Investor inquisition – where the investors are putting their money and why


Liam Timms (International Towers Sydney Lendlease), Paul Edwards (Mirvac) and Marcus Hanlon (ISPT)  were the stars in our highly popular investor series. What do they care about in sustainability and wellness when it comes time to sign the cheques?
What’s coming over the horizon?

As you can see from the photos and this full report there was plenty of lighthearted moments spicing up this most serious of topics

Ben: So looking at what we’re talked about so far, there’s a lot of interesting things but someone has to pay for them. What sticks out in this conversation on happy, healthy offices as important to invest in?

Paul: I convince people to sign the checks, I don’t actually sign the checks. We have access to the money but trying to pry the money out of the people who sign the checks is somewhat challenging. 

The reason it is challenging is because there’s a real tipping point over the last few years, and it will continue because everything we’ve talked about is really valid, but the industry is driven by returns – rent, quarterly returns, etcetera. 

And we think of it in two ways: we go to the people who sign the checks and say we want $1 million to invest in smart buildings or wellness and they say “well, what’s the return?” And you say, “we’re not sure, but it’s important to the customer, it’s on trend, and a few years later we can tell you how successful it has been, so trust us.” 

That doesn’t really work; in some cases it does but not always. But there’s been no fundamental change in the way decisions have been made in real estate for a long time, which is feasibility studies, return on investment and reporting on it. 

The bigger picture is how the building industry values office buildings, and valuation today is based on the tenants and their lease term and the rent they pay. Think about this concept of flexibility, maybe ten per cent, 20 per cent of the building may not have a lease term of ten years. It might have a flexible working environment. 

And valuers are struggling to value that and they don’t value it in the same level as ten year lease terms. So, by catering to the customer, you are potentially impacting on the value of the investment. You shouldn’t be, because that’s what the customer wants. So it’s a real tipping point and an interesting time to be in the industry.

The bigger picture is how the building industry values office buildings, and valuation today is based on the tenants and their lease term and the rent they pay

Marcus: I also don’t sign checks. Building on that is we are all driven by the customer and the customer is changing dramatically. It’s a workforce moving towards millennials and Gen Z’s. 2024 is the tipping point where they become the major force in Australian workforces. 

And their view on life is very different to others in the room, including myself. How they work, who they work with, and it’s less around loyalty to one company for their entire life. It’s about the gig economy, freelancing, co-working, working with different people on different projects constantly. 

You look at the way businesses are adapting to that, and pretty much all of them are calling themselves digital businesses. Which means they are all vying for the same talent. 

Commonwealth Bank isn’t just going after the same people as Westpac, they are also going after the same staff as Google or Amazon. Why’s that important? Talent is pretty much it. You have to have talent for your business to last. If you haven’t got talent, then your business isn’t going to be lasting very long. 

“And so we’ve got to change, our models will need to change to keep up with the modern workforce to meet the customer’s needs”

There’s also the growth in tech companies happening so fast. We’ve got a client that was 150 people and they got $100 million and now they want to become 400 people in like three weeks. It’s ridiculous. How do we cope with that as a landlord, as an industry, that’s set up with long term leases? 

And valuations are linked to that, and investors are linked to that, and don’t understand flexibility at all. And so we’ve got to change, our models will need to change to keep up with the modern workforce to meet the customer’s needs. 

Customers are also changing as well to be more about experiences. Millennials don’t want to collect stuff, they want to collect experiences, as seen in the success of AirBnB adding an experiences element to its model. 

In the property sector we’re changing the ground plan and delivering different spaces and co-working and flexible spaces to create these spaces. There’s this huge drive. Demographic change, technology change and the inherent flexibility that comes with it – that’s really changing the whole market. 

Liam: ­I do sign the checks, I just wasn’t going to tell anyone. It is an investment in place, and even from a fund manager’s seat, I purely see that you get better performance when you create an environment that’s safe and thriving, and the health and wellbeing part is a critical piece of all of that, but it is only part of it to me. 

Doing all the right things matters and matters a lot, we’ve done research and it shows you will get healthy clean air with plants, you will get a 20 per cent improvement on cognitive tasks. So it’s very easy for me to say to a CEO when 90 per cent of your costs is on people, a little bit on your real estate to get 20 per cent improvement in people, it’s not hard to do the maths. So I look at people performance like that. 

I look at how we create a safe environment because, as mentioned, people will move from project to project. People become associated with the project itself and want to complete it. I think the long term loyalty to a brand that we saw our parents do just doesn’t exist. 

So we need to create environments that accommodate that. People say there is no return on investment but the reality is there actually is.  The concept of people feeling very safe is that they will be performing, and I have seen that because I hosted the marriage equality campaign at Barangaroo. 

They started with the space City of Sydney had given them, which was a typical space with power boards and power leads everywhere. But they took what they could because they were fighting for rights they shouldn’t have had to have been fighting for. 

So, when I got the call I said “absolutely, move in”. We have a custom built campaigning space and they were able to use that. They ramped up the campaign to have 12,000 people using the space within weeks. That was an eight week campaign, and look at how successful it was. 

But importantly I interviewed them with a behavioural psychologist and when they arrived in the space and they said they felt like they belonged, that they should be there. And all I said was that: “I could provide a space for you to be the best you can be, I can’t do what you guys do, but I can help you be the best you can be.” 

They are a good example, and a very measurable example, including the direct feedback with people saying they were stressed and uncomfortable in the previous space and wanted to leave, and they had a space they felt they belonged and performance went through the roof. That’s how I see it as an investment for us. I don’t see it as “I have to put money out and then have to prove it worked”. 

Another thing we do: I put up the three flags of Australia, the Aboriginal flag, the Torres Strait Islander flag and the national flag, and these are expensive. But this creates conversation. 

And admittedly I said I wanted it and I didn’t have to prove to anyone why to spend money on it, but I can tell you if you ran an Excel spreadsheet across it, it would make absolutely no sense. And most people don’t do it and that’s been the very historic nature of our industry. 

And it’s very sad that our industry hasn’t worked through the layers to actually understand what people want on the coalface. We all talk about it now but the reality is that it’s been there for a while.

Ben: There’s now all this data that proves the benefits of wellbeing, such as the 20 per cent improve in cognition with access to nature, etcetera. Do people generally believe this data or are they suspicious of it?

Liam: We had a tenant who said they couldn’t afford a place like Barangaroo, they are in technology and education, so I met with the CEO and talked to him about performance, health and wellbeing. They moved in and I bumped into them on the street and they gave me a hug and said, “This is the best thing we’ve ever done, we’ve got offices globally, and we have no trouble attracting talent, our customers love it.” It’s changed their mindset.

Marcus: Just to build on that, the conversation between landlords and tenants needs to change. Traditionally it’s been a technical conversation about rent reviews and square metres etcetera. 

Landlords need to start having conversations with the users of the space rather than tenants. It’s important to have the conversation with the right people; it’s usually real estate people, but that’s usually the wrong people. It should be HR, people strategy and workplace strategy rather than real estate people. Once you start to understand what they are doing, you can start shaping up an offering that’s about more than just rent. 

But then it gets interesting because the industry has our tenant reps themselves between tenants and the landlords. Those tenant reps take a very technical approach to those negotiations. They deal with rent, square metres and incentive. And they don’t get, broadly speaking, this whole piece that needs to become a critical part of the conversation. 

So the ability to talk directly with tenants is an opportunity to change that conversation. The industry needs to mature or continue to be held back by the old way of doing things. 

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Tina Perinotto: We’ve found in some of our past work such as the Tenants and Landlords Guide to Happiness ebook series that tenants and landlords are actually quite scared of each other and don’t talk. Tenant reps have been blamed for stifling a lot of innovation. But when did this conversation start to change between tenants and landlords? Was it WeWork? Or something else?

Paul: I don’t know when exactly but it has definitely changed in the last five or 10 years. There’s generational change. That’s part of that; landlords used to sign a 10 year deal with someone and on year nine you would knock on the door and say, “Hey, how you doing? Wanna stay for another 10 years?” 

You can’t do that now, it’s all changed, all companies are starting to get human centred design, engaging with the businesses and then creating spaces and experiences that work better for them, continuously.

The need for flexibility is also changing that. WeWork has had an impact on the industry because its growth has been crazy and it will likely become the largest tenant in Australia in the next four or five years. That has brought up the idea of do we need to do more curation, etcetera. 

But in the past three years we’ve started actually focusing on our customers and making sure we know all of them, which sounds ridiculous. 

We used to know the person who did the deal and a handful of others in a 3000 person business. We can’t know all of them personally but we can find ways of knowing most of them, which also helps work out how you value things. 

We’ve got an internal innovation program called Hatch, which has been running for three years. Out of that we’ve started looking at underutilised spaces in our building, on the basis that cars will automate carparks so it will change how those spaces are used in the future. 

So we ran a pilot called Cultivate by Mirvac, which is actually an urban farm built on the bottom of 200 George Street. We did it as a $15,000 experiment. So, you get that money and go build it. 

We worked with a company called Farmwall out of Melbourne. They installed an aquaponics system, which is basically a fishtank at the bottom with water flowing though the walls to gardens so that the nutrients from the fish are pumped around to grow lettuce and salads. 

The farm in the basement proved unbelievably successful.

We put one in our office space so people can go in at lunch time and cut their own lettuce. And the farm in the basement proved unbelievably successful. But not just about growing lettuce, it also got customers talking and building community. 

We’ve now gone to Westpac to build another one which is much bigger at 275 Kent Street. Again, you can just walk down the heritage laneway at the back and go in. You can work out of there, there’s also a co-working type space. 

It’s been great for Westpac as we’ve started to look at the mental health impact it has, running surveys on health and how it is growing wellbeing within their own staff. And about 96 per cent of people who attend say they feel healthier and less stressed as they leave the space. 

“the industry hasn’t just changed, it’s changing. The question is how fast

So it’s like an example where you take an initiative about health and wellbeing, pilot it, learn from it, and scale it. It doesn’t make any money but we believe in it. We also invested in Farmwall through Mirvac Ventures, so we have a stake in the business and will roll it out across our portfolio.

Marcus: Firstly, the industry hasn’t just changed, it’s changing. The question is how fast it is changing. By 2024, 75 per cent of the workforce will be millennials. That’s less than a lease term away. So you put it in that context and it’s a real challenge.

So WeWork, as pointed out, will be Australia’s biggest landlords soon, and probably globally. Last financial reporting their bottom line doubled negatively at the same level as their revenue grew. 

But the CEO and cofounder Adam Neuman is claiming that its evaluations and size are based more on energy and spirituality than revenue. They’ve nailed the market. They’ve got the market exactly right, the trends are right. But the jury is out from a financial perspective. It’s an interesting time and these next few years will throw a curveball into that market.

What do you think is going on there? They must know what they are doing?

Paul: You’d argue that they are growing at a rapid rate and if they stop growing, you wonder if they’d still make money. I don’t know the answer to that. They are an interesting group; what I find interesting is their agility. 

They are quick to change things around as a business and try new things, such as dormitory housing (WeLive), early childhood education (WeGrow), fitness (WeRise), and social gatherings (MeetUp). They have that luxury because they got $2 billion from SoftBank, and they’ve got IPO now. 

But they are really shaking up the market because they are really offering different services for customers and they are learning, and they are using technology to learn quicker. Their technology overlay on the way they do business is dramatically different to ours and most others.

Also, to answer the question about why you do something when it’s not a financial benefit. I think it’s the way we did it, we have a lean, mean methodology. Fail fast, fail cheap, so we spent $15,000 on something for six months, tested it to hell, and it worked. Our customers got value. Will our customers stay in the building longer with all those different experiences and ideas? Yet to be borne out. 

So with flexibility, how do you manage long term returns?

Liam: Well, like anyone knows in the financial world knows you need long term pre-commits to make these things stack up. You don’t have a market without it. 

The other thing is, often these spaces are better managed by the people occupying them. You have people saying they want flex space, and then you have an honest conversation “why would you like it?” and “oh, we don’t know, when we need it” so let’s have a conversation about what kind of availability charge, rather than usage charge, you need. 

People will say they don’t want to pay for that, because on your PNL clearly its easier for you to just do it as a long term and just manage it under your own umbrella. You could have Westpac, who is doing a project with the government, and they might change the date, then the promise you have up the hill to KPMG that the space will be available suddenly won’t be available and then everyone loses the plot. It has to be worked through.

But doesn’t WeWork provide space on demand?

Liam: They do and they don’t. The market is always changing and that’s just the dynamic at the moment. It’s continual change. 

An article I read recently talked about the conversion form horse drawn power to motor power, and that took 30 years. And if the motor car arrived here today then not one of us would get in because of the high fatality rate of young children. And why was this happening? There were no laws, no regulation, no licences. The first pedestrian crossings were done with tennis court line markings. That took 30 years. 

When people talk about disruption, it’s happening all the time. So you should openly accept the change and that investing in things you aren’t sure about is a learning experience. It’s not a fail if managed properly. There’s things I’ve invested in and I’ll just say let’s repivot, that’s the reality. 

You can’t change it by sitting in the grandstand. You need to be on the playing field. And there’s too many people in the grandstand with a lot to say about people on the ground getting smashed up every day of the week. I’d rather see that person learn.

I wanted to ask about what’s in your garage?

Liam: Let’s talk about Uber and Tesla, Uber destroyed the taxi industry and we have no social issue about what’s happening in that industry. And then if you buy a Tesla you’ll have to return it to them because we are going to autonomous cars shortly. 

Cars are a good simile because it’s easy to understand. Ford, when asked about what people wanted before the car, they said they wanted a faster horse. To translate that into the technology thing, because in Barangaroo you own the electricity supply of all the tenants, yes?

Liam: Yes it’s a private network, built to an Ausgrid standard, but yes it’s a private network.

But in the future you could provide a lower cost for power and a greater guarantee?

Liam: There are lots of regulatory challenges but ultimately yes.

Question from the floor: So the City of Sydney was championing cogeneration and trigeneration before but it never really took off?

Liam: I did the Darling Quarter gas generator down there, maybe 10 years ago. So gas power generation was considered a great way to do it and you get heat recovery off the jackets. But what happens in NSW, talking about regulation, is you are either a domestic customer with the gas on at home or you are an industrial customer. There’s no in-between. 

For any industrial customer, the government guarantees to industry, because this is the industry melting metals and doing stuff with gas manufacturing, they guarantee 25 per cent to maximum capacity. That costed a lot at Darling Point and that’s why it doesn’t work, because at the end of the day, the price you had to pay because you were an industrial customer rather than a domestic customer was extraordinary.

I had to literally buy the gas supply to service the city to make sure I had gas when I wanted it because I wanted it at peak time. That’s why regulation isn’t able to accommodate innovation very successfully. That’s why innovations like that are so difficult and take so long. 

Question from the floor: There’s also the question of scale. With Barangaroo there was an opportunity to start from scratch and futureproof it, but you are telling me you can’t really do that because technologies are changing so rapidly? 

So my question is, what do you do with the not Barangaroo? The stranded assets that can’t improve, what’s the rate of churn with technology like to get them up to speed? Can you work on the fabric that’s there? 

Paul: There’s a big difference between precinct and building. At Barangaroo it had elements like common basement and had retail, office and residential, so you can do load smoothing. 

You can now buy renewable energy generally cheaper from the grid than you can make it onsite

As Liam says, it’s not just the market issue, the price of gas is ridiculous in Australia and it is all sent offshore, and so the price of electricity and gas has closed, so the metrics just don’t stack up.

What’s more interesting is where the market is going from the gird perspective. You can now buy renewable energy generally cheaper from the grid than you can make it onsite. Embedded networks are common in retail – not so much office and residential – you can basically buy that power much cheaper offsite. 

So basically, the grid is good, use the grid, we need to use it more, but the government needs to come up with new regulation about the grid because I could put 10 MWs on my sheds out west, but as soon as I put that solar into the grid I get nothing for it. 

And then I try to pull it out the other end because I want to do a power purchase agreement with the banks or others in the building, but the regulation and network charges and other things don’t work in favour of that happening. 

Question from the floor: So on the question of scale, at UNSW, where the tech to develop these PVs was done, they aren’t putting PVs on any more of their buildings. They’ve built a huge solar farm out at Balranald and will be the first carbon neutral university, but the energy is coming from there. 

Paul: So did Westpac and other banks, and we’ll probably do the same. The market price has closed so much on a big solar or wind farm at scale that it makes it much more viable.

Question from the floor: But what about the smaller owner-occupiers that may not be able to do something like that?

Paul: You can do collaborative work on something like this. We were part of the Melbourne one that ran for a long time and we were the only landlord on that bid. 

But the problem is that landlords trade assets. But the other people on that group were Melbourne Zoo, RMIT, Melbourne Convention Centre – and they aren’t going anywhere. Tenants with a ten year lease are more capable of writing a PPA agreement than we are because we are likely to sell our assets. Scale has its benefits, but it’s misleading to think that landlords can just go buy packs of power in the current market because we’re buying and selling assets and changing our portfolios too much.

ISPT is considered the unsung hero of sustainability and wellness. How come we don’t know about it more?

Marcus: ISPT deliberately flies under the radar from a broad brand perspective. That’s been a conscious decision. It’s changing now though; ISPT would like to have a more publicly recognised brand, and for a couple of things with one of those being sustainability. 

What’s interesting is we won’t talk about things we are going to do, we’ll only talk about them once we’ve done them. Sustainability can be used from a marketing perspective, and there’s a lot of people that put a full page advertisement in the newspaper but behind the scenes are not as committed to it.

We’ve worked consciously on getting our portfolio, which is commercial, retail and industrial, to bring it to a certain standard. But we’re not there yet. By 2020 we want to be comfortable with the baseline standard of the portfolio. What’s changing is shutting down and working with our customers or tenants around sustainability. And we’ve had some interesting conversations. 

“ESG is now a critical issue from an investor perspective”

We are going in far earlier than we used to asking how the workplaces are changing, and one of our big government clients is really focused on sustainability and wanted to sit down with us and build a sustainability pilot program jointly, because we can help them achieve their sustainability goals. 

And if we help them that drives straight to the war for talent and the productivity piece. And so it will move further away from a base building focus to a more collaborative tenant focus, especially the bigger uses, who have publicly stated their goals.

So where does environmental sustainability rank in your business?

Marcus: It’s changed dramatically because ESG is now a critical issue from an investor perspective. So with investors focused on that and customers as well, we say that safety is our number one priority across the organisation and now sustainability is number two.

Paul: We’d all say safety is number one, it’s the way businesses are structured, it’s fundamental. Sustainability probably comes in at number two as well but it’s probably more the whole world has woken up in the past six months, I think young Greta has made a big difference, the world has woken up to climate change, I don’t know why, there’s this huge moment globally. 

And we are beholden to our tenants, without them we don’t have a business, ultimately. So the demographic change that I’m talking about has a huge impact on that, and millennials have a much stronger focus on social wellbeing, human rights, they want to do more good rather than just less bad. There’s countries banning plastics, mostly overseas. There’s more than is being done here. 

And the number one issue is currently climate change and we’ll see if that comes through on the votes. In our business it’s always been important. We came out with the goal to be net zero carbon by 2030 and the rest of the market went, “Well, what does that mean, what does it matter?”. But we’ve found that it drove our business in that direction and our CEO was courageous and said she didn’t know how we get there but better to try. 

We’ve done some amazing things because of that, like Mirvac Energy, a bunch of projects. You learn by trial and error and keep progressing, but having that goal plus zero waste to landfill and zero wasted water, that has driven our business to think outside the box and push past barriers. 

Liam: Setting the vision is important because when a leader goes out and says something like that it gives the organisation permission to go and break the rules and change things. Having those visions is critical. ESG is good business. 

It’s very simple: you engage with CEOs, and they start talking money, you probably haven’t got a deal, it won’t be enjoyable. You talk to a CEO and they talk environment, they talk social, they are the topics you are discussing and the relationship is excellent. 

Sustainability is at the top of the tree for us, complete alignment

That’s driven around ESG, in terms of the investment world there’s a handful of measurements and tools that are well recognised now. It helps benchmark the globe because at the end of the day it’s your superannuation money, it’s your future, we want to know what you are doing. If you saw investor surveys, they used to be an A4 page long, now they are pages long. 

The reality is, people have a social voice and it should be used more, the good people have the opportunity to stand up and be heard a bit more. The community needs to stand up and demand change. And I have to look back 20 years to see a leader that had a vision and tried to get there. We’re very fractured and we’re not alone in that, same in the US, UK. 

Sustainability is at the top of the tree for us, complete alignment. 

As leaders, what are you doing about biodiversity?

Paul: There’s Cultivate but also the Indigenous rooftop farm in South Eveleigh in the old ATP site, and formed a new company called Yerrabingin with Indigenous leaders Christian and Clarence, we helped them set up a business and its growing so fast. The plants on the farm are all edible, that came from engaging the Indigenous community and someone asked for food. And I thought, “How do I get food for them, I can’t build a shop?” So I started think about farms. 

The purpose now is educating people around food, using it in cooking, also about Aboriginal culture, and ensuring they have financial sustainability by managing the landscaping and biodiversity on the entire precinct. We’re about to start classes, there’s a firepit on the roof.

Marcus: I’ll talk about the importance of biodiversity. We have a big retail portfolio, and last year we put a challenge to some students to think about giving shopping centres a community heart. They came back with 10 or 12 presentations, and so many had this concept of community wrapped up in food. 

Liam: There’s lot of bigger things but a small thing is why are the plants always exotics. So we kept interviewing contractors and they said they only do exotics, so I finally found one that would work with me to do native plants inside. 

We are aiming to get to 100 per cent but that takes time because natives take time to establish; that’s why people go for the exotics because they are so cheap, easy and fast. Like most things that are cheap easy and fast they are problematic – just ask people about those box hedges from Bunnings about how they keep them down. 

I thought, how can we have such diversity in plants in Australia, and be told that only exotics can be grown? That had to be rubbish. 

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