Explore the resurgence of investor confidence in Australian commercial property as market fundamentals strengthen across office and industrial sectors. Our panel discusses Quintessential's tenant-first investment strategy, successful capital raising in today's environment, and where they're finding value across the eastern seaboard.

Jess Magree

Welcome back to another episode of JLL Perspectives Podcast. Today we're joined by Quintessential: Noah Warren, Chief Operating Officer, Dan Colman, Head of Capital, and my colleague Tim Carr from the Capital Markets team. I'll hand over to you to introduce yourselves and tell us a bit about your role.

Tim Carr

Tim Carr, JLL Capital Markets office. We specialise in selling office assets ranging from 10 to 500 million, typically.

Noah Warren

Noah Warren, Chief Operating Officer of Quintessential, had the good fortune of working with the business for close to 16 years now focusing on core plus and value add opportunities in the office and industrial space.

Dan Colman

Daniel Colman, Head of Capital, I've been with the business for about 14 months now. Career has been half more finance based and half property focused, so I've spent some time across different disciplines, capital raising, debt, asset management, you sort of, you name it. But this role is focused very much on capital raising.

Jess Magree

So Quintessential has undergone a bit of a pivot in strategy in recent times. Can you talk to us a bit about that pivot and where you're seeing tenant depth now?

Noah Warren

Jess Magree

And I guess Tim, from your perspective across the eastern seaboard, where are you seeing that tenant depth?

Tim Carr

Jess Magree

And Dan, from an asset perspective, what do you think makes an asset worth backing?

Dan Colman

From an investor's perspective, really and if you think about the makeup of returns being distributions and capital growth, we think that our investors are really looking for distributions. So if you translate that to what attributes does a property need to have, you need to have strong tenant depth. Tenants are buying buildings that tenants want to be in and that's going to give you that sort of strength and reliability in the distribution profile.

Noah Warren

And we've seen examples of that through our assets. Adelaide case in point, we've recently done two major refurbs in two different towers and both of those assets are now underpinned by AGL who's moved from a fringe location and then the other asset being underpinned by BDO and Kellogg Brown Root. These are large leases for the Adelaide market where the tenant has said, well to Dan's point, what's going to attract and retain best talent?. And being centralised where there's the amenity, the offerings to staff, that's where staff want to be.

Tim Carr

And Dan, you spoke about distributions, we speak to core investors all day every day and it feels like there's return hurdles that most groups need to meet. What are you seeing that investors need right now to make it financially stacked for them to invest with you?

Dan Colman

Broad brush, if we're talking specifically about office, if you can offer distributions in the range of 6 to 8% and hit an IRR of about 15%, that's generally what's going to get people's attention. We've obviously been active in Brisbane, that's been a very simple narrative to sell with infrastructure spend and the Olympic games; we're a first mover there. And looking at other markets, the makeup of the returns is going to be largely driven by price as well. So where you can get a better opportunity perhaps in Melbourne, that's going to be something that's a bit more price driven.

Tim Carr

I mean it's interesting Melbourne at the moment, again, it has been a challenge market. We are starting to see a lot of capital now looking at Victoria because the Sydney market is so buoyant, as is Brisbane. And we're starting to see markets like Tasmania and Adelaide really surge as well. But Melbourne, you can get value here now, which I think we haven't seen for a long period of time.

Noah Warren

No, and I think you're right Tim, in terms of whether it's Melbourne or around the east coast of the country where you look at the buying fundamentals below replacement costs. And now more than ever the economic rents for a new development are so much higher than what it is in existing assets. That's an attraction for us when we're looking at buildings, the ability to retain that tenant and win the race when it's 30 to 40% below new development economic rents.

Tim Carr

Yeah, I mean we're starting to sell assets now where we're benchmark anywhere from 50 to 60, even sometimes 70% of the value tied up in the land holding itself, which starts to become really compelling when you're looking at future opportunities for the asset.

Jess Magree

So it sounds like equity is back for the right deals. Dan, can you tell us about your most recent capital raise and what does it tell us about the market?

Dan Colman

So our most recent deal was Green Square North Tower in Fortitude Valley. We needed to raise $98 million as a part of that transaction. We had a six week raise window and we had commitments or at least expressions of interest in the equity raise within two and a half weeks. We were subsequently oversubscribed and had to do some scaling on that. I think that there was a very noticeable shift middle of this year where investors perhaps who were more opportunistic were taking an opportunity to buy into office for the first time this cycle. We had really strong interest from wealth managers.

Dan Colman

And just to give a bit more background on Quintessential, we are a wholly private capital investor base. No institutions. So wealth managers were certainly back and very interested. They were buying the Brisbane thesis and the strong tenant covenant. It was an 80% government leased building. So we really saw a big step back into property equity and I think that's going to continue. Most of those equity raises have filled, some others have also been oversubscribed.

Noah Warren

And Dan, what we've seen from our equity partners is our investors are willing to back us because they understand when we look at opportunities, how we screen them, and the entrap value that we can effectively unlock.

Dan Colman

Yeah, and I think we've got a great track record that we want to protect. So we will only do exceptional deals. I experienced just the layers of governance that sort of go into a transaction, backed by really strong analysis by management. We identified opportunities in that property from a leasing perspective where we could create immediate value. There was a major near term lease expiry with a government tenant. We were actually able to negotiate a lease during due diligence and the capital raise window and have that lease in an executable form by settlement. That deal was signed the day of settlement and created that immediate value.

Tim Carr

Yeah, I mean you guys adding value like that is tremendous for your investor pool. And as agents at the moment, we're finding that deal security is even more important than sometimes headline price and other commercial terms. So buyer ability to either raise capital, complete DD and make sure they hit all milestones at the appropriate time parameters is so important.

Noah Warren

Spot on and first and foremost it's about de-risking. Then how do we add value along the way.

Jess Magree

Noah, you mentioned unlocking that untapped value piece. Can you talk to us about what that process looks like from start to finish?

Noah Warren

Noah Warren

We then effectively went and de-risked that during our first year of ownership. And we brought that back to market in a position where the risks were removed and that stigma had gone away. That's something that we look for in assets: how do we de-risk it?.

Tim Carr

It also resonates with the investor market. Groups are looking at every geography in every sector, so making sure for vendors that we're working with to provide as much detail upfront on the asset itself is so important at the moment.

Jess Magree

Noah, back to you looking across your portfolio, what are the assets where you think things have gone right and maybe some learnings that you can talk to us about?

Noah Warren

There are always challenges and there are always wins. We had challenges over the past number of years with the inflationary environment and the heavy regeneration uplift that some assets need. We had one asset where we acquired it pre-inflationary environment so our costing levels did not match up to the rate at which inflation effectively sped ahead.

Noah Warren

But again, our business has effectively got three circles: the capital raising side, the asset management side, and then our engineering and design component which is getting in there, understanding the asset and delivering solutions. Through this inflationary environment, we rolled the sleeves up and worked with our design team, engineers, and builders to value manage an incredible outcome. How do we protect investors and the business through challenging points in time?

Dan Colman

And protecting investors' capital is a unique point of difference for Quintessential, having builders and architects on staff. When things go wrong they can step in, verify information, and look at ways that we can value manage things to protect the invested dollar.

Jess Magree

So it's quite unique that Quintessential has all the in-house capabilities for a business of your size. Over to you Tim, what are buyers gravitating towards today? Is it income stability or repositioning upside?

Tim Carr

Anything office in Melbourne? No, in all seriousness, I think we are starting to see a lot of liquidity coming back to the market. Sydney and Queensland seem to be the markets that groups are gravitating mostly to. In the current market, we talk about the haves and have nots. Assets with locational deficiencies where there's not a lot of tenant demand are very challenging to get anyone excited at a level that makes sense for a vendor to trade.

Jess Magree

Tim, as you're saying liquidity starting to come back into Melbourne. Can you tell us about the pricing differential between buyer and seller? Is that narrowing?

Tim Carr

Yeah, we have a global system called Horizon, where our bid data gets uploaded real time. Global bid are spread is starting to really narrow to sort of 3% between vendor and buy globally. That market typically is at least six months ahead of the Australian market. From an Australian anecdote, we're starting to really see that close at the absolute trough of the market in Victoria, which was probably late last year or this year. That differential was anywhere from 10 to sometimes 30%, but we're starting to see that really closing up now.

Jess Magree

And Dan, from your perspective, who do you think the most active traders will be in the next 12, 16 months?

Dan Colman

Oh look, I think it probably goes without saying that there's been a very long period of illiquidity in the market. So there is quite a bit of property sitting on balance sheets or in syndicates that does need to be sold. In the last few transactions we've been bidding against groups that are very much like ourselves—syndicators. The next 12 months, it'll be interesting to see if institutions come back into the market with lower costs of capital. We are seeing that in Sydney already. APAC capital from an office perspective was focused on Tokyo and Sydney.

Dan Colman

Sydney as it gets too expensive, investors are going to have to look elsewhere. Brisbane is a relative unknown in offshore markets, while Melbourne is a known entity with challenges starting to take shape.

Tim Carr

Jess Magree

Where's Quintessential looking in the next 12 months? What assets and sectors are you looking to play in?

Dan Colman

We are a predominant office and industrial investor. I expect that that'll stay the same. Generally we are sector and geography agnostic between those two. So really we'll look for where we can find value for investors.

Noah Warren

That's spot on. Office is still a really great asset class. You look at the development supply pipeline that is coming over the next five to six years, which is pretty thin. Buying good quality office provide great opportunity. And on the industrial side, we are looking to go again at present looking for opportunities that we believe are exceptional.

Jess Magree

And Tim, from your perspective, where do you see the next set of shifts coming from?

Tim Carr

The tenant demand component is really important. All investment decisions are just driven by: where are my tenants, how much will they pay, and what's my incentive. At the moment there's 22 briefs in excess of 4,000 square metres of tenants looking for CBD space. 17 of which haven't been committed yet. So there's 17 movements in the next 6-12 months. Inevitably this will drive investment decisions. We'll start to see some offshore capital groups looking to trade out of Melbourne just because of uncertainties in the tax landscape and global opportunities.

Tim Carr

That creates an opportunity for local groups like Quintessential to capitalise on a market that we haven't seen for a period of time. The syndication style product at the moment is rife and I think that'll continue.

Jess Magree

Noah, I understand that Quintessential gave JLL the national portfolio management. Can you tell us a bit about that relationship and how it's transpired?

Noah Warren

So only about three, four months ago we appointed JLL to run our assets nationally—currently that's 12 assets. For us, asset management is tenants first and foremost. JLL provide full circle disciplines from operations and property management to technology solutions. We were incredibly comfortable to provide that platform and develop a partnership over the coming years to deliver fantastic experiences to all of our tenants. If we don't have tenants, life's pretty hard.

Jess Magree

Well it sounds like there's lots of opportunity in industrial and office. All positive here for us. Thank you all for joining us today. It was a great conversation, lots of interesting insights.

Jess Magree/Guests

Thank you.