Steven Bennett: What's happening wouldn't be a surprise is that interest rates have gone up the fastest in a generation and what it's meant is that investors are repricing their return requirements. And in property, two of the key drivers are the capitalization rate as well as the discount rate. And for those that don't know property, the way capitalization rates work is similar to how interest rates impact bond pricing. So, as they move up, bonds come down. In our case, as cap rates go up, values come off all else being equal.

So, it has been an interesting time. But look, this is impacting multiple asset classes. I saw the JPMorgan, I think they got a 7 to 10-year Aussie bond index, it's done around a negative 7.9% return per year for three years and that's a safe bond index. So, we are going through a period of adjustment. But look, these are short term. We're a long-term investor. We look through where are the returns going to be generated for our investors over that five to seven-year period.

James Gruber: There seems to be a large disconnect between unlisted and listed property valuations. The listed property values or prices at least are up to 40%-45% discount from prices. Why do you think there's that disconnect? Is it just the transparency of it?

Bennett: Well, look, the listed market is always going to be more volatile. I actually had our portfolio managers give me a statistic which I think is quite interesting. The market almost never trades at NTA in the listed space. So, if you look back since 2005, exclude property fund managers and just look at really the landlords in that index, only 20% of the time do they trade plus or minus 5% of their NTA. So, you'd almost say it's quite unusual if they do and that can be on the upside and the downside. And increasingly, the marginal buyer of these real estate stocks are general equities funds, and they don't need to be in the property sector. So, you will see them come into the market, exit the market. So, that's a bit of a structural change that's occurred over the last couple of decades.

Where will it end? I often get asked that. I really don't like forecasting future valuations. But what I'd say is, they will probably move towards each other. We do think the listed market is overdone. Without naming specific stocks there's some great companies as you said big discounts. Some of them have big funds management businesses with an implied value of zero based on what the market is telling you. In fact, we launched an A-REIT vehicle in the last six months because we thought some of these valuation drops in the listed market were overdone compared to what we're seeing in the physical markets.

Gruber: Right. What are the key opportunities and challenges that you're dealing with in your own funds?

Bennett: Look, the challenges, let's start there. We just had interest rates go up the other week. Look, it's very much around the short term. So, as those discount rates, cap rates increase, valuations are weakening across the industry. The opportunities are really around what happens in the medium to longer term and what kind of assets can you pick up at the moment. So, you heard me say before transaction volumes are down. What it means is that you can secure some great assets with less competition and at much better pricing than you perhaps would have been able to get into 12, 18 months ago.

The long-term side of things – and we do look at the long term – you look at the structural things happening, population growth, half a million people. Demographics are your friend in real estate. More people, more need for shopping centers, warehousing, office buildings. The economic growth is strong, and over medium to long term, Australia is a very transparent market, compares very favorably to other global real estate markets. By that I mean on average higher returns with less volatility. So, I think the challenge and the opportunity are almost the opposite sides of the same coin. So, shorter term challenges, but if you can pick up some assets, it should drive some great returns in the longer term.

Gruber: What sectors do you think are deeply discounted at the moment that you think, wow, this is an opportunity longer term?

Bennett: Look, you're not seeing distressed selling in any serious way. This isn't the GFC. I worked in London through the GFC, and I can tell you that was three years of very, very tough markets. That's not where we're at at the moment. We think the industrial market has some great long-term structural tailwinds. The vacancy rate 0.6% in prime industrial, Sydney 0.2%. Your ecommerce growth, it's not going anywhere. It's not getting any easier to build these big warehouses where people want to be. There's lags in getting development approvals, the enabling infrastructure around electricity, water, sewer. So, you've seen some great rental growth. We think it will come off in industrial. It can't keep going at the 20% or even 16% returns the last 12 months. But we do think it will continue to do better than it has over the long term in terms of those rental growths. So, that's a market we do like.

Gruber: What about the global property trends that you're monitoring right now? What are some of those?

Bennett: Yeah. I'll start by saying one of the trends which I don't think is applicable because people often draw these parallels, often get asked about what's happening in the U.S. around their office markets. And to give your listeners some context, the San Francisco office market, 32% vacancy, downtown LA, 27% vacancy. But the key difference here is Asia Pacific is leading the way in the return to the office. So, we are not America. A lot of those cities, people are worried about their safety. The amenities going downhill, the public transport, different taxes depending on where you live. And if you look at the vacancy rates in our core markets, they're materially under that. In fact, the lowest vacancy rate is in Canberra because the government is continuing to take leases. We were talking about the Canberra market prior to starting this. And the lowest generally is around Singapore. They've got a sub-5% office vacancy rate. So, that's something I would say is different. They've got older stock. We've got much newer stock. And that trend we don't see passing through to this part of the world.

Gruber: People tend to extrapolate that whatever happens in the U.S. comes here, right?

Bennett: And with good reason, often it does with a bit of a lag. But in this case, there are different fundamentals playing out.