Rahul Bharara, Head of Real Estate and MD of Credit Suisse Australia reveals where we’re really heading.
Overlooking an unrivalled panoramic view from the Credit Suisse boardroom, Rahul Bharara shares his knowledge on the real estate market with a relaxed confidence and positivity that only someone with true insight can do.
“The numbers speak for themselves.” Mr Bharara says “The economy is strong. When you look back at 2021, that was the anomaly. There was one straight line with the market going up and everything basically going up on the back of excess liquidity, interest rates etc. But if you look back historically every year is not like that. 2022 is going to be one of those years where high quality companies, certainty of income coupled with a natural inflation hedge, and a lot of real estate has that….. will actually really shine. It’s not going to be everything goes up in a uniform line, but the good quality ones certainly will.”
Mr Bharara made macroeconomics sound so simple. Will recovery be this straight forward? Not quite. He talks about the ‘indigestion’ we need to get through first, interest rate rises being a key part of that. The level of impact these rises will have on the property market will of course depend on what the property asset it is and why exactly those interest rates are happening. Mr. Bharara continues to use New York apartments as an illustrative example. “There has been 20% rental increases and some reports are saying rents in New York are above where they were pre-pandemic. That’s obviously driven by supply demand but also by pretty significant inflation. So there will be a lot of pockets of real estate that can be inflation hedged in this environment. But I think if you’ve got earnings going up we think a lot of the real estate will still keep doing well once we get through that initial ‘indigestion’.”
On the very morning of our interview with Mr. Bharara, inflation was yet again in the spotlight as the US had just published their annualised inflation rate of 7.5%. "Inflation is running hot globally … in certain markets off shore, far hotter than what we’re seeing in Australia. I do think certain items like commodities are going to remain hot over the course of 2022 but these things move in cycles and 7.5% is not sustainable. A lot of this is also led to by supply imbalances which have been playing out….but as things come back and lockdowns hopefully are a thing of the past….we should normalise over the course of the next 6-12 months.”
As most industries endure a natural evolution over time, so does real estate. Taking the office sector as an example, in the last decade our per capital space has been reducing. Contrary to what we may think about this sector heading for the fall due to recent hybrid working arrangements, Mr Bharara highlights that more office space may now be needed, but in a different format. This is because the way in which we work has now changed. Offices appear to be trending towards smaller collaboration spaces and break out rooms as opposed to the traditional set up of years ago where staff were seated more closely, with less choice of spaces within which to work.
“Theres no linear impact from a reduction in what I’d call 'through the week occupancy’ because we might have the entire team in on a Wednesday or Thursday and you might need more space for that collaboration. There is a real estate evolution naturally and I think we will be going through another evolution of the use of real estate, but one thing thats going to stay constant are places like we’re in right now, in the heart of the CBD, prime great assets will remain very much in demand.”
In regards to the Industrial and logistics sector, the next evolution Mr. Bharara talks of is increasing rents.
“That Initial boom over the last few years was driven by declining cap rates. We’ve now moved into the next evolution of that boom which is increasing rents. Clients on the private side that own some logistics assets, they’ve said even for what was previously B-grade stock they’ve done value add projects on it and the rental increases have been very significant in the logistics space. There doesn’t seem anything at this stage which concerns us about lack of demand or asset values being impacted because the trend is just in a positive direction.”
The retail sector also appears to be heading in the right direction with levels trending back to where we were 2019. “Its a critical part of the buying experience” states Mr. Bharara “…and omni-channel, a combination of physical and online, I think is here to stay and the good quality assets are going to do well.”
In our interview, we further discuss REITS, funds management, build to rent and M&A’s, amongst other trends and investment assets. However in sum and broadly speaking, Australia appears to be in a strong position with our biggest challenge, other than managing interest rates and inflation, being the ability to satisfy the huge demand for our real estate assets across both the listed and private markets.
“Australia is an extremely attractive destination (for global capital investment in real estate). You just have to look around and you’ve got… our legal system which stands up against the best in the world, it is a very, very attractive destination. And with things opening up you will find more capital flowing into Australia to try and pick up what is a scarce pool of assets.”
Click here to watch the interview.
