Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. Talking about properties is pretty much a national pastime, but a whole range of things have happened over the past year or so that have shifted the conversation into another gear altogether. House prices have been soaring, industrial and warehouse sites have been in demand as eCommerce as booms. Office buildings have sat empty, yet people still want them and people are still building them. I wanted to get an idea of where property is heading and what investors should consider, as well as some of the ways to invest in property without doing it directly. Trilogy Funds is an Australian fund manager and financier of property- based investments. Philip Ryan is the co- founder and managing director of Trilogy Funds, which is a supporter of this podcast. Philip, welcome to Fear and Greed.

Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. Talking about properties is pretty much a national pastime, but a whole range of things have happened over the past year or so that have shifted the conversation into another gear altogether. House prices have been soaring, industrial and warehouse sites have been in demand as eCommerce as booms. Office buildings have sat empty, yet people still want them and people are still building them. I wanted to get an idea of where property is heading and what investors should consider, as well as some of the ways to invest in property without doing it directly. Trilogy Funds is an Australian fund manager and financier of property- based investments. Philip Ryan is the co- founder and managing director of Trilogy Funds, which is a supporter of this podcast. Philip, welcome to Fear and Greed.

Hello, Sean. How are you?

Hello, Sean. How are you?

Well, thank you, well. Have you ever seen a period like the last 18 months?

Well, thank you, well. Have you ever seen a period like the last 18 months?

Well, Sean, one advantage I think I've got from my age is that I've actually seen quite a few market cycles in my life. That actually extends back to childhood when I started investing in shares as a teenager, but also when I was studying law. I was actually interested in shares and I was reading books like The Intelligent Investor, but also reading microfiches, which many members of the audience wouldn't wouldn't even know what they were.

Well, Sean, one advantage I think I've got from my age is that I've actually seen quite a few market cycles in my life. That actually extends back to childhood when I started investing in shares as a teenager, but also when I was studying law. I was actually interested in shares and I was reading books like The Intelligent Investor, but also reading microfiches, which many members of the audience wouldn't wouldn't even know what they were.

"A what?"

"A what?"

They were really almost like photographs of old newspapers. And one of those was The Wall Street Journal, which was tracing through periods before the 1929 crash and also afterwards. If you try and look at areas in history, which have seemed to me to be reasonably similar to today, you've got to go back to the 1960s and 1970s. One of the things I remember as a very young boy, as coming into a teenager in 1970s, was we had a relatively stable environment in the 1960s. And then in 1972, we had the election of Gough Whitlam, which actually brought quite a bit of euphoria to a lot of people. They were seeing a change in government after many years of liberal government. And also of course, Gough Whitlam, through the labor government, was increasing money supply. So, we started to see increases in inflation. Interest rates at the time were very, very low, and people of course were able to borrow money. And I remember back in the 1960s, my dad, for example, went to the bank to try and borrow money to buy another house. And the bank said, " Well, why do you need two houses for? Ones enough, so we're not going to give you the loan."

They were really almost like photographs of old newspapers. And one of those was The Wall Street Journal, which was tracing through periods before the 1929 crash and also afterwards. If you try and look at areas in history, which have seemed to me to be reasonably similar to today, you've got to go back to the 1960s and 1970s. One of the things I remember as a very young boy, as coming into a teenager in 1970s, was we had a relatively stable environment in the 1960s. And then in 1972, we had the election of Gough Whitlam, which actually brought quite a bit of euphoria to a lot of people. They were seeing a change in government after many years of liberal government. And also of course, Gough Whitlam, through the labor government, was increasing money supply. So, we started to see increases in inflation. Interest rates at the time were very, very low, and people of course were able to borrow money. And I remember back in the 1960s, my dad, for example, went to the bank to try and borrow money to buy another house. And the bank said, " Well, why do you need two houses for? Ones enough, so we're not going to give you the loan."

Wow. Wow.

Wow. Wow.

To me, that sort of environment is very similar to today. But I've got to say, one of the things I'm conscious of is actually investment biases, and that's where you try and hook into something which was similar to your life and say that it's going to repeat today. And the differences between the 1970s and today are quite marked in terms of things like in the 1970s, we had the oil crisis which meant that the price of oil increased many hundreds of percent. In the mid seventies, and then again, there was another oil crisis in 1979. So, that really hit the Western world's bottom line in terms of price of everything to do with transport. Not just the cars we saw transition from the big old V8s more to six and four cylinder cars. But moreover, you saw also rapid increases in prices which occurred during that period. And then of course, we had the effect of unemployment and interest rates. So in a broad sense, I think that there's some elements which are similar in terms of leading to inflation and high interest rates. But I don't see that there's necessarily those extraneous events. Of course, it could happen. I mean, there could be a war, for example. And of course, we've seen increases and decreases recently in all prices, but nothing of the magnitude that occurred back then.

To me, that sort of environment is very similar to today. But I've got to say, one of the things I'm conscious of is actually investment biases, and that's where you try and hook into something which was similar to your life and say that it's going to repeat today. And the differences between the 1970s and today are quite marked in terms of things like in the 1970s, we had the oil crisis which meant that the price of oil increased many hundreds of percent. In the mid seventies, and then again, there was another oil crisis in 1979. So, that really hit the Western world's bottom line in terms of price of everything to do with transport. Not just the cars we saw transition from the big old V8s more to six and four cylinder cars. But moreover, you saw also rapid increases in prices which occurred during that period. And then of course, we had the effect of unemployment and interest rates. So in a broad sense, I think that there's some elements which are similar in terms of leading to inflation and high interest rates. But I don't see that there's necessarily those extraneous events. Of course, it could happen. I mean, there could be a war, for example. And of course, we've seen increases and decreases recently in all prices, but nothing of the magnitude that occurred back then.

Okay. So let's bring it back to Trilogy Funds. What do you tend to focus on? Is it residential or industrial, retail office? What's your specialty?

Okay. So let's bring it back to Trilogy Funds. What do you tend to focus on? Is it residential or industrial, retail office? What's your specialty?

We actually look at the whole suite. So in terms of residential, through the Trilogy Monthly Income Trust, we actually land on around 130 different property projects on the east coast of Australia. So, they're projects ranging from around $ 3 million up to $ 30 million in terms of loan value. So, the project value is actually obviously significantly higher than that again, and that actually gives us good helicopter view of what's happening in each state.

We actually look at the whole suite. So in terms of residential, through the Trilogy Monthly Income Trust, we actually land on around 130 different property projects on the east coast of Australia. So, they're projects ranging from around $ 3 million up to $ 30 million in terms of loan value. So, the project value is actually obviously significantly higher than that again, and that actually gives us good helicopter view of what's happening in each state.

Yeah.

Yeah.

In terms of industrial, we actually have the Trilogy Industrial Property Trust, which owns a suite of different industrial properties, and that's based on areas from south Australia through to Queensland. So, that's actually quite widely diverse as well. But we started that actually in 2018, and we really centered in regional areas like Mackay. Because as a countercyclical play, Mackay and those other central Queensland areas were suffering from the mining downturn which followed through from 2014. So, we were fortunate in getting in quite early on that. And as a result of that, investors have benefited from a high yield in that trust and also increasing unit price as well. In terms of retail, we don't have much exposure to that. Thank goodness, during COVID I might add, but I could see in the future that could also be a countercyclical play because you see areas of retail, which has actually struggled during COVID. I've got to say, I'm not a big fan of inner city retail. I mean, the CBDs as you just walk around a pretty desolate. And reminds me again, thinking back in the past, of the 1990s recession, when we actually saw a lot of retail small businesses fold. That's very, very sad to see, and I've got to say I'm not too sure when that might recover. I suspect it'll be some time. And then when it comes to offices, we do have some standalone property trust, which do have exposure to office and commercial. They've had a tough time during COVID, particularly in terms of incentives to obtain new tenants. So, incentives very much are blown out. Just for the listeners' information, that's where the landlord provides an incentive in terms of rent free or through fit out or other means in order to secure a tenant so that the tenant pays a higher rate. Well, incentives in Brisbane, Sydney, and Melbourne, in many cases in north of 40%, which is extraordinarily high. The highest I've ever seen it And of course, that's affected the yields on those particular trusts.

In terms of industrial, we actually have the Trilogy Industrial Property Trust, which owns a suite of different industrial properties, and that's based on areas from south Australia through to Queensland. So, that's actually quite widely diverse as well. But we started that actually in 2018, and we really centered in regional areas like Mackay. Because as a countercyclical play, Mackay and those other central Queensland areas were suffering from the mining downturn which followed through from 2014. So, we were fortunate in getting in quite early on that. And as a result of that, investors have benefited from a high yield in that trust and also increasing unit price as well. In terms of retail, we don't have much exposure to that. Thank goodness, during COVID I might add, but I could see in the future that could also be a countercyclical play because you see areas of retail, which has actually struggled during COVID. I've got to say, I'm not a big fan of inner city retail. I mean, the CBDs as you just walk around a pretty desolate. And reminds me again, thinking back in the past, of the 1990s recession, when we actually saw a lot of retail small businesses fold. That's very, very sad to see, and I've got to say I'm not too sure when that might recover. I suspect it'll be some time. And then when it comes to offices, we do have some standalone property trust, which do have exposure to office and commercial. They've had a tough time during COVID, particularly in terms of incentives to obtain new tenants. So, incentives very much are blown out. Just for the listeners' information, that's where the landlord provides an incentive in terms of rent free or through fit out or other means in order to secure a tenant so that the tenant pays a higher rate. Well, incentives in Brisbane, Sydney, and Melbourne, in many cases in north of 40%, which is extraordinarily high. The highest I've ever seen it And of course, that's affected the yields on those particular trusts.

Stay with me, Philip. We'll be back in a minute. My guest today is Philip Ryan, co- founder and managing director of Trilogy Funds. Okay. So, retail could be a countercyclical play. Office, there's plenty of incentives out there so it's probably good if you're the buyer, not the seller as much. What do you think about residential and what do you think about industrial over next 18 months to two years?

Stay with me, Philip. We'll be back in a minute. My guest today is Philip Ryan, co- founder and managing director of Trilogy Funds. Okay. So, retail could be a countercyclical play. Office, there's plenty of incentives out there so it's probably good if you're the buyer, not the seller as much. What do you think about residential and what do you think about industrial over next 18 months to two years?

Yeah. Well, I like residential, but of course it's got to be in particular areas. Now, I might be a little bit parochial, but actually still like residential in Brisbane. The main reason is that Brisbane's property market, it's roughly correlated the Sydney of Melbourne, but it does dance to its own tune. And typically over the last few decades, it has often a period of about 10 years of flatness. And that was pretty evident during the 1990s when Sydney and Melbourne took off in about '96, but Brisbane property market stayed flat till around the year 2000 and then has a big kick along. And usually, that's as a result of falling unemployment, other more symmetry like local infrastructure spends and the light. And I got to say, when you look at Brisbane's picture; we've got increasing infrastructure, we've got the Olympic games obviously, which of course will cause extra infrastructure to be built. We're seeing also interstate migration from Melbourne to Brisbane so I think that's very positive. Now in terms of prices. Well, I think one of the lead up to prices in a Australia has obviously been low interest rates. That's just speaking the obvious. But the other thing is, of course, is that there's been a lack of supply. I mean, people haven't been selling their properties. So, there's been a supply in the market generally. And as a result of people wanting to buy, that's caused prices to move quite significantly. So, there's been a bit of a FOMO in terms of people buying property. And that's of course, effect of first home buyers who have been used to seeing property prices being reasonably flat and then suddenly they're escalating. Now in terms of that FOMO, we're starting to see that transition from a buyer's market to a seller's market where the sellers are now saying, " Oh, well look, we now want to sell our property because we're concerned that property prices have risen so much that we'll be concerned that they might be about to fall," and that's causing more supply, and I think we'll continue to see that in each capital city. When you dissect the residential market, houses are always a standout. I think apartments, they're still over supply in Melbourne in areas like Docklands and also Southbank. We did see oversupply in Brisbane in 2016 through overbuilding and places like Newstead, the Gabba, and also West End. But over time, that's been basically saved up by the market, and more particularly by interstate buyers. And they've been useful for, say, rental stock. And of course we haven't seen increase in supply in terms of new builds. In many ways, that's the way the building market works is that there are periods of over supply, and then of course there's no supply, and then of course there's an undersupply and then prices go up. And so, we'll start to see that also in apartment markets. Just crossing over to industrial. Look, the thing I like about industrial of course is that when you look at our portfolio, it's exposed to the mining sector, but it's also exposed to manufacturing and also logistics. Moving forward, I think logistics will continue to play apart because as we move towards a more digital economy, we're going to see more and more things which are transported and more things which will be demanded by people. And I think when you look at people who are ordering online, it's still not the majority of people. That will transition over a period of time where people be buying all sorts of things online, and as a result, that's quite positive. The one thing I've got to say we just have to watch out for in all markets at the moment is over exuberance. And particularly in an industrial, I do see yields decreasing where people are paying 3% or 4% cap rates on particular properties.

Yeah. Well, I like residential, but of course it's got to be in particular areas. Now, I might be a little bit parochial, but actually still like residential in Brisbane. The main reason is that Brisbane's property market, it's roughly correlated the Sydney of Melbourne, but it does dance to its own tune. And typically over the last few decades, it has often a period of about 10 years of flatness. And that was pretty evident during the 1990s when Sydney and Melbourne took off in about '96, but Brisbane property market stayed flat till around the year 2000 and then has a big kick along. And usually, that's as a result of falling unemployment, other more symmetry like local infrastructure spends and the light. And I got to say, when you look at Brisbane's picture; we've got increasing infrastructure, we've got the Olympic games obviously, which of course will cause extra infrastructure to be built. We're seeing also interstate migration from Melbourne to Brisbane so I think that's very positive. Now in terms of prices. Well, I think one of the lead up to prices in a Australia has obviously been low interest rates. That's just speaking the obvious. But the other thing is, of course, is that there's been a lack of supply. I mean, people haven't been selling their properties. So, there's been a supply in the market generally. And as a result of people wanting to buy, that's caused prices to move quite significantly. So, there's been a bit of a FOMO in terms of people buying property. And that's of course, effect of first home buyers who have been used to seeing property prices being reasonably flat and then suddenly they're escalating. Now in terms of that FOMO, we're starting to see that transition from a buyer's market to a seller's market where the sellers are now saying, " Oh, well look, we now want to sell our property because we're concerned that property prices have risen so much that we'll be concerned that they might be about to fall," and that's causing more supply, and I think we'll continue to see that in each capital city. When you dissect the residential market, houses are always a standout. I think apartments, they're still over supply in Melbourne in areas like Docklands and also Southbank. We did see oversupply in Brisbane in 2016 through overbuilding and places like Newstead, the Gabba, and also West End. But over time, that's been basically saved up by the market, and more particularly by interstate buyers. And they've been useful for, say, rental stock. And of course we haven't seen increase in supply in terms of new builds. In many ways, that's the way the building market works is that there are periods of over supply, and then of course there's no supply, and then of course there's an undersupply and then prices go up. And so, we'll start to see that also in apartment markets. Just crossing over to industrial. Look, the thing I like about industrial of course is that when you look at our portfolio, it's exposed to the mining sector, but it's also exposed to manufacturing and also logistics. Moving forward, I think logistics will continue to play apart because as we move towards a more digital economy, we're going to see more and more things which are transported and more things which will be demanded by people. And I think when you look at people who are ordering online, it's still not the majority of people. That will transition over a period of time where people be buying all sorts of things online, and as a result, that's quite positive. The one thing I've got to say we just have to watch out for in all markets at the moment is over exuberance. And particularly in an industrial, I do see yields decreasing where people are paying 3% or 4% cap rates on particular properties.

Yeah. It's pretty expensive.

Yeah. It's pretty expensive.

Yeah. Well, that concerns me because of course when you look at the risk free rate of return, you look at official cash rate 0. 1%, you can invest in a term deposit or so at less than one, but if you buy a commercial building or industrial property, if it's three or four, that doesn't represent much in terms of risk. It doesn't take much for markets to move in terms of either increased interest rates, or alternatively, a tenant falling over. The one thing, I guess, which benefits industrial and commercial property is, of course, the rent review mechanism is tied to CPI. So when inflation increases, you'll see rents increase, but also you'll find that it does affect cap rates as well.

Yeah. Well, that concerns me because of course when you look at the risk free rate of return, you look at official cash rate 0. 1%, you can invest in a term deposit or so at less than one, but if you buy a commercial building or industrial property, if it's three or four, that doesn't represent much in terms of risk. It doesn't take much for markets to move in terms of either increased interest rates, or alternatively, a tenant falling over. The one thing, I guess, which benefits industrial and commercial property is, of course, the rent review mechanism is tied to CPI. So when inflation increases, you'll see rents increase, but also you'll find that it does affect cap rates as well.

Are you worried about rising interest rates? Because undoubtedly, the next move in rates will be up whenever that is. But this time three or four years, we will certainly... I mean, almost certainly have fairly sharply higher rates.

Are you worried about rising interest rates? Because undoubtedly, the next move in rates will be up whenever that is. But this time three or four years, we will certainly... I mean, almost certainly have fairly sharply higher rates.

Yes. Well, we've been a beneficiary of interest rates. I never foresaw in my lifetime that we'd see interest rates so low. They're the lowest for 4, 000 years apparently, so all you can say is that they got to go up at some particular point in time. And that will be representative of a more healthy economy. the reason why they're low obviously is because of COVID and that really quite a courageous and front foot forward position by Western governments worldwide, and also central banks as well. So we've been beneficiaries of that, but of course, those days will come to an end. I think the RBA and governments are much more sensitive in terms of consequences these days than what they were back in the 1990s and also the GFC, and that was where central banks tended to act too quickly, too late. They would raise interest rates up to a period where it would actually absolutely kill off economic growth and have rising unemployment as a result. Remember, the RBA has always said that its main objective is to actually keep the unemployment rate down to 4%. I think with that in mind, we will see rising interest rates, but they'll be of a small magnitude. Now there's a few things I think, which will affect residential property prices in particular next year. One is, of course, what I talked about before, which is FOMO on the seller side. So, we're starting to see more supply come on the market. In some particular areas like the Gold Coast, for example, I think is one area where it's had a magnificent rise and usually what is quite a volatile market over the last couple of years, and I think that we will see more stock come on the market. I don't think necessarily see that in Brisbane, because I think they're still catching up. But in Sydney, Melbourne, likewise, we'll probably see more stock come on the market. But that's a healthier market and we'll see, I suspect, and these are my views only, but that we'll see a reasonably steady residential property market. I don't see that there'll be massive falls. There may be in some areas of oversupply, but general I think you'll see that markets level off. Subject to course to extraneous events. For example, is COVID over? Is there going to be an international war or some other outlier which might affect all of our wellbeing?

Yes. Well, we've been a beneficiary of interest rates. I never foresaw in my lifetime that we'd see interest rates so low. They're the lowest for 4, 000 years apparently, so all you can say is that they got to go up at some particular point in time. And that will be representative of a more healthy economy. the reason why they're low obviously is because of COVID and that really quite a courageous and front foot forward position by Western governments worldwide, and also central banks as well. So we've been beneficiaries of that, but of course, those days will come to an end. I think the RBA and governments are much more sensitive in terms of consequences these days than what they were back in the 1990s and also the GFC, and that was where central banks tended to act too quickly, too late. They would raise interest rates up to a period where it would actually absolutely kill off economic growth and have rising unemployment as a result. Remember, the RBA has always said that its main objective is to actually keep the unemployment rate down to 4%. I think with that in mind, we will see rising interest rates, but they'll be of a small magnitude. Now there's a few things I think, which will affect residential property prices in particular next year. One is, of course, what I talked about before, which is FOMO on the seller side. So, we're starting to see more supply come on the market. In some particular areas like the Gold Coast, for example, I think is one area where it's had a magnificent rise and usually what is quite a volatile market over the last couple of years, and I think that we will see more stock come on the market. I don't think necessarily see that in Brisbane, because I think they're still catching up. But in Sydney, Melbourne, likewise, we'll probably see more stock come on the market. But that's a healthier market and we'll see, I suspect, and these are my views only, but that we'll see a reasonably steady residential property market. I don't see that there'll be massive falls. There may be in some areas of oversupply, but general I think you'll see that markets level off. Subject to course to extraneous events. For example, is COVID over? Is there going to be an international war or some other outlier which might affect all of our wellbeing?

Yeah. Philip, thank you very much for talking to Fear and Greed.

Yeah. Philip, thank you very much for talking to Fear and Greed.

Thank you. Thanks, Sean.

Thank you. Thanks, Sean.

That was Philip Ryan, co- founder and managing director of Trilogy Funds. This is the Fear and Greed Daily Interview. Join me every morning for the full Fear and Greed podcast with all the business news you need to know. I'm Sean Aylmer, enjoy your day.

That was Philip Ryan, co- founder and managing director of Trilogy Funds. This is the Fear and Greed Daily Interview. Join me every morning for the full Fear and Greed podcast with all the business news you need to know. I'm Sean Aylmer, enjoy your day.