This AI-generated transcript:
Manny Anton: Hello and welcome to this week’s edition of Winston’s Weekly, which covers all things real estate. I’m Manny Anton, your host for today’s asset discussion. Winston, welcome back.
Winston Sammut: Thank you.
Manny Anton: Nice blouse today.
Winston Sammut: Thank you.
Manny Anton: Is there a story about that or. . . ?
Winston Sammut: No, no, it’s just a flowery Friday.
Manny Anton: Okay. It is ok. Well, Winston, let’s start with an update on this week’s real estate news. The interest rate area has been busy this week, which is why the U. S. Federal Reserve is holding a shutdown on interest rates. The U. S. economy satisfied markets this week by signaling that it was moving away from a restrictive bias and even going so far as to reiterate its forecasts that it would potentially be looking for three-discount rates this year. So what do you think about this and what are the implications for the real estate industry, from your point of view?
Winston Sammut: yes, well, I guess what the Fed is waiting for is more evidence that inflation is under control. We know. And we know there will be rate cuts. It’s just a matter of when they’ll happen. And markets have been content to wait until then to see what happens in the coming months. And the markets are pretty convinced that those rates will be cut. It’s just a matter of when we want to see the first one so that everyone is satisfied.
Manny Anton: yes, do you think there’s a consensus that they’re going to keep these three rate cuts?
Winston Sammut: No, the consensus is that they’re going to implement those three rate cuts. But again, it’s a matter of timing and magnitude of the cuts. And that’s the question of the moment.
Manny Anton: Okay. Let’s move on to more internal matters. This week, residential housing has been the focus of the press. There’s a lot of talk right now about rising costs and dwindling sources. You know, they seem to be making headlines on a point guard. What do you think of the residential housing scenario and what is your view on the outlook?
Winston Sammut: Look, the outlook for the residential sector is essentially this: will we continue to see increases in value throughout this year?They won’t be as high or as dramatic as those of the last two years. But we will see increases in value and this is essentially due to a source and a demand. We are receiving more immigrants. We have other people who are looking to buy and have not yet made the decision to buy, essentially due to considerations about the current interest rate situation. Remember, 2 or 3 years ago you could get a 2 or 3 year loan set at 1. 9%, and today it’s 6. 5%. Historically, six-and-a-half is rarely a very large number because, when I started, we had loan rates of 16, 17, 18%.
Manny Anton: Unfortunately, I can also do those moments, Winston.
Winston Sammut: It’s relative. And the challenge is that the other people who borrowed at that constant low rate of 1. 9 had to pay a very big jump to now have to pay back to 6. 5 as those loans are implemented. But the truth in residential terms in general is literally a matter of source and demand. What we’ve noticed over the last 20 to 30 years is that the Australian dream of owning a space on a quarter-acre block is no longer applicable because what’s happening is that the length of the block has decreased. They’ve gone down and the costs have gone up and we’ve noticed that continue over time.
So other people get less, pay more for it, and have to borrow more. But it’s the demand that’s driving it. Disruptions in the residential sector and in the structures sector are similar to the load factor lately, as rates have increased dramatically. A number of developers really went bankrupt in this era where they had fixed-price contracts and had to buy the fabrics at higher rates, so they couldn’t make money from that.
So, urban sprawl is becoming a scenario where we’re now looking at infill progress because there’s an additional burden for residential sprawl and it’s what you want — you want transportation, you want schools, all those things that get loaded. But if you do it in a filler area, that is, in the center, in the suburbs that are there, they are all there.
So that makes it easier. And now I think in the western suburbs of Sydney they’re talking about allowing advances of up to six floors, which are rarely very big advances, but still. This way, you can attract more people and more families to the same spaces as before. . And I think that’s how it’s going to evolve.
Manny Anton: I mean, the Europeans have been on this path for a long, long time. So instead of fainting, they have a tendency to let it go. That’s what’s happening here.
Winston Sammut: Exactly. Also, the focus has been on “build to rent,” where other people are looking to invest money in entities that are looking to build apartments just to rent rather than incentivizing other people to buy them.
But in reality, when you look at real estate in the long run, you don’t make a lot of money from your particular rental income source. And that’s why negative leverage exists, because it somehow offsets some of the prices that you make money by appreciating the asset you own. So, right now, there are the “haves”: those who have a home, some with mortgages (a smart number with mortgages), and those who “don’t” and are looking to get into the market.
And that’s the challenge of the moment. And I guess as we’re going to see rate cuts here in Australia as well, but probably later in the year at the earliest, in my opinion, maybe even next year, other people will be able to budget accordingly, they’ll be able to get back into the residential market.
Manny Anton: Okay. But that’s precisely where rates will come down at some point. We don’t know when it will happen, but I guess you’re right. I think there are question marks as to whether that will happen in 2024. Personally, I think this will probably happen in 2025, but what you just described, once the RBA starts adopting this easing policy, won’t that increase space prices?
Winston Sammut: Well, real estate costs are already very high right now because of demand. But what it will do is it will allow more sources to come in because the costs will be lower. And just because of the interest rate factor, I’ve had employment figures here in Australia that imply employment is very strong, unemployment is down, it’s now back below 4% to 3. 7%.
Therefore, the prospect of an early rate cut here in Australia is somewhat rejected. And keep in mind that the liquidity ratio in Australia is already 1% lower than in Europe and the US. So, anyway, we’re at a point of decline.
Manny Anton: Ouais, I think that’s right. We would be remiss if I did not inform you of the prestige of the acquisition of BWP Newmark. What’s the latest on this?
Winston Sammut: Well, the most recent one is that yesterday, Thursday, BWP announced that the offer was unconditional. Previously, it was conditional on obtaining 50. 1%; now it’s over 40%, so now it’s unconditional. From Euree’s point of view From the point of view and from the point of view of our customers, we’ve really sold our products and we’ve made higher costs than we were originally looking for, and in a scenario where those roles are offered, you don’t have a selection like what paper you get, whereas it’s better to get cash and then what you need to buy, rather than getting paper from some other entity.
Manny Anton: Okay. So, hopefully this will progress and end at some point.
Winston Sammut: That’s right. If they will get to 90% and then mandatory procurement, I don’t know when that will happen, but in my opinion they will get to 50% in the next few days.
And then there’s the other scenario where Eureka and Aspen are bought out and Filetron now declares that they own 19. 3. 9% of Eureka. I doubt they will really increase, but we have to wait and see what is proposed in this scenario. Aspen’s offer, which is 0. 26 Aspen percentages for any and all Eureka percentages at the current value of about $1. 76, valuing Be’s offer at about 45/46 cents, which is well below what is paid in the market, is trading at 53. and a part of it as we speak.
Manny Anton: All right, great. You spoke about Euree’s position. How is Euree Asset Management evolving?
Winston Sammut: Performance is going well, especially in the last few months. The sector is back on the rise, with the A-REIT sector up 4. 8% on the month since the start, followed by last month’s 4. 7%. But this is basically due to the Goodman Group, which accounts for 36% of the index. If you take a look at a chart of the index and the Goodman index, they are very similar. Goodman’s is driving that trend right now and some of the other stocks are now being dragged into the rally because what happens is when something gets too expensive, other people start looking at, you know, the next point and where, hopefully, they can choose. A bargain. The Euree is doing well: at the October low, the unit value was around $0. 92. It is now in position for the dollar. That’s why we’re quite satisfied with the way it’s working.
Manny Anton: Okay, fantastic. Alright, let’s take a look to conclude, looking forward to next week. Is there something you’re looking for in terms of real estate?Is there anything we want to pay attention to, or is it silent?
Winston Sammut: Well, in the real estate sector, distributions will be announced for the March quarter. As such, not all REITs will be. Those who pay quarterly will announce their distributions. So it will be a positive sign. I don’t expect other people to sell shares in the meantime and prefer the distribution to continue. And then it’s April and we’re going to see what happens in April. But at this point, it’s all going pretty well.
Manny Anton: Winston, as always, thank you for your time and your concepts today, they’ve been wonderful. And we’ll be back with some other issue of Winston’s Weekly after Easter. Until then, have a wonderful day and a wonderful weekend.
Disclaimer: Sequoia Financial Group (ASX: SEQ), the parent company of Finance News Network, owns a 20% stake in Euree Asset Management.
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