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Winston’s Weekly: Inflation, Interest rates & Office politics

The following transcript was AI-generated.

Manny Anton: Good morning, and welcome to this week’s edition of Winston’s Weekly, covering all things property. I’m Manny Anton your host for today’s property chat. Winston, as always, thank you for your time.

Winston Sammut: It’s a pleasure.

Manny Anton: Alright. let’s get let’s start with the US, as usual. It’s been an interesting week, quite a bit of data around, and again, rates have been swinging around a little bit, and quite frankly rates have been going north. So, that’s really where it’s been heading. But, the US real estate sector has again seen some decent swings as well during the week. As a result of what’s going on there on in that inflation and rate front. So most of the data this this is basically showing that the U.S. economy remains very robust. In fact, overnight we had some jobless data, for example, and again it was suggesting things are still looking pretty good from a U.S. economic perspective. Now, obviously markets are thinking, well that’s going to make it pretty tough for the fed, in terms of their interest rate policy. And in fact, the fed chair came out during the week as well and made some comments about perhaps having to hold rates at current levels for a little bit longer. What are your thoughts around that?

Winston Sammut: Well, obviously the data that’s come out does suggest and support a much stronger U.S. economy, even a lot of people would have hoped for. We don’t want to see a recession, which is probably off the cards now, given how strong the economy is going. But, given that it is very strong, it does put pressure on the fed, not to cut rates early. So it’s really about the timing issue, and I think people are getting a little bit disappointed with the fact that we haven’t seen rate cuts yet and they’re now likely to be pushed out.

The bond market is really what is being focused on, and the ten year yields have gone about 4.5% in the US. they, they are edging closer to the 5% level, which is a bit of a worry. Whether they get there or not is another matter. If there’s some more, strong economic news coming out, we may see that, but that’s not going to be a short term impact rather than, than anything else. And it’s a similar situation here in Australia; the data that’s come out here, the employment data that came out during the week, that suggests that the economy is still cranking along. And so, the prospects for rate cuts in Australia as well is being pushed out.

Manny Anton: Okay. Well, let’s let’s move on to the domestic markets. Domestic property: Now, there’s been some interesting discussion I’ve noticed this week, about some of the trends we’re seeing in the office sector. It’s been a little bit in the press. I think there have been some surveys about vacancy rates across the office space. Now, a recent analysis on CBD office has shown that there is a growing gap in vacancy numbers emerging between Grade A and Grade B office. What’s happening there? What’s what’s driving that? What’s the outcome of that ultimately?

Winston Sammut: Well, given the amount of vacancies it’s been around for a while, tenants now have a bit of a choice as to where they want to move to. And, it sort of helps their bottom line in a way, because less people are coming into the office, so they need less space, but they want to improve the facilities and the offerings for their people. So they’re moving up in terms of quality. They may be paying per square meter the same, or probably a higher rate, but they’re actually leasing smaller spaces. So they come out neck and neck / flat, rather than actually spending more money to improve their position. And that’s something that the sector, particularly the office (manages and so on) are sort of focusing on offering better quality office space. Even though it might be smaller in terms of needs, but at least that’s where the demand is. And, conversely, what will happen is that the lesser quality, assets are the ones that are going to suffer going forward.

Manny Anton: What happens to those assets?

Winston Sammut: Well, a lot of them, in the past, they used to be either converted into some other use, like residential little hotel or whatever.

Manny Anton: Repurposed?

Winston Sammut: Repurposed. Or in some cases it might be a case of, depending on how old they are, of completely pulling them down and rebuilding something new. But that’s a fairly risky, thing to take on at this point in time. But I’m sure as time goes by, some of those things will will eventuate.

Manny Anton: How would you play that particular thematic, that movement of A versus B? How would you play that in the listed space?

Winston Sammut: Well, you want to be invested in in those REITs that do have the quality assets, the A-grade. Now, realistically not every building that that that an owner owns is A-grade. And so they’re also working through their portfolios in terms of curating them to have a higher percentage of the better quality that the premium, the A-grade buildings, and sort of offloading some of the lesser quality properties if they can.

Manny Anton: Okay, great. Let’s move on to, M&A. BWP/Newmark. What’s the latest on acceptances on that front? Have they got their 90% yet?

Winston Sammut: No, they haven’t got their 90% yet. And the last figure I saw, which was yesterday, they’re in the low 80s (82% / 83%). So they still got another 7% or so, to go to get to the 90. But they have extended the time frame to, not this Friday to the following Friday of next week. But it’s been slow going, which is quite interesting. I know they’ve all they’ve been ringing every investor that is still out there that hasn’t made up their mind to try and get them to sign up, so that’s I think that’s what the process they’re in at the moment.

Manny Anton: Okay. And looking forward to next week, anything material that we need to be focused on from the property perspective or is it –

Winston Sammut: We’re in that sort of gray area at the moment in terms of other news or situations that will impact. So we left to the vagaries of what happens with the bonds and what happens with with CPI numbers as they come out. There’s there’s no results due. There’s no updates, no quarterly updates. All that has happened in the past. So it’s really a matter of, working your way through at the moment. Interestingly, last month, the REIT sector was up a strong 9% this month. So far, it’s down about 8%. And that’s the impact of of what’s happening with rates and concerns about pushing out the time frame of rate cuts.

Manny Anton: Yeah. And we’ve seen the you know, as I said mentioned earlier, we’ve seen some pretty decent swings in US real estate as well.

Winston Sammut: Yeah, that one thing that is perhaps I should note, is that in the US there was a report came out that basically said that the demand for industrial space has somewhat come off the boil. It’s not a it hasn’t come off a hell of a lot, but it was enough to – Prologis is the largest, listed, industrial entity in the US, and that got knocked back quite a bit. And it did have a slight impact on on Goodman’s here, but Goodman is still sort of powering along on the basis of the fact that, you know, they’re concentrating now in data centers, which is a very, very big demand, and they have, you know, a lot of opportunities in that space.

Manny Anton: All right. Well, Winston, thank you for your time and insights today.

Winston Sammut: It’s always a pleasure.

Manny Anton: And, we will be back with another edition of Winston’s Weekly after the Anzac Day weekend. So have a great day and have a great weekend.

Disclaimer: Sequoia Financial Group (ASX:SEQ), the parent company of Finance News Network, owns a 20 per cent interest in Euree Asset Management.