Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. One of the recurring themes of reporting this year was the revival of parts, at least of the local property sector. Data centers, retail, even office box found some favored with investors, whereas residential still seems to be struggling. So what should investors make of the somewhat mixed sector. Remember this is general information only and you should always see professional advice before making investment decisions. Lou Prank is the head of Property and Reets Equity research at Jardin Australia. Lou, welcome to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. One of the recurring themes of reporting this year was the revival of parts, at least of the local property sector. Data centers, retail, even office box found some favored with investors, whereas residential still seems to be struggling. So what should investors make of the somewhat mixed sector. Remember this is general information only and you should always see professional advice before making investment decisions. Lou Prank is the head of Property and Reets Equity research at Jardin Australia. Lou, welcome to Fear and Greed.

Thanks Sean. Good to be here.

Thanks Sean. Good to be here.

So let's take a top line view of it. What do you make of roats at the moment, and then we'll jump in and go through the specific types.

So let's take a top line view of it. What do you make of roats at the moment, and then we'll jump in and go through the specific types.

No sounds good now. I think riats are in a good position, you know, with the first interest rate cut earlier in the year, and you know, the Jardin expectation is that we'll get one or two more later in the year. That's a good backdrop for the RITZ. Most companies is reported that they're at the trough of their property valuation, cycle. Most companies will probably hit a trough in earnings in the next you know, six to twelve month as well, So yeah, the outlook over the next few years is positive across the board.

No sounds good now. I think riats are in a good position, you know, with the first interest rate cut earlier in the year, and you know, the Jardin expectation is that we'll get one or two more later in the year. That's a good backdrop for the RITZ. Most companies is reported that they're at the trough of their property valuation, cycle. Most companies will probably hit a trough in earnings in the next you know, six to twelve month as well, So yeah, the outlook over the next few years is positive across the board.

Okay, so just explain to listeners, lou why property in real estate investment trusts are so intestrate sensitive.

Okay, so just explain to listeners, lou why property in real estate investment trusts are so intestrate sensitive.

Yes, I think that. I mean, there's two main reasons for it. First of all, property investment has always involved leverage debt, so returns are clearly impacted by the fact whether your cost of debt is going up or down. And then I guess the second, which is maybe even the more important reason for it, is that properties get revalued, particularly enlisted land, every six month, and the benchmark rate or in the DCF valuation, one of the main inputs is the cost of capital, which again is a combination of the cost of debt or the risk free rate and then the risk premium. So that's why it changes. Long term investors, you know, should really look at a long term cost of debt. But what we've seen in previous cycles is that it's always very tempting when interest rates come down to ignore the longer term cost of debt, but to just play the shorter term that cost cycle.

Yes, I think that. I mean, there's two main reasons for it. First of all, property investment has always involved leverage debt, so returns are clearly impacted by the fact whether your cost of debt is going up or down. And then I guess the second, which is maybe even the more important reason for it, is that properties get revalued, particularly enlisted land, every six month, and the benchmark rate or in the DCF valuation, one of the main inputs is the cost of capital, which again is a combination of the cost of debt or the risk free rate and then the risk premium. So that's why it changes. Long term investors, you know, should really look at a long term cost of debt. But what we've seen in previous cycles is that it's always very tempting when interest rates come down to ignore the longer term cost of debt, but to just play the shorter term that cost cycle.

Okay, And just on that revaluation you talk about the DCF. What that effectively means is that the higher and interest rate, the discounted cash flow that's what DCF is, is lower. So that's bad for the rate. So with the interest rates falling potentially falling, that should be good for reads? Am I right in saying that?

Okay, And just on that revaluation you talk about the DCF. What that effectively means is that the higher and interest rate, the discounted cash flow that's what DCF is, is lower. So that's bad for the rate. So with the interest rates falling potentially falling, that should be good for reads? Am I right in saying that?

Absolutely? Yes, falling interest rates it's good for reads. I mean, of course, it's a little bit more complicated than that, is that there's always a reason why interest rates are falling, So it normally means that the economy is slowing down, which has some impacts or depending on the asset class, but simplistically, a lower interstrate environment is good for property.

Absolutely? Yes, falling interest rates it's good for reads. I mean, of course, it's a little bit more complicated than that, is that there's always a reason why interest rates are falling, So it normally means that the economy is slowing down, which has some impacts or depending on the asset class, but simplistically, a lower interstrate environment is good for property.

Okay, So let's get into the asset classes. Let's start with industrial slash data centers. I mean, we seem to because of Goodman Group in Australia, we seem to conflagate the two together nowadays. But what about industrial? What's that looking like? It's kind of been the dialing of the market since COVID really at least until data sentates came along.

Okay, So let's get into the asset classes. Let's start with industrial slash data centers. I mean, we seem to because of Goodman Group in Australia, we seem to conflagate the two together nowadays. But what about industrial? What's that looking like? It's kind of been the dialing of the market since COVID really at least until data sentates came along.

Yes, no, that's that's right, and it is probably still quite important to separate data centers from logistics, even though it's often the same land and the building structures can look quite similar, but from a cycle point of view, they're quite separate. So logistics, yes, have had an exceptional period of growth. It started even before COVID, with you know, just the emergence of e commerce. Traditional retailers really needed to respond to that by pushing through supply chain efficiencies which involved you know, bigger, more modern warehouses, and then COVID really was you know, the icing on the cake, which accelerated this whole e commerce store. And this is all in the time when there wasn't that much supply. Vacancy was already quite quite low. We're now coming towards the end of the cycle where demand is normalizing, vacancy is it's still low, it's two three percent, but it's going up, which means that rents or rental growth is slowing down a little bit. So we're still quite constructive on logistics, but growth is certainly slowing down from the last you know, five six years, okay.

Yes, no, that's that's right, and it is probably still quite important to separate data centers from logistics, even though it's often the same land and the building structures can look quite similar, but from a cycle point of view, they're quite separate. So logistics, yes, have had an exceptional period of growth. It started even before COVID, with you know, just the emergence of e commerce. Traditional retailers really needed to respond to that by pushing through supply chain efficiencies which involved you know, bigger, more modern warehouses, and then COVID really was you know, the icing on the cake, which accelerated this whole e commerce store. And this is all in the time when there wasn't that much supply. Vacancy was already quite quite low. We're now coming towards the end of the cycle where demand is normalizing, vacancy is it's still low, it's two three percent, but it's going up, which means that rents or rental growth is slowing down a little bit. So we're still quite constructive on logistics, but growth is certainly slowing down from the last you know, five six years, okay.

In data centers and goodmin Group, which is the market later here in Australia, they have pushed heavily into data centers, Am I right and saying future income likely be about well, not future income, but I think future work is about forty five percent data centers for that group. Now, I mean, what's the outlook and why is everyone sowing to data centers?

In data centers and goodmin Group, which is the market later here in Australia, they have pushed heavily into data centers, Am I right and saying future income likely be about well, not future income, but I think future work is about forty five percent data centers for that group. Now, I mean, what's the outlook and why is everyone sowing to data centers?

Yeah, the outlook there is positive. You know, given how new the as of classes, it's still a little bit and there's always a little bit of uncertainty about you know, how big this opportunity can be. But with the growth in cloud computing and now the emergence of AI computing, all of that computing needs chips. The chips need to be stored in climate controlled and you know, powered facilities data centers. And given the expectation of growth in cloud and AI, the expectation is that the demand for data centers is going to be exponential over the next next few years globally. So I guess that companies that have land in the right location and more importantly, power connected to the land are going to be in a very good position. And Goodman, which clearly has done logistics very well for a very long time, they are sitting on a five gigawatt pipeline of power which they hope to activate over the next ten plus years and then work with you know, the hyperscalers, so the Amazons and the Microsoft of this world, to basically build facilities for them.

Yeah, the outlook there is positive. You know, given how new the as of classes, it's still a little bit and there's always a little bit of uncertainty about you know, how big this opportunity can be. But with the growth in cloud computing and now the emergence of AI computing, all of that computing needs chips. The chips need to be stored in climate controlled and you know, powered facilities data centers. And given the expectation of growth in cloud and AI, the expectation is that the demand for data centers is going to be exponential over the next next few years globally. So I guess that companies that have land in the right location and more importantly, power connected to the land are going to be in a very good position. And Goodman, which clearly has done logistics very well for a very long time, they are sitting on a five gigawatt pipeline of power which they hope to activate over the next ten plus years and then work with you know, the hyperscalers, so the Amazons and the Microsoft of this world, to basically build facilities for them.

Is there any chance it's a bit of a hyped such that II will improve. So the use of the amount of storage space, amount of chips isn't quite as much as we think it might be at the moment.

Is there any chance it's a bit of a hyped such that II will improve. So the use of the amount of storage space, amount of chips isn't quite as much as we think it might be at the moment.

It's possible. Ultimately, we don't have a lot of data to go on yet, but judging by or what we can look at is you know, what the hyperscalers or the big AI companies are telling us on their growth and based on that, and you know industry experts, which you know, of course are a little bit biased as well, but based on all that, the growth will be. The question is, you know, is it you know ten x, it's fifty x, is one hundred x of the current demand, And nobody really will be able to give you the definitive answer. And clearly a lot of players are starting to jump into the supply site. Everybody wants to build data center, so it's definitely something that we need to keep watching. You know, at the moment, there is not really any empty data center anywhere in the world. So that tells us that right now the supply demand balance is in favor of the you know, the current owners of data centers. But it's something that we need to watch, like in any other s. A class demand is one thing, but you need to watch that there's not too much supply either.

It's possible. Ultimately, we don't have a lot of data to go on yet, but judging by or what we can look at is you know, what the hyperscalers or the big AI companies are telling us on their growth and based on that, and you know industry experts, which you know, of course are a little bit biased as well, but based on all that, the growth will be. The question is, you know, is it you know ten x, it's fifty x, is one hundred x of the current demand, And nobody really will be able to give you the definitive answer. And clearly a lot of players are starting to jump into the supply site. Everybody wants to build data center, so it's definitely something that we need to keep watching. You know, at the moment, there is not really any empty data center anywhere in the world. So that tells us that right now the supply demand balance is in favor of the you know, the current owners of data centers. But it's something that we need to watch, like in any other s. A class demand is one thing, but you need to watch that there's not too much supply either.

Stay with me, Lou, we'll be back in the moment. I'm speaking to Lou Prank from jarn and Australia. Let's take a look at a couple of sectors which haven't had as good a time of it, but it seems to be rebounding pretty well. Retail. I noticed, I think we're centered group or one of those big mall operators was to talking about the lack of retail space, which is a good thing obviously for center shareholders. Where do you say retail going?

Stay with me, Lou, we'll be back in the moment. I'm speaking to Lou Prank from jarn and Australia. Let's take a look at a couple of sectors which haven't had as good a time of it, but it seems to be rebounding pretty well. Retail. I noticed, I think we're centered group or one of those big mall operators was to talking about the lack of retail space, which is a good thing obviously for center shareholders. Where do you say retail going?

You know, we are very constructive on retail. You know, clearly have strong population growth that is likely to continue, and really since COVID, there hasn't been any supply growth in whether it's in males. Maybe there's a few neighborhood centers around new communities in Australia, but generally supply growth is very limited. So that's clearly you know, positive when you're negotiating least terms with your tenants. Before COVID, we were very nervous about, you know, the emergence of e commerce and you know, all of us stopping going to the mall and all going to buy all our things on Amazon and other websites. But I feel that, you know, COVID again accelerated the trend and also made retailers realize that just having a website is not really enough. You need bricks and mortar presence for marketing for people to you know, people still like to shop, People still like to you know, touch and feel the products that they buy. So I would say that most retails have found that the right balance between you know, the number of stores that they want to own depending on the brand, and then clearly they need a very good web and online presence as well. So as long as you know, we don't see the emergence of a lot of new malls or malls expanding the supply, themo dynamic should be very positive.

You know, we are very constructive on retail. You know, clearly have strong population growth that is likely to continue, and really since COVID, there hasn't been any supply growth in whether it's in males. Maybe there's a few neighborhood centers around new communities in Australia, but generally supply growth is very limited. So that's clearly you know, positive when you're negotiating least terms with your tenants. Before COVID, we were very nervous about, you know, the emergence of e commerce and you know, all of us stopping going to the mall and all going to buy all our things on Amazon and other websites. But I feel that, you know, COVID again accelerated the trend and also made retailers realize that just having a website is not really enough. You need bricks and mortar presence for marketing for people to you know, people still like to shop, People still like to you know, touch and feel the products that they buy. So I would say that most retails have found that the right balance between you know, the number of stores that they want to own depending on the brand, and then clearly they need a very good web and online presence as well. So as long as you know, we don't see the emergence of a lot of new malls or malls expanding the supply, themo dynamic should be very positive.

Office now, I can't find a car park in my train station in the morning. If I'm there after seven thirty in the morning, I reckon everyone's back in the office. That's my theory, but it's very very heading down invest the same to like office again somewhat.

Office now, I can't find a car park in my train station in the morning. If I'm there after seven thirty in the morning, I reckon everyone's back in the office. That's my theory, but it's very very heading down invest the same to like office again somewhat.

Yes, somewhat, it's coming from a very low base, and I would definitely say that the fundamentals are not getting incrementally worse, they're getting incrementally better. But it's still very dependent on where you are. Sydney is a lot stronger than Melbourne as the two largest markets. Brisbane and Perth have always been a little bit more resilient, so Sydney is recovering stronger. And then even within Sydney, you know, the core or premium buildings in the core see are performing a lot stronger than some of the outer CBD buildings. So yes, the outlook is stronger, and if developers can remain disciplined, the outlook should be strong. And I say that because what we've seen in the last five or six years is that every time demand picks up, somebody will basically build a new, you know, sixty seventy eighty thousand square meter building. And you know, even if demand is strong, demand is to be very strong to absorb all that new supply. So at the moment, vacancy is still quite elevated, about thirteen percent in Sydney eighteen percent in Melbourne. You know, roughly speaking, you need to be below seven percent vacancy to have real pricing power. So there's still you know, a long way to go. Kind of demand needs to pick up a lot stronger before you know, I think office becomes a real bang the table rental growth type market.

Yes, somewhat, it's coming from a very low base, and I would definitely say that the fundamentals are not getting incrementally worse, they're getting incrementally better. But it's still very dependent on where you are. Sydney is a lot stronger than Melbourne as the two largest markets. Brisbane and Perth have always been a little bit more resilient, so Sydney is recovering stronger. And then even within Sydney, you know, the core or premium buildings in the core see are performing a lot stronger than some of the outer CBD buildings. So yes, the outlook is stronger, and if developers can remain disciplined, the outlook should be strong. And I say that because what we've seen in the last five or six years is that every time demand picks up, somebody will basically build a new, you know, sixty seventy eighty thousand square meter building. And you know, even if demand is strong, demand is to be very strong to absorb all that new supply. So at the moment, vacancy is still quite elevated, about thirteen percent in Sydney eighteen percent in Melbourne. You know, roughly speaking, you need to be below seven percent vacancy to have real pricing power. So there's still you know, a long way to go. Kind of demand needs to pick up a lot stronger before you know, I think office becomes a real bang the table rental growth type market.

I Kaylee, let's bring it to a residential A little bit of good news and residential now it still seems to be the poor cousin no.

I Kaylee, let's bring it to a residential A little bit of good news and residential now it still seems to be the poor cousin no.

And it also depends a bit who you are, whether you know just a homeowner or whether you're a developer that wants to you know, build more supply. Again, we are getting more constructive unresidential after you know, a very difficult period. And there's kind of three elements to this. The first one is the structural element, and that has been positive for some time. I mean you will have heard about undersupply for quite some time. You know, there's a lot of people that would like to buy a house, would like to rent, but I just can't find something, or at least not something that is affordable. And that so that has been strong and that provides a very attractive backdrop to residential. Overall, the cyclical story has been more difficult, clearly with high interest rates which has made the affordability even harder. That is starting to improve, you know, with the first rate cuts. Hopefully we have more rate cuts coming our way. Going into an election cycle, I think every politician in Australia is going to make this a very big part of their campaigns because housing supply situation needs to improve. We're not going to solve this by creating more demand, because the demand is there. We just need more more housing and we're seeing pockets of that. New South Wales have had some real success with you know, basically state authorities taking control of this and basically looking at you know, stations or certain areas where they say we're going to accelerate approvals zoning changes to basically create more supply. And then the third part of it is that the developers you know Mrvak and Stockland are the two largest ones, have also worked through some of their weaker projects and have made improvements to their capital structures, to their pipelines. Yeah. So I think that assuming that that cyclical part is coming to the party, the outlook for developers will be strong and hopefully that will not come at the expense of you know, prices, you know going up too strongly, which you know is great if you own a house, is not so great if you're you know, still trying to get on the on the property letter.

And it also depends a bit who you are, whether you know just a homeowner or whether you're a developer that wants to you know, build more supply. Again, we are getting more constructive unresidential after you know, a very difficult period. And there's kind of three elements to this. The first one is the structural element, and that has been positive for some time. I mean you will have heard about undersupply for quite some time. You know, there's a lot of people that would like to buy a house, would like to rent, but I just can't find something, or at least not something that is affordable. And that so that has been strong and that provides a very attractive backdrop to residential. Overall, the cyclical story has been more difficult, clearly with high interest rates which has made the affordability even harder. That is starting to improve, you know, with the first rate cuts. Hopefully we have more rate cuts coming our way. Going into an election cycle, I think every politician in Australia is going to make this a very big part of their campaigns because housing supply situation needs to improve. We're not going to solve this by creating more demand, because the demand is there. We just need more more housing and we're seeing pockets of that. New South Wales have had some real success with you know, basically state authorities taking control of this and basically looking at you know, stations or certain areas where they say we're going to accelerate approvals zoning changes to basically create more supply. And then the third part of it is that the developers you know Mrvak and Stockland are the two largest ones, have also worked through some of their weaker projects and have made improvements to their capital structures, to their pipelines. Yeah. So I think that assuming that that cyclical part is coming to the party, the outlook for developers will be strong and hopefully that will not come at the expense of you know, prices, you know going up too strongly, which you know is great if you own a house, is not so great if you're you know, still trying to get on the on the property letter.

Thank you for talking to Fear and Grade.

Thank you for talking to Fear and Grade.

Thank you.

Thank you.

That was Lou Prank, a head of Property and rates equity research at Chart in Australia. This is the Fear and Great Business Interview. Remember this is information only and you should seek professional advice before investing. Join us every morning for the full episode. I'll hear and Greed daily business news for people who make their own decisions. I'm Sean alma Enjoy your day

That was Lou Prank, a head of Property and rates equity research at Chart in Australia. This is the Fear and Great Business Interview. Remember this is information only and you should seek professional advice before investing. Join us every morning for the full episode. I'll hear and Greed daily business news for people who make their own decisions. I'm Sean alma Enjoy your day