The Long Road: Are CRE Investor Preferences Shifting?

Hello and welcome to Talking Property. I'm Catherine House, your podcast host, and in this latest episode we'll be examining how investor attitudes could shift as interest rates fall and inflation is tamed. Where assets are strategic and tenants are prepared to take long leases, those assets are very prime for some lease back opportunities. This is Avi Angar, Charter Hall's diversified CEO. Avi joined Charter Hall in 2003 and has over 20 years experience in property funds management. This includes the establishment of the $5.5 billion Charter Hall long-wale rate, which he continues to lead. Groups are still looking at short-wale, it's not a shift away from short-wale. Our investable space is getting larger again because capital is coming back into long-wale. And that's Chris O'Brien, the executive director of CBRE's Industrial and Logistics Capital Markets Business. I'll be chatting with Avi and Chris about whether long-lease assets could swing back into favour, as core funds seek greater income security amid ongoing global economic uncertainty. In tandem, are we likely to see more occupiers pursuing long-term sale and lease back opportunities? I hope you enjoy our conversation. Avi, thanks for joining Talking Property. Thank you, Catherine. I'm a keen listener of your podcast, so it's great to be here today. Oh, that's good to hear. And Chris, so glad you could join, as I know you've been on the road and are currently in Singapore. Oh, thank you for having me, Catherine, looking really forward to this and looking forward to a great conversation with Avi. So perhaps we could do a bit of scene setting to start with. Avi, could you give us your thoughts on the current market environment and your expectations moving forward? I know that's a big question, so maybe a high-level view. Yeah, sure, Catherine. Look, I'd say the current market environment's positive this year in 2025, especially compared to the two years before that. So over the two years before that, we probably saw across the board valuations were falling as a result of some cap rate expansion driven by higher interest rates. But now in 2025, we're seeing valuations troughing. Interest rates are starting to fall, which is resulting in a far more positive sentiment in the market. So my expectations are that valuations have generally bottomed, and we'll see a few more interest rate cuts this year, which will be very positive for real estate. In terms of Australian economy more broadly, I think that the reduction in interest rates will stimulate the economy over the next year. I think Australia's screens really well compared to the rest of the world in the near term, and we're seeing that our global investor interests that we see in our business are very positive about Australia. When they think about Asia, it's really Australia and Japan, and Australia's screens really well from a growing economy and positive population growth. So I'm very positive about the year ahead. It's good to hear. And interesting to know that Australia is screening well, and Chris, perhaps that's a really good question for you, given you're up in Asia at the moment. How are you seeing investors viewing the Australian market at the moment, and what are your thoughts on the current environment? Yeah, good question. And look, it is positive. I completely agree with Avi on that front, and I'm into day two of my trip in Asia, and certainly Australia is still seen as a safe haven. Quite positive. There's no doubt there's some uncertainty in the market right now. There is some disruption, but I think to that point, it means that groups are looking for safety and security and income. And I'm a big believer that we are seeing long-wale coming back in a big way this year. Because yes, it's positive, yes, there's good engagement, but there is certainly some quirky things in the market right now, whether it's foreign owners, land tax, whether it's tariffs, whether it's a slowing of rent growth. Yeah, I think the market's really seeking safety this year, in my view. Yes. I agree with that, and this wasn't a question that we discussed before, but we recently had the election. Is there any change into that? Is that something that Asian investors are focused on, you know, are they looking at that result and seeing that that will make a difference to their investment strategies? Yeah, good question. I think there's a macro answer and a micro answer. I think the macro is Australia is going to come out looking good. I think the micro is you will see just a few groups pausing over the next month or two as they work out what's happening. But the upshot is industrial logistics Australia is on point and on trend with the market. It's just the next month might be a little bit slower as everyone takes a pause, which is fair enough. I get it. There's a lot going on in the market right now. It makes sense to have a pause and observe. Yes. So, Avi, you've talked a little about interest rates, and we've got the latest rate decision coming quite soon on May 20. CBRI's Pacific Head of Research thinks a 25 basis point rate cut appears highly probable. What are your expectations? Are we going to get a cut, do you think, on May 20 and what impact do you think that will have? Yes, Catherine. I think we will. That's certainly our expectation as well. So that will have a positive impact, and I think we'll probably see two more cuts, at least we're expecting two more cuts this calendar year. So I think all that combined will have a very positive impact on the market. You're already seeing that in terms of the longer term rates. So you can borrow three year fixed money now, three year swap rates now about 3.2%. You add a margin to that. So you're all in cost of debt, might be over for a three year fixed, say 4.7, and you can buy high quality long lease assets well north of five. So you're starting to see a positive spread emerge, which we haven't seen for some time, which will be very positive for property prices, and property yields will probably come down, and it'll be positive for valuations. And also give investors a lot more confidence. When they see rates coming down, they give them more confidence to invest in a market, whereas previously with much higher inflation and raising rates, it was a lot harder to have that confidence about what market you're investing into. Mr Arvy, if we zero in on assets with long weighted average lease expires known as whales, you oversee Australia's largest listed rate with a long whale focus. But in recent years, we've seen many buyers chasing assets with short term leases, particularly in the industrial sector. Why do you think that's been the case, and do you see that changing as interest rates reduced? Yeah, that certainly was the case. I think, you know, we're in a high rate environment previously, and there was a bit of uncertainty around about where rates were going and where inflation was going, and as a result, investors were seeking out higher returns on their capital. And we did see, you know, rental growth and industrial of sort of 20 per cent per atom for a couple of years, and investors were trying to capture that so that buyer property with a short lease reset the rents and then realise the upside. I think that is now changing. I think the rental growth and industrial is still positive. You know, we saw 7 per cent last year over the last 12 months, but it's certainly slowing from the 20 per cent per atom. And we're now entering to a lower rate environment, where I think long lease assets will come back into favour, as Chris was mentioning earlier, you know, I've mentioned the positive spread is a positive between what you can borrow it and what you can invest at. And the features of long whale assets provide investors with, you know, defensive cash flows over a long period with annual increases, either fixed or CPI or CPI plus in some instances. And generally, at least where we look, you know, high quality tenants, good underlying real estate. So in a low rate environment, where investors are prepared to accept more core type returns, I think long whale is definitely an attractive place to invest. So Chris, what are your thoughts? I know you've already touched on it, but are we in that space now or are we just on the cusp of investors really looking hard at these long leased assets? Yeah. Good question. I think we're on the cusp. We won't have a lot of data points as we speak today, but we're certainly seeing a shift back into long whale. So I think by Q4 and certainly Q1 next year, you'll see a backlog of transactions that are now back from a long whale perspective. The thing that's probably worth noting, Catherine, is groups are still looking at short whale. It's not a shift away from short whale. No, investable space is getting larger again because capital is coming back into long whale. So I don't want people to listen to this and go, okay, short whale's gone, long whale's back. It's both. It just means that we've got a more investable market now, more capitals looking, core capitals back and core capital like long whale. There's always short whale though. There's always interest for that. So as a whole, the industrial market is in a really healthy position in Australia. So by extension on that long whale conversation, do you think that we're going to see more long term Salon Leaseback opportunities in this current environment? Definitely. Just looking at the conversations we're having with corporates, corporates are looking to monetise their balance sheets and looking at what they can do. It was a very big trend probably three to four to five years ago and we're expecting that to come back. The one thing that we're just assessing now is what's defined as long term now? The Salon Leasebacks that Charter Hall have done, some of them have been 30 plus years. Are they going to be 30 years or are they going to be 15 years? That's one thing we probably just aren't sure on yet, but certainly the conversations we're having with corporates, it's back on the table and it'll be back even more so in our view in 2026. Are there industries you think that are likely to be more active than others when it comes to pursuing these Salon Leasebacks? I think so. I think what's going to happen is it's groups that have strategic assets and they're often specialised or infrastructure-based where they know they're going to be their long term. They look to monetise those assets. A market where we probably won't see it is probably the three PLs given contracts are getting shorter. We probably won't see a lot of long term Salon Leaseback with three PLs, but certainly traditional industrial logistics, cold storage, infrastructure-based groups and the alternative is market. That's where we see there'll be probably the most activity on the long rail front. I might add Catherine, we're also seeing a lot of activity as well on the retail side of things. You've got tenants where they're happy to commit to long leases because those properties are an important part of their operations and they want to, as Chris said earlier, monetise some assets that are on their balance sheet. We've done a lot of deals with the likes of Bunnings, BP, Amphol, Endeavour Group in the pub space, Coles and Woolworths, Telstra. That was more telephone exchange properties, but yeah, you get that. Where assets are strategic and tenants are prepared to take long leases, those assets are very prime for some Salon Leaseback opportunities. And makes sense for them to not have their cash tied up in the real estate, but to be able to reinvest that back into their businesses. Yeah, exactly. So to give our listeners a bit more of a feel for what these Salon Leaseback deals look like, next we could have a chat about a deal that happened a few years back. It involved private equity giant KKR selling three Arnett's facilities in Queensland, New South Wales and South Australia. Chris, how did that deal play out? Yeah, it was a growing trend at the time where private equity groups were getting heavily involved in M&A and corporate activity. It's a good thesis. You take on the Propco, the Opco, so you take on both parcels and then sell out a Salon Leaseback from a real estate perspective. It was a proven program for probably a three-year period there and all the private equity groups capitalised on it. There was Arnett's, there was Ingham's, there was a number of ones. We're expecting that to come back. It's just whether it's going to come back in the same scale as it previously did. That's one thing to kind of monitor, Catherine, the big lumpy Salon Leasebacks that we were doing three or four years ago when there was a premium for scale and size. It's just whether that's the case now where at the moment it feels like there's probably stronger value in some of the smaller deals, the sub-200 mil at the moment. There's just more money around for that type of deal size. So interesting to see if there's going to be the larger ones. I'm fascinated to hear what Arnett says about that and whether he's having high-level conversations already with those groups because we're certainly seeing it now. Yeah. I mean, the Arnett's deal was a great deal. We participated in that with Chris and his team. We purchased the Huntingwood facility in Sydney on a 32-year leaseback. That was a triple net lease as well. So the tenant is responsible for all costs associated with the property, including capital expenditure. It's a great big piece of land in Western Sydney, very well-located. Arnett's, it's their main processing facility for Tim Tam Biscuits. So it's a very exciting facility to go and visit. Do you get free Tim Tams out of that? On my site inspection, we did, which was very exciting. We saw the whole manufacturing process, which is really very interesting to see. And it's a great facility, great business. So we were really happy with that deal and Arnett's were too because KKR, the private equity group, were able to monetise the value of those assets as part of the deal and drive their IRRs as well. So it was a good deal all around. And we've been very active. We also participated in the Ingams portfolio that Chris talked about earlier, as well as many other sale and leaseback opportunities. It's a very large part of the charter hall business. So both from corporates like the Telstra's and BP's that want to monetise assets on their balance sheet, as well as working with private equity groups who want to realise assets from properties or companies that they're acquiring. So they're both good sources of deal flow for us and we have been very active in that space. So we've been still active all through recent years, even though the volumes in sale and leaseback have been a bit less over the last few years. But as Chris said, it will pick up and we're already seeing signs of that and we were very active and have been all the way through the last sort of 10 plus years across a number of those opportunities. So without revealing too many secrets, are you talking to many people right now? Yeah, always. Yeah, there's a number of deals on the go at the moment for some portfolio type sale and leaseback opportunities, which are really good, really exciting. So we'll have to wait and see. Exactly. Yeah. Chris said that was a private equity sale we talked about with KKR. But are you now seeing more private equity capital on the sidelines waiting to be deployed? Yeah, we are. We're seeing that. Just to watch full on at the moment, the private equity groups are very active right now. I guess with a lot of them, they do require higher returns, Catherine. So the private equity groups over the last couple of years have probably been playing in the short-wale space, given the higher returns through the rank rate that Ivy was mentioning earlier. Given their cost of capital, we don't expect them to be as aggressive as some of the more traditional sovereign wealth funds looking at the sale and leasebacks. But certainly they're looking, but at this point, they're probably still focused on the shorter while. But we are expecting that to change relatively quickly. And Chris, I've also heard you talk about more core money coming out of countries like Japan and Germany. Are they chasing long-wale assets? Absolutely. Yep. Absolutely, they are. Long-wale certainty, fixed reviews, all the hotspots that Ivy mentioned earlier, the type of investments where you just own it and you never really hear from the tenant, that type of stuff, which is what Charterhall's been doing for a very long period of time. But that's the market that they're playing in, and that's the market we're expecting to be super aggressive over the next 12 months. So, Ivy, the Charterhall long-wale rate has a diversified portfolio, owning pubs and bottle shops, service stations, telecommunication exchanges, and so on. Where are you seeing some of the best opportunities at present? We're seeing opportunities across the board. We really are active on the sale and leaseback front, as I discussed earlier. A lot of those deals are more retail and flavor and industrial. In the office space, selectively, there are some long-lease assets that are interesting and attractive that we're actively looking at. In social infrastructure, that's been a big area for us at Charterhall across whether it's childcare or medical health universities. I think the government space, we've spoken about this for some time, but I really do think government sale and leaseback is going to become a bigger part of the market. Governments are going to be spending more, particularly the new government that's coming in. They're going to want to monetize some assets given their growing debt levels, and I think that's going to be an interesting area. I think across the board, we're seeing really good opportunities. It's a very large part of our business. We've been buying long-wale throughout the last few years when a lot of other groups were focused on other areas of the market will continue to be very active in the long-wale space. In the US, the net lease sector is a very large part of the market, and in Australia, we've been driving that, and we'll continue to do that, but it's definitely a growing part of the market, and we see some very exciting opportunities in that space going forward. So Chris, CBRE's H1 Lender Intention Survey was recently completed, with responses from 34 commercial real estate lenders across local banks, international banks and non-banks. It shows that industrial and logistics assets are still the preferred asset class for new investment by a considerable margin, despite weaker leasing growth in that sector. What's your view on why INL is still outpacing the other market sectors? It's a good question, Catherine. You mentioned that the rents have slowed somewhat, but they're still highly outperforming most sectors. I just think we've had such a good run that we become apologetic about 7% growth. Most sectors would be delighted with that, so I kind of need to have perspective when you're talking about the industrial market. We sound a bit flat sometimes about it, but it's 7% growth is really, really good, and the sector has proven to be highly defensive through really difficult economic conditions over the last five years. So I think it's still a relatively new asset class from the institutional perspective. I know that sounds ridiculous, but it's really only since COVID it really elevated allocations across the globe for institutional. So I think unapologetically it's still doing really well. It's probably just not growing at the pace that it was last year, but that was impossible to maintain, to be honest with you, Catherine. So that's why everyone loves it still. It's still a wonderful sector and is going to continue to grow and outperform most sectors. Yeah, we're very positive on the industrial sector as well, Catherine. I think vacancy rates still very low, it's sort of two and a half percent nationally. Supply will probably be lower going forward than it has been over the last year. We did see record supply last year, but most of that was pre-leased by the time of completion anyway. And I think given the pressures on construction costs across all sectors now, the existing industrial stock continues to perform well and the new supply that we're involved with is still getting a lot of interest. So we're very positive on the space. Because we still have those vacancy rates that are some of the lowest in the world, aren't they, Chris? Absolutely. They are the lowest in the world. So it's incredible metrics that you're talking about, like sub two percent in some markets. We have favorable leases. We have net leases. We have a transparent market in Australia. And we sometimes underestimate the fact that we are primarily a freehold market as well. We're competing across APAC with a lot of Asian markets, a leasehold, Catherine. So there's a lot of long-term thematics that really make sense for Australia logistics. So it's just great to see more diverse capital coming back in now. With Long Whale, you're going to have greater volume because you become less restricted to geographies when you're looking at Long Whale. The market's been very focused on eastern seaboard in logistics the last two years, Melbourne, Sydney, Brisbane. When you start bringing Long Whale into it, it becomes about the covenant, the infrastructure, the actual fundamentals of the business. So all of a sudden Adelaide's back, Perth's back, because you're looking at it for different drivers. So the investable space of Australia gets bigger. And Avi, turning away from I&L, maybe ask you a question about office. It was very unloved the last couple of years, but you mentioned that office was on your radar. Why are you more positive about office? Look Wes, definitely seeing the market as a lot more positive this year on office. Definitely strengthening, occupying interest, particularly in Sydney and Brisbane markets has been very strong. Investment activities definitely picked up the rental growth, the high since we've seen since before the pandemic. So that all bodes very well for office. I think particularly well-located prime office, we think is a really attractive asset class. I think that to construct new office now, we've seen more than 30% increase in construction costs from prior to the pandemic. And that means that the cost of constructing new office and the economic rents that are needed to support new office development will set a floor, I think, for prime well-located good quality office. And I think that really will be very positive and is being very positive for the market for really good quality, well-located prime office, particularly in Sydney and Brisbane. And we're seeing that at the moment. So as we wrap up, any closing thoughts, Avi, on what we're likely to see this year? Well, I think we're likely to see higher transaction volumes cross the board. I think that there's been good transaction activity, industrial shopping centers have been having a good run, but I think office is definitely picking up. There'll be more long while transactions as Chris was alluding to earlier, which will also stimulate volumes. And as rates come down, I think that volumes will improve, pricing will improve, there'll be more people willing to trade because they can get more pricing in line with their expectations. So I'm very positive about the year ahead. And Chris, what about you? Are there any hurdles or roadblocks out there? There's always roadblocks, but nothing that the market can't get through with good fundamentals. I just think we need to get back to a more normalised market where core assets served. There's a gap between core and secondary from a yield perspective and fundamentals start coming back and groups start focusing on quality. We've come out of a market where mysteriously long-wale was a softer yield than short-wale. That's going to pivot back to more traditional metrics over the next 12 months. Well, it looks like there are interesting times ahead, and let's hope that we do see that 25 basis point interest rate cut on May 20. So thanks so much for joining, Avi. Thank you, Katherine. And thanks for joining, Chris. I hope you get to enjoy some chilli mud crab while you're in Singapore. I'm actually having that tonight, so you must have my diary. I'm very jealous. So we've got some great episodes coming up. So make sure to follow Talking Property wherever you get your podcasts. That way you won't miss an upcoming episode on Australia's emerging co-living sector. And a behind-the-scenes look at some of the key themes to emerge from the upcoming Property Council Leaders Summit. And if you get a chance, rate or review Talking Property to help other people find us. Until next time.