upa linkedin 14.5.2015

ECONOMIC & PROPERTY OUTLOOK

& AREAS OF CONCERN… 2015 & BEYOND

20 March 2015

01 | OUR SERVICES

Urban Property Australia

Our SErvicESurban Property australia is a full service and independent property advisory business, servicing major financial and corporate institutions throughout australia.

ServiceS provided

§ valuation & advisory Services

§ acquisition & Disposition

Services

§ Development advisory Services

§ research

§ consulting assignments

ASSet coverAge

§ Development

§ retail

§ commercial

§ industrial

§ residential

trAcK record

§ Over 1,000 valuations per annum

§ advising an aSX listed company

on redevelopment strategies

§ aquired over $25m of property

in last 12 months

§ Several corporate real estate

assignments

02 | AGENDA

agENDa

globAl economy

AuStrAliAn economy

AuStrAliAn property overview

victoriAn property overview

AreAS of concern

03 | ECONOMIC OUTLOOK

Economic Outlook

glOBal iNDicatOrS

globAl themeS where Are we now 2015 – 2018

globAl growth Around 3%: With divergent economic conditions between the big advanced economies

lower oil prices and improving uS economy likely to accelerate global growth to around 3.5%

chinA the chinese economy hit its lowest annual growth rate since 1990 last year – 7.4%

the iMF now expects chinese growth of 6.8% this year, before falling to 6.3% in 2016

oil priceS Oil prices are already down more than 50% as supply increased and demand reduced

lower oil prices are likely to boost activity in india with a global net gain

indiA New government reforms boosted growth to 7.7% in 2014 (but down from 8.25 % in 2013)

india forecast to overtake china as world’s fastest growing major economy in 2015

04 | ECONOMIC OUTLOOK

Economic Outlook

lOcal

locAl themeS where Are we now 2015 – 2018

gdp Economy grew by 2.8% in 2014, stronger than expected with rebalancing now occurring

Economy to steadily gain momentum as slowing mining investment weighs on growth

intereSt rAteS 2.25%: lowered in February to activate the slow economy and keep the dollar low

another rate cut in coming months, before rises are in h2 2016 to be 3% by late 2017

currency Falling global commodity prices led fall in the auD over 2014, trading around $0.76

continue lower in 2015, ending around $0.70 by end of 2016

employment growth unemployment up to 6.4%, highest level since June 2002

unemployment rate to peak at 6.7% in late 2015 before falling to around 6.0% in late 2017

05 | HOUSE PRICES VS INTEREST RATES

House Prices vs Interest Rates

2003-2014 § housing sales and prices

continue to reflect a two-speed

market with Sydney home prices

posting solid gains – 14.6% yoy,

while prices in other capital

cities reflected more tentative

sales markets (all below 6% with

exception of Melbourne 9.0%)

§ looking ahead, the multi-speed

housing market will present a

challenge to policy-makers who

will be faced with prospect of

containing speculative price

gains while supporting housing

construction in an economy

low on confidence

140

SEP-03 SEP-04 SEP-05 SEP-06 SEP-07 SEP-08 SEP-09 SEP-10 SEP-11 SEP-12 SEP-13 SEP-14

HOUSE PRICE INDEX RBA OFFICIAL CASH RATE

130

120

110

100

90

80

70

60

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

AUST HOUSE PRICE INDEX (LHS) RBA CASH RATE (RHS)

Source: rBa / aBS / urban Property australia

06 | FOREIGN INVESTMENT

Foreign Investment

2010-2014 § Foreign buyers in new property

markets less active in all

states, except vic where they

accounted for 32.5% of all sales

– a new high

§ around 53% of foreign

purchases were for apartments,

31% for houses and 16% for

re-development. By price point,

40% of purchases were between

$500k to <$1mill. and 29% less

than $500k. around 5% were

for premium property (+$5mill.)

18

15

12

9

6

3

0JUN-10 SEP-10 DEC-10 MAR-11 JUN-11 SEP-11 DEC-11 MAR-12 JUN-12 SEP-12 DEC-12 MAR-13 JUN-13 SEP-13 DEC-13 MAR-14 JUN-14 SEP-14 DEC-14

OVERSEAS BUYERS SHARE (%)

NEW PROPERTIES ESTABLISHED PROPERTIES

Source: NaB / urban Property australia

RESIDENTIAL MARKET

08 | RESIDENTIAL MARKET

Australian Dwelling Supply

2004-2014 § australian apartment

commencements have now reached a record high level, now 42% higher than 12 months prior and 74% above the 10-year average

§ Over the last 10 years, the level of new houses is 47% higher than new apartments. however, latest data reveals that the level of new houses is only 20% higher than new apartments

§ the recent trend since 2011, reflects that residents are increasingly willing to live in apartments but also to some degree unaffordability of broader residential market

35,000

30,000

25,000

20,000

15,000

10,000

5,000

SEP-04 SEP-05 SEP-06 SEP-07 SEP-08 SEP-09 SEP-10 SEP-11 SEP-12 SEP-13 SEP-14

COMMENCEMENTS

HOUSES APARTMENTS / UNITS

Source: aBS / urban Property australia


Australian Housing Finance

2004-2014 § Owner-occupier housing finance

has been weak through 2014, with investor lending booming. investor lending is now 65% higher than 2012 levels

§ looking forward, momentum in housing finance is likely to be supported in the coming months by the positive impact from the February rBa interest rate cut (and potentially more forthcoming)

§ the combined impact of strong underlying supply-demand fundamentals and positive home buyer sentiment are likely to provide moderate housing finance growth in 2015


$175

$150

$125

$100

$75

$50

$25

$0

DEC-04 DEC-05 DEC-06 DEC-07 DEC-08 DEC-09 DEC-10 DEC-11 DEC-12 DEC-13 DEC-14

COMMENCEMENTS$BILLIONS

FIRST HOME BUYERS INVESTORS UPGRADERS


Victorian Housing Shortage?

POPulatiON vS. hOuSiNg grOWth § Despite the record levels

of apartment development

(particularly in the inner

Melbourne region), dwelling

construction levels have not

kept pace with record levels

of population

§ victoria recorded the fastest

population growth of all

australian states with 80%

of the population growth

concentrated in Melbourne

§ the supply/demand disparity

has also supported recent price

growth (and will continue

to do so in the short term for

the broader market)Source: aBS / urban Property australia

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

POPULATION GROWTH DWELLING COMPLETIONS

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

VIC ANNUAL POPULATION GROWTH (LHS) VIC ANNUAL DWELLING COMPLETIONS (RHS)

RETAIL MARKET

12 | RETAIL MARKET

Australian Retail Trade

2004-2014 § retail sales confirm retail

lost momentum towards the end of the year. retail sales results consistent with patchy anecdotes from retailers and subdued consumer confidence in the month

§ Suggests that consumers were saving, rather than spending, despite lower petrol prices

§ the short-term outlook for retail remains uncertain. Weak household income growth will remain a constraint on overall household spending, while a lower auD and the cash flow benefits from rate cuts should provide some offset

10.0

8.0

6.0

4.0

2.0

0.0

DEC-04 DEC-05 DEC-06 DEC-07 DEC-08 DEC-09 DEC-10 DEC-11 DEC-12 DEC-13 DEC-14

YoY% CHANGE

10 YEAR AVERAGE 4.3%


13 | RETAIL MARKET

Victorian Retail Trade

BY iNDuStrY SEctOr § the strength of spending in

supermarkets (and convenience)

underlies why retail property

with food attached is such

a sought after investment

§ Discretionary spending has been

affected in recent years; clothing

and department stores in

particular – but should improve

as the economy strengthens

§ household goods retailing

remains mixed as it has been

over recent years, reflective

in part due to victoria’s

population and housing growth

15.0

12.0

9.0

6.0

3.0

0.0

-3.0

-6.0

FOOD HOUSEHOLDGOODS

CLOTHING /FOOTWEAR

DEPT.STORES

COSMETICS CAFES /RESTAURANTS

TAKEAWAYFOOD

TOTAL

YoY% CHANGE

2012 2013 2014


14 | RETAIL MARKET

Success of the Melbourne CBD Retailers

iNcOMiNg iNtErNatiONal tENaNtS § international retailers have

been lured to australia by the

country’s comparative economic

stability and consumers’ high

disposable incomes

§ Shopping centre landlords

expect that having global brands

in their centres will boost sales

and leasing demand through

the entire centre

§ large retailers and shopping

centre landlords have turned

their focus to the rising markets

of Brazil, china and india due

to the stalled growth in mature

economies

Source: urban Property australia

15 | RETAIL MARKET

Victorian Retail Market

SuMMarY

rentS

cbd mArKet

retAil Strip mArKet

bulKy goodS mArKet

inveStment demAnd

§ Expectations for rent growth to improve across most parts of the retail sector as the economic recovery becomes entrenched in late 2015.

§ the continued entrance of new foreign retailers has increased demand for prime cBD space, with expectations this trend will spill over to quality regional centres going forward.

§ impacted by the high vacancies and subdued retail trade conditions, rents have eased along many of the prominent strips. looking ahead, residential development should boost local population levels, local retail trade and attract new tenants.

§ retail trading conditions were boosted by buoyant activity in the housing sector, which has driven sales of household goods, particularly in NSW and vic, growing above 8% in 2014. tenant demand should support this asset class in 2015.

§ While transactions in victoria surpassed $1.3 billion for a second consecutive year, there remains a mismatch between investment demand and supply. competition for quality retail assets is likely to see investors move up the risk curve in 2015.

INDUSTRIAL MARKET

17 | INDUSTRIAL MARKET

Aust. Port Container Movements by port

§ Melbourne’s seaport handles

almost 40% of australia’s

container trade

§ Melbourne has 36 million square

metres of industrial building

area; approximately double

the size of Sydney’s industrial

market and 3 times larger

than Brisbane’s

§ Melbourne’s lower costs, with

cheaper land values and rental

levels, continues to attract

interstate and international

tenants

3,000,000

2,500,000

2,000,000

1.500,000

1,000,000

500,000

0

TEU TOTAL MOVEMENTS

MELBOURNE (

VIC)

PORT B

OTANY (

NSW)

BRISBAN

E (QLD)

FREMAN

TLE (W

A)

BURNIE (TAS

)

ESPER

ANCE (

WA)

TOWNSVILLE

(QLD)

DEVONPO

RT (TAS)

PORT A

DELAIDE (

SA)

NEWCAST

LE (NSW

)

CAIRNS (

QLD)

Source: Ports australia / urban Property australia


Import Container Destinations

§ the container destinations

match the industrial hubs

of Melbourne with hot spots

around Dandenong South

in the South East and laverton

North in the West

§ New supply is forecast to total

600,000sqm this year. up on

2014 levels but still 10% below

the 10-year average

§ the West is likely to deliver the

bulk of the new industrial supply,

accounting for 47% of the

forecast supply in 2015

Source: Port of Melbourne / urban Property australia


Melbourne Industrial Land Consumption

BY SuB-rEgiON § Prior to the gFc industrial land

consumption across Melbourne

averaged 280 hectares a year

§ Following the gFc consumption

dropped significantly to average

around 190 hectares per year

§ consumption started to pick up

again in 2011-12 however it is yet

to return to pre-gFc levels

§ the Western region has led

the consumption of land across

Melbourne boosted by the

land made accessible by the

construction of the Western

ring road

400

350

300

250

200

150

100

50

0

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

INDUSTRIAL LAND (Ha)

NORTH SOUTH WEST OTHER*

Source: DtPli / urban Property australia *Other: incudes East, Pakenham and hastings regions


Retailers… Driving Industrial Take Up

ONliNE rEtail traDE 2013-2015 § increasingly industrial

construction activity is shaped by warehousing and logistics users driven by tenant demand from online retailers, food refrigeration facilities, transport and freight services

§ the strong $au made imports attractive fuelling demand for distribution centres and warehouses

§ in australia, the share of online sales has risen to currently around 5%. as online retailing in australia matures and becomes increasingly popular and more convenient, the proportion of total retail sales is forecast to reach 10% within the next 5 years


900

800

700

600

500

400

JAN-13 JAN-14 JAN-15

$ MILLIONS

§ Prime industrial rents have largely remained steady over the year; however, increasing vacancy has resulted in a rise in the incentive levels. Secondary rental levels continue to have downward risk as tenants relocate to better accommodation.

§ looking ahead, as the global (and local) economy continues to recover, the retail trade and transport & storage sectors are expected to drive the majority of industrial tenant demand and supply in 2015.

§ as a result of rezoning around Fishermans Bend, new development in the region is increasingly focussed on residential development, which is now offering higher and better use.

§ While the investor demand has been particularly strong for prime grade facilities, high levels of capital availability coupled with limited core asset offerings has led some buyers to shift their focus to secondary assets.

§ Strong investor appetite has compressed yields further; with prime yields tightening by 25 basis points over 2014 to now range between 7.70% and 8.25%, although assets with lease expiries of in excess of 10 years are likely to transact below 7.00%.


Victorian Industrial Market

SuMMarY

rentS

tenAnt demAnd

city fringe

inveStment demAnd

yieldS

AREAS OF CONCERN

23 | AREAS OF CONCERN

Inner Melbourne Apartment Supply

2002-2018

Source: city of Melbourne / urban Property australia

10,000

8,000

6,000

4,000

2,000

02002 2004 2006 2008 2010 2012 2014 2016 2018

ANNUAL APARTMENT COMPLETIONS

COMPLETED UNDER CONSTRUCTION MOOTED AVERAGE

FORECAST


Areas of Concern

MacrO EcONOMic FactOrS

intereSt rAteS

§ australian household debt at

206% of disposable incomes

§ Marginal interest rate rises

would significantly impact

demand and prices

potentiAl lvr chAngeS

§ aPra has concerns on growth

of investment loans with lvrs

greater than 80%

§ Over past 12 months investment

loans with lvrs between 80%

and 90% grew by 17.7%

§ aPra proposing lower lvrs

on 2nd property loans

foreign inveStment chAngeS

§ chinese purchasers supporting

price growth

§ Potential fees on buyers may

also discourage foreign backed

development

§ 40% (and trending higher) of

inner Melbourne apartments

under construction being built

by offshore groups


Areas of Concern

rESiDENtial MarkEt

inner melbourne ApArtment mArKet

§ record supply, limited capital

growth for medium term

§ Off the plan sales to settlement

valuation 10-15% delta

§ Quality of construction and

development offer significant

risks to values

§ Owners corporations

lAnd SubdiviSion mArKet

§ 40% of all projects offer

a rebate to purchasers

§ 5 of Melbourne’s 6 growth

areas have 25 years or

more of land supply


Areas of Concern

cOMMErcial MarkEt

retAil Strip mArKet

§ vacancy at record highs

§ rents falling by up to 20%

§ transactions showing yields

between 3% and 4%

§ Difficult to see capital value

growth in short term

induStriAl lAnd Supply

§ Melbourne industrial land 35%

cheaper than other markets

§ vast tracts of industrial land

continues to limit land and

rent growth

§ Melbourne industrial rents

have only grown by 15%

over the 10 years

mAnufActuring Sector

§ contractions in manufacturing

have impacted leasing activity

§ Poor tenant demand for vacant

secondary assets

§ limited alternative uses for

properties that cannot be

redeveloped for residential uses

27 | DISCLAIMER

thaNk YOu

disclaimer: this document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from urban Property australia. this document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. urban Property australia accepts no liability for damages suffered by any party resulting from their use of this document.

contAct:

Sam tamblyn | Managing Director

e [email protected]

t 1300 870 064

QUESTIONS

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