1 00:00:03,990 --> 00:00:07,080 Sean Aylmer: Welcome to the FEAR & GREED Business Interview. I'm Sean Aylmer. The 2 00:00:07,080 --> 00:00:10,680 Sean Aylmer: commercial property sector has had its share of headwinds lately. 3 00:00:10,920 --> 00:00:15,059 Sean Aylmer: New data from MSCI shows deal flow in the sector 4 00:00:15,059 --> 00:00:18,659 Sean Aylmer: fell by almost half to about $ 40 billion, dragged down 5 00:00:18,660 --> 00:00:21,419 Sean Aylmer: by office towers with so much uncertainty over the future 6 00:00:21,420 --> 00:00:24,869 Sean Aylmer: of the workplace. But commercial property investing in Australia is 7 00:00:24,870 --> 00:00:27,719 Sean Aylmer: much bigger than just office towers. In the middle of 8 00:00:27,719 --> 00:00:31,590 Sean Aylmer: it all are the real estate investment trusts or REITs, R-E- I- T- 9 00:00:31,590 --> 00:00:34,260 Sean Aylmer: S, REITs. I wanted to find out how they work, 10 00:00:34,739 --> 00:00:37,229 Sean Aylmer: how the team behind an ASX listed REIT goes about 11 00:00:37,229 --> 00:00:40,110 Sean Aylmer: choosing the property assets within the fund, and what sort 12 00:00:40,110 --> 00:00:42,870 Sean Aylmer: of assets are we talking about. Matthew Strotton is the 13 00:00:42,870 --> 00:00:46,260 Sean Aylmer: executive director, head of real estate at RAM, which stands 14 00:00:46,260 --> 00:00:49,500 Sean Aylmer: for Real Asset Management, a great supporter of this podcast. 15 00:00:49,500 --> 00:00:52,888 Sean Aylmer: RAM runs the ASX listed RAM Essential Services Property Fund. 16 00:00:53,309 --> 00:00:56,550 Sean Aylmer: Remember, this is general information only. You should definitely seek 17 00:00:56,550 --> 00:01:00,930 Sean Aylmer: professional advice specific to your circumstances before making investment decisions. 18 00:01:01,200 --> 00:01:03,150 Sean Aylmer: Matthew Strotton, welcome to FEAR & GREED 19 00:01:03,960 --> 00:01:05,670 Matthew Strotton: Thank you, Sean. Great to be here. Great to see 20 00:01:05,670 --> 00:01:05,999 Matthew Strotton: you again. 21 00:01:06,660 --> 00:01:10,049 Sean Aylmer: Can we start with a 101 on REITs, on real 22 00:01:10,049 --> 00:01:13,290 Sean Aylmer: estate investment trusts? Many out there know exactly what they 23 00:01:13,290 --> 00:01:16,440 Sean Aylmer: are, but many don't. It is a massive part of 24 00:01:16,440 --> 00:01:20,280 Sean Aylmer: the market, but incredibly diverse as well. So what are 25 00:01:20,280 --> 00:01:23,670 Sean Aylmer: we talking about when we talk about REITs, and particularly 26 00:01:23,670 --> 00:01:25,440 Sean Aylmer: how diverse some of those assets are? 27 00:01:26,039 --> 00:01:28,828 Matthew Strotton: A great question, Sean. Real estate investment trust, it's quite 28 00:01:28,830 --> 00:01:33,900 Matthew Strotton: a descriptive name, quite a descriptive acronym. It is typically 29 00:01:33,900 --> 00:01:37,410 Matthew Strotton: a collection or a portfolio of real estate assets and 30 00:01:37,410 --> 00:01:41,069 Matthew Strotton: oftentimes there is one distinction beyond that and that is 31 00:01:41,700 --> 00:01:44,400 Matthew Strotton: whether or not a manager is actually internalized or an externalized 32 00:01:45,059 --> 00:01:48,119 Matthew Strotton: manager. So at the core of a real estate investment 33 00:01:48,119 --> 00:01:53,040 Matthew Strotton: trust is a portfolio of pure commercial, typically commercial real 34 00:01:53,040 --> 00:01:56,460 Matthew Strotton: estate, and whether or not a manager is actually part 35 00:01:56,460 --> 00:02:00,090 Matthew Strotton: or embedded within that vehicle or it's an external manager 36 00:02:00,090 --> 00:02:04,110 Matthew Strotton: is one of the main differences. As you pointed out, 37 00:02:04,709 --> 00:02:08,130 Matthew Strotton: the commercial office market is quite a significant part of 38 00:02:08,130 --> 00:02:12,180 Matthew Strotton: the real estate sector and therefore no surprise that the 39 00:02:12,180 --> 00:02:16,500 Matthew Strotton: majority or certainly a significant number of real estate investment 40 00:02:16,500 --> 00:02:21,899 Matthew Strotton: trusts are comprised of office assets in Australia. All of 41 00:02:21,900 --> 00:02:24,600 Matthew Strotton: the other real estate sectors are reasonably well covered, including 42 00:02:24,600 --> 00:02:28,320 Matthew Strotton: retail assets or shopping center assets. These are shopping center assets 43 00:02:28,320 --> 00:02:33,090 Matthew Strotton: that can range from the assets that are some of 44 00:02:33,090 --> 00:02:35,730 Matthew Strotton: the largest in the southern hemisphere, like Chadstone, through to 45 00:02:35,730 --> 00:02:40,019 Matthew Strotton: smaller real estate assets like supermarket- anchored, Woolworths and Coles- 46 00:02:40,020 --> 00:02:43,320 Matthew Strotton: anchored assets, through to even smaller high street assets. And 47 00:02:43,350 --> 00:02:47,100 Matthew Strotton: then beyond that, we do have an array of residential 48 00:02:47,100 --> 00:02:50,548 Matthew Strotton: based real estate investment trust. These can include student housing, 49 00:02:50,550 --> 00:02:54,719 Matthew Strotton: they can include the growing build to rent asset types 50 00:02:54,719 --> 00:02:58,500 Matthew Strotton: that are emerging in Australia, and through to two of 51 00:02:58,500 --> 00:03:00,569 Matthew Strotton: the asset classes that I will call out, which is 52 00:03:00,840 --> 00:03:03,419 Matthew Strotton: two of RAM's focus, which is the healthcare or medical 53 00:03:03,419 --> 00:03:08,370 Matthew Strotton: sector, which typically contain at the top end of the 54 00:03:08,370 --> 00:03:12,269 Matthew Strotton: spectrum private and public hospital. These are assets that can, 55 00:03:12,840 --> 00:03:17,009 Matthew Strotton: as you'd imagine, contain a longer term leasing commitment from 56 00:03:17,010 --> 00:03:20,370 Matthew Strotton: either public or private operations that provide services in the 57 00:03:20,370 --> 00:03:23,519 Matthew Strotton: hospital sector. These can be overnight hospitals, full service hospitals, 58 00:03:23,520 --> 00:03:27,179 Matthew Strotton: they can be day hospitals. Through to other aspects of 59 00:03:27,179 --> 00:03:32,129 Matthew Strotton: healthcare including IVF, mental health hospitals, and other allied healthcare. 60 00:03:32,730 --> 00:03:35,819 Matthew Strotton: And beyond that, there are other smaller sub- sectors like 61 00:03:35,820 --> 00:03:38,910 Matthew Strotton: we call essential services retail, which is your daily or 62 00:03:38,910 --> 00:03:42,900 Matthew Strotton: weekly needs visitation for the type of retail assets including supermarket- 63 00:03:42,900 --> 00:03:46,650 Matthew Strotton: anchored and other localized retail offerings. And then you have 64 00:03:46,650 --> 00:03:52,080 Matthew Strotton: other REITs that do cover everything from service stations and 65 00:03:52,080 --> 00:03:57,510 Matthew Strotton: so on. But the broad intention of REITs is to house 66 00:03:57,690 --> 00:04:01,590 Matthew Strotton: a collection of real estate assets and derive what is 67 00:04:01,590 --> 00:04:04,860 Matthew Strotton: typically a sustainable rental income from those portfolios. 68 00:04:05,969 --> 00:04:08,010 Sean Aylmer: That is a great explanation. And the bottom line is 69 00:04:08,070 --> 00:04:11,489 Sean Aylmer: real estate investment trusts are trusted invest in real estate, 70 00:04:11,580 --> 00:04:14,730 Sean Aylmer: which is stating the obvious, but real estate is such 71 00:04:14,730 --> 00:04:17,339 Sean Aylmer: a broad... So it really is across the spectrum. They 72 00:04:17,339 --> 00:04:20,849 Sean Aylmer: haven't done so well in more recent times. Tell me 73 00:04:20,849 --> 00:04:25,320 Sean Aylmer: how interest rates affect REITs and then going forward, if 74 00:04:25,320 --> 00:04:27,959 Sean Aylmer: REITs start to fall, what that means. 75 00:04:28,709 --> 00:04:32,130 Matthew Strotton: That is a very good question, Sean. The one central 76 00:04:32,370 --> 00:04:35,430 Matthew Strotton: feature of REITs is the level of transparency. Naturally in 77 00:04:35,430 --> 00:04:40,200 Matthew Strotton: a listed environment, and including myself as well as all 78 00:04:40,200 --> 00:04:44,730 Matthew Strotton: of our peers, are subject to the regime that exists under 79 00:04:44,730 --> 00:04:48,629 Matthew Strotton: the ASX, which means regular reporting, which means regular updates 80 00:04:48,660 --> 00:04:51,928 Matthew Strotton: of our valuations of our assets, which are conducted by 81 00:04:51,930 --> 00:04:55,770 Matthew Strotton: third parties. And on that particular point, Sean, I'll call 82 00:04:55,770 --> 00:04:58,498 Matthew Strotton: out that most of your viewers would no doubt be 83 00:04:58,500 --> 00:05:02,279 Matthew Strotton: aware that the valuation of real estate, longer term commercial 84 00:05:02,279 --> 00:05:04,049 Matthew Strotton: real estate is linked to a cap rate, and a 85 00:05:04,049 --> 00:05:08,909 Matthew Strotton: cap rate is typically linked to what or what is 86 00:05:08,910 --> 00:05:12,089 Matthew Strotton: representative of the sustainable income that can be attributed to 87 00:05:12,089 --> 00:05:16,889 Matthew Strotton: a piece of real estate. In the stronger points of 88 00:05:16,889 --> 00:05:19,740 Matthew Strotton: the real estate cycle there have been examples where high 89 00:05:19,740 --> 00:05:24,059 Matthew Strotton: grade commercial office, even supra- regional real estate, can be 90 00:05:24,059 --> 00:05:27,150 Matthew Strotton: used priced as low as a 4% cap rate, and 91 00:05:27,150 --> 00:05:29,789 Matthew Strotton: cap rates can vary beyond that depending on the asset 92 00:05:29,790 --> 00:05:33,149 Matthew Strotton: quality, the asset location, the sustainability of that income in 93 00:05:33,150 --> 00:05:36,209 Matthew Strotton: terms of how long a lease duration remains on that 94 00:05:36,210 --> 00:05:39,479 Matthew Strotton: particular asset, so on and so forth. There is an 95 00:05:39,480 --> 00:05:45,719 Matthew Strotton: inextricable link between cap rates and lending rates. And in 96 00:05:45,720 --> 00:05:49,589 Matthew Strotton: this particular example, when we witnessed, or as we all 97 00:05:49,589 --> 00:05:53,730 Matthew Strotton: witnessed inflation start to move upwards, our reserve banker and 98 00:05:53,730 --> 00:05:57,178 Matthew Strotton: therefore lending rates by our financiers within Australia started to 99 00:05:57,178 --> 00:06:02,670 Matthew Strotton: increase interest rates. And because that has a natural burden 100 00:06:02,790 --> 00:06:05,820 Matthew Strotton: on investment, particularly if I'm holding any sort of longer 101 00:06:05,820 --> 00:06:09,089 Matthew Strotton: term debt instruments, I am then going to naturally compare 102 00:06:09,089 --> 00:06:12,779 Matthew Strotton: to what is a competitive holding in equity real estate, 103 00:06:13,230 --> 00:06:16,649 Matthew Strotton: and that lends itself to increasing the required levels of 104 00:06:16,650 --> 00:06:21,120 Matthew Strotton: return in equity returns and thus points to, in this 105 00:06:21,120 --> 00:06:24,690 Matthew Strotton: example, a higher expected rate of return on real estate. 106 00:06:24,960 --> 00:06:29,580 Matthew Strotton: Therefore cap rates rise and prices start to reduce. What 107 00:06:29,580 --> 00:06:32,729 Matthew Strotton: it does do in an environment where inflation and interest 108 00:06:32,730 --> 00:06:37,260 Matthew Strotton: rates did rise quite quickly, it tends to shine quite 109 00:06:37,260 --> 00:06:41,190 Matthew Strotton: a light on the particular underlying fundamentals of real estate. 110 00:06:41,580 --> 00:06:45,210 Matthew Strotton: I think in periods of the economic cycle where real 111 00:06:45,210 --> 00:06:48,629 Matthew Strotton: estate is moving, and as it did coming into the 112 00:06:48,630 --> 00:06:51,509 Matthew Strotton: end of this real estate cycle or this interest rate 113 00:06:51,509 --> 00:06:58,080 Matthew Strotton: cycle, real estate wasn't necessarily priced perhaps as individually, shall 114 00:06:58,080 --> 00:07:00,900 Matthew Strotton: I call it, as it should have been. I think 115 00:07:01,230 --> 00:07:05,669 Matthew Strotton: there were sectors and assets being traded that probably maybe 116 00:07:05,670 --> 00:07:10,619 Matthew Strotton: moved a little bit too rapidly up the pricing curve. 117 00:07:10,650 --> 00:07:15,780 Matthew Strotton: And in this environment at the moment where pricing has 118 00:07:15,780 --> 00:07:18,330 Matthew Strotton: become, as you alluded to in your opening comments, has 119 00:07:18,330 --> 00:07:21,900 Matthew Strotton: been a little bit less frequently traded, capital is being 120 00:07:21,900 --> 00:07:25,650 Matthew Strotton: a little bit more cautious when it undertakes an analysis 121 00:07:25,860 --> 00:07:28,859 Matthew Strotton: of any sort of new acquisition or new disposal. It 122 00:07:28,859 --> 00:07:33,270 Matthew Strotton: means the individual fundamentals of assets tend to become far 123 00:07:33,270 --> 00:07:36,240 Matthew Strotton: more important in their analysis, and that lends itself to 124 00:07:36,240 --> 00:07:40,260 Matthew Strotton: even an even wider curve in cap rates. So cap 125 00:07:40,260 --> 00:07:43,289 Matthew Strotton: rates, yes, are inextricably linked to interest rates, but importantly 126 00:07:43,679 --> 00:07:46,319 Matthew Strotton: you tend to see a wider spectrum of cap rate 127 00:07:46,529 --> 00:07:47,639 Matthew Strotton: across different sectors. 128 00:07:48,209 --> 00:07:50,130 Sean Aylmer: Stay with me, Matthew, we'll be back in a minute. 129 00:07:56,280 --> 00:07:59,759 Sean Aylmer: I'm talking to Matthew Strotton, executive director, head of real 130 00:07:59,759 --> 00:08:04,139 Sean Aylmer: estate at RAM. So cap rates/ interest rates, we're talking 131 00:08:04,139 --> 00:08:06,810 Sean Aylmer: about quality of buildings. On top of that, you've got 132 00:08:06,810 --> 00:08:09,239 Sean Aylmer: things for office, for example, work from home trends, all 133 00:08:09,240 --> 00:08:12,510 Sean Aylmer: the post- COVID stuff that's going on, it makes it 134 00:08:12,510 --> 00:08:17,219 Sean Aylmer: a challenging sector just to get your head around, really, 135 00:08:17,219 --> 00:08:21,179 Sean Aylmer: maybe not to invest in. What about RAM Essential Services 136 00:08:21,179 --> 00:08:23,789 Sean Aylmer: Property Fund? Where do you play? Where do you think 137 00:08:23,789 --> 00:08:24,540 Sean Aylmer: the sweet spot is? 138 00:08:25,350 --> 00:08:28,710 Matthew Strotton: I like our outlook in that we are... Two of 139 00:08:28,710 --> 00:08:32,699 Matthew Strotton: our central areas we focus on is in healthcare in 140 00:08:32,700 --> 00:08:37,469 Matthew Strotton: the medical sector, and we've had some very strong areas 141 00:08:37,469 --> 00:08:40,439 Matthew Strotton: of momentum over the last 12 or 18 months in that space, 142 00:08:40,440 --> 00:08:44,640 Matthew Strotton: as well as essential services retail, which is those shopping 143 00:08:44,640 --> 00:08:46,410 Matthew Strotton: centers that we all visit once a week, twice a 144 00:08:46,410 --> 00:08:48,929 Matthew Strotton: week, that either house a Coles or a Woolworths. 145 00:08:49,020 --> 00:08:51,990 Sean Aylmer: I'm a daily shopper, Matthew. I'd love to be twice 146 00:08:51,990 --> 00:08:55,230 Sean Aylmer: a week. Really essential services. Go on. 147 00:08:55,230 --> 00:08:59,340 Matthew Strotton: There you go. So in quite a short summary form, 148 00:08:59,340 --> 00:09:03,358 Matthew Strotton: those particular sectors have remained quite defensive. And when I 149 00:09:03,360 --> 00:09:06,270 Matthew Strotton: say defensive, that means our tenants that are housed in 150 00:09:06,270 --> 00:09:09,270 Matthew Strotton: our real estate properties, be they private hospitals, day hospitals, 151 00:09:09,840 --> 00:09:13,770 Matthew Strotton: supermarkets, the local butcher, the local grocer, or some of 152 00:09:13,770 --> 00:09:16,858 Matthew Strotton: those other local services that we visit on a regular 153 00:09:16,859 --> 00:09:22,140 Matthew Strotton: basis, have withstood an array of different economic scenarios. And 154 00:09:22,140 --> 00:09:24,630 Matthew Strotton: we've all experienced that over the last four or five 155 00:09:24,630 --> 00:09:29,160 Matthew Strotton: years. So today, looking forward, not only can I speak 156 00:09:29,160 --> 00:09:32,549 Matthew Strotton: with such confidence that we've endured an array of stress 157 00:09:32,549 --> 00:09:37,440 Matthew Strotton: tests economically, and we've remained very defensive in terms of 158 00:09:37,440 --> 00:09:41,610 Matthew Strotton: our income levels, looking ahead in an environment where we 159 00:09:41,610 --> 00:09:45,179 Matthew Strotton: may... Our Australian economy either as a whole or certainly 160 00:09:45,179 --> 00:09:47,910 Matthew Strotton: parts of the economy are going to experience more duress, 161 00:09:48,570 --> 00:09:51,389 Matthew Strotton: we might start to experience a little bit more weakness 162 00:09:51,809 --> 00:09:54,510 Matthew Strotton: in our household incomes or whatever it might be up to 163 00:09:54,630 --> 00:09:57,000 Matthew Strotton: this discussion. It's going to mean it's going to put 164 00:09:57,000 --> 00:09:59,160 Matthew Strotton: further pressure on the tenants that exist in certain real 165 00:09:59,160 --> 00:10:02,760 Matthew Strotton: estate holdings, and I would rather in this environment have 166 00:10:02,760 --> 00:10:07,260 Matthew Strotton: a more substantive exposure to healthcare, which is... I think that 167 00:10:07,440 --> 00:10:10,259 Matthew Strotton: the fundamentals of healthcare, why it's remained resilient, I think 168 00:10:10,260 --> 00:10:13,800 Matthew Strotton: is self- evident, but also in that essential services retail 169 00:10:13,800 --> 00:10:17,040 Matthew Strotton: class. You talked about office and it being subject to 170 00:10:17,040 --> 00:10:20,218 Matthew Strotton: disruption, like retail has been subject to disruption over the 171 00:10:20,220 --> 00:10:26,069 Matthew Strotton: last 10 or 15 years as we've absorbed and seen the flow- 172 00:10:26,070 --> 00:10:27,959 Matthew Strotton: on effect of a change in behavior in the manner 173 00:10:27,960 --> 00:10:30,208 Matthew Strotton: in which we shop. But there's one thing about real 174 00:10:30,208 --> 00:10:35,520 Matthew Strotton: estate, there is always going to be an underlying level 175 00:10:35,520 --> 00:10:38,340 Matthew Strotton: of demand that is always pinned to both population growth, 176 00:10:38,340 --> 00:10:42,360 Matthew Strotton: income growth, and other demand drivers that is always going 177 00:10:42,360 --> 00:10:45,720 Matthew Strotton: to underpin the longer term fundamentals of a particular sector. 178 00:10:46,500 --> 00:10:48,958 Matthew Strotton: When we talk about disruption, like you hinted at with 179 00:10:48,960 --> 00:10:55,260 Matthew Strotton: office, those impacts tend to be absorbed within a period 180 00:10:55,260 --> 00:10:58,110 Matthew Strotton: of time. I think office has... Yes, it's gone through 181 00:11:00,059 --> 00:11:03,509 Matthew Strotton: an interesting cycle, but I might suggest, like a lot 182 00:11:03,509 --> 00:11:05,939 Matthew Strotton: of our peers are describing at the moment, that office 183 00:11:05,940 --> 00:11:10,319 Matthew Strotton: has absorbed that impact. The underlying demand for space is 184 00:11:10,320 --> 00:11:14,400 Matthew Strotton: certainly reemerging and you're starting to see quite a level 185 00:11:14,400 --> 00:11:17,849 Matthew Strotton: of interest back in that particular sector. But not withstanding 186 00:11:17,849 --> 00:11:19,649 Matthew Strotton: all of that, when you add all of those features 187 00:11:19,650 --> 00:11:22,500 Matthew Strotton: up, it's easy to describe real estate perhaps in a 188 00:11:22,500 --> 00:11:24,570 Matthew Strotton: cap rate on one hand, but on the other end 189 00:11:24,570 --> 00:11:27,330 Matthew Strotton: of the spectrum, yeah, there are a lot of factors 190 00:11:27,330 --> 00:11:29,160 Matthew Strotton: that can impact the volatility of real estate. 191 00:11:29,730 --> 00:11:32,250 Sean Aylmer: Matthew, I learned a lot today about real estate. Thank 192 00:11:32,250 --> 00:11:33,960 Sean Aylmer: you very much for talking to FEAR & GREED. 193 00:11:34,530 --> 00:11:36,000 Matthew Strotton: Oh, my pleasure, Sean. Good to see you again. 194 00:11:36,630 --> 00:11:39,719 Sean Aylmer: That was Matthew Strotton, executive director, head of real estate 195 00:11:39,719 --> 00:11:42,360 Sean Aylmer: at RAM, which is a great supporter of this podcast 196 00:11:42,360 --> 00:11:45,420 Sean Aylmer: and runs the RAM Essential Services Property Fund. This is 197 00:11:45,420 --> 00:11:48,000 Sean Aylmer: the FEAR & GREED Daily Interview. Remember, this is general information 198 00:11:48,000 --> 00:11:50,820 Sean Aylmer: only and you should get professional advice before making investment 199 00:11:50,820 --> 00:11:53,699 Sean Aylmer: decisions. Join us every morning for the full episode of 200 00:11:53,700 --> 00:11:57,629 Sean Aylmer: FEAR & GREED, Australia's best business podcast. I'm Sean Aylmer. Have 201 00:11:57,630 --> 00:11:57,958 Sean Aylmer: a great day.