From vacancy to value

With financial markets inching toward a fragile new equilibrium and commercial real estate (CRE) valuations stabilising after several quarters of volatility, John Taylor, head of private capital at Dexus, believes the moment is right for wholesale investors to reconsider their posture on property, particularly those willing to embrace opportunistic strategies that capitalise on dislocated pricing and sectoral asymmetries.

“The macro is still choppy,” Taylor admits, referencing geopolitical tensions and ongoing interest rate adjustments. “But the inflection point is here. Rates are easing, and that’s good for valuations.”

Taylor underscores the importance of moving beyond the headline noise to focus on structural shifts that offer durable investment theses. He notes that while it’s easy to become fixated on central bank movements or Middle East flashpoints, the more enduring narratives are found in demographic change, technological infrastructure and energy transition. These themes aren’t just philosophical but are very tangible. In property they manifest as data centres, power transmission upgrades and age-targeted accommodation. “You need to be thinking in decades, not quarters,” he says, reminding advisers that strategic patience and thematic alignment are crucial to portfolio construction in this asset class.

Importantly, Taylor insists on deconstructing the notion of a ‘property cycle’, a term often used to homogenise what is, in reality, a highly fragmented market. “Each sector is at a different point in its own cycle,” he explains. “What’s happening in logistics bears little resemblance to the story in office or retail.”

One standout performer has been industrial, where the transformation has been nothing short of profound. “When I started working in property, a shed in the sticks was anything but sexy. Now, logistics represents about 40 per cent of the index.” Rents in South Sydney industrial, for instance, have nearly tripled in under a decade, from $125 a square metre in 2014 to $375 today, driven by e-commerce and increasingly, demand for data centre capacity.

Despite rising interest rates, valuations in logistics have held firm due to outsized rental growth. “It’s one of the few sectors where fundamentals have offset macro headwinds,” Taylor explains. For developers, the strategy has shifted: stabilised assets offer limited upside at prevailing cap rates but greenfield or brownfield developments still present compelling opportunities. “Develop-and-sell models are attractive right now,” he says, pointing to Dexus’s own footprint in this space. “Liquidity is high, demand remains strong, and the supply pipeline is still constrained which supports rental growth and capital values even in a higher-rate environment.”

Residential and accommodation sectors are also on the radar for the Dexus platform. Taylor highlights a structural under-supply of housing, an issue exacerbated by record immigration, complex planning regulations, and spiralling construction costs. “Everything from build-to-rent and student housing to seniors living is under pressure,” he says. These aren’t flash-in-the-pan trends; they’re demographic imperatives.” He points out that the depth of demand, especially in immigration-driven metros, creates a base case for sustained capital investment.

On opportunistic investing, Taylor is quick to define both its promise and its perils. “No free lunches,” he warns. “You’re taking risk at two levels, one in the nature of the asset and other in the nature of the structure.” These risks include rezoning uncertainty, development delays, tenant repositioning and construction blowouts. Equally, illiquidity must be understood: closed-end structures and syndicates are not casually exited. “This is not listed REIT territory. You’re in until the job is done,” he says. But for those willing to embrace these risks, the rewards can be substantial, especially when dislocation creates mispriced opportunities.

The key, he insists, lies in deal sourcing and execution. “Being early in the deal flow is everything,” Taylor explains. But visibility is not enough. Execution is what separates good managers from great ones. “It’s not enough to say you’re looking at student housing conversions. You need to understand zoning laws, construction logistics, tenancy trends. Can your manager actually get the job done or are they just marketing a thesis?”

Taylor offers a recent Brisbane property case study as a benchmark. Dexus Real Estate Partnership Series (DREP), the opportunistic fund series, is repurposing a vacant B-Grade office building into student accommodation. The complexity in securing this deal was immense, requiring deep knowledge of office leasing, construction pipelines and student demand. “It tapped every part of our platform from office development teams, student housing experts to local planning. Not many firms could have executed that deal at the speed and scale required,” he notes. “But it’s a blueprint for what opportunistic investing looks like when done right.”

This flexibility to pivot between sectors and strategies is embedded in the structure of DREP. “We wanted to create something that could go where the best deals are across the capital stack and across sectors,” Taylor says. Unlike siloed vehicles that chase office repositioning or niche developments, DREP can move between equity and credit, residential and industrial depending on where risk-adjusted returns are most attractive. “It’s that agility that was born out of Dexus’s on-balance-sheet strategy, which delivered an average 30% internal rate of return (IRR) asset-level return since FY 2012,” he notes.

Indeed, DREP1’s performance has been strong. The investment period only concluded in November last year, yet it has already returned circa 30 per cent of its committed capital. “That recycling is crucial, especially when you’re competing for capital with sectors like VC or PE that are stuck in illiquidity traps,” he says. The response from investors has been overwhelmingly positive, with substantial re-ups into DREP2 from both institutional and private capital channels.

Timing, Taylor argues, is on DREP2’s side. “Deal flow has doubled and broader indicators such as narrowing discounts to NTA in listed markets suggests smart money is looking at office again.”

For advisers guiding wholesale clients, Taylor’s message is clear: consider re-engaging with property but do so with eyes wide open. “There’s cash on the sidelines and fewer safe havens. Hybrids are maturing, term deposits are thin. If you work with a trusted manager and the strategy makes sense, now’s the time to step off the sidelines. Being positioned early makes all the difference.”