The Rise of Skyflation: This is what Crestone and Brookfield say about Aussie real estate now
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The banks have moved quickly to lock in that rate change. And this new trajectory of the cost of borrowing presents a whole new vale of tears and/or cheers for a lot of sectors already transformed by the COVID-19 pandemic.
Following the initial panic and market crash – literally right from the onset – a peculiar, new and unexpected bunch of consumer habits wreaked a delightful/terrible havoc across a multitude of sectors, nicely captured by the wonky demand we’ve seen across the variety of real estate assets.
Just this week, Australia’s two biggest residential markets (Sydney and the other one) delivered their first quarterly price falls since around the time… okay, let’s call it, Friday Feb 27 2020. Because this one remembers that was when US President Donald Trump told an unreal news conference COVID-19 would actually vanish instead of spread:
“It’s going to disappear. One day — it’s like a miracle — it will disappear. And from our shores, we — you know, it could get worse before it gets better. It could maybe go away.”
Great times. Thank you President Trump.
Anyway, this week CoreLogic data shows in the last three months Sydney property prices fell 0.5% to $1.1 million while the other city dropped 0.1% to $806,145.
But prices are still nuts on a year ago. Sydney is up almost 15% on average, and the home of being recently knocked out NBL finals by a debutant Tasmanian NBL team, grew 8.4%.
CoreLogic’s research director Tim Lawless reckons we’re going to see a further momentum bleed in housing conditions all the way into 2023.
“Stretched housing affordability, higher fixed term mortgage rates, a rise in listing numbers across some cities and lower consumer sentiment have been weighing on housing conditions over the past year.”
Meanwhile, available rentals across Australia are still at an all-time low, Domain’s latest Rental Vacancy Report reveals, as populations head back to inner-city Sydney with workers returning to the office and international students heading back to school. (The other city is also seeing tenants return to the inner city for work, Domain adds, almost as an afterthought, really.)
But just like there’s more to removing the skin from a cat with a strong thumb and a sharp fingernail; there’s heaps more to real estate than residential property alone.
Crestone Wealth’s CIO Scott Haslem says thanks to the advent of new paradigms like WFH and the pandemic-party in online shopping, over the past two years, commercial real estate has recalibrated to reflect the crazy changes in the Aussie way of life – building opportunities in some sectors and removing them from others.
For Crestone’s senior investment analyst, Anshula Venkataraman, real estate assets broadly play a defensive role in her client portfolios.
And it’s not just Australians who are nuts for property, Venkataraman says. The sector acts as ‘the backbone of the global economy’ providing stable yield in volatile times.
She says core, quality real estate assets are now playing an even more important role in investment portfolios.
“Sectors such as corporate bonds currently present a higher correlation to equities, so we believe quality real estate assets can play a defensive role in clients’ portfolios, providing diversification and yield, and often providing some inflation protection.”
In a panel discussion with Crestone this week, Leonie Wilkinson, senior VP, Portfolio Management for Brookfield’s Australian assets (one of the world’s largest global real estate investors across office, retail, residential, and hospitality), says rising rates aren’t going to be such a bad thing for real estate.
Unlike fixed income, where cash is stashed in a slow cooker for a set time, property income can be handily reheated a la the microwave of increasing rents.
And in any case, Wilkinson actually reckons we’re less in a pickle than we are a ‘relatively benign’ inflationary situation. She says it’s just a tad elevated due to some supply-chain fiascos which time and patience will moderate.
“With inflation around 3-4%, long-term interest rates around a similar level, full employment and GDP growth in the 2.5-3.0% range, that’s a really attractive environment to invest in real estate. The key risk is that central banks hike rates too high, which impacts growth, and then you’re unable to pass that growth through, but we don’t think that will occur.”
Some assets, such as student accommodation, manufactured housing, multi-family apartment buildings and self-storage, are gaining popularity, ‘cos they benefit from relatively low cap-ex and a decent conversion from rent to cash flow.
In Australia, both listed and unlisted property generally offer high-quality management and high-quality assets.
The crux is really the exposure to volatility via the listed market, which might have nothing to do with what’s happening in the real, real estate market. So, it’s in the unlisted market that investors can be specific about where they put their cashola and generally avoid the volatility in returns.
Brian Kingston, Brookfield’s Real Estate Group CEO, says property markets began diverging as COVID landed, long before rising rates became a factor.
For example, logistics property (warehouses and the like – and some industrial sites) more than benefited from the mad boom in e-commerce and they did well, not in spite of, but because of the global pandemic.
Residetial we’ve already seen rocked the pandemic as people punted more capital into where they live, while government stimmy like the renovation subsidy-led boom did its bit to exacerbate the theme.
But at the same time WFH, lockdowns and the Covid-with-the-lot impact left many parts of the office, retail and hospitality sectors in a bit of a stew, simply because people weren’t willing or able to go hit the workspace through the pandemic.
While high-quality assets within those sectors continue to perform well, Kingston says lower-quality assets suffered.
During the upheaval, businesses tried to figure out how to align e-commerce with the ‘bricks-and-mortar’ shopfront. And not everyone got that right.
“A lot of retailers realised through the pandemic that businesses need both an online presence (where customers can engage with the brand, research products and in some cases purchase products), as well as a physical store front to pick up products and return and examine products more closely. The retailers that thrived during the pandemic are those that had a well-integrated online and bricks-and-mortar strategy.”
Going right back, Kingston reckons that prior to COVID-19, office property was splitting like a Kardashian marriage. A bit of a bifurcation between high-quality, modern office buildings that met sustainability standards and older assets which were sliding into functional obsolescence.
Now of course as we come out of the pandemic, there’s a renewed focus on getting people back into the office, and part of that return-to-work strategy is thinking about how they’ll use the office differently.
This includes hybrid working environments and weird new ways of interacting. Think: new, modern office buildings with wide open floor plans, reset spaces, functional utilities and so on, theese are the types of snazzy offices corporates will want to consider.
As a consequence, the value of these assets has increased, with rents rising, and the quality of the tenant has too.
Giving Brookfield Place Sydney a plug, the company says tenants are now demanding the very best office accommodation for their employees.
“Offices still need to tick all the boxes they have in the past, such as a good location and sensible floorplates. However, now all the extra amenities are also becoming standard. Employers also see an opportunity for the office to be a physical manifestation of their corporate values. We have seen greater demand for assets that meet sustainability criteria.”
There’s also been a step-up in demand for flexibility, such as increasing the amount of video-conference enabled meeting rooms, as well as flexible working space.
Brookfield says the super-low unemployment is a right tailwind for real assets generally. And global investors like our market since it has a very sexy income yield compared to other markets.
The spread – the diff twixt income you can earn from a real estate asset and the cost of paying the bloody thing off – is currently around 300 basis points (bps) in the twin global gateway markets of Sydney …and the other one.
This compares to around 200bps in other global gateway markets, Kingston notes.
With global demand for income expected to continue as populations age and pension funds move from accumulation to retirement phase, this should underpin high demand for Australian real estate.
Finally, Aussie property lives in a transparent and highly-regulated market, with tight links to China and the broader Asian economy. And that’s a mighty plus too.