Blackstone to acquire Australian data centre business AirTrunk.
The world’s largest private equity group is betting on growth of artificial intelligence in Asia-Pacific region.
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast site, my own website, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz or at Banking Day.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 32 in our series for 2024 and today’s date is Friday September 6.
First I’ll be talking to Evan Thornley, the co-founder and executive chair of LongView, the fund that allows property investors to invest in a slice of the more lucrative/better-performing family home market – without either the hassle of being a landlord or owning the entire property outright.
And I’ll be talking to economist Nicholas Gruen about how central banks around the world, including our Reserve Bank of Australia, can make better economic forecasts.
But first, let’s talk to Evan Thornley.
So what’s happening the news?
Australia’s economy fared better than expected in the June quarter as government spending fueled growth. On a per capita basis, though, activity shrank for a record sixth quarter in a row. Gross domestic product grew 1% compared with the June quarter of 2023, the Australian Bureau of Statistics said on Wednesday. That rate compared with 0.9% predicted by economists and 1.1% previously report by the ABS for the March quarter. On a quarterly basis, the economy grew 0.2%, in line with forecasts by economists and the ABS’s revised outcome for the March quarter growth. Australia’s swelling population has masked some of the pain caused by 13 interest rate rises by the Reserve Bank in the past 28 months. Per capita GDP contracted 0.4% in the June quarter, extending a record retreat that began at the start of 2023 in data that goes back to 1973. June quarter growth would have been weaker without an increase in spending by federal, state and local governments. That extra demand shored up on-going strong employment growth s but it also make near-term interest rate cuts less likely.
Health Department officials have conceded that private hospitals are uninvestable and more will close. Labor MPs are increasingly concerned that the government is failing to fix a funding crisis that threatens to spill into the public system. The preliminary findings of a review ordered into a growing crisis within the health care system by Health Minister Mark Butler warn that private hospitals will close in the next 12 months. The findings also say a shift from overnight stays to same-day procedures is harming profit margins. The findings, which have not been released publicly, note that private hospital closures will put more pressure on public hospitals. “Decline in investability of the sector risks the contribution it, and the hospital sector as a whole, makes to meeting health needs,” documents summarising the review circulated by Health Department officials read. “While there is substantial variability in earnings, profitability of the sector has declined over recent years. Average returns in the Hospital Sample may not support continued investment,” the review, led by Health Department secretary Blair Comley, finds. The concerns raised by the review are similar to those from major private hospital operators such as Ramsay Health Care, which said on Friday that it could not build new facilities because the returns were not high enough. The pressure building on the health system comes amid an increasingly bitter stoush between private hospitals and insurers over who should shoulder rapidly increasing medical costs. Private hospital providers say profitability has swung too far to insurers. Insurers say private hospitals need to operate more efficiently. The outcome of that dispute, and Labor’s review, will most affect the 12 million people who are covered by private health insurance. Their fees are regulated by the government, with increases approved once a year.
This would explain why private hospital investors have shifted away from new health projects following a surge in construction costs and collapse in profits, according to building industry figures. Silverstone Developments managing director Troy Daffy said a sharp rise in building costs combined with the collapse in yields following interest rate hikes had eviscerated the feasibility of building private hospitals. The builder, who has developed three projects in the health space, said Australian property funds and wealth sovereign funds, both of which were heavy investors in private hospitals until a few years ago, had abandoned the sector. “There’s no appetite for private developers or builders to build these things any more,” Mr Daffy said. This was evidenced by the collapsed proposal for a 12-storey health centre on Annerley Road in Brisbane’s Woolloongabba, which highlighted the lack of support for new private facilities. Mr Daffy said the construction crunch was particularly acute in Queensland where the government’s enormous investment in state infrastructure, including public hospitals, had drained the workforce from the private sector and increased building costs. His company is currently developing a private health facility in Brisbane’s inner-city suburb of Spring Hill, but he said the “massive flip” in market conditions would have made the project unviable if it was beginning today. “The construction price would be 40% more, but the valuation would be 30% less,” Mr Daffy said. Brenton McEwan, general manager of healthcare at major real estate and infrastructure group Dexus, called for an overhaul of the private treatment sector to ensure health funding remains sustainable. The company, which has $2 billion worth of hospital and health centres under management, said ageing private facilities were inefficient and needed to be closed. “While this might be a short-term fix, we need to think long term,” Mr McEwan said. “We envision the future of Australian healthcare through the development of multipurpose real assets within precincts that offer a mix of treatment, care, prevention and research facilities. “These intermediate care facilities could reduce costs by 30% to 40% compared to a traditional hospital stay of four days.”
REA Group is considering a takeover of Rightmove, the United Kingdom’s largest property platform, in a deal that could cost more than $9 billion and transform the ASX-listed News Corporation-backed real estate giant into a global player. REA told investors on Monday it was considering “a possible cash and share offer for the entire issued and to-be-issued share capital of Rightmove”, citing “clear similarities between REA and Rightmove” that would allow it to build a global empire. REA’s possible £5bn-plus move on Rightmove therefore has something for everyone. Murdoch watchers can wonder if it means that Lachlan, the chosen one, is keener on property websites than newspapers. And is the medium-term destiny of NewsCorp to be split in two, liberating the 61%-owned REA and other property-based operations from the media assets, as one US activist fund called for last year? Rightmove was founded in 2000 by four real estate agencies, and listed on the London Stock Exchange in 2006. It is worth £4.4 billion ($8.5 billion). REA, founded in 1995, is one of the ASX’s 20 largest listings with a market capitalisation of $27.3 billion. But the two company’s fortunes have been very different over the past year. REA has grown more than 25%, while Rightmove has fallen 1%. The expansion could be a risky one, with shares falling as much as 7% on investor concerns before closing 5.5% lower. Some of Australia’s largest companies have come unstuck in the UK, including Wesfarmers, with its failed 2016 purchase of hardware chain Homebase for $705 million. It exited that investment in 2018. Lendlease has also dramatically scaled back its international ambitions, and will leave the UK next year, while AMP tried – and failed – to expand into the region in the 2000s. Despite being the market leader in a country of 66 million people – more than double Australia’s population – Rightmove last year posted revenue of £364.3 million ($706 million) against REA’s $1.35 billion. Rightmove is more profitable; it reported £264.6 million, compared to REA’s $461 million. Morningstar analyst Roy van Keulen, who covers classifieds businesses, said this could be seen as a defensive move by REA to ward off a future international competitor. US property data giant CoStar bought third-placed residential listings platform On The Market for £99 million ($192 million) in December, a bid that initially sent Rightmove’s share price tumbling 14%. “If you’re REA, you’ve got to think 10 years ahead,” Dr van Keulen said. “Running ahead from number three position is harder than running from number one position.” REA’s chairman is Hamish McLennan, a Murdoch family lieutenant who has held several other prominent board positions.
AirTrunk founder Robin Khuda has cemented his billionaire status after clinching the sale of his nine-year-old data centre business to Blackstone in a deal valuing the company at $23.5 billion which highlights the wealth created by the artificial intelligence boom. Founded in Australia in 2015, AirTrunk opened Australia’s first and largest hyperscale data centres in 2017. It now operates a platform of hyperscale data centres across the Asia-Pacific and Japan region. Blackstone, the New York-headquartered asset management giant, beat a consortium led by industry superannuation fund money manager IFM Investor to buy AirTrunk from Mr Khuda and Macquarie. Mr Khuda will take home $500 million in cash and retain a stake in AirTrunk of about the same value. He will remain as chief executive. The businessman, who arrived in Australia from Bangladesh to attend university when he was 18, sold 88% of the company to Macquarie’s infrastructure arm and Canada’s PSP Investments at the start of 2020. He kept a 10% share of the business. After yesterday’s sale, Mr Khuda’s stake in AirTrunk has been reduced to 5%, and is worth about $500 million after the company’s debt is factored in, sources close to the transaction said. Macquarie’s fund and PSP will sell their AirTrunk stakes in full. The deal triggers a large performance fee for ASX-listed Macquarie Group, which manages the fund. The fee is expected to be worth hundreds of millions of dollars. The deal is easily the biggest corporate transaction in Australia this year, and the fifth largest ever after Block paid $39 billion for buy now, pay later group Afterpay in 2021, the $33 billion sale of Westfield to Unibail-Rodamco in 2018, the $32 billion acquisition of Sydney Airport by a consortium of superannuation investors in 2022 and the $26 billion merger of gold miners Newmont and Newcrest last year.
Cash isn’t the only thing in short supply at Star Entertainment. Time is also running out for newly installed chief executive Steve McCann to get a deal across the line. After being suspended for three days from the Australian Securities Exchange, for failing to provide its accounts by last Friday, every hour Star remains banned from ASX trading adds to the company’s reputational damage and the urgency to secure an agreement. That will be no easy feat. The NSW and Queensland governments are at odds over whether they will deliver tax relief. The bank syndicate, while open to a deal, is demanding extra security before it advances any more cash, all of which has to be ticked off by regulators and auditors. Everyone is playing chicken, raising the odds on a high-stakes game of chance. Once perceived as the glittering symbol of city sophistication, Australia’s biggest listed casino group has found itself reduced to the status of last chance saloon. McCann, who has been in the job just a matter of weeks, has made it clear to all that he’s not interested in putting a stop gap measure in place, that the deal he’s proposing will need to shore up the company’s finances for the long term. By all accounts, the former Lend Lease chief executive was stunned to discover shortly after arriving that Star’s finances had been drained by huge cost blowouts at its new Brisbane casino development on the river at Queen’s Wharf. The massive development cost almost twice as much as anticipated. And while it technically opened last Thursday, it remains a cash drain given the facility is less than 20% leased with work continuing on retail sectors.
The ultra-rich are buying up big and using shell companies to hide it. They are increasingly hiding behind corporate entities and trusts as they snap up high-end properties. Of the 50 most expensive properties sold last year, almost a quarter were acquired in this way. In 2018, this figure was only 12%. Piercing the secrecy of these companies shows a growing industry – from buyer’s agents to lawyers, accountants and realtors – devoted to obscuring the true owners of high-end property. David Morrell, a buyer’s agent who specialises in prestige Melbourne property, says the wealthy are increasingly creating schemes to shield their real estate transactions from view, although he adds that this is largely not for any nefarious reason. “These very wealthy people, the wealthier they are, the more they value their privacy,” Morrell says. “Privacy is the main driver, but I’m sure there is a seedier side. I’m seeing more and more people using a company vehicle to purchase properties.” Along Sydney Harbour, from Circular Quay to Barangaroo, a slew of apartments in the Crown Residences, Bennelong Apartments, Macquarie Apartments and Opera Residences are held by shell companies – vehicles that lawfully hide the identity of their owners. The easiest way to keep a property purchase away from prying eyes is to put it in someone else’s name. Nicole Kidman, for instance, owns a three-bedroom apartment in Latitude, a Milsons Point apartment block, which she purchased for $7.7 million last year. The property, however, was bought in the name of the Hollywood actress’s childhood friend, Annette Rechner. A more complicated approach is to use a shell company, often linked to a trust.
In what will be disappointing news for first home buyers, Australian house prices have continued to rise over the past month, according to new data. Average dwelling values climbed by 0.5% in August, the 19th consecutive monthly increase in house prices tracked by CoreLogic’s Home Value Index. The median-valued home is now worth $802,357, jumping from $798,207 in July, but the findings indicate the pace of growth in the real estate market is showing signs of slowing. Australia’s capital cities were evenly split on house price rises and falls, a symptom of what CoreLogic has described as “a multi-speed market”. Parts of the country continued to see house prices rising, with Sydney (+0.3%), Brisbane (+1.1%), Adelaide (+1.4%) and Perth (+2%) increasing over the month.On the other hand, there were declines in Melbourne (-0.2%), Hobart (-0.1%), Darwin (-0.2%) and Canberra (-0.4%) in August. Eliza Owen, the head of research at CoreLogic, said on a national level, house prices had been rising consecutively for more than a year, which was “seemingly defying” the current economic climate.
The Greens have their eyes firmly focused on winning over renters at the next election, with a new policy aimed at giving tenants more power in resolving disputes with their landlords. The Greens have announced plans to establish a National Renters Protection Authority (NRPA) which would only deal with tenancy disputes, including enforcing national minimum standards the party has put forward, covering ventilation, heating, cooling and insulation, Costed at $200m a year by the parliamentary budget office, based on the Greens rental policies, the NRPA is proposed to have 1,000 staff across the nation “allowing them to investigate rental breaches as well as offering advocacy, advice and education to renters all around the country”. The Greens say investigators with the proposed body would be able to issue fines of up to $18,780 to real estate agencies found to have breached the rules, as well as on-the-spot fines of up to $3,756. The fines would increase for “serial offenders”. The agency would take the place of state and territory administrative tribunals, which are often overwhelmed with rental disputes, particularly over bond payments.
And that’s it for this week. And next week, I’ll be talking to Mustafa Nuristani, the executive director of the Transcendental Meditation Organisation in Australia. He has taught TM to thousands of people including business leaders, judges and doctors in Australia and abroad.
And I will talk to economist Saul Eslake about the state of the economy.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week
