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Speaker 1: Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer.

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Speaker 1: One of the recurring themes of reporting this year was

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Speaker 1: the revival of parts, at least of the local property sector.

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Speaker 1: Data centers, retail, even office box found some favored with investors,

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Speaker 1: whereas residential still seems to be struggling. So what should

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Speaker 1: investors make of the somewhat mixed sector. Remember this is

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Speaker 1: general information only and you should always see professional advice

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Speaker 1: before making investment decisions. Lou Prank is the head of

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Speaker 1: Property and Reets Equity research at Jardin Australia. Lou, welcome

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Speaker 1: to Fear and Greed.

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Speaker 2: Thanks Sean. Good to be here.

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Speaker 1: So let's take a top line view of it. What

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Speaker 1: do you make of roats at the moment, and then

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Speaker 1: we'll jump in and go through the specific types.

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Speaker 2: No sounds good now. I think riats are in a

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Speaker 2: good position, you know, with the first interest rate cut

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Speaker 2: earlier in the year, and you know, the Jardin expectation

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Speaker 2: is that we'll get one or two more later in

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Speaker 2: the year. That's a good backdrop for the RITZ. Most

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Speaker 2: companies is reported that they're at the trough of their

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Speaker 2: property valuation, cycle. Most companies will probably hit a trough

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Speaker 2: in earnings in the next you know, six to twelve

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Speaker 2: month as well, So yeah, the outlook over the next

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Speaker 2: few years is positive across the board.

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Speaker 1: Okay, so just explain to listeners, lou why property in

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Speaker 1: real estate investment trusts are so intestrate sensitive.

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Speaker 2: Yes, I think that. I mean, there's two main reasons

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Speaker 2: for it. First of all, property investment has always involved

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Speaker 2: leverage debt, so returns are clearly impacted by the fact

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Speaker 2: whether your cost of debt is going up or down.

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Speaker 2: And then I guess the second, which is maybe even

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Speaker 2: the more important reason for it, is that properties get revalued,

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Speaker 2: particularly enlisted land, every six month, and the benchmark rate

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Speaker 2: or in the DCF valuation, one of the main inputs

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Speaker 2: is the cost of capital, which again is a combination

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Speaker 2: of the cost of debt or the risk free rate

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Speaker 2: and then the risk premium. So that's why it changes.

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Speaker 2: Long term investors, you know, should really look at a

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Speaker 2: long term cost of debt. But what we've seen in

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Speaker 2: previous cycles is that it's always very tempting when interest

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Speaker 2: rates come down to ignore the longer term cost of debt,

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Speaker 2: but to just play the shorter term that cost cycle.

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Speaker 1: Okay, And just on that revaluation you talk about the DCF.

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Speaker 1: What that effectively means is that the higher and interest rate,

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Speaker 1: the discounted cash flow that's what DCF is, is lower.

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Speaker 1: So that's bad for the rate. So with the interest

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Speaker 1: rates falling potentially falling, that should be good for reads?

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Speaker 1: Am I right in saying that?

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Speaker 2: Absolutely? Yes, falling interest rates it's good for reads. I mean,

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Speaker 2: of course, it's a little bit more complicated than that,

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Speaker 2: is that there's always a reason why interest rates are falling,

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Speaker 2: So it normally means that the economy is slowing down,

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Speaker 2: which has some impacts or depending on the asset class,

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Speaker 2: but simplistically, a lower interstrate environment is good for property.

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Speaker 1: Okay, So let's get into the asset classes. Let's start

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Speaker 1: with industrial slash data centers. I mean, we seem to

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Speaker 1: because of Goodman Group in Australia, we seem to conflagate

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Speaker 1: the two together nowadays. But what about industrial? What's that

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Speaker 1: looking like? It's kind of been the dialing of the

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Speaker 1: market since COVID really at least until data sentates came along.

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Speaker 2: Yes, no, that's that's right, and it is probably still

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Speaker 2: quite important to separate data centers from logistics, even though

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Speaker 2: it's often the same land and the building structures can

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Speaker 2: look quite similar, but from a cycle point of view,

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Speaker 2: they're quite separate. So logistics, yes, have had an exceptional

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Speaker 2: period of growth. It started even before COVID, with you know,

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Speaker 2: just the emergence of e commerce. Traditional retailers really needed

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Speaker 2: to respond to that by pushing through supply chain efficiencies

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Speaker 2: which involved you know, bigger, more modern warehouses, and then

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Speaker 2: COVID really was you know, the icing on the cake,

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Speaker 2: which accelerated this whole e commerce store. And this is

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Speaker 2: all in the time when there wasn't that much supply.

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Speaker 2: Vacancy was already quite quite low. We're now coming towards

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Speaker 2: the end of the cycle where demand is normalizing, vacancy

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Speaker 2: is it's still low, it's two three percent, but it's

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Speaker 2: going up, which means that rents or rental growth is

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Speaker 2: slowing down a little bit. So we're still quite constructive

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Speaker 2: on logistics, but growth is certainly slowing down from the

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Speaker 2: last you know, five six years, okay.

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Speaker 1: In data centers and goodmin Group, which is the market

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Speaker 1: later here in Australia, they have pushed heavily into data centers,

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Speaker 1: Am I right and saying future income likely be about well,

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Speaker 1: not future income, but I think future work is about

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Speaker 1: forty five percent data centers for that group. Now, I mean,

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Speaker 1: what's the outlook and why is everyone sowing to data centers?

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Speaker 2: Yeah, the outlook there is positive. You know, given how

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Speaker 2: new the as of classes, it's still a little bit

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Speaker 2: and there's always a little bit of uncertainty about you know,

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Speaker 2: how big this opportunity can be. But with the growth

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Speaker 2: in cloud computing and now the emergence of AI computing,

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Speaker 2: all of that computing needs chips. The chips need to

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Speaker 2: be stored in climate controlled and you know, powered facilities

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Speaker 2: data centers. And given the expectation of growth in cloud

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Speaker 2: and AI, the expectation is that the demand for data

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Speaker 2: centers is going to be exponential over the next next

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Speaker 2: few years globally. So I guess that companies that have

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Speaker 2: land in the right location and more importantly, power connected

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Speaker 2: to the land are going to be in a very

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Speaker 2: good position. And Goodman, which clearly has done logistics very

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Speaker 2: well for a very long time, they are sitting on

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Speaker 2: a five gigawatt pipeline of power which they hope to

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Speaker 2: activate over the next ten plus years and then work

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Speaker 2: with you know, the hyperscalers, so the Amazons and the

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Speaker 2: Microsoft of this world, to basically build facilities for them.

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Speaker 1: Is there any chance it's a bit of a hyped

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Speaker 1: such that II will improve. So the use of the

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Speaker 1: amount of storage space, amount of chips isn't quite as

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Speaker 1: much as we think it might be at the moment.

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Speaker 2: It's possible. Ultimately, we don't have a lot of data

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Speaker 2: to go on yet, but judging by or what we

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Speaker 2: can look at is you know, what the hyperscalers or

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Speaker 2: the big AI companies are telling us on their growth

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Speaker 2: and based on that, and you know industry experts, which

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Speaker 2: you know, of course are a little bit biased as well,

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Speaker 2: but based on all that, the growth will be. The

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Speaker 2: question is, you know, is it you know ten x,

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Speaker 2: it's fifty x, is one hundred x of the current demand,

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Speaker 2: And nobody really will be able to give you the

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Speaker 2: definitive answer. And clearly a lot of players are starting

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Speaker 2: to jump into the supply site. Everybody wants to build

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Speaker 2: data center, so it's definitely something that we need to

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Speaker 2: keep watching. You know, at the moment, there is not

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Speaker 2: really any empty data center anywhere in the world. So

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Speaker 2: that tells us that right now the supply demand balance

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Speaker 2: is in favor of the you know, the current owners

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Speaker 2: of data centers. But it's something that we need to watch,

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Speaker 2: like in any other s. A class demand is one thing,

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Speaker 2: but you need to watch that there's not too much

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Speaker 2: supply either.

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Speaker 1: Stay with me, Lou, we'll be back in the moment.

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Speaker 1: I'm speaking to Lou Prank from jarn and Australia. Let's

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Speaker 1: take a look at a couple of sectors which haven't

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Speaker 1: had as good a time of it, but it seems

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Speaker 1: to be rebounding pretty well. Retail. I noticed, I think

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Speaker 1: we're centered group or one of those big mall operators

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Speaker 1: was to talking about the lack of retail space, which

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Speaker 1: is a good thing obviously for center shareholders. Where do

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Speaker 1: you say retail going?

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Speaker 2: You know, we are very constructive on retail. You know,

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Speaker 2: clearly have strong population growth that is likely to continue,

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Speaker 2: and really since COVID, there hasn't been any supply growth

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Speaker 2: in whether it's in males. Maybe there's a few neighborhood

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Speaker 2: centers around new communities in Australia, but generally supply growth

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Speaker 2: is very limited. So that's clearly you know, positive when

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Speaker 2: you're negotiating least terms with your tenants. Before COVID, we

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Speaker 2: were very nervous about, you know, the emergence of e

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Speaker 2: commerce and you know, all of us stopping going to

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Speaker 2: the mall and all going to buy all our things

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Speaker 2: on Amazon and other websites. But I feel that, you know,

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Speaker 2: COVID again accelerated the trend and also made retailers realize

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Speaker 2: that just having a website is not really enough. You

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Speaker 2: need bricks and mortar presence for marketing for people to

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Speaker 2: you know, people still like to shop, People still like

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Speaker 2: to you know, touch and feel the products that they buy.

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Speaker 2: So I would say that most retails have found that

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Speaker 2: the right balance between you know, the number of stores

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Speaker 2: that they want to own depending on the brand, and

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Speaker 2: then clearly they need a very good web and online

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Speaker 2: presence as well. So as long as you know, we

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Speaker 2: don't see the emergence of a lot of new malls

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Speaker 2: or malls expanding the supply, themo dynamic should be very positive.

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Speaker 1: Office now, I can't find a car park in my

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Speaker 1: train station in the morning. If I'm there after seven

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Speaker 1: thirty in the morning, I reckon everyone's back in the office.

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Speaker 1: That's my theory, but it's very very heading down invest

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Speaker 1: the same to like office again somewhat.

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Speaker 2: Yes, somewhat, it's coming from a very low base, and

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Speaker 2: I would definitely say that the fundamentals are not getting

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Speaker 2: incrementally worse, they're getting incrementally better. But it's still very

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Speaker 2: dependent on where you are. Sydney is a lot stronger

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Speaker 2: than Melbourne as the two largest markets. Brisbane and Perth

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Speaker 2: have always been a little bit more resilient, so Sydney

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Speaker 2: is recovering stronger. And then even within Sydney, you know,

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Speaker 2: the core or premium buildings in the core see are

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Speaker 2: performing a lot stronger than some of the outer CBD buildings.

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Speaker 2: So yes, the outlook is stronger, and if developers can

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Speaker 2: remain disciplined, the outlook should be strong. And I say

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Speaker 2: that because what we've seen in the last five or

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Speaker 2: six years is that every time demand picks up, somebody

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Speaker 2: will basically build a new, you know, sixty seventy eighty

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Speaker 2: thousand square meter building. And you know, even if demand

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Speaker 2: is strong, demand is to be very strong to absorb

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Speaker 2: all that new supply. So at the moment, vacancy is

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Speaker 2: still quite elevated, about thirteen percent in Sydney eighteen percent

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Speaker 2: in Melbourne. You know, roughly speaking, you need to be

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Speaker 2: below seven percent vacancy to have real pricing power. So

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Speaker 2: there's still you know, a long way to go. Kind

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Speaker 2: of demand needs to pick up a lot stronger before

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Speaker 2: you know, I think office becomes a real bang the

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Speaker 2: table rental growth type market.

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Speaker 1: I Kaylee, let's bring it to a residential A little

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Speaker 1: bit of good news and residential now it still seems

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Speaker 1: to be the poor cousin no.

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Speaker 2: And it also depends a bit who you are, whether

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Speaker 2: you know just a homeowner or whether you're a developer

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Speaker 2: that wants to you know, build more supply. Again, we

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Speaker 2: are getting more constructive unresidential after you know, a very

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Speaker 2: difficult period. And there's kind of three elements to this.

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Speaker 2: The first one is the structural element, and that has

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Speaker 2: been positive for some time. I mean you will have

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Speaker 2: heard about undersupply for quite some time. You know, there's

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Speaker 2: a lot of people that would like to buy a house,

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Speaker 2: would like to rent, but I just can't find something,

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Speaker 2: or at least not something that is affordable. And that

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Speaker 2: so that has been strong and that provides a very

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Speaker 2: attractive backdrop to residential. Overall, the cyclical story has been

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Speaker 2: more difficult, clearly with high interest rates which has made

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Speaker 2: the affordability even harder. That is starting to improve, you know,

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Speaker 2: with the first rate cuts. Hopefully we have more rate

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Speaker 2: cuts coming our way. Going into an election cycle, I

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Speaker 2: think every politician in Australia is going to make this

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Speaker 2: a very big part of their campaigns because housing supply

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Speaker 2: situation needs to improve. We're not going to solve this

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Speaker 2: by creating more demand, because the demand is there. We

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Speaker 2: just need more more housing and we're seeing pockets of that.

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Speaker 2: New South Wales have had some real success with you know,

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Speaker 2: basically state authorities taking control of this and basically looking

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Speaker 2: at you know, stations or certain areas where they say

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Speaker 2: we're going to accelerate approvals zoning changes to basically create

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Speaker 2: more supply. And then the third part of it is

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Speaker 2: that the developers you know Mrvak and Stockland are the

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Speaker 2: two largest ones, have also worked through some of their

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Speaker 2: weaker projects and have made improvements to their capital structures,

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Speaker 2: to their pipelines. Yeah. So I think that assuming that

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Speaker 2: that cyclical part is coming to the party, the outlook

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Speaker 2: for developers will be strong and hopefully that will not

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Speaker 2: come at the expense of you know, prices, you know

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Speaker 2: going up too strongly, which you know is great if

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Speaker 2: you own a house, is not so great if you're

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Speaker 2: you know, still trying to get on the on the

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Speaker 2: property letter.

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Speaker 1: Thank you for talking to Fear and Grade.

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Speaker 2: Thank you.

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Speaker 1: That was Lou Prank, a head of Property and rates

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Speaker 1: equity research at Chart in Australia. This is the Fear

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Speaker 1: and Great Business Interview. Remember this is information only and

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Speaker 1: you should seek professional advice before investing. Join us every

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Speaker 1: morning for the full episode. I'll hear and Greed daily

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Speaker 1: business news for people who make their own decisions. I'm

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Speaker 1: Sean alma Enjoy your day