Home Property Australia The new capital dynamics

The new capital dynamics

  • September 15, 2023
  • by Property Australia
Jess Adamson, Anouk Darling, Stuart Penklis, Deborah Coakley and Michael O’Brien

In the midst of global economic challenges, the dynamics of investment in the Australian real estate sector are undergoing a notable transformation, according to insights shared by prominent property figures at this year’s Property Council of Australia’s Property Congress in Adelaide.

Although major investors continue to acknowledge the allure of this asset class, their financial commitments are undergoing a discernible evolution.

Deborah Coakley, the Executive General Manager of Funds Management at Dexus, highlighted a divergence in the priorities of Australian core real estate investors versus their offshore counterparts. Australian investors find themselves wrestling with concerns related to property valuations, while offshore investors are honing their attention on substantial projects with a long-term horizon spanning five to ten years.

“We have traditionally seen super funds, sovereign wealth funds, family offices, high-net-worth individuals as equity investors in real estate,” Ms Coakley said.

“They’re now very much considering that funding side, the debt or credit side of real estate, which is fantastic, but it changes the dynamic of the market. So, we’re all just readjusting around to those conversations that look at what is actually available to kick off a project today.

“You need debt, and you need equity, which means you need both sides of the table, actually believing in the future forecast.”

According to Ms Coakley, conducting on-the-ground research remains irreplaceable when it comes to gaining an authentic understanding of the prevailing dynamics within the world’s major office markets. This firsthand approach provides insights that surpass the limitations of relying on written reports.

“We are very much alive and alert to the concerns of investors, we are sending lots of our people offshore to really understand what’s happening in foreign markets.

“You actually have to walk the streets of Chicago to understand what’s happening. You have to be in London, or in Berlin to understand what’s happening in those markets. And they are all acting differently.

“So depending on where your investors are coming from, that’s what they see when they look out the window every day.”

Sally Auld, the Chief Investment Officer at JBWere, affirmed that Australia continues to retain its allure as a compelling destination for investors seeking to deploy their capital.

“It might be difficult at the moment for property investors because, across assets, there are some significant headwinds, but the message is, fundamentally here in Australia, (that) there are some pretty impressive structural tailwinds for the asset class,” she said.

QIC Real Estate Managing Director Michael O’Brien said the outlook for inflation will play a large role. 

“If inflation remains high, you may get small rate rises,” he said.

“The problem with that is that it creates uncertainty in the minds of investors, the cost of capital, environment is unclear, pricing of assets is very difficult. 

“And so people wait on the sidelines, which makes very challenging for the sector, in terms of attracting investment and getting things built and invested.”

Mr O’Brien said tax reform is on the agenda for all levels of government. 

“And we also have a national council affordability crisis, which is very severe,” he said.

“And I think governments, particularly federal government really understands that it needs to provide the right sort of policy settings, the right investment settings, to attract investment into the housing sector.

“And we are seeing some really good progress.

“It’s really good to see to see the Housing Australia Future Fund getting through the Senate.

“But, for every win that we have, like reducing withholding tax for foreign investors investing into build-to-rent residential. For every one of those wins, the government is looking to increase its tax revenue. And so, we get things like changes to the thin cap legislation, which makes it harder for foreign investors to invest into housing.

“So, it is a real push pull and I think that will continue.

“What we want to have, is to make Australia a really attractive investment destination into real estate, both for domestic investors and for foreign investors.”

Ms Auld said we’ve seen inflation, pretty much in every economy peak around the end of last year and start to come down.

“In the UK and Europe, even though inflation has peaked and has calmed down, it’s still well above central bank targets. Central banks will not be able to relax until they have greater confidence that inflation is really, truly on a trajectory towards a 2 per cent target.”

Mirvac’s chief executive, development, residential, commercial and mixed use, Stuart Penklis, expressed confidence in the solid foundations of the home building sector.

He also commended government housing targets as commendable and worthwhile goals to pursue.

“One of the great things that has come out, and the devil will be in the detail, is the funding to incentivise those states to hit the targets – most importantly that investment in planning systems but also that funding flowing down to local government to really make things easier for communities to accept greater densities,” he said.

Anouk Darling, CEO of Scape, underscored that a significant challenge facing governments in the foreseeable future will be the need to seamlessly connect various elements, including taxation, regulations, construction and expenditures.

“I’d actually like government to join the dots, not just on their thinking but on the secondary effects of their thinking and the impact into the economy and then ultimately to the customer, who has to wear it.”

She said there is a lot to be excited about in the purpose-built student accommodation sector. 

“We’ve got a sector here that’s igniting the economy, increasing Australia’s IP, and doing something that’s actually good for the future of Australia.

“So I’m pretty excited about the sector. It’s been a long time coming.

“And it’s a very healthy asset class, there’s not many investments that you can make right now, where rental growth is saying ahead of interest rates.”