0:09

Welcome to Talking Property, our

0:11

C B R E podcast series where our team of

0:13

experts, our clients, and industry specialists

0:16

share insights into the way we live, work,

0:18

and invest through the lens of commercial

0:20

real estate. I'm Catherine

0:22

House CBRE's Australian communications director,

0:25

and I'm your host for this latest Talking Property

0:27

episode. Today we'll be talking

0:29

about commercial property investment activity, the

0:32

current trends, the continued challenges, and

0:34

what to expect as a year progresses. It

0:37

was clearly a challenging first half with

0:39

our recently released in and out report, hiding

0:42

a 50% dip in the total value of

0:44

Australian deals across the office, industrial,

0:47

retail, and hotel sectors. Today

0:49

we'll be doing a deep dive into those numbers while

0:52

examining the current debt landscape and the

0:54

other drivers that will shape the market and influence

0:57

investor decision making this year. To

0:59

talk us through this, I'm joined by three of CBRE's

1:01

market experts, Stuart McCann,

1:03

head of International Capital for Pacific and

1:05

Southeast Asia. Andrew McCaskey

1:08

, our Pacific Managing Director of Debt and Structured

1:10

Finance, and Todd Broderick, CBRE's

1:12

, Australian Head of Capital Markets Research. Thanks

1:15

for joining me today.

1:16

Thank you.

1:18

So the last podcast we did on this topic earlier

1:20

in the year had our biggest talking property

1:23

audience, which highlights just how hungry people

1:25

are for Intel on the capital markets outlook

1:27

at the moment. So perhaps to set the

1:29

scene, Tom, can you talk us through the recent in

1:31

and out report and some of your key observations?

1:35

Yeah, sure. So as

1:37

you mentioned , um, we saw

1:39

a fairly significant drop in overall

1:42

volumes, 50% drop total

1:44

volumes were $8.8

1:47

billion in the first half of 2023 across

1:49

the four key sectors. That

1:51

also included $2.3

1:54

billion worth of deals that are yet to settle.

1:57

And some of those deals are , are

1:59

subject to capital raise. So there's

2:01

a bit of uncertainty around whether they actually

2:04

conclude, but one of the key trends

2:06

we saw was that there was a fairly

2:08

significant discrepancy between

2:12

large deals and smaller deals. So the sub hundred

2:14

mil transactions held up much

2:17

better, a drop of 36% year

2:19

on year . The major reason for that

2:22

was that private buyers were relatively

2:24

active. They probably see the current market

2:27

as a bit of an opportunity where

2:29

larger institutional investors , uh, on

2:31

the sidelines, but the over

2:33

a hundred million dollars transactions dropped

2:36

by 58%, which was, which

2:38

is typically dominated by the large institutional

2:40

investors and offshore groups. In

2:43

terms of offshore investment, we've

2:45

seen a 73%

2:47

drop year on year to $2.1

2:50

billion in the first half of 2023,

2:52

and it only counted for 24%

2:55

of total volumes compared to 44%

2:58

over the same period last year. One

3:01

interesting trend in terms of offshore investors,

3:03

we saw an increase in Japanese investment

3:06

into the Australian market. There's

3:08

been an increase in outflows out

3:10

of Japan in general, and

3:12

the main reason for that is their interest

3:15

rates remain low, so they're at a competitive

3:17

advantage at the moment compared to other

3:19

investors in the market. We

3:21

also saw investment come in from Hong

3:24

Kong, Singapore, and North America, but they're

3:26

all down on previous years.

3:28

I mean that overall decline in offshore

3:31

investment activities a real shift from what we've seen over

3:33

the last couple of years. Um , Stuart

3:36

, you've really got your finger on the pulse with what's

3:38

happening in those, you know, offshore markets at

3:40

the moment, sort of what's your take on that?

3:42

Yeah, look, I think what we're seeing play out in

3:44

the first half of this year in Australia

3:47

is, is really no different to what we've seen as

3:49

a trend globally. And look,

3:51

that's been really driven by many, you

3:53

know, institutional investors. As Tom said,

3:56

looking to batten down the hatches and and

3:58

manage existing portfolios. I'd

4:00

say for those that are investing right now,

4:03

there is fundamentally a high bar for

4:05

putting equity out the door. In this environment,

4:07

you know, underwrites have become more conservative,

4:10

investors have become laser focused

4:12

on the ability to drive visionary

4:14

income up so that they can

4:16

manage and service rising debt,

4:19

cash flows and and service costs. So

4:22

what we did see over the first half of the year is lower

4:24

volumes really due to one less

4:26

liquidity in the system, and two , ultimately

4:29

a wider bid ask spread

4:31

in terms of our transactional activity. I

4:34

still think the positive though for Australia is that

4:36

we've got an absolutely key position

4:38

in Asia Pacific for offshore investors.

4:41

It's really one of two, maybe three big

4:43

mature markets that's easy to transact

4:45

in that capital is comfortable to be in. You've

4:48

also got great occupied demand

4:50

across all sectors and

4:53

quite big barriers to supply across each of

4:55

the sectors too. So the outlook for rental

4:57

growth in our market is very good, particularly

5:00

when you're looking at cash flows on an

5:02

unlevered basis. It is quite attractive

5:04

the performance of our markets and

5:06

I think the other reason that we're confident about

5:09

the recovery in volumes is really that

5:11

capital's recognizing now is a great time

5:13

to buy some of the best real estate in the market

5:16

at this point in cycle. So I

5:18

guess while the first half of the year was down, we

5:21

do anticipate a gradual recovery

5:23

over the course of this year and a big peak up

5:25

into 2024.

5:27

I guess too , it's worth noting that the figures don't

5:29

include B T R at this point in

5:31

time, given it is a relatively new sector here

5:34

and we have seen a bit of activity happen,

5:36

particularly right at the end of the first half with

5:39

mvac

5:40

Big time . Um, you know, that transaction with with

5:42

MVAC is, you know, it's a $1.8

5:45

billion portfolio, a sell down of, you

5:47

know, 56%. It's a , a

5:50

big endorsement of the sector across Australia.

5:53

It is a great demonstration of how rapidly

5:56

that sector is maturing and is

5:58

very much gonna become a very key pillar to

6:00

offshore capital's portfolio construction

6:03

across the country in the next , uh, couple

6:05

years.

6:07

Katherine just, just a call out too , and she's

6:09

absolutely right, b t r both on the equity space and

6:11

the debt space has been very active not

6:14

only the last six months, but for the last 18

6:16

months. Uh , the , the other bit I wanted to

6:18

throw in there, keeping my debt hat on and

6:20

, and Stew's being front and center of this

6:23

with offshore capital coming to Australia , um,

6:26

looking at those debt platforms as well. So pivoting

6:29

or adding a , um, another investment strategy

6:31

to their bow going from direct

6:33

property investment to direct debt investment,

6:36

so a complimentary asset

6:38

class to what they're usually invested

6:40

into. So Australia's see , been

6:42

seen as quite an attractive platform

6:45

for these groups to step off into

6:47

And more attractive than some of the other global markets when

6:49

it comes to that.

6:51

Uh , look, I think for where Australia sits

6:53

is that we're , we've got a very transparent platform

6:55

that we operate in . Our legal system

6:58

is consistent with the , uh, the

7:00

UK and a number of the Asian groups , so it

7:02

makes entry into Australia significantly easier

7:05

than potentially other countries that

7:07

may have a different legal system or a different way

7:09

of transacting. Yeah,

7:11

One of the other interesting conversations has

7:14

been about the valuation side of things. I think

7:16

valuations have been, you know, really a bit in

7:18

the cross hairs in Australia, you know, some

7:20

commentators saying that the , the revaluation

7:22

cycle has been a little too slow in

7:24

Australia and maybe that's why we're not seeing as

7:26

much activity as we've started to see in

7:29

some of the other markets. Um, I'd really

7:31

love to get all of your thoughts on, on this point,

7:33

and I know Stuart , you mentioned to the other day

7:35

that in Europe where the market has rebased,

7:37

they've gone from having, you know, relatively low

7:40

transaction numbers to having something like 3

7:43

billion pounds in transactions in, you know, under offer

7:45

in one quarter. I mean, how important is

7:47

this sort of , you know , revaluation piece?

7:50

Look, it's very important, you know, we, we've

7:52

touched on it before that when we're

7:55

dealing with these international investors, they've got a relative

7:57

lens and they're looking at opportunities that they can invest

7:59

in around the world. And so they'll ultimately,

8:01

you sort of gravitate to where they think the the best

8:04

value sits across the globe. And

8:07

right now, you're right, our valuation cycle

8:09

has been slower. Uh, if

8:11

we look across our major REITs in the last 12

8:13

or so months as a general observation,

8:16

they look to sort of wind back values, you

8:18

know, up to 5%. If we compare that to,

8:21

to the uk, it's probably been been , uh,

8:24

for those REITs between five to 10%

8:26

plus or minus. So look, in

8:28

fairness to our valuers , there's been less transactional

8:31

activity. We were slower in terms

8:33

of the tightening process than some of these other

8:35

big markets, but we do think that

8:37

when you do start to see some pricing

8:39

and, and valuations to Rebase, you're

8:42

right, we've seen offshore capital,

8:44

you know, definitely returning, you know,

8:46

the example that you talked about, Catherine was

8:48

across our Western Europe office

8:51

team, they have seen a massive

8:53

uptick in , in office trades go

8:55

under alpha within one quarter , and you're

8:58

right, it's around that 3 billion pounds,

9:00

which is quite an extraordinary number given

9:02

the , um, it was off a , you know, incredibly

9:04

low base. Interestingly, the

9:07

average yields on those under office

9:09

sit between the mid to high five cap

9:11

rates, which is clearly a big movement

9:14

of the traditional, you know, circa 4%

9:16

plus or minus across those markets in a

9:19

pre interest rate rising environment.

9:21

So clearly a sign that when these

9:23

markets rease the , the capital is

9:25

returning.

9:26

I think too in , in the debt space, Catherine

9:28

, the banks have an

9:30

uncertainty around what the valuation

9:33

number is, so it's

9:36

fine sort of working back on a interest

9:38

cover ratio or a lending value ratio, but

9:40

the variable that all the banks are concerned about

9:42

is what is actually that valuation number. Uh,

9:45

so once we can get some , um, stability

9:47

and certainty in the market that

9:49

we've either hit the bottom or close to

9:52

the bottom, we'll certainly see a

9:54

greater degree of participation in the banking

9:56

space.

9:57

Yeah, I think the only comment I'd make is

9:59

that there are starting to be some

10:01

transactions that are trading well

10:04

below book values. So to

10:06

Stuart's point, the book values

10:09

have unwound slower than other

10:11

markets around the world, but we are starting

10:13

to get that deal evidence which might

10:16

start to accelerate the process.

10:18

I think one of the interesting things for me was looking at

10:21

the in-N-Out report, Tom and um, you know,

10:23

whilst virtually all of the sectors did have a

10:25

dip, inactivity hotels was

10:27

a bit of an outlier, so activity didn't

10:29

drop and was, you know, actually in line with what we

10:31

saw in the first half of last year. And I

10:33

know just even in the last couple of weeks we've

10:35

seen, you know, a couple of really big transactions,

10:38

a couple of you know, big portfolios come onto

10:40

the market. What's different in the hotel

10:42

space right now?

10:43

Yeah, it's not all doom and gloom

10:45

out there and you're right, the hotels

10:49

spaces , but the trend , uh, $1.2

10:52

billion worth of assets sold in

10:54

the first half, which was the same as last year.

10:57

I think from a fundamentals perspective, we've

10:59

seen a significant rebound in travel into

11:02

Australia and both domestic

11:04

and overseas tourists occupying

11:07

our hotels. And in

11:09

fact, if you look at the average daily rates

11:11

on average in Australia, they're

11:14

26% higher than pre covid

11:16

levels. So we've

11:18

seen significant increase in daily rates

11:21

for hotels and to give you

11:23

context inflation in Australia

11:25

over that period's only risen by 15%.

11:28

So it's outperforming inflation quite

11:31

significantly and it's all kind

11:33

of that revenge travel that we've seen around

11:35

the world, but Australia's been a key beneficiary

11:37

of that and so that's driven a lot of activity

11:41

in the hotel's investment

11:43

market and we've also

11:45

seen some fairly high

11:47

profile private investors enter that

11:49

market as well, which has boosted

11:52

some of that transaction activity.

11:54

It'll be really interesting to see how some of the other campaigns

11:57

that are running at the moment pan out. I think a lot

11:59

of interest in the Ritz Carltons that have come on the market, so

12:01

there'll be some really good transactional evidence

12:04

moving into the second half. One

12:07

sector we really haven't touched on yet is industrial

12:09

and logistics, which really, you

12:12

know , has been a bit of a market darling over the last

12:14

couple of years. There are a

12:16

lot of, you know, larger portfolios in the market

12:18

at the moment. I guess Stuart , what's

12:20

your view on how that sector's gonna play out in the next

12:23

few months and is there the depth of capital still

12:25

there? Look,

12:26

Absolutely you can't ignore, the sector is

12:28

running at virtually a hundred percent occupancy

12:31

at the moment, so it's one of the strongest

12:33

performing sectors and markets globally

12:36

right now. And so absolutely

12:38

we anticipate to see capital continue

12:40

to be allocated to the sector. We did see

12:43

in the first half this year a big transaction

12:45

which we were fortunate enough to, to

12:47

be involved in on behalf of Mirvac

12:49

where we help them assist the establishment

12:51

of a , a large capital partnership

12:53

with Australian Retirement Trust. And so

12:56

that's a great example of, you

12:58

know, big capital allocation to

13:01

the sector In terms of some of these other big

13:03

portfolio and transactions that are in

13:05

play at the moment. Look , certainly

13:07

we're confident that a number of these will get executed

13:10

on, but one thing we would say is that the

13:12

capital's been super selective going forward and

13:14

that's probably the big shift into where they allocate

13:16

capital and how they allocate into the sector moving

13:19

forward.

13:20

Andrew, maybe if we sort of change course a little bit,

13:22

and I know we have talked about debt

13:25

already, but you know, one of the areas we

13:27

focused on in the last podcast was the cost of funding,

13:29

which has clearly become more challenging

13:32

in recent months following rate increases,

13:35

but there is still an appetite from both

13:37

bank and non-bank lenders, which we

13:39

saw through your team's recent lender sentiment

13:41

survey. Can you talk us through some

13:43

of the key trends you're seeing in the debt

13:45

space right now?

13:47

Yeah, sure Catherine , and it was interesting

13:49

comparing our current survey to our previous

13:52

, uh, survey and what we had

13:54

expected is that we would've seen a much

13:57

greater increase in the retail space because

13:59

we've seen that asset class rebound

14:02

post covid and has become a, a

14:04

sought after investment class. But

14:07

what we have said is the consistency , uh,

14:09

from the previous survey, which showed financiers

14:12

are very interested in industrially

14:15

continue to be, we've got that underlying

14:17

rental growth story which will

14:19

supplement any potential softening of yield

14:22

in the industrial space. And the other

14:24

space of course is, is built to rate and

14:26

we've , we touched on that earlier on with the number of transactions

14:29

that we've seen in Australia over the last

14:31

12 months. We did see an uplift

14:34

in appetite for retail , uh, but

14:36

unfortunately the environment we're at

14:38

the moment , uh, and the uncertainty around the valuation

14:40

in the office space, it's certainly approached

14:43

with a great deal of caution. The

14:45

one benefit that we do have in the Australian

14:47

market is that the banks are still very

14:49

active in that space and whilst it

14:51

may not be an asset class that

14:54

they're seeking , uh, that's still

14:56

able to get finance at reasonable levels at

14:58

a reasonable debt cost as well.

15:00

And there seems to be quite a difference between how

15:02

some of the offshore lenders and the domestic banks

15:05

are approaching different asset classes

15:07

right now. Yeah,

15:08

Very much so Catherine and, and it's

15:11

really influenced by where they're domiciled.

15:13

Uh, so we are seeing an overlay of

15:15

groups out of America , uh, having

15:18

a much more negative approach towards

15:20

office and still having a, a

15:22

somewhat tarnished approach towards retail, whereas

15:25

we're seeing a different approach out of Asia on

15:27

both office and retail. So

15:29

it really comes down to the experiences in

15:31

the home countries of those offshore banks , uh,

15:34

lending into Australia.

15:36

Is that playing out for you, Stuart , in the conversations

15:38

that you're having with your investors?

15:40

Look, absolutely. I think any certainty around access

15:43

and cost of finance right now is providing a

15:45

lot of confidence and stability. Catherine

15:47

,

15:49

So I guess , um, a question for everyone,

15:51

and maybe I'll start with you Tom. I

15:54

mean, what would your top tip for investors

15:56

be in the short to medium term?

15:58

I think the window is starting to open where

16:00

there is some value in the market and generally

16:03

that only happens kind of once

16:05

every decade. We thought it might've happened

16:08

when covid hit, but then low

16:10

interest rates kind of boosted asset

16:12

values, but we're actually starting

16:14

to see, we're seeing the valuations

16:17

declining and we're seeing some assets

16:20

sell at soften cap rates and well

16:22

below book values. Um,

16:24

so that might start to look appealing to

16:26

some of these domestic and offshore groups. And

16:29

the fundamentals of Australia are still strong.

16:31

We've got high population growth, the

16:34

medium to long-term economic outlooks

16:36

really strong for Australia. So

16:38

I think we're still an attractive destination and

16:41

I think the up final point is that

16:43

these softening cap rates are definitely gonna

16:45

have an impact on the supply of new

16:47

stock. It's getting really hard to make

16:50

development stack up. So that's

16:52

a real positive for existing assets and

16:55

rental growth over the medium term .

16:57

Absolutely. Construction costs are still such an

16:59

issue here. So Andrew,

17:02

what's your top tip,

17:04

Catherine ? I could take the easy way out and say build

17:06

a red or residential property given the fundamentals

17:09

that we have in relation to vacancy rates and

17:12

supply demand curve. Uh, but

17:14

I truly think , uh, we touched on it before , uh,

17:16

retail hotels , uh, the upcoming asset

17:19

classes both for debt and for equity.

17:22

Uh , there's value in, in both of those asset

17:24

classes and uh , the opportunity to buy

17:26

assets that would normally be on

17:29

the market in the cycle that we're seeing at the moment.

17:32

Stuart Lucky last.

17:33

Yeah, look, I think it's a general combination

17:35

of Andrew and Tom's responses, but I think it's

17:38

just , uh, for the capital not to wait

17:40

until the dust settles because the

17:42

availability of product right now is , um,

17:44

yes it's high, but it's been driven

17:46

by a lot of the bigger institutions wanting to,

17:49

you know, reduce gearing or set up big business

17:52

shaping capital partnerships going forward.

17:54

And um, you know, I think that a lot of

17:56

these big institutions are , are making their way

17:58

through these programs and

18:01

um, are getting to a point where the balance sheets are the

18:03

starting to look pretty good. The capital partnerships

18:05

are now in place and

18:07

, um, I think once you start to see, you

18:10

know, the books close of some of these bigger institutions

18:13

and then you're starting to see inflation taper

18:16

into some of these other big markets in the US

18:19

and you feel like you're , you're getting to the back end

18:21

of our rate, I process through

18:23

the R B A , you know, this market

18:25

could change really quickly and

18:27

, uh, you know, return back into the favor of

18:30

a landlord market, you know, very, very quickly

18:32

and ultimately the window could and

18:34

can close , uh, you know, very quickly.

18:37

Yeah, no , it's gonna be very interesting to see some of the,

18:39

the stats that are coming out. I guess we've got property accounts

18:41

of vacancy rates coming out, which people will be,

18:43

you know, taking a very close look at this time around,

18:46

you know, some transactions that are coming up that will maybe

18:48

give us some a lot more certainty about values

18:50

. So it's gonna obviously be

18:52

an a very interesting next few

18:55

months. But thanks so much once

18:57

again for your time, Stuart , Andrew and Tom, I

19:00

think you've given our listeners some food for thought and

19:02

you know, it's gonna be really interesting to see how market

19:04

conditions evolve when we next catch up.

19:07

So thanks for tuning into this

19:09

latest episode of Talking Property with

19:11

C Bre . If you like the show and wanna

19:13

check out more, visit cbre.com

19:16

au slash talking dash property

19:18

or subscribe through Spotify and Apple Podcasts.

19:22

You can also access our in-N-Out report

19:24

by clicking on the link in our show notes. Until

19:26

next time,