gathering pace. Do

7:09

you see that starting to change

7:11

the attitude toward the office sector

7:14

here from an investor perspective. Those

7:16

more positive numbers?

7:18

I don't think we've seen it through transaction activity.

7:20

As I mentioned, we're 65% down

7:23

on last year for office investment,

7:25

but it is absolutely the

7:28

biggest question that we get in the office

7:30

space is what the return to office is

7:33

like. I think sometimes Australia

7:35

gets lumped in with the US and other markets,

7:38

but what our report showed was

7:40

there has actually been decent momentum

7:42

in the return to office throughout 2023.

7:46

On average across Australia, we're

7:48

sitting at 71% of pre-Covid

7:50

levels, that's up from 54% 12

7:52

months ago. So that's improved

7:55

quite a bit. Sydney's been the biggest improver over

7:57

the last 12 months. For context,

8:00

the US was sitting at around

8:02

50% at the start of the

8:05

year and they're still sitting at

8:07

50%. They really haven't seen any improvement,

8:09

whereas Australia has seen some improvement

8:11

and certainly we're finding that

8:13

the smaller markets on peak days are

8:15

almost back to pre-Covid levels. I think that will

8:18

help on the investment side. We

8:21

probably just haven't quite seen it

8:23

yet.

8:26

Yeah, no, it'll be very interesting

8:28

to see how that does play out in 2024.

8:31

Ss, shifting from debt to

8:33

capital and welcome to CBRE

8:36

Paul. You are working closely with

8:38

Stuart McCann who heads CBRE's APAC

8:40

Investment Banking business, to steer

8:43

capital raising, Coporate Advisory and

8:46

M&A Services. I'd be really keen to hear

8:48

about the trends you are seeing in that market, including how

8:50

Australia's currently being viewed by

8:52

offshore capital.

8:54

Thanks Kathryn. And I'm very excited to be

8:56

joining the CBRE Investment Banking team. I

8:59

might start with how Australia is being

9:01

viewed by offshore capital as that plays

9:03

into the trends a little bit. So, when

9:05

investors look at Australia, it's very much seen as part of

9:07

Asia, and I think within that context is viewed as

9:09

a highly attractive and transparent market to deploy

9:11

capital into. The weak Aussie dollar

9:14

is also seen as a positive in terms of an entry point

9:16

into this market. Similar to what

9:18

Andrew was saying, the interest rate cycle is viewed as

9:20

coming to an end in the nearer term with the rates expected

9:22

to stay higher for longer. Although trending down,

9:24

I think consensus is pretty hard to pin down.

9:26

But you know, broadly speaking, the end of ‘24

9:29

and into ‘25 is when investors are planning on

9:31

that to flow through into the market. I

9:33

think investors, it's safe to say, are conscious that Australia

9:35

hasn't repriced as far as say the US or

9:37

UK Europe. So, there’s some concern that Australia

9:39

seems a little expensive on a relative basis.

9:42

Foreign investors have significant capital

9:44

to deploy, however, their risk

9:46

appetite is low at the moment. So really, sentiment needs

9:48

to be assessed by individual sub-sectors. To

9:51

give a bit of a feel for that, I mean office, similar to

9:53

Tom's comments, is pretty challenged at the moment.

9:55

You know, there is high conviction in certain pockets of

9:57

Sydney such as the CBD core. We are

10:00

seeing increased inquiry around discretionary retail in

10:02

conversations with investors, which, you know,

10:05

it's been a very long time since that's even been raised. So that's

10:07

a positive sign in that space. And

10:09

there still is solid interest remaining in

10:11

the industrial & logistics and living sectors.

10:15

Although we would note that investors are being more selective in

10:17

how they look to deploy capital within these

10:19

strategies. The alternatives or niche

10:21

sectors remain highly sought. Some examples include

10:24

data centres, student accommodation, self-storage,

10:26

land lease communities, health

10:28

and life sciences, social infrastructure, tourism

10:30

and leisure, and anything really exposed

10:32

to the energy transition and renewables. Investors

10:35

are also seeking to increase exposure

10:38

to real estate debt and private credit strategies on

10:40

the basis that they offer compelling risk adjusted returns versus

10:43

equity at the current point in time. And

10:45

in terms of structures that investors are looking

10:47

to invest into Australia in it remains via

10:49

JVs, SMAs or separate

10:52

managed accounts, partnerships or club structures, which

10:54

offer greater control for the investor

10:56

and also alignment with managers. In terms of

10:59

the trends that we're seeing across our business, there's three

11:01

I'd call out. I think we do expect direct market

11:03

volumes to increase and as

11:06

Tom noted, that's off a very low base. We

11:09

expect that to happen as rates stabilise and the bid-ask spread

11:11

narrows. We think that happens probably, you know,

11:14

second quarter, middle of next year. We think M&A

11:17

volumes will remain subdued. And we think the catalyst

11:19

for that being reinvigorated is when NTA resets

11:21

as valuations come down and debt financing

11:24

conditions normalise in terms of both

11:26

the volume available to fund M&A and also the

11:29

cost of that debt. And then the last trend we're seeing,

11:31

I think private capital, we expect to remain the primary

11:34

source of equity financing to support in any M&A

11:36

and also equity raisings, which we think will remain including partnerships,

11:39

JVs and recaps particularly in the alternate asset

11:42

classes.

11:45

Yes, that alternate asset class interest

11:47

is coming through quite strongly. In

11:50

the debt survey that you just recently did,

11:52

you know, there was a doubling of the lender interest in

11:55

alternatives. Why do you

11:57

see that that's happening? What's the real sort of

11:59

attraction there?

12:01

Well, I think similar to Paul's world is

12:03

that the groups are just looking for that greater return

12:06

and some continuity in relation to cash flow.

12:08

We're looking at data centres or cold

12:11

storage as an alternate investment asset

12:14

and the certainty of

12:16

cashflow over a long period of time is there,

12:18

but also they're getting a greater return and

12:21

more certainty of that stabilised return,

12:23

than what they are in office. I'd be

12:26

interested, just if I jump back for a sec, Kathryn, when

12:29

Paul's talking about capital partners into Australia,

12:31

the groups that had primarily focused

12:33

on office, Paul, have they shut

12:36

the books or are they looking to another asset

12:38

class?

12:41

I think there's probably more interest

12:43

in lightening up on office than bulking up in

12:45

office and I think that the

12:48

interest is still there to acquire, but

12:50

it's being a lot more selective. So, I think as I

12:52

mentioned, we are seeing strength in certain pockets such

12:55

as the Sydney CBD core where occupancy

12:57

is still very tight, rents are increasing on

12:59

an effective rent basis and there's real,

13:02

I guess, tailwinds behind that specific submarket. But

13:04

outside of that where there's a lot more uncertainty around where

13:06

rents are going, and the view that cap rates

13:08

have a fair way to move, I think it's very hard to underwrite that

13:11

exposure and that risk. So, I

13:13

think it's more, yeah, looking to lighten

13:15

up on office and then selectively looking to repurchase.

13:17

I think in terms of the

13:19

assets that we've seen come to market, it's less of the investments

13:22

that people want to make. So less of the prime, really

13:24

prime Sydney core assets.

13:26

So, if they're not doing office Paul, are they looking for,

13:29

again, those alternates that Kathryn was talking about?

13:31

No, absolutely. They are, and I think for similar

13:34

reasons that you were just mentioning. So, I

13:36

mean the alternatives typically offer pretty

13:38

good fundamentals, you know, compelling cash

13:40

yields, they've got little leakage for example

13:43

from tenant incentives. They've got strong rental

13:46

income growth and typically there's, you know, very high

13:49

occupier demand, for mission critical real estate. There’s

13:51

often high barriers to entry. It's often hard

13:53

to replicate these assets. I think for those

13:55

reasons, you know, the fundamentals stack up much

13:57

more strongly for the alternates than for the traditional sectors.

14:00

I think investors are also seeking to

14:02

diversify a little as well, you know, most

14:05

of them are pretty well set across retail, office and increasingly

14:07

industrial. So, in terms of just

14:09

getting a bit more

14:11

diversity in the portfolios, this is really where they need

14:13

to get to. And I think from an Australian context, getting

14:16

access to these alternate sectors is just incredibly hard

14:18

to do in scale. You

14:20

know, effectively there's a lot of investors chasing very

14:23

few investment opportunities, which is really underpinning pricing and

14:25

typically generating portfolio premiums for vendors who

14:27

are looking to exit

14:30

these investment classes. So yes, I just

14:32

think it's good fundamental, scarcity of investment opportunities

14:34

and better risk adjusted returns in the alternatives at the

14:36

moment.

14:40

So, I think we just talked about cap

14:43

rates, but I know we have just

14:45

completed our recent Cap Rates Survey

14:47

for Asia Pacific, which has

14:50

highlighted this delay, you know,

14:52

and lag effect. The respondents, only

14:54

12% of them cited a recovery in their

14:56

local markets this year and that was

14:58

largely in India and Japan, and interestingly

15:02

Australia was tipped to be one of the laggards. But

15:04

from 2025 onwards. I'd be

15:06

really interested to hear your views on this

15:08

front. You know, when it comes to capital markets, what your

15:11

expectations are.

15:14

Look, we've on our numbers

15:17

recorded kind of 100 to 125 basis

15:19

points of softening for the

15:22

industrial and office sector over the last

15:24

12 months. Retail probably not

15:27

so much, particularly in metro areas,

15:29

maybe in regional areas, more softening.

15:32

So, it has been

15:34

delayed compared to other markets in Asia Pacific,

15:36

but we are certainly seeing it now

15:38

because of more transactions that are

15:41

occurring. We kind of feel

15:43

the yields will probably stabilise sometime

15:46

next year, maybe around Q3. We're

15:48

pretty close to peak interest

15:51

rates, we think. So once interest rates

15:54

stabilise, we think there will be

15:56

a delay in the stabilisation of cap rates,

15:58

but we do think it'll happen sometime next year

16:01

and hopefully that will trigger more

16:03

transactional activity.

16:06

Yes, I mean, and the more activity we have, the

16:08

more evidence that we've got so that really gives

16:10

people a lot more confidence when

16:13

they're looking to invest.

16:15

I think from an investor perspective I guess it's

16:17

more valuations than cap rates. I think the consensus is

16:19

that cap rates just have to come down. I think

16:21

they’re backward looking, and the question is whether or not

16:24

valuations can hold, given there's offsets between rental growth, industrial

16:26

being the sort of prime example,

16:28

whereas cap rates have blown out quite considerably,

16:30

but a lot of the valuation impact has

16:33

been offset by an increase in rental growth. So,

16:35

I think it's, yeah, the cap rate question, it's not

16:37

if but how far and then it's what

16:39

does that flow through to value? And I

16:41

think the investors at the moment are looking at valuations and

16:44

just sort of taking them with a grain of

16:46

salt and looking at what their forward IRR

16:49

calculations or return hurdles are going to be and sort of whatever the

16:51

number is it is, but typically I think that's

16:53

below valuation, but for, you know, certain of these alternate

16:55

sectors that are pretty highly tightly held.

17:02

I think that's a good point too, Paul, and right

17:05

at the very start we spoke about the lenders’

17:08

cautiousness, particularly in the office space, and it

17:10

comes down to the valuation side of

17:12

things. The income has definitely been

17:15

affected because of the significant increase in

17:17

interest rates, but until such time that

17:19

the financers can get comfortable with what

17:21

the actual valuation is and having

17:24

a view is that the bottom or is there

17:26

further to go, that cautiousness is going

17:28

to continue to apply, specifically into

17:31

that office sector.

17:33

And you look at the listed market, which is trading at a

17:35

pretty meaningful discount to NTA and

17:37

obviously NTA’s backed by valuations that get restruck every,

17:40

call it six months. So, I mean

17:42

the market and investors don't believe book value

17:44

and maybe it's oversold, but you know, I think the answer

17:46

is somewhere in the middle. I think valuations have to come off

17:49

and you know, maybe there's a bit more upside in

17:51

in the listed market. But yes, it feels to me

17:54

that they're overstated at the moment.

17:56

Will that start coming through at all in the next

17:59

reporting season come February, will

18:01

we see that start to be evidenced more?

18:05

I think it's just been a slow unwinding

18:07

over the last 12 months and that'll continue

18:10

again. The poor valuers

18:13

are waiting for transactional evidence that

18:15

has been very slow to come

18:17

and it is trickling through

18:20

across most sectors.

18:21

Yes, I think it's a bit death by a thousand cuts

18:23

until we see that activity pick up and

18:25

then it's a bit circular about when the activity will

18:27

pick up versus valuation. So hopefully

18:29

sooner rather than later.

18:30

Absolutely. So, Tom

18:33

and Andrew, you've been on this podcast before

18:35

and you know, I always like to ask sort of one big

18:38

question. So, I would love

18:40

to know if you have any contrary views

18:43

on the outlook for 2024 and

18:46

if not a contrary view, one of your

18:48

top predictions. Maybe I could

18:50

start with you Andrew.

18:53

Look, I always dread this backend of

18:56

the recording when you ask for these comments, I've yet

18:58

to get one right. I did mention that I feel

19:01

that the interest rate cycle will start to

19:03

soften and come off at the

19:06

back end of ‘24. I do believe that the market

19:08

and the cycle we're in is going to be short

19:10

and sharp and potentially we could see some positive

19:13

reduction in interest rates happen by June if

19:16

we see the inflation figures continue the

19:19

trend that we saw last month.

19:22

The Christmas retail trade figures, within what the

19:24

projected band is going to be. And

19:27

we see a little bit of movement

19:29

in the unemployment rate moving up slightly to provide a

19:32

little bit of headroom as far

19:34

as the employment's concerned. I think if those three key markers

19:37

come into play, we could actually

19:39

see that interest rate cycle come forward six months and

19:42

start to ease.

19:45

I like it. What about you Tom?

19:48

Well, I think the contrarian investors

19:50

are already starting to look

19:53

back at office. I think a lot

19:55

of the major institutional investors are still

19:57

focused on industrial and alternatives

20:00

about what we've

20:02

talked about today. But I guess from

20:05

a fundamentals perspective, there are actually markets

20:08

in office that are doing better

20:10

from a leasing perspective than pre Covid. The

20:12

pricing is starting to look

20:14

attractive, like our research yields are

20:17

back to 2015 levels across most

20:19

markets. And then as

20:22

we've already spoken about,

20:24

the return to office in Australia

20:26

hasn't stagnated. It's actually progressing quite healthily

20:28

and it's been all over

20:31

the news recently about some large organisations who

20:34

are getting a lot more

20:36

serious around getting people back in, impacting

20:38

on people's pay and bonuses.

20:41

And so that should help in terms of

20:43

the fundamentals for office moving into next

20:46

year. And my bold prediction is

20:48

that Andrew McCasker will get his prediction

20:51

on interest rates right this time.

20:57

Well I'm cursed now, thanks Tom.

20:58

No, no, I think a lot of people would like that

21:00

prediction to come true. I would for my own

21:02

personal perspective with my mortgage. So, Paul,

21:06

you're going into the hot seat for the first

21:09

time. What's your view?

21:11

Yes, I think we'll see an uptick

21:13

in capital raising activity around

21:15

the alternates, and I think a lot of that will be driven by,

21:18

currently a lot of them are in sort of develop to

21:20

core strategies. So really shifting from that cost

21:22

of capital to a lower cost of capital as portfolios

21:25

have reached critical mass. I think that will

21:27

be one theme that we'll see play out. And I

21:29

think maybe a contrarian one, it is obviously very

21:31

early days, but I think there will be an uptick

21:33

in investment in discretionary retail.

21:36

The non-discretionary end of the market has just

21:38

held strong throughout. Obviously, anything anchored by

21:41

supermarkets or anything small enough to be acquired

21:43

by high-net-worth individuals has just been pretty much bulletproof. We're

21:45

starting to see transactions in the bigger end

21:47

of town of, you know, $200 million-plus malls and

21:50

I think what we're seeing there is from

21:52

peak to trough pricing, I think

21:54

it's probably off 40 to 50% in some instances.

21:57

So, it is absolutely repriced in terms of the

21:59

income. There's an element of stability there.

22:02

I think the tenants, occupiers are in

22:04

a lot healthier position, you know, from

22:06

an occupancy cost and just overall health perspective.

22:09

So, I think people can underwrite income, underwrite

22:11

a little bit of growth and

22:13

I think the e-commerce penetration has sort

22:16

of played its course a little bit. It's structurally different to

22:18

overseas in terms of delivery times and logistics infrastructure

22:20

that's in place. I think people, investors

22:23

can get a lot more comfort with the yield and the

22:25

growth in those sectors and the yields are

22:27

probably at a point where you can get positive leverage. You know,

22:29

so in the absence of everything going bad

22:31

and hitting a massive recession that impacts the

22:33

consumer, I think that could be

22:36

something to watch out for in 2024.

22:40

No, and let's not see a massive recession, I

22:42

don't think any of us want to see that. Thank you

22:45

so much for your time, Tom, Andrew and

22:48

Paul. It's going to be interesting to reconnect

22:50

in a few months' time to see how your predictions

22:53

have played out and how market and conditions have

22:55

evolved. Thanks for tuning

22:57

into this latest episode of Talking Property

22:59

with CBRE. If you like the show

23:01

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clicking on the links in our show notes. And if

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you have any questions or feedback on this episode or

23:22

ideas for future podcasts, please email

23:24

us at [email protected]. We'll be

23:28

having a small break until January 8 when I'm

23:31

excited to let you know that we'll have a new Talking Property

23:33

Client series that will kick off for the

23:35

three weeks of January. We're going to

23:38

be talking to Lendlease Charter Hall, Investa, CBRE

23:41

Investment Management, Aware

23:43

Real Estate, Brookfield, Aliro and

23:45

ISPT about where they

23:48

see the best opportunities in 2024 and where

23:50

they see the best opportunities

23:53

for transformation in our industry.

23:55

So happy holidays and make

23:57

sure you tune in.