Do you think there are further legs down in the listed market?
Mate, I know direct property really well. I’m not even going to guess how crazy the listed market is going to get because it’s not priced on intrinsic value. So… and it’s not just Australia, US REITs are all off quite a lot. So I think you will have a lot of volatility.
To what degree is pricing going to fall in the direct or unlisted market?
It’s not going to fall to the level that the listed world implies. For the reasons I outlined. Look, we’re great believers in the bifurcation of markets. I’ll run through them.
Modern office assets are going to have much lower vacancy than 40-year-old buildings, they might still be in good locations, but… you know, you and I can’t look like a 20-year-old again, right? So you can’t do that with old buildings.
We’re seeing the same in industrial. A lot of the big industrial users, whether they are retailers or e-commerce or 3PLs [third-party logistics], they want modern buildings. They’re introducing a lot of automation. So a lot of that is very difficult to do in a 30-year-old shed.
I think the same thing is happening in the shopping centre world. It’s not all about ‘discretionary retail’s dead, and convenience retail is going to be okay’. There’ll be great malls in discretionary retail that continue to have high occupancy and continue to get sales growth which drives rental growth, and then there’ll be some shockers.
You need to be a stock picker in the direct market more than you ever had to be and you need to be very discerning about which sort of assets you want to own and where you want to be in the capital stack because the land in any development or any capital stack is the most volatile when construction costs go up.
Is there potential that some of the things we’ve talked about, office projects for example, won’t proceed?
Totally. They won’t.
I think this level of inflation we’re seeing at the moment is good for some markets because it’s going to push new supply out another seven to 10 years that may have otherwise been developed.
There’s reasonably healthy signs that the core markets like Sydney and Melbourne, yes, we’ve got new supply, but it’s not crazy as a percentage of the total supply in those markets [will be okay]. Some markets, like north Sydney, I think it’s gonna be a bloodbath. I’ve never seen mooted supply as a percentage of a market of 1 million square metres, like what’s going on in North Sydney.
It’s going to come down to who is smart enough to see the bifurcation.
Do you agree with Darren [Steinberg] about Parramatta?
Look, we’re great believers in the centre of gravity moving to the southwest of Sydney. More than half the population sits west and south west of Parramatta. So we think there’s strong population demand drivers.
But you’ve had some big supply shocks. You know, our friend Lang’s [Lang Walker] created 30 per cent of the A-grade office supply in effectively one project so it’ll take time to digest. I’m less negative about Parramatta than I am about North Sydney.
And then what about Melbourne?
Yeah, you got to remember Docklands created a million square metres over 15 years which created a supply shock to Melbourne. Now most of the decent part of Docklands is developed out so you don’t have this 20 per cent of new supply holding back things in Melbourne. If I go back 30 years, I could go down to Melbourne, look, and find 10 sites to develop. It is very, very tight now. It’s hard to find any good development land.
I think Melbourne actually is going to be the quieter achiever of all commercial markets because net effective rents are still lower than… Brisbane and it’s got a CBD and a population the size of Sydney. So I’m I’m actually confident about Melbourne not having that 20 year supply problem from the creation of Docklands.
And yeah, that’s why we’re well through quite a successful development of Collin Street anchored by Amazon, and once again, I think it’ll be pretty close to 100 per cent at least before we complete in mid ’23.
We know your view about getting people back to the office…
They’ve got to decide whether they want a career or a job. It’s really simple.
We had activity-based working prior to COVID and it’s over. So we experimented for about six years. It just doesn’t… I don’t think it works.
So that will single-handedly move us back to 12 to 13 square metres per person back from 10.
We’re going to need to create a lot more amenity wellbeing space within our developments in the CBD. But the city spine like most city spines have been set up for 100 years for all roads to come to your CBD. It doesn’t matter how many cross river rails you do or how many M12s you create. The public transport system is still driving greater access to the CBD.
The last thing I’d say about it: be really careful what you wish for. In the logistics sector, the reason why most of the major users are going to fully automated facilities is they save a lot of money on labour.
So you know, you’ll want to watch it. Our industry has a lot of people that are employed doing processing roles. And it’s not just the processing roles, it’s sales roles, so you can get your BDM [business development management] team and your sales team and your processing team to get replaced by robots.
So it’s okay when unemployment is 3.5 per cent, but if we keep having to deal with a lack of productivity and people saying ‘I want to work from home’… once unemployment rises, and it will, will we see jobs replaced by robots. So I think we’re going to see quite a change over the next five years.
I think governments and corporates around the world, and Australia is no different, have been pretty weak at realising the risks that’s coming from having all our 20 somethings coming from uni, not getting any mentoring and any training and any cultural understanding of what your organisation’s about… So it’s a big problem. But as I said, you know, and I say this to unions all the time, be careful what you wish for, because you know, technology has changed so much, it will continue to change and the labour force will get replaced by automation.
Now, funds management is in Charter Hall’s DNA. Everybody seems to want to be a fund manager. Have you seen any fallout, any tightening of returns because of that?
Charter Hall was started by the founders in 91. It’s in their DNA because when you don’t have a balance sheet, you’re managing other people’s capital. We’ve never changed our spots.
Even when we IPO’d in 2005, we quickly turned the balance sheet capital we’ve created with owning assets into co-investments in funds and yeah, the rest is history.
I think there’ll be a lot of pressure on rates that have not performed well over the last 10 years to go from balance sheet heavy to capital light. But it’s not easy. You can’t just flick a switch
I talked about the two Big B’s; Brookfield and Blackstone, globally. They’ve both been managing wholesale capital, you know, virtually since their inception. It just doesn’t happen overnight.
So, I think there’ll always be a bit of a fad where someone says, ‘oh, let’s get into funds management’.
But if you don’t change your spots and you’re quite focused on being a fiduciary and a manager of other people’s capital, whether it’s our 40,000 retail investors or 120 wholesale investors, that’s really what is going to set you apart from everyone else.
Have you got a view on inflation and interest rates?
The comments earlier around inflation being embedded for a period of time rather than it being transitory are right. But as [Lendlease CEO] Tony [Lombardo] said, you know, we are certainly seeing signs of peak pricing of cost inflation coming off.
And, look, if you’re a student of economics, central banks lift interest rates to smack demand to bring down inflation. And then ultimately, that brings down interest rates. So every cycle you’ve been through, you hit a peak, the central bank raising interest rates eventually has an impact. Most of the time in history they overshoot, and it’s a hard landing. Let’s see what happens this time. I’m quietly confident we’ll have somewhere between a soft and a medium landing, but there are big risks as well as geopolitical risks that could see the global economy go into a hard landing, and then central banks will be reversing interest rate rises pretty quickly.
There are some sectors of the market you’re not in. You’ve got pubs as investment but you don’t operate pubs.
No, my old man used to have a few walk in walk out pubs and I decided that it’s actually best to own the freehold and let someone else be the operating risk.
What about build to rent?
Monitoring [it]… It’s a big sector, $9 trillion in Australia is the residential sector.
I think my view on build-to-rent is one, it’s a bad name, because once you’ve built it, it becomes multi-family. It’s not built to rent then, and that’s why the US calls it multi-family.
This country has never had multi-family because in all of my time, and well before that, the all-up cost of debt has been up above the yield you can do on build to sell. You know if any of you have bought apartments, if anyone really says they’ve ever got something above a 2-2.5 per cent net yield they’re deluding themselves because by the time you add up, you know all your statutory outgoings, let’s say a normal occupancy rate, etc. It’s really hard.
I think it’ll get there. It’s not going to surge and become a core institutional sector as quickly as other parts of the world. If you go to Europe but particularly in North America, part of the reason it’s worked, you can access 30 year debt money through Fannie Mae and Freddie Mac and until this government does it, and we can get long term institutional debt secured against multifamily. I’m not sure that’s going to work.
We would like to see a level playing field in terms of withholding tax, so we can get foreign investors. If you look at the student housing sector in this country, the vast majority has been funded by foreign capital. And without that foreign capital, we wouldn’t have the student housing sector we’ve got now.
Sorry. They have funded it knowing the withholding tax [regime]. Why should we change it then?
Well, the issue is that with the rise in interest rates, the negative spreads have become worse. So if we want to access capital, as someone asked Darren [Steinberg] earlier, the state governments need to watch that they don’t kill the golden goose. They charge stamp duty and they charge land tax. They keep doubling the rates. The land values keep going up. Now, we’ve got Queensland saying, ‘Oh, if you own a piece of real estate in Tasmania, WA, South Australia, whatever, we’re going to aggregate it to lift up the threshold.’
So I say to most state governments; be really careful what you wish for.
Half the room probably don’t remember this, but New South Wales introduced a buyer stamp duty. It was the biggest own-goal I’ve ever seen. It completely collapsed volumes. So if you’re a government, there’s only two things that are going to drive your revenue growth, the rate that you charge people, and the volume of transactions.
So if the volume drops off the cliff, you’re back to half the revenue you had before. And that is what I think the state governments need to be really careful of because the double whammy of increasing stamp duty rates and then ,you know, for foreign capital, they’re being asked to pay double the land tax rate on rising land values. I just think it’s political suicide.
But it’ll play out and there’ll be times where the revenue base drops and everyone’s gonna go, ‘oh, geez, maybe we’ve killed the golden goose’.