Episode 5 - Real assets: A wrap on investor sentiment

Disclaimer: The information contained in this podcast is general information only and opinions of participants are their own and not the views of their organisations. Any advice is general advice only. Past performance should not be relied on as indicative of future performance.

Intro: Welcome to The REAL Deal, a monthly podcast about what’s happening across the real estate and infrastructure sectors.

Episode grab (Deborah): There’s two key themes. One is investors want a greater return than they've wanted for a long time in terms of an absolute return, and therefore they're 
having to go up the risk curve. And so how far up that risk curve they can go determines what kind of investments they can make. The other thing that has become really important is the sort of style of cash flow that is flowing through the assets that they're looking at and are they inflation linked?

\Intro (cont.): That was this week’s guest, Deborah Coakley, Executive General Manager of Funds Management at Dexus. Deborah joins Darren Steinberg to give a final view on real asset markets for the year.

Darren: Welcome, everyone, and thanks for joining us again for what is our last podcast of the year. Today we are going to talk about some insights on global markets and investor sentiment for Australian real assets that we've picked up from recent international roadshows. And we have a special guest this afternoon, Deborah Coakley, who is the Dexus EGM for our funds management business. So welcome, Deb, it's great to have you for our final episode of the year. 

Deborah: Thanks Darren. 

Darren: Deb's been with Dexus for almost 11 years now, and for the majority of the journey of the new Dexus. So over that time, Deb, you've had many different roles within the group, and that has given you a broad perspective both on Dexus and our investor community. Now, in our last episode, we heard from Melbourne Airport CEO Lorie Argus, one of the few Australian senior businesswomen in this country. So as a fellow successful businesswoman, perhaps you can start by telling listeners a bit about yourself, your career 
and the type of challenges you may have been through to get where you are today.^{dexus.com 2}

Deborah: [00:01:05] Well thanks, Darren. It has been a really interesting career. It spans a little longer than the 11 years at Dexus. But when I reflect, I learnt that I liked work when I was at uni. So study is one thing, but I really like being involved with teams and working on productive things, looking at outcomes and meeting people. So I started my career in investor relations, actually, while I was at uni and worked full time and went to uni at night and tried to put what I was learning at uni into practice. But the main parts of my career that have led me into my role in funds management now have been working with groups like Deloitte. I worked there in management consulting and then eventually with Qantas, which was a really interesting time. I mean, I was at Qantas when the A380 first came to Australia. I was in the shed the day that big plane came in, and it was really wonderful to work with real assets. That then led me to another form of real assets, which was real estate here with Dexus and started with Dexus in HR or people and culture, as we called it, added on things like property management, marketing, we had an innovation hub, we started business excellence and just added on a whole portfolio of things that have really contributed to making Dexus the business that it is today. And the past six years have been in funds management, where with the very small funds team, to a very large funds team now, we've built a real reputation in that space.

Darren: [00:02:43] You and I have both spent some time overseas this year speaking to our investor base, both on the listed and unlisted side. Why don't we start with a little bit of feedback from what you're hearing about our offshore investors on your international roadshows?

Deborah: [00:02:57] It's a really interesting question, because investors themselves are often bucketed into one group and they're really different. The international investor isn't all the same either. So a global investor potentially versus someone who's just based somewhere say in the US or Europe. So the big global investors, have a different view on 
Australia than someone who perhaps is a pension fund, let's say in Germany, who might have a small allocation, very small allocation to the Asia Pacific market versus the global guys who the region is very, very important to their asset allocation. So the region itself, Asia, including Australia, is screening really well. We are full of economies that are doing well. We're full of really great developments that are happening, whether it's in office, industrial, retail or in the newer sectors, particularly in areas like health. So the investors are really interested in what's happening here. And they like generally things like the transparency and population growth that they're experiencing in Australia because they're all really good for real assets.

Darren: [00:04:08] As you say, our economy stands out from a global perspective due to that population growth. It’s between 1.3-1.4%, the organic population growth. Plus 
migration really does underpin all real estate asset classes and real assets, because obviously with the population coming through, you need additional houses, additional 
^{dexus.com 3}offices, shopping centres and of course the infrastructure to help move that population around the country.

Deborah: [00:04:35] It was interesting, I was listening to your last podcast about Melbourne Airport and the enormous passenger numbers that are students who go through Melbourne airport itself. And then really to reflect on the comment that was made about, and so do all their parents and family who come to visit them. So student accommodation, hotels, all those things are really supported by not only population growth but the attractiveness of being in Australia, whether you're a student or a professional who wants to emigrate here.

Darren: [00:05:04] The beauty of the Dexus platform today is that we don't just rely on one source of capital. We have Australian pension funds, international pension funds, sovereign funds. But we also have the retail and high net wealth capital. I know you've spent a fair bit of time in Singapore recently. One of the observations I've made, having been up and down into that market for 20 odd years now, is just the growth of the high net worth and the ultra high net wealth capital being distributed out of Singapore. Do you have any comments on that?

Deborah: [00:05:35] Oh, absolutely. And its wealth that people don't really understand. It's quite hidden. It's very private, as you say. It's called private wealth for a reason. It’s not appearing in newspapers and those sorts of things. And what I observe is that a number of those groups are really sophisticated. They have global real estate and infrastructure 
investments, and so they're very sophisticated. They know what they're looking for. They understand the risk return profile that they need to get out of real assets, and they're very 
keen on Australia. The transparency here for them is really important, as are things like the sort of ESG environment that is being wrapped around the real assets here in this country. So there is a growing swell of high net worth, and I'm talking really ultra-high net worth capital, which is just as sophisticated as some of the other capital sources coming into our market, and they're really active.

Darren: [00:06:39] And it's great that you've opened an office up there this year, and the team and yourself are spending more and more time in that market. It's a great market that intersects the European companies, Middle East and a lot of US companies of late all setting up there to look at deal flow within the region.

Deborah: [00:06:57] That's exactly right. You can be going to Singapore, but actually meeting with the head of real estate for a UK based insurance company because that's 
where their head office is going to be for this investment class. So Singapore's been a great addition for us and I really enjoy spending time in Singapore as well. It's a great place to do business.^{dexus.com 4}

Darren: [00:07:18] So, Deb, what are the things that you're finding that investors are looking for in an investment partner? Are they consistent across the globe with the different 
investors? Are they looking for the same things that Australian investors are looking for?

Deborah: [00:07:31] So really, it's access to good deals with high quality managers who do the right thing and have a keen eye on performance. That's really what an investor wants. They want to be able to trust you with their money. And if you think about any real asset class, the cheque is really large. So you're being trusted with someone's personal savings, with insurance money, and you're being trusted to invest that appropriately and have the right skills and capabilities to bring to bear, to get the most out of the asset that you're buying or holding for them. So that's probably universal. What do they look for in Australia, though, is they're really looking for knowledge. Which side of the road should I be buying on? Why is this asset versus another better? And you and I would both agree if you don't go and see it and walk around it, you're probably not getting the full story. So they really want boots on the ground. And that's one of the great things about Dexus. We have an office in each capital city, and we use that to our advantage on behalf of our investors to walk the streets.

Darren: [00:08:40] Yeah, it's fascinating, you used the word trust a lot there, and that's the important thing. By the sheer nature, these assets are not liquid like equities which you give money to an equities manager and if you decide that that manager isn't for you, the asset can be sold within 24 to 48 hours, maybe a touch longer depending on the size of the mandate. But with this style of assets, whether it be an airport or a big office building or a shopping centre, or industrial estate, you can't just liquidate them the next day.

Deborah: [00:09:09] And you can't wallpaper over a mistake. That's why the insights and research that's required to make those large-scale investments is really important. And why you want local knowledge, so you really want your local manager to be best in class, best of breed.

Darren: [00:09:28] So, Deb, the person's giving you the money to invest. But if I look at what's happened this year with in the 13 interest rate rises, inflation coming through, this has impacted transactional deal flow. It's on the record, and I've been doing this for over 25 years, this will be right up there with 2008 when we had the GFC, just the lack of 
transactions this year, I get asked a lot about what that means for the traditional real estate sectors such as office and retail. So I'll have a view. But I'm going to want to listen to yours.

Deborah: [00:10:04] Oh, I get to go first. There's two key themes. One is investors want a greater return than they've wanted for a long time in terms of an absolute return, and therefore they're having to go up the risk curve. And so how far up that risk curve they can go determines what kind of investments they can make. Because you're absolutely right, if they're not prepared to do that, they are probably sitting on their hands. The other thing that d^{exus.com 5}  has become really important is the sort of style of cash flow that is flowing through the assets that they're looking at and are they inflation linked? And so you're having more and more conversations now about, well, what? Tell me about the lease or the type of leases that are in a portfolio than you've had before. So for us, the response to this has been the creation of our really successful series of DREP, the Dexus Real Estate Fund, which looks at opportunities in the market where there's been dislocation or distress. It's also really a product for the time which will invest in the actual asset itself. But we'll also look at the debt side of things. So you've got investors saying debt and credit are really interesting to me today because I can get a better return than I can from the equity investment in the asset. And so DREP has been really successful in doing that and is a direct response to those interest rate hikes that that you've talked about.

Darren: [00:11:28] Yeah, and that first fund was raised at a very opportune time. That first fund is closed and I understand that you're in the market raising for a second fund. So we'll see how that goes in in due course. But that will start to be deployed in the next year or so. So that was good timing Deb getting that that series of funds up and running.

Deborah: [00:11:49] Yeah, it's good timing and it's also really an appropriate product for those high net worth individuals we were talking about before, Darren.

Darren: [00:11:56] Yeah, but you've got pension funds in there as well, Deb, so that's been a very good outcome.

Deborah: [00:12:01] Come one, come all.

Darren: [00:12:03] So look, obviously there's a lot of nervousness with the interest rates.  And a lot of that comes back to where assets should be priced. And you just spoke about investors not really wanting core type returns now because they can get 5.5% in the bank, or 6% maybe in some other countries by just putting their money in the bank. And that's why they're attracted to the 15% type opportunities. Look what we're definitely seeing around the globe right now, if you look at data coming out of the US and the UK, is that there are definite signs of inflation starting to stabilise, and that means that hopefully interest rates have peaked. So on the back of that, as I've said before, by the time we get 
into Q1 next year, valuations will start to reset. And we're currently doing our valuations for December now. But those valuations will reset and hopefully what we're saying is we're looking for a stabilised environment where interest rates aren't going up every month. I don't think they're going to come down quickly. We are probably back to more normalised interest rates now. So when you take all that into account, we're probably going to get a period where it should be a very good time to invest as we move into the Q2, Q3, next calendar year. And if you fast forward from investing off that sort of base, the returns as you look forward on a 3 to 5 year [basis], which you should be looking for, real assets should start to look really attractive.^{dexus.com 6}

Deborah: [00:13:29] That's absolutely right. And the mindset of an investor is about where is stability. They’re not necessarily looking for interest rates to come down or for there to be a particular outcome on valuations. What they're looking for is certainty so that they can actually forecast and plan. And as soon as we get that certainty into the market, whether it's on interest rates or valuations, that's going to have a huge impact on opening up the cheque books and the wallets.

Darren: [00:14:03] So Deb, coming back into the asset classes for a minute. So real estate for Australia for many years was office, industrial, retail, or predominantly it was office and retail, and then industrial sort of got a bit sexy lately. Residential has obviously been there for a long time. But this is changing, if you look around the globe there's been data centres, there's been build-to-rent, which is obviously getting there, there's student accommodation, which is growing in Australia. And we were very fortunate to pick up a very big student accommodation business when we bought the AMP Capital business. But do you want to just tell us what you're seeing with regard to what kind of asset classes are attractive for our investor base?

Deborah: [00:14:45] Yeah, I like how you put that something like residential’s always been there, which it has. But I think where you were going with this is very much around the institutionalisation of an asset class. 

Darren: Absolutely.

Deborah: Here in Australia we are, I'd say, we're at the start of institutionalising, getting the institutional investor excited and involved in the living and housing sector versus those traditional or more classic investment asset classes of, as you said, office, industrial and retail. So industrial is definitely still, I'm not necessarily going to call it sexy, but it's still of interest to our investors.

Darren: [00:15:21] Some people find sheds sexy Deb.

Deborah: [00:15:24] We all love a real asset. It's still of interest to our investors and certainly Australia has across predominantly the eastern seaboard, but to a large extent 
WA as well, some really important pieces of land which are zoned to be redeveloped and are going to end up as really great distribution hubs and industrial centres for the country. So it's a really exciting time in that space. But the office space traditionally has been a bit of a darling as well. I've always enjoyed looking at office towers and think they're generally interesting buildings, but they're not the darling at the moment. And a lot of that is a COVID hangover. Here in Australia, we have certainly seen the return to office happen. It's no longer really an issue for the Sydney CBD, although what is tainting that story of return to office is underperforming assets. And so today, the underperforming asset, the asset that ^{dexus.com 7} doesn't have the ESG credentials or where, let's call it the maintenance and capex, hasn't kept up with tenant demand. They are really affected. The thing we're really enjoying is watching retail. I know it’s an asset class very close to your heart, Darren, but retail really is rebounding. We've seen some amazing statistics from our retail asset management teams, with both foot traffic and sales coming out of some major centres around the country. And it's really been a bit of a good story for the past couple of months.

Darren: [00:17:06] Yeah, it's definitely bouncing off a of a low base. Hopefully it will continue, albeit I'm a little worried about next year as savings get worn away with this 
increase in housing interest rates, and will that take away disposable income from the consumer? But fingers crossed it doesn't. But we’ll see how that plays out. So Deb, let's 
come back to return to the office, because it's obviously another hot question. I was on a large panel last night, and it's very topical with your HR background and obviously your real estate now strong insights, do you have a view on return to the office and where this is going to land? And of course, you mentioned that Sydney was very strong and probably one of the strongest in the world, but do have a view on the workplace and where people should work from?

Deborah: [00:17:52] Yeah I do, and it's really interesting now that you have CEOs globally asking their people to return at least part of the time, if not all the time, to the workplace. And if you think about it financially, why wouldn't they want to just get rid of rent from their budgets? I mean, it's a huge number for many companies. So there's got to be something in this, Darren. It's got to be something in this being altogether coming into a workplace where there's professional equipment around you, where you have the right people to act as a sounding board to learn from, to host meetings in a real format that means everyone is actually included, but they're actually all concentrating. I mean if we're all honest with ourselves, sometimes online meetings are a great opportunity to read two or three emails. So I just feel like there's a real purpose to being in the office for those who do office work. They go to a purposeful place to do what they do, and they do it in an environment that is fit for purpose. So I really feel like offices are better off for the team environment, for the collaboration. And I know people have said this and I'm not saying anything many others haven't before, but I don't know why there's disbelief when really it would be very easy to eradicate rent from your budget if you could. Yet all the CEOs globally are progressively asking people to return.

Darren: [00:19:30] Yeah, it's really interesting, as someone that's run businesses for over 18 years now, and as a CEO, I can't imagine a running a business without a place to 
collaborate, innovate and to build culture, and even the tech companies, the ones that were originally pushing this work from home, they know [they need the office] to build their 
culture properly and to really deliver results. Because we're seeing it in productivity forecasts and numbers that are coming out that having a workplace drives those key parts of building a really good, strong business. And there was some data coming out of Savills ^{dexus.com 8} the other day that said Australia was lagging. And then I was reading some other research today that says Australians work from home an average of 1.3 days a week less than the UK, which is 1.5 days. Asia is obviously a lot stronger with under one day a week work from home, while North America (US and Canada) are about one and a half days as well, in line with the UK. So, as you said quite rightly, Sydney's back to normal, but people are operating flexibly. Mondays are a little quieter, Fridays are a little busier. Tuesday, Wednesday, Thursday, are really busy. Melbourne is probably not anywhere near what Sydney is.

Deborah: [00:20:44] But return to the office works hand in glove with flexibility. They're not mutually exclusive. So you have, as you say, that day or day point five, two days working somewhere else and flexibly as our business development leasing teams do, they're often working somewhere else, they're not always in the office because they're on site or they're driving around, or they're doing things you need to work where it's the right place for the work that you're doing.

Darren: [00:21:12] Deb, I'd rather they're out doing deals and finding capital than sitting in the office doing emails. Thank you Deb for your time today. There’s been some really 
interesting insights there. Thank you, listeners, for coming on board with this podcast over the past six months. Once again, if you have any questions, please send them to 
therealdeal@dexus.com. I'd like to wish everyone a happy and safe holiday season, and we'll be back in the New Year chatting to Andrew Ballantyne from JLL on what's in store for real assets in 2024. Thank you.

END