Russell Bullen is CEO at Quintessential Equity, a private equity business specialising in property regeneration and development. We recently got together on Zoom to talk about technology trends that have been normalised or accelerated due to the pandemic and their effect on equity.
FuturePlace: How did you get into private equity?
Russell Bullen: I’ve always been involved in property. I have a background in property valuation and previously worked for one of the big four banks in Australia. I also worked for PwC and went more into advisory, but always with a focus on property. I later moved to the US and got more exposure to the capital markets. Through Alvarez and Marsal, a leading turnaround firm, I got exposure to the restructuring side of the industry as well.
Here in Australia, we use the term private equity but it’s not often used in the real estate context like it is in the US. We use terms like syndication which Quintessential Equity does by definition, as we pool private capital and also will often co-invest. We unlock value by either regenerating an ‘unloved’ existing property or creating purpose-led developments for tenants. We’ve always been about making things better than we found them, it’s at our core.
FP: How is Quintessential Equity doing things better?
RB: Around three years ago we decided we wanted to take our business, our funds management business, carbon-neutral. Not just implement carbon neutral strategies, but actually get certified. We received that for 2019 and we’re going through the process for 2020. Through the work we’ve done, we’ve saved over four million kilograms of greenhouse gas. What does that mean in layman’s terms? It’s the equivalent of taking around 1,700 cars off the road, or planting about 25,000 trees. Sustainability is an important way for us to look after our tenants, our community and environment, but also provide strong and stable returns for our investors.
FP: Congratulations and that’s great work you’re doing. What are some investment trends that you’re seeing in the Australian commercial real estate market?
RB: Industrial has gone from an unloved industry segment to being the absolute darling. There is an unprecedented amount of capital that’s looking at industrial. With the pandemic, the shot in the arm that eCommerce has had is off the charts. However, no segment is bulletproof, and there are some areas of industrial property that are struggling, and there are segments with quite a degree of risk. We specialise in office and industrial so we do have exposure to both, but we’re confident that by sticking to our acquisition fundamentals we’ll be able to seek out opportunities in the market.
The second major trend that I’ve seen relates to office space and central business districts. I believe that it’s very easy to get a headline when there’s a period of distress. There are a lot of headlines around “the end of this” or “it’s not the end of this.” But it’s too early to say and I don’t think it’ll be at the end of either spectrum. It’ll normalize to some form in the middle but it will change. I certainly don’t think it’s the end of the office or the CBD, but technology will continue to have a marked impact.
FP: Very true. Technology has brought down walls and has normalized many interactions that were once unique, like Zoom which we’re using now.
RB: Think about how the adoption of video conferencing has changed the landscape. Something I’m intrigued about is the relationship between the employer and the employee. At the moment there’s a big swing to employee needs. We unquestionably put the health and safety of our employees as number one. As we come out of this, if there’s a vaccine and we learn to live with and can manage this, what does that mean for getting back to the office? Getting people back into a mass transit situation, back into the cities, CBDs and downtown areas, that is clearly a challenge. Office space will change, flexibility will be required more, there will probably be more shorter-term lease arrangements and co-working in certain environments is going to be a benefactor of it as well.
FP: Vaccines and going back to the office are definitely hot topics. How about the “trend” of healthy buildings?
RB: Yes, I would say that’s the third movement I’m seeing. We’ve been focusing on the healthy, sustainability side of buildings since we started but now we’re seeing a real shift in how occupants are seeking this out. It’s not just C-suite decision-makers but it’s the average person walking into an office building, they’re now concerned about air quality, about their environments, and other occupants in the buildings. There are two key things here. One is the reality, is it actually healthy and do the systems allow the building to be healthy? Then there’s the perception. As an owner and provider of that service to our customers, you have to cover both. It’s not just about having a healthy building, you have to make people feel healthy in it. And similarly, you can’t just make people feel like it’s healthy, you have to actually make it healthy. We’re really excited about this, as it’s something we’ve inherently always done but it just hasn’t had the priority in discussions or negotiations as it does today. It’s about time.
FP: Speaking to those three points, do you think they’re consistent globally?
RB: It is very widespread, you just need to read the papers. It seems like the first two trends, industrial and use of office space, are definitely global and especially in the western world. The third, building health, I believe that Australia, if it’s not leading the way, is certainly at the top of the pack.
FP: How do you expect these to change due to the pandemic?
RB: You can’t take the pandemic out of it and governments and employers have to deal with it from a health standpoint. We can’t just ignore it, we have to be able to manage it and live with it. In terms of healthy buildings, it has to feel safe and be safe. There’s a bit of a paradox, too. There’s certainly risk and if you start to look around corners and look ahead, certain risks are going to increase. As much as I believe there is going to be a recovery, this was an external shock, it wasn’t a fundamental shock, so it will recover. The paradox here is income is going to be more at risk, but capital — the amount of capital and the quantitative easing that’s occurred and the cost of capital, that’s an absolute paradox. You’ve got income risk, but you’ve also got so much capital chasing deals and paying record rates and accepting record low rates of return for those assets. If you have the security of income, a prime asset in a good location, values are going to go up and cap rates are going to get more pressure on them. Where will they end up? Who knows. But an asset without income is likely to come under significant pricing pressure.
That’s been a really interesting one for me to observe and to forecast what’s going to happen with rates of return going forward. I think you’re going to see a return of the recognition of risk. Pre-pandemic, the last five to ten years, risk has progressively been ignored more and more. So much so that the spread between prime and non-prime has narrowed to an unsustainable level. It was always going to take something to make that revert back. Like anything, no one saw the pandemic coming, well maybe there were a few people, but certainly not how widespread the impact was and is. Risk is now getting priced even more . Secondary assets are starting to suffer. For us, pandemic or otherwise, we stick to fundamentals. That might mean we don’t get every deal, but we’ve never got every deal. Stick to your fundamentals and be patient and if there’s value there, then you strike.
FP: I noticed an emphasis on futureproofing on your website. What are you doing through the regeneration of buildings that others aren’t?
RB: We always buy at or below replacement costs, so you have that competitive advantage. One of the things that distinguish us from others is that we regenerate from the inside out and do all the things you can’t see, behind the scenes. This includes mechanical systems, HVAC systems, and other things that might not get done on other regenerations. We want to futureproof the asset and make it last and perform beyond when we own it. We want the new buyer to speak well of us because of what we’ve done. If you were selling a car to a friend, you wouldn’t sell them a lemon. We want the same for buildings.
We raise our own capital, and we are property people and we have a really strong construction and engineering skillset in-house. We can go in and do efficient regenerations, cost-effectively, and really well. We’re also futureproofing from the environmental standpoint, from a sustainability and health perspective.
FP: How much of your futureproofing is rooted in technology? What about community?
RB: It’s always been core to us, but it’s obviously growing. With regenerations, there are often greater structural challenges to implement technology enhancements. Where we can, we will implement technology such as touch-free functionality which is even more relevant today. Trying to reduce touchpoints within a building is key, but efficiencies can also be achieved through design. We’re advocates of the WELL rating system and we had a project in Geelong, where we developed the new headquarters for WorkSafe, which was the second project in the world to achieve Platinum WELL Core & Shell Certification. A lot of the products and components in the building are healthy and the building has the ability to provide a high proportion of fresh air. When the outside conditions are suitable, in an ideal world you’re bringing in 100 per cent of fresh air which has massive environmental impacts as you’re not running air conditioning systems to the same extent.
In regards to the community, from a design standpoint, trying to be sensitive and cognizant to the environment around us – streetscapes, community, residents, office users, etc. We also engage with community groups, Indigenous groups, local business or others and are empathetic to that influence on design. That’s something we’re very passionate about and so are our partners.
FP: There’s been an increase in investment for making buildings healthier – what are some technologies or methods you’ve really seen take off?
RB: Over the last few years it has been around energy efficiency and solar. It’s become so much more efficient, the kilowatts you can get out of a panel today is substantially more than in recent years and the conversion of solar to energy is much more efficient. The ability for a building’s BMS to manage the entire ecosystem within a building, not just the HVAC system, is another. That ability to really fine-tune a building and make it run efficiently and still provide great comfort conditions for the occupants. It’s not about turning the AC off an hour early and starting it an hour late, it’s about getting the mechanics of the building operating at optimum efficiency and technologies now allow that.
In terms of sensors, they’re now measuring in the tens of thousands of data points. The ability to manage and manipulate the building to get the most out of it is one of the biggest things. If you read about the technology that’s at the forefront today, a lot of it is around health like temperature scanners or alarms if too many people are in one spot. I don’t know how sustainable that is. As humans, we’re adaptable and we can get used to things but I’m not sure how that will go in terms of people feeling like they’re in a comfortable place and a place they want to be in with alarms going off if people breach social distancing requirements.
FP: Interesting tie back that buildings have to message correctly that they’re healthy, but also being healthy. If buildings are healthy but it’s uncomfortable for people to be in them, is that actually a win?
RB: Exactly, and “How far can tech go to make people feel healthy before it’s counterproductive?”
Future of Office Space Summit
Russell will be speaking at our upcoming Future of Office Space Summit, taking place from 17-18 February 2021. Get insights from technology & innovation leaders, tenant & workplace experience experts, property fund managers and industry thought leaders.