Retail real estate, student accommodation, and the hotels and hospitality sector took a hit during the COVID pandemic. But less than five years on, their comeback journeys are defying expectations.

Respected real estate analyst and commentator Andrew Ballantyne speaks to Perspectives podcast host Rebecca Kent about what has been driving the rebound of what were real estate's most challenged asset classes.

He also dives into the industry's most polarising sector: offices. Plus, find out why real estate investment volumes have come to be at their lowest level since 2012.

Rebecca Kent

Hello, Andrew Ballantyne, head of Research for JLL in Australia. Thanks for joining us again.

Andrew Ballantyne

Always great to be back talking about our results and what we're seeing in the market.

Rebecca Kent

Andrew Ballantyne

Sure. So, I thought the first area we could touch on is some of the sectors that were really challenged over the last few years and having a look at their recovery trajectory. The three in particular I wanted to spend a little bit of time on is what we've seen in hotels and hospitality and the broader retail sector. And also the student accommodation market. It's very topical still to be talking about the office sector. So that was the second area I wanted to explore and really delve into the story around quality and location that we're seeing across a number of the different geographies. And then finally, what's happening in the broader capital markets, having a look at where transaction volumes are. As you know, they're at very low levels, but looking at where they're sitting in terms of a historical context, and what we're seeing a little bit with the price discovery journey.

Rebecca Kent

Why don't we kick off on that first one. So, some of the sectors that have been challenged the most over the past few years and where they're at now. You mentioned hotel, retail and student accommodation?

Andrew Ballantyne

If you look at the hotel sector in particular it has recovered really strongly over the past 18 to 24 months. And if you think about the different drivers for that sector, everyone gets very fixated on international tourism. And that clearly is a positive factor for the broader sector, but it really supports certain markets. But what's been more interesting is the recovery we've obviously been seeing in domestic tourism. We've started to see an improvement in the number of business conferences as we've become more mobile, and also the whole story around visiting friends and family that drive that hospitality sector.

Rebecca Kent

Okay, great. Retail, what's happening?

Andrew Ballantyne

So retail is interesting. If you look at the most recent numbers that came out of the Australian Bureau of Statistics, retail turnover growth actually surprised on the upside. But really, through the course of this year, we have seen overall retail turnover growth start to moderate. And part of that moderation has come through cost-of-living pressures that we're seeing. But interestingly, going to that story around population is generally when you bring people into the country, there's a significant multiplier effect around their consumption that you see come through. And we've certainly seen that positive impact flowing through the sector more broadly.

But if you look at the most recent reporting season that we've just been through, virtually all the major shopping centre owners are recording positive re-leasing spreads. So that's ultimately saying that market rent is above passing and they're able to capture that. So that's certainly been a story which has been positive in terms of owners of shopping centres.

The other area that's been quite interesting to follow - and I don't think we've fully finished this journey - is if you go back two years ago, and look at the NAB online retail survey, they were saying that online retail was equivalent to 14.3% of total retail sales. While its most recent observation in September showed an increase, it equates to 12.8% of total retail sales. So, we saw an acceleration in online. We're now seeing a moderation. And while it's certainly different for each of the respective retail categories, it's interesting to look at that story that we're seeing around stabilisation of overall online penetration.

Rebecca Kent

So where was that online penetration in COVID times when we're all shopping on our computers?

Andrew Ballantyne

Rebecca Kent

So that's the pull, isn't it? It's the experience.

Andrew Ballantyne

But also service retail - anything related to healthcare. I'd call that a service retail offering. So the tenancy mix has certainly changed for a number of centres. The tenancy is always very aligned to that local retail catchment. A number of owners have been looking at what is the optimal mix for the catchment that they’re in, and they've been very proactive over a number of years. And what you can see through those positive re-leasing spreads is a sign that they've been successful and ultimately achieving that very strong tenancy mix.

Rebecca Kent

And this is all despite the cost-of-living pressures …

Andrew Ballantyne

I think most mature economies' households would say they're facing cost of living pressures. Inflation prints are quite frankly too high for most mature economies. We have started to trend down. But yes, cost of living is something that we're watching closely in terms of how that impacts consumption patterns. I keep coming back to population growth. Population growth is a key multiplier. And when you see the level of growth that we've seen in Australia it is very positive for a whole range of commercial property sectors. And when you look at our population growth here in Australia it's significantly higher than what we're seeing and other mature economies.

Rebecca Kent

This might sound like a stupid question, but if we didn't have that population growth, would we still see that pace of activity or recovery in these markets that we've spoken about?

Andrew Ballantyne

To me, population growth is necessary for any mature economy to continue to grow. Australia's population growth is very much driven by overseas migration. What we saw through the COVID period was essentially borders shut and population growth went very low levels. So when you don't have population growth, you don't have that multiplier effect. So yes, to me, it is a very key variable for when we look at the performance of commercial real estate.

Rebecca Kent

So, it's a pretty simple correlation.

Andrew Ballantyne

It's very basic stuff. When you look at logistics and industrial, we've said for a number of years, every additional head of population is 4.5 square meters of floor space. That's been a little higher over the last few years. Historically, retail was around 1.8 sqm to 2 sqm. That has come back a little bit, but again, there's a multiplier there. You look at the residential sector, typically when a migrant comes to Australia, they start looking to buy their first home at around 18 months to two years. So, you can see that flow and coming through there as well.

Rebecca Kent

Student accommodation was the third sector that you earmarked. What's happening there?

Andrew Ballantyne

International education is one of our largest export sectors, so it's an important part of the overall Australian economy. Given what we had through the lockdown periods was ultimately international students weren't able to come and study here (a number of those students did study online) we saw a significant reduction in the overall numbers.

So part of the investor story around the ‘why’ of the student accommodation sector is, 1) it's recovered quickly from a demand-side perspective; 2) Australia is very well positioned in terms of how highly rated our educational institutions are, so we're very attractive. We're very open to international students; 3) Greater diversification on country of origin is actually meaning that the demand side of the equation has less risk due to that diversification.

It's quite interesting when you look at different geographies, Western Australia and South Australia now have India as the number-one country of origin for international students. If you look at Queensland, it has Brazil and Colombia up in the top numbers in terms of international students. So Queensland does very well from that movement of students out of South America into Australia. Each geography has its own very unique story. It's quite interesting when you peel behind the headlines in terms of where students from different countries are ultimately studying in Australia.

If you also look at the capital side of the equation, it's still very difficult to acquire assets within this sector. It is still a very small sector overall in terms of the investable universe. But just recently we saw Blackstone make its first acquisition into the sector with an acquisition of a portfolio of assets from Student One up in Brisbane. So we're seeing cross-border investors saying that this is a sector, as part of what they call their 'broader living' mandate – build-to-rent (BTR), student, and to a lesser extent, co-living sectors as part of that. We're seeing a number of global investors saying that ‘living’ as a sector is something they want to have greater exposure to moving forward.

Rebecca Kent

Andrew Ballantyne

If you look at the existing market - we tend to call it PBSA, so 'purpose-built student accommodation', you still find a lot of students end up in the private rental market. But when you look at those actual purpose-built assets, what you've typically seen is that their occupancy rates have recovered very strongly and they're starting to see rental growth for those assets. And given the expectations of growth within international students moving forward, we're seeing a number of groups actually look at saying, 'well, how can we participate in asset creation to actually cater for that demand given the high occupancy rates that already exist.'

Part of the challenge around construction and development more broadly is the costs have gone up, the ability to get a builder contractor has got harder. And prices have gone up in terms of what they're doing. And a number of the highly rated builders are ultimately saying 'we're no longer willing to participate on fixed-price projects, we're looking at cost-escalation projects'. So that creates a level of uncertainty. And that's really across the whole commercial property sector we're seeing that. You're even seeing evidence of that within the residential sector. Typically, you're looking to hit a level of pre-sales to go and get construction finance. But then you're thinking about the builder, the credibility or the trustworthiness of that builder, and then probably quite rightly, in an environment where costs are volatile, we need to look at cost-escalation contracts rather than fixed-price. So, it's just another layer of uncertainty that we're seeing within the broader development and construction markets.

Rebecca Kent

Okay. So they are what were the more challenged sectors over the past few years, but it looks like they're on a really great ...

Andrew Ballantyne

Rebecca Kent

How does that then influence expectations around the office sector?

Andrew Ballantyne

Office is probably the most polarising sector that we see at the moment. And there's a whole range of views in terms of how that sector plays out longer term. I think we've touched on it in these podcasts before, but it's still very relevant around the quality story. When you look at our numbers through to the end of Q3, we recorded positive absorption for prime grade assets of around 215,000 sqm. For secondary grade assets we recorded minus 75,000 sqm. So that quality story, while we know it's very relevant day to day, we certainly see it coming through very strongly in our numbers.

It's quite interesting when you go into the different geographies. In Sydney CBD, I would argue the story is quality and location. If you look at the core precinct, which is Circular Quay up to Martin Place, and down to King Street, we recorded 61,000 sqm of absorption. If you look at all other precincts, it's been negative. So we've seen a quality and a location story coming through very strongly in the numbers in Sydney.

In Melbourne, it's very much reflected around quality, with positive absorption for prime grade assets and negative absorption for secondary grade assets. Once you get outside of the two larger geographies, the story's a little broader in terms of what we're seeing around demand. So yes, it's still demand for quality assets. But the secondary grade market's not getting hit as hard in Brisbane, Perth and Adelaide. Part of the reason we're seeing those markets stay a little more resilient is there a lot of very small organisations that occupy space. Typically 500 sqm or less, occupiers are privately run businesses, and they're very price sensitive businesses when they look at real estate, so they're still supporting that secondary grade market.

Rebecca Kent

Thank you. So that’s offices. The third point you want to raise was around transaction volumes.

Andrew Ballantyne

Rebecca Kent

And are the economic conditions comparable?

Andrew Ballantyne

Every cycle has its own set of unique economic ingredients. I think what's quite interesting is when we speak to cross-border capital, is the Australian story hasn't really diminished. They talk about strong GDP growth outlook through the cycle and the population growth that we spent a few moments on. We're still on a triple-A credit rating. We're one of only nine countries that holds a triple-A credit rating from all major rating agencies. When you look at Western Australia, it's actually been upgraded to a triple-A from one of the rating agencies. The volatility of returns are lower in Australia than what we typically see within the region. And most global investors over a long period of time are ultimately looking to allocate a higher proportion of their portfolio towards the Asia Pacific region. None of that story has changed.

Rebecca Kent

Andrew Ballantyne

Ultimately, you start to get a level of confidence around what risk-free rate you should be using to price assets. So more recently, we've seen another step up in bond yields. The bond yield is very volatile if. you look at forecasts from economists, they do expect to see a reversion back from the level that we currently have. So once there starts to be a little more confidence around that reversion coming through, then simply it's just easier to price assets.

Rebecca Kent

Great. All right, Andrew, thanks very much for that snapshot of our Q3 data. We've said off our camera that the cycle doesn't change all that drastically between quarters. But it's still nice to get a little bit of an update on how things are getting on. Anything you want to add?

Andrew Ballantyne

I think it's interesting when we look at Australia, as we go through this journey, is a number of us have spent a large part of our career talking about office retail and logistics. And while the real estate alternatives are still very small, we're certainly having a lot more discussion around BTR and PBSA, which we touched on earlier. There's a lot more discussion around data centres as a sector. Healthcare-related assets, too. Our demographic profile doesn’t look as bad as some other mature economies, but we clearly do have an ageing population So, I think what's going to be interesting moving forward is among those sectors we view as niche, which have the potential to become mainstream due to the demand tailwinds that they have, which is ultimately going to lead to more asset creation. So that's certainly going to be an area that we're going to be spending a lot more time focusing on moving forward.

Rebecca Kent

That sounds like a podcast we should dedicate to the alternatives on its own. Yep. All right. Thanks very much. Nice to chat.

Andrew Ballantyne

Thank you.