In this episode of the [i3] podcast, I’m speaking with Mary Power, who is the Head of Property Research at asset consultant Jana. We cover the struggles of the property market in the early 90s, when Mary started out in the industry, and the learnings from that time. We take a look at how investors have dealt with 13 consecutive rate rises, starting in 2022 and we cover portfolio construction issues, including blending listed and unlisted property assets, the convergence of real estate and infrastructure, while Mary also predicts that up to 50 per cent of Australian property money might be reallocated to international assets as super funds grow bigger.
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Overview of podcast with Mary Power, JANA
03:00 Getting into the industry
04:30 The early 1990s was a dramatic period in the office market and as a young person in the industry that experience was fascinating
07:00 I think we have turned a corner in terms of unlisted property
8:00 In June 2022, we headed into 13 interest rate rises, which was a significant head wind for the property sector.
10:00 The REIT sector is very sensitive to interest rates
11:00 Are REITs equities or properties?
12:30 Property people don’t price off the cash rate; they price off the 10-year bond rate
14:00 The Melbourne property market is still a little bit difficult
16:00 People aren’t getting their forward projections of labour seating in offices right
19:00 I think it is very hard to promise quarterly, ongoing liquidity in a portfolio with large assets
25:00 There is a big push for the build-to-rent sector to mature in Australia
31:00 Super funds could move up to 50 per cent of Australian property money offshore
Full Transcript of Episode 121
Wouter Klijn 02:01
Mary, welcome to the podcast.
Mary Power 02:04
Thank you very much, pleasure to be here.
Wouter Klijn 02:07
So you’ve been with Jana for more than 15 years. What got you into property investing or property research in the first place?
Mary Power 02:16
Oh, I might have to let you in on a little secret. I I’ve actually had two stints at Jana. I was actually at Jana in the between ’94 and 2000 as well. So yes, I was how did I get into property? It’s a great question. I had a friend whose father was a valuer, and I commenced the property valuations course at RMIT, and he got me a cadetship at Urbis, known as at Cox then, and I was hooked. I was enjoyed it immensely. And love the idea of the commerce and the built form coming together. Yeah. So I, I really enjoyed it. And I, I joined at a time when the property market was exuberant in the late 80s, and then it went into the early 90s, which was the recession we had to have. So I saw the best and the worst at the time. And I always say I learned all my skills over those eight or nine years.
Wouter Klijn 03:12
Yeah, and apart from the environment at a time, has the investment side changed much? I mean, do do the valuation practices change the deals, change the structures. What’s that like?
Mary Power 03:26
It’s a great question. In fact, a lot of it’s changed, and a lot of the fundamentals remain the same. So lots of change, lots of so if you went into the early if you went into the early 90s and we had that recession, which absolutely impacted the office sector. In Melbourne alone, there were six office buildings that were built, and they would have been built on, not with pre commitments that you would have today, so built by developers who then had to entice tenants in. So a mill, we say, a million square feet, or square metres of Office became was built, and then the rest became vacant. So vacancy rose to about 25% and in fact, rents halved. So it was a really dramatic period in the office market. And it was, you know, as a very young person learning it was, it was, it was fascinating. What had happened over that period. We didn’t have a Funds Management basis. Then the I think, as we headed into the 90s, I think amp and national mutual were about the only funds managers that were available. Most of property was held within a Balanced fund. And of course, over the course of the next few years. If you fast forward to 2025 the Mercer survey is, in fact, about 94 billion. That’s without Goodman, I think that adds another 18 billion on. So, you know, you’re a very substantially funds management platform has emerged over that period, over that last 30 years. And you know, it. It now consists of specialist sector managers plus diversified managers. So it’s been amazing.
Wouter Klijn 05:05
Yeah, sounds like the office sector has gone through a few problematic periods and more exuberant ones, because we’ve seen, of course, with covid and as well that it got strongly impacted we were working from home. Did that experience earlier on help you going through the covid period?
Mary Power 05:26
I think covid, I always say covid was a black swan event. No one had, noone had predicted it, but the balance sheets and corporates and and employment data was all in good shape. It wasn’t the same. In the early 90s, we had very high unemployment, up to 11% most people I knew had someone had lost their jobs, and these were very smart people, and we had a lot of corporate issues going on in the early 90s. That wasn’t the case in covid. We were in pretty good shape going into the into the covid. So I think whilst it was annoying, and we hadn’t seen it before, it was nothing like what I’d seen in the in the early 90s. So that gave me some comfort at the time, yeah. And of course, we had, you know, the new phenomena of working from home, which was something we hadn’t had before. And of course, you know, various states had different lockdown periods. Melbourne had a very severe lockdown period. And of course, it’s taken some time for people to return to the office. Yeah.
Wouter Klijn 06:28
Fair enough. So if we fast forward to today’s environment, I looked recently in sort of the superannuation returns for the full financial year, and spread out by the different asset classes. And what sort of struck me is that unless that has been relatively poor performer in recent years, last two years, negative, this year, low, single digit, but at the other side, first time it’s single digits again with positive results, have we turned the corner there?
Mary Power 07:01
I think we have, and I think you know what happened in 2020? Was covid occurred, and there was this, you know, significant lockdown over quite a long period of time. Never good for the built form that have leases in place. They have contractual leases in place, but you still need people to buy things at shopping centres and office buildings to be occupied for those leases to be sustainable and and of benefit to the tenant. So I think that was very difficult period. I mean, I’m would, I would call the Property Council at the time, they had to negotiate with tenants, 1000s of and come up with a code of conduct of how to interact with a tenant during this, you know, significant period of disruption. And to their credit, they did do that within a reasonably short period of time. On the other hand, infrastructure asset had one contract with talking about 1000s of contracts through the property sector. So it was, it was very, a very difficult period, but I think they did a great job. And then, of course, we headed into in June 22 the start of 13 interest rate rises, which, of course, was a significant headwind to the property sector, because it had performed quite well, even through covert up until the mid, mid 2022 and then we started facing into to higher interest rates. And the higher interest rates, in fact, had been quite difficult for cap rates at the time as a differential. So we know what happened. Cap rates expanded, capital values went down in most cases, the income line, the leasing line was was not too bad that that sort of stood up. You know, it was really the rapid interest rate rises 13 right? Interest rate rises in a short period of time. That really was the problem for the property industry, yeah.
Wouter Klijn 08:50
And then if you look at the listed side of the property sector, somehow they did much better. So I looked at Australia’s property that increased by 13.8% and then I think international listed property went more than 9% why is there such a strong difference between the listed space and the unlisted space over that period?
Mary Power 09:12
So I think, you know, the listed is highly correlated to equities, so you have a big influence. You know, I go back to March 2020, and the a rate sector fell by 46% so that was a very, you know, that was a very stark fall compared to what the unlisted property index was doing at the time. So the A rates are, you know, they’ve got some interesting characteristics. For instance, the Goodman group makes up about 39 40% of the a rate index. So that will rise and fall depending on on how government have performed over over a period of time. So I think the other thing is that, you know, the a the rate sector, while it is very much correlated to to equities, it’s very interest rate sensitive. So you get interest rate, you know, interest rate. Cuts like we’ve had attractive, very attractive for for the rate sectors, you know, good for repricing of debt. Good indicate, lead indicator. And I think, yeah, the rates can be a good lead indicator for unlisted property. Yeah.
Wouter Klijn 10:15
So do you subscribe to the idea that REITs are equities in the short term and property in the long term, or are they just always equities?
Mary Power 10:24
Yeah, I think that’s a great question. I think over the long, long term, you’d think that they do. You do have a quite a strong correlation, you know, to property over the long term. I think though, you need to be able to withstand having them in the portfolio. You do need to be able to be aware of the volatility. So if you’re sitting there in March 2020 you have to ask a trustee or a fund how you know how comfortable you are with a 46% drop in your rate portfolio over that period. Because I think the way we structure a diversified portfolio is we try to buffer, we try to include asset classes like property and infrastructure and private equity that actually buffer equity market risk, so it actually allows you to have strong equity market exposure, but realise that in a downturn in equity markets that you’ve got these other unlisted assets that actually provide a buffer and should not decline as far As your equities do
Wouter Klijn 11:21
Yeah, so we’ve just seen a quite controversial cut in interest rates from the RBA. And then I think there was a lot of comments that I didn’t cut the time before that, but now we just seen that inflation figures came out, and they are sort of, I don’t know if spiked is the right word, but it went from 1.8 to, I think, 2.9 What are your thoughts around that? Is that an indication that that won’t be cut for a while? And how does that affect the property sector?
Mary Power 11:52
Yes, always cautious on commenting on interest rate cuts. But look, I’d like to think that there, you know, are some more coming. I think the benefit of of the cash rate being cut is obviously in the debt markets, so very attractive for pricing of debt. So that’s a that’s a big positive property. People don’t generally price off the cash rate. They obviously price off the 10 year bond rate. So the 10 year bond rate at, you know, 4.29 4.3 has been reasonably sticky above that 4% mark. There was some excitement when it got under under four, you know, you know, more than 12 months ago now 18 months. But I think you know, to get true increases, it would be great for that 10 year bond rate to come down. The only other benefit, of course, is, of course, the cash rate with with gearing and debt, allows you to be accretive, especially when the markets have bottomed. So you know that that is an attractive feature if you add gearing onto your base, base return.
Wouter Klijn 13:01
So we’ve seen a lot of volatility in recent years, and I think you’ve spoken in the past about the importance of cell evidence stabilising to get a better sense of where the sector is. Is that happening? Are we getting to a more stable environment?
Mary Power 13:19
Your short answer is yes, the MSCI Mercer unlisted survey for property is indicating that this is a third quarter of positive returns. So that’s fantastic. So yes, we are. I think there’s pockets, there’s sub markets. Now it’s not everything. Not everything is on the, on the on the rise, and I think our one call out at this moment would be the Melbourne office market at this stage, again, back to covid, longer to come out. You know, had severe lockdowns, longer time returning to work. And there has been some punitive tax, taxes that have been introduced into Victoria around the foreign owners surcharge, and that has deterred offshore investors from coming into into Victoria. So we’ve seen lot less sales in Victoria than anywhere else. So the sales evidence allows the valuers to actually have some some sort of basis for undertaking evaluations. Melbourne is still a little bit difficult. Yeah.
Wouter Klijn 14:21
So those numbers that we mentioned earlier about this that they’re not unless Should we take them with a grain of salt then in the unlisted space, or have there been enough transactions that we can get a good sense of what happened there?
Mary Power 14:34
I think we’re in a reasonable place with with where we’re at with valuations now and going forward, and the other the real green shoots for property are the fact that there’s a lack of supply. So what kills property supply in a recession like the early 90s? Now, we haven’t, we’re not. Hopefully we’re not gonna have a recession. And supply is is very muted. Is muted? Yeah. Yeah. So that’s really positive, and so is the sustainability the tenants are requiring that. That’s very important. So not every building is the same. So the universe of, you know, desirable buildings has actually shrunk on the basis of sustainability. And that, again, you want to be in those buildings. That’s a good thing, yeah.
Wouter Klijn 15:21
So you mentioned that the Melbourne office market, and it seems that there’s more and more companies that sort of either referring the working from home or reducing the number of days that you can do that is that supporting the office market. Are we seeing some more positive numbers coming out there?
Mary Power 15:40
Yes, yes. I believe so yes. And I think, you know, again, with this lack of supply, people are actually got their forward projections a bit wrong. You know, I was over in the UK, there was a big investment house over there that had been in Canary Wharf was coming back to London, and they miscalculated by some enormous amount of seating, whether it was 3000 seats or something. And instead of being able to go into one location back in the city, they actually had to spread it out across a number. So people aren’t necessarily getting the getting the forward looking Labour Employment seating arrangements, right? So it’s putting more pressure on, on building, on certain buildings, within certain sub locations, yeah, so that’s a positive thing, because it’ll drive rents. It will drive rents, and that will drive returns.
Wouter Klijn 16:32
Yeah, yeah, yeah, that’s interesting. So we talked a little bit about, you know, the unlisted and the listed space, but some of the recent developments we’ve seen as well, that fund has started sort of blending both listed and unlisted exposures. And partly that seems to be, you know, where they have the relationship and the expertise, they tend to go direct, but then in other markets where they might be less familiar with or don’t have the relationships, they might have more listed holdings. What is your opinion on that sort of blended approach, and how do you implement it?
Mary Power 17:07
Well, well, it often circles around two things. One, liquidity, they need some level of liquidity. And the second is that there has been a pushover a few years now for where funds have had an unlisted exposure that may have some gaps in it, and they call it a completion portfolio. They may complete the overall exposure on the exposure side with supplementing with some listed so let’s say they’re underweight industrial they may have gone across the globe and bought industrial stocks and use that as their proxy to build up that that exposure. I think that can work. It depends on your time frame. And back to your earlier question about, you know, is property is, is listed rates more like property on a longer term basis? Yes? I think the answer is yes. And I think if, but then you’ve got to marry that up with a fund’s ability to absorb the risk of volatility in, you know, periods of stress, like we saw in covid. So it really comes down to the perception of risk and return and that level of bullet tolerance to volatility.
Wouter Klijn 18:17
What does it mean for the liquidity profile? Is that harder to manage, because, obviously listed space is much more liquid. How do you manage that?
Mary Power 18:24
Well, that is a very topical question at the moment, because there are, you know, funds that are looking to change their liquidity mechanisms, rather than one long Cliff event, they’re looking for quarterly liquidity, or allowing investors potentially quarterly liquidity with a cap, not just, you know, they can get at any stage. I think it’s very hard to promise liquidity ongoing quarterly with large assets in a portfolio, because I don’t know practically how that works. I think people that need liquidity should almost be sticking with REITs. Yeah, the only other areas that I’ve seen is where they’ve actually buttressed some debt exposure alongside the unlisted that allows some runoff characteristics as as loans are realised, and that will give some some level of liquidity going forward.
Wouter Klijn 19:18
Another development that we’ve been looking at is, is there starting to become an overlap between infrastructure and real estate assets? And for examples, we’ve seen situations where there’s empty land on at airports or at ports, and perhaps that can be developed for property purposes. What do you see there?
Mary Power 19:45
Yeah, definitely, definitely. I think going forward, there will be a blurring between property and infrastructure, and I think it will be possibly, sort of viewed through the lens of the cash flow. Because I think one of the things that. Uh, even this last period of the last five years has demonstrated is that, you know, the cash flow needs to be able to withstand things like capital expenditure, and that’s a dint to the cash flow. So if you look at infrastructure, mainly it’s contracts, and they’re pretty stable, and you can actually increase the gearing quite substantially. Property you need to be able to allow for these capex requirements, whether it’s incentives or actual expenditure on the on the building. So I think where you start to get some purity in the cash flow, like you do almost with infrastructure, that’ll be very interesting area of interest
Wouter Klijn 20:39
in the past, infrastructure property either set in separate asset classes or were an alternative asset class. But we see these days more the rise of sort of mid risk in these assets being labelled as mid risk. Is that sort of an indication of that trend that I coming closer together?
Mary Power 20:57
Yeah, I think that’s that’s really important, because I think what’s happening is that, you know, illiquid assets now, particularly in property infrastructure, almost need to compete for a place in the portfolio on a whole of portfolio perspective. So if you’ve got an infrastructure investment and a property investment, you need to look at those on a risk and return basis. So, you know, I think that blurring and that competition between the two asset classes will continue going forward.
Wouter Klijn 21:27
Might it also be heightened the competition for these assets by if we get to a stage where there’s more and more people retiring looking for income streams, portfolios probably being more geared towards income streams. Do you think that that will contribute to the competition for assets?
Mary Power 21:43
Yes, definitely, definitely, and that stability of income.
Wouter Klijn 21:47
So maybe we don’t need annuity products, just more property assets?
Mary Power 21:51
Yeah. And some of the annuity providers had had the basis of the annuity has been, has been property assets, yeah, at all a part of it, anyway. So yes, I think that’s, that’s, that’s quite possible.
Wouter Klijn 22:04
Yeah, very true. So if we look at the environment again today, what are you finding? Where do you find more interesting opportunities? What sectors look attractive at the moment?
Mary Power 22:16
So yes, we have been looking across the globe at all various sectors. And I was going to say, 18 months ago, we went to Europe. We were very excited in Europe. In 23 mid 23 Australia had had fallen by minus 1.6 the UK was down minus 17, and the US was down minus 10. So I thought this looks very interesting in the UK. Not always. The UK is not always interesting, but it was certainly interesting at that time. And we identified an opportunity. Was an opportunistic opportunity, where they where we invested, where our clients invested, on a, on a, on a multitude of different sectors. But the attractive feature was the discount and the ability for interest rates to fall over time, which was, which was pretty, which was pretty compelling on both fronts, and it’s going to be a great vintage for investment over that period. Yeah, yeah. Closer to home, we’ve looked at and in, and funds have invested in convenience retail, which is a smaller retail, and the attraction of that is its necessity. You’ve got to buy there, you know, you need to get your usual everyday goods there as a as opposed to expenditure, you know, experience based retail. And I think that that’s going to be very solid performer, particularly in a falling interest rate environment. So that’s that’s been very attractive. We also like the idea of the of the being smaller assets. You know, more assets, smaller assets. You know, big assets can have big problems from time to time. So smaller assets can be quite attractive. And we found that to be quite, quite a good way. You know, area to be looking in.
Wouter Klijn 23:59
Yeah, last year there seemed to be a lot of, I call it hype around, sort of the bill to rent in the US, but in Australia, it seems to be still a relatively immature market. Is that starting to change, or are we still at the beginning of it?
Mary Power 24:15
Look, I think we’re still at the beginning. I mean, I was at Ann Rove and spoke at a on a panel last about last week. And I sort of had to remind myself and sort of others that, you know, we’ve had sort of five years taken out of the investment timeline over the last five years. So I think we’ve got to remember where we’ve been, to think about where we’re going. And I think, you know, the US has got a 30 or more than probably 40 year history in multi family. The UK is probably 1015, years into it, and Australia is very immature at this stage. And I think there’s a few reasons. I think we’ve had this period of disruption of five years or more. We’ve. Had, you know, such negative returns that people aren’t allocating. And I think that building costs have escalated so much as well, and development sites have gone down as well in price. So I think, you know, there’s a whole lot of things, but I would think if you look forward over years, it will start to mature. I mean, it has to mature. You know, the housing Australia Future Fund is very prominent. We’ve looked at half deals which are an interesting structure, they’re more they’re a debt structure, so a blurring of two asset classes, property and debt. So I think that over time, it will mature, and it’s certainly a big government push for it to mature?
Wouter Klijn 25:41
Yeah. So we talked about a number of opportunities in the different sectors, and I think if you look at property versus sort of other asset classes like equity or bonds, it tends to be a little bit more transactional focused. How do you look at opportunities in terms of a portfolio, and the construction of the portfolio. Do you just have to wait for certain deals to come up? Or do you really think, okay, we can’t this might be an interesting deal, but from a portfolio perspective, it doesn’t make sense to add this at this stage. How do you deal with sort of those tensions?
Mary Power 26:17
Well, the usually the first question that’s asked is, what’s the deployment capability over five years? So if you’ve got a lot of deployment if you’ve got a lot of deployment capacity, that’s a great thing, because you can actually plot out where you want to be over time. If you haven’t got any deployment capability, you’re actually waiting on redemptions to come back. That’s a that’s a very hard it’s a much harder game because you gotta wait. Gotta make sure the timing is right. You know, there’s not a there’s not a defined, actually a defined date that you know you’re going to get your money back. So matching deals and and flows is is very difficult. So if you’ve got big deployment capabilities, I think we’ve been very keen to be students of the rate markets and the debt markets, to look where where things are moving to. And in fact, we’ve done a lot of work in the US. Where we’ve gone into, went to single family housing, medical office, senior housing, storage. So we’ve gone into a lot of areas where the rates were lead indicators for those, for those sectors. So the emergence of the alternate sectors, which is what they’re called, really has has been expressed through the rates, which has been interesting.
Wouter Klijn 27:32
And how do you look at the tension between sort of large funds and smaller funds, in terms of this, this portfolio construction question, because sometimes it seems that small funds have less ability to take on a lot of illiquidity. Is that true? Or how do you look at that question?
Mary Power 27:47
Well, I think you’ve really got to start. I like to start at the basics. What’s the investment objective for the fund, what’s their tolerance for volatility, and then how many, how much equities and bonds do they have in the portfolio, and then how much illiquid assets do they have? Do you know, if they’re running in liquid exposure of 40% that’s very high, and that could be across property, infrastructure, private credit and private equity. So you need to sort of start with the basics of each fund and how they’re the composition is at the at the time, look at their investment objective. If they’ve got a CPI plus two, it’s very different to a CPI plus seven. Yep. You know expectation. So, so you need to be able to construct your portfolio based on what their expectations are for risk and return.
Wouter Klijn 28:33
And another trend we’ve seen recently is there’s a lot of talk about total portfolio approach, or the joint up investing, and sort of the conversations I had around that is one sort of hurdle that I need to overcome is to speak the same language around investments, and that can be quite different, whether you talk about property or you talk about equities or fixed income. How do you see that conversation taking place with sort of China’s clients? Is it hard to make the translation exercise?
Mary Power 29:03
I don’t think we’ve had a problem with that. I mean, you know, we look at discount rates across infrastructure and property, you know, forward looking PES in private equity. So I don’t think that we’ve had much of a problem with the language going forward. So I think we understand, you know, discount rates, cap rates, growth rates, I mean, yeah, discount rates, cagers, leverage all really important parts of, you know, of the investment subset across every, every asset class, really?
Wouter Klijn 29:41
Yeah, yeah, for sure, if we sort of look a little bit ahead, how do you think that the blend between sort of super funds, exposure to Australian property and international property will develop over time? Are we seeing less investment in Australian and more in international like we see? Probably more money shifting into international equities, or what is sort of your view there?
Mary Power 30:06
Well, I think the I think it is inevitable money will go offshore, and it has the bigger fund, the big, big funds with lots of deployment capacity are likely to take up exposures in areas that they can’t get here in domestically. So that’s some of the areas that I spoke about earlier, single family housing, medical office. So so those that have developed up and have a, you know, some level of track record investment, you know, you know, the markets are quite deep, so I think money will definitely go offshore. What percentage of a total property allocation would go off? I’d say up to 50 per cent could okay. It could be anywhere between 30 and 50 Yeah.
Wouter Klijn 30:51
And do you expect to see a shift as well in the mix between unlisted and listed? Or is that more up to the individual fund?
Mary Power 30:59
It’s very much an individual fund, fund basis, very much an individual fund. Again, you know, perhaps if there’s a reason they need liquidity for within the portfolio, they might elect to have an allocation to rates.
Wouter Klijn 31:14
Yeah, yeah, for sure. Well, Mary, thank you very much for participating in this podcast. It was great to have you on the show.
Mary Power 31:20
Oh, thank you very much for having me. Thank you.