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    Anz august market research 2010 Anz august market research 2010 Document Transcript

    • Australian Property Outlook / August 2010 / 1 of 12 ECONOMICS & MARKETS RESEARCH AUSTRALIAN PROPERTY OUTLOOK FUNDAMENTALS SOLID… BUT CAUTION LINGERS AUGUST 2010 ECONOMIC OVERVIEW The aftershocks from the global financial crisis (GFC) continue to reverberate INSIDE through financial markets with sovereign debt crises in Europe weighing heavily on investor sentiment. Despite heightened market fears and weak Economic Overview ... 2 Residential Property .. 3 equity markets, the economic outlook for Australia remains robust. Office Property ......... 8 RESIDENTIAL PROPERTY Retail Overview ........ 9 Tourist – With interest rates expected to rise, we expect house price growth will Accommodation ........ 10 (temporarily) slow to low single digits in 2011. Nonetheless, in the absence of Industrial Property 11 a major economic downturn, a critical shortage of housing will see house prices and rents grind ever higher and housing affordability and availability CONTRIBUTORS will become major social and political issues in the decade ahead. Paul Braddick Head of Property Research COMMERCIAL PROPERTY +61 3 9273 5987 Office fundamentals are set to improve from a relatively favourable starting Paul.Braddick@anz.com position. With the market re-calibrated to a risk averse post-GFC Ange Montalti environment, we expect healthy returns as confidence restores. Senior Economist, Property Research For the retail sector, despite fundamentals suggesting moderate under- +61 3 9273 6288 valuation, investor conservatism and interest rate headwinds will see a Ange.Montalti@anz.com lingering ‘fear discount’ on asset prices for a little while yet. David Cannington Tourist accommodation has shown indications of recovery, particularly in Economist, inbound business numbers, following a period of decline in both domestic and Property Research +61 3 9273 4274 international tourism driven by a strong A$ and the impact of the GFC. David.Cannington@anz.com Increased international trade activity and softer supply have seen industrial Dylan Eades yields tighten and added upward pressure on rents. The outlook for subdued Research Analyst, additions to supply in the near term and continuing growth in demand for Property Research +61 3 9273 2708 industrial space should see these trends continue. Dylan.Eades@anz.com HOW LOW NEW-HOME ‘FAIR’ VALUE FOR CONSTRUCTION SPENDING? COMMERCIAL PROPERTY? 6 % of GDP 10 % Long-term average ‘property risk Premium’* 9 Current ‘property risk 8 Premium’ 5 7 Below ‘fair value’ by: 8% 6 28% 4 5 5% 4 3 3 2 About to breach a record low 1 with further interest rises to combat 2 0 59 63 67 71 75 79 83 87 91 95 99 03 07 11 Office Retail Industrial *PRP = sector yield less real risk-free benchmark rate. Long-term average is calculated over period 1985 to 2010 Sources: ABS, IPD, ANZ
    • Australian Property Outlook / August 2010 / 2 of 12 ECONOMIC OVERVIEW AUSTRALIA’S PROSPECTS REMAIN BRIGHT GLOBAL ECONOMY STILL FRAGILE The aftershocks from the global financial crisis (GFC) June. Until recently, we saw the greatest risk to continue to reverberate through financial markets growth in ongoing inflationary pressures that may with sovereign debt crises in Europe weighing have forced the RBA to ‘over’-tighten, resulting in a heavily on investor sentiment. A concurrent debt servicing crisis for highly geared households. softening of momentum in the US and signs of However, evidence of a moderation in underlying overheating in China have severely reduced the growth momentum (retail sales, sentiment, building appetite for risk. Sovereign debt concerns and the approvals, housing finance/prices) and underlying necessary fiscal adjustments will restrict growth in inflation itself in the June quarter indicate policy much of the developed world and we expect on- moves to date are successfully managing growth going market volatility and elevated risk premia for onto a more sustainable path. This provides the RBA years to come. with some breathing room to assess the balance Nonetheless, we do not expect a ‘double dip’ in between more cautious household and business global growth. US policy stimuli will be removed sentiment and booming mining investment and gradually allowing a subdued, yet ongoing recovery profits. Nonetheless, growth is likely to return to and Chinese authorities are expected to successfully trend (or slightly above) in 2010-11 and tightening reduce growth to more sustainable levels between 9 labour supply suggests inflationary pressures will and 10% per annum. There is every indication the eventually force the RBA to lift rates further into China slowdown is being managed very well. While restrictive territory. This could see a return to the the greatest risks lie in the European economy and ‘two speed economy’ where the resource states banking system, we believe authorities will do what perform strongly and the non-resource states bear is necessary to avoid a GFC Mark 2. the brunt of tighter policy settings. AUSTRALIAN OUTLOOK POSITIVE DWELLING INVESTMENT Despite heightened market fears and weak equity Most forecasters expect an upswing in dwelling markets, the Australian economic outlook remains investment to be a key driver of growth in the years healthy. Our performance during the GFC was ahead. However, sharp declines in new dwelling unparalleled and activity has since rebounded approvals in recent months, if continued, imply strongly. Part of the strength last year was directly home building could detract from growth. Interest attributable to policy stimulus that is gradually being rates have always been a key trigger for shifts in removed. However, the current commodity boom the dwelling cycle. The recent fall in approvals and will maintain growth momentum in the years ahead our expectation that interest rates will continue to via stronger resource investment, production, rise indicate that dwelling investment could weaken exports and profits. despite a clear shortage of housing that is driving rents and house prices ever higher. By reducing COMMODITY BOOM WILL BOOST GROWTH economic growth, weakening home building activity Terms of trade* will mitigate near term inflationary pressures. 130 index However, the ongoing imbalance in housing demand 120 and supply could create far more intractable 110 housing-related cost pressures in later years. NON-RESIDENTIAL BUILDING 100 Non-residential building activity has been supported 90 by the Government’s $42 billion economic stimulus 80 plan. However, savage declines in non-residential building approvals suggest that activity will weaken 70 *export price index/import price index sharply as the Government programs conclude. 60 Combined with subdued market sentiment and tight 01 02 03 04 05 06 07 08 09 10 credit access, additions to the stock of commercial Sources: ABS, ANZ property will be limited (a stark contrast to the early Moreover, the labour market remains remarkably 1990s) and will help to support market valuations. strong with employment up 3.3% over the year to
    • Australian Property Outlook / August 2010 / 3 of 12 RESIDENTIAL PROPERTY SHORTAGE SET TO WORSEN CUSP OF A GOLDEN ERA? NOT LIKELY…. will the industry languish but the social and Australia’s building sector was used to having wild economic repercussions of not providing adequate swings in dwelling activity over the 1980s and accommodation will be significant. Australia is likely 1990s but thanks to relative stability in interest to face a full blown housing crisis. rates over much of the past decade, the traditional …ACTIVITY IS GOING TO WEAKEN FURTHER swings have pretty much disappeared.1 If not for Most forward indicators of housing construction intervention by governments, the observed volatility activity suggest building is likely to weaken over of housing construction and associated risks that 2010/11. Private sector approvals have weakened this presents to operators would have been much after a very short-lived upturn. This is symptomatic reduced. We don’t have the counter-factual, so it is of both the cyclical and structural elements. That we difficult to know what the wash-up would have been have a building downturn re-commencing when without government assistance but the net lasting dwelling expenditure as a percentage of GDP is benefits are questionable. already breaching historic lows is troublesome. Given expectations for continued relative stability in Dwelling completions are now expected to peak at interest rates, the cyclical risks to housing will just below 160,000 in 2011 before retreating to remain subdued and secondary to the more 150,000 in 2012. Unfortunately, this remains well imposing structural cracks that have been until now below our underlying housing demand estimate of dealt a mere ‘patch–up’ job in the form of expedient 200,000 p.a., suggesting what is already a critical or knee jerk solutions. These ‘solutions’ at best housing shortage will deteriorate significantly merely band-aid or mask the condition and quite further in the years ahead. possibly exacerbate the affordability challenge. They APPROVALS HAVE TOPPED OUT also promote more volatility by bunching demand Residential construction spending Building approvals and exposing the industry to post-policy grief. What $bn, 2007/08 prices 12 Number, trend, ‘000 11 they don’t do and what policy should be doing is New dwellings dealing with the fundamental imbalance between 10 10 Total houses supply and demand. We need more homes. The gap 9 between housing demand and supply has widened 8 8 dramatically in recent years and will continue to Total “other 6 widen into the foreseeable future. 7 residential” building The political, social and economic imperative to deal 6 4 more seriously with the structural impediments is 5 Renovations Private “other residential” accumulating. The good news is that there does and extensions 2 building 4 appear to be considerable mobilisation of resources at many levels to deal with the problem. But it is 3 0 91 93 95 97 99 01 02 05 07 09 00 01 02 03 04 05 06 07 08 09 10 only at the early stages. Planning and development systems, growth strategies (including regional and Source: ABS urban) and a preparedness to invest substantially in Combined with rising interest rates (yes, the cycle is infrastructure to support growth are critical to not dead) this suggests conditions for renters and success. Importantly, to be successful, policies also first home buyers will become increasingly difficult. need to support community aspirations and they For builders, the combination of further interest rate need to be co-ordinated across often conflicting rises, ‘headline’ dwelling price falls in June and little stakeholders within the community. headway on the structural impediments spells If we get it right, the Australian building industry is caution. Specifically, these conditions heighten potentially on the cusp of one of the strongest margin risk and reduce expected profitability. While secular increases in activity since the 1960s. If we there is some buffer from the run-up in prices fail to act both swiftly and appropriately, not only through 2009, this will not last forever. For new projects, a flatter price trajectory built into budgets 1 Note the apparent cycle in the early part of the most recent suggests a greater percentage of projects will fail the decade was attributable in large part to the timing distortion viability test. generated by the introduction of GST. The 2009 “cycle” had everything to do with assistance to first-home buyers.
    • Australian Property Outlook / August 2010 / 4 of 12 RESIDENTIAL PROPERTY While finance to the medium-density sector appears IS THERE A HOUSE PRICE BUBBLE? to be flowing more freely than it was 12 months ago, International comparisons of ‘house price to income’ the demand for such funds will most probably remain ratios have been widely used to suggest that subdued in the atmospherics that appear to be Australian house prices are significantly overvalued. establishing. These analyses are dangerously simplistic and HOUSE PRICES DECELERATE ignore a key component of the housing affordability equation – interest rates. Australian house prices rebounded strongly last year buoyed by low interest rates, tightening supply, The proponents of the housing ‘bubble’ story argue relaxed foreign investment rules and the elevated ‘house price to income’ ratios must revert government’s first home-owner boost. The national to their long term historical average in order to dwelling prices rose by 10.5% over the year to June return housing ‘affordability’ to sustainable levels. 2010, with Melbourne prices up a relatively solid However, as a measure of housing affordability, 16% over the same period2. However, momentum ‘house price to income’ ratios are flawed as they has softened in recent months following the removal completely ignore interest rates. Ultimately, house of the first home owner boost, a re-tightening of purchase affordability relates to debt servicing costs foreign investment rules and rising mortgage rates. of which interest rates are a key driver. This not Annualised growth in capital city house prices in the only means that ‘house price to income’ ratios are June quarter slowed sharply with further momentum fundamentally flawed as a measure of housing loss evident through the quarter3. Importantly, affordability but also makes intertemporal and cross some of the near-term price weakness being border comparisons of these ratios next to recorded is likely to be reflecting the unprecedented meaningless (given varying interest rates, tax level of pent-up trading supply (property listings) regimes, population concentrations, quality of flying in the face of the interest rate-induced housing stock, market balances, lending standards reductions in buyer demand. Lower clearance rates etc). The predominant reason for the jump in the support this market mismatch and would most ‘house price to income’ ratio is the structural (read probably have generated more significant price falls permanent) reduction in interest rates experienced had the supply been ‘forced”. In the absence of a Mortgage interest rates in Australia in the 1980s supply-side stress, the current weakness is likely to averaged around 14%, however, since 2000 the prove only temporary. average has been close to 7%. This fall in mortgage interest rates has, quite reasonably, been While we do not expect continued trend declines, we capitalised into house prices and measured housing do expect annual house price growth to slow to low affordability remains broadly equivalent to average single digits in 2011 and remain sluggish, 1980s levels. particularly as interest rates rise further over coming quarters. Nonetheless, in the absence of a FALLING INTEREST RATES ‘JUSTIFY’ PRICE GAINS major economic downturn, a critical shortage of Median house Household income Mortgage rate House price to price income housing will see house prices and rents grind ever $'000 600 100 $'000 14 % 6 ratio higher and housing affordability and availability will Ratio that equates to 1980s become major social and political issues in the 500 12 5 average 80 servicing decade ahead, even with a projected slowing in burden population growth. As noted above, there is no 400 10 4 panacea for this condition but temporary solutions 60 8 will in all likelihood play again into the hands of 300 3 volatility and do little to solve the underlying supply 40 6 problem. 200 2 4 20 100 1 2 0 0 0 0 85 09 85 09 85 09 85 09 Sources: ABS, RBA, ANZ 2 RP-Data Rismark 3 RP-Data Rismark report “all dwelling” all capital cities prices fell 0.8% in the month of June.
    • Australian Property Outlook / August 2010 / 5 of 12 RESIDENTIAL PROPERTY NEW SOUTH WALES the beginning of 2011, foreshadowing a period of stronger rental growth. The Sydney residential property market has recorded strong gains over the past year with VICTORIA dwelling prices growing 10.4% in the year to June, Melbourne’s housing market has continued to around the national average.4 There are signs outperform with residential property prices however that price growth is easing. Private housing increasing 16% in the year to June, although house finance approvals grew by 41% over the course of price growth has begun to cool recently. Positive 2008–09, but have declined by 12% since their peak economic conditions continue to prevail, with trend in July 2009. Furthermore, auction clearance rates unemployment falling from 6.0% to 5.4% over the which were at 75% during February have fallen past year. Consumer confidence and consumption sharply to below 60% in June as the amount of have remained strong, with the Victorian economy stock coming on to the market has increased and expected to grow by 2.5% and 3.0% over 2009-10 deteriorating housing affordability has taken some and 2010-11 respectively. This should support of the heat out of the market. This has been a housing market activity in the years ahead. moderating influence on dwelling price growth which only gained a modest 0.5% over the June quarter. The number of first home buyers participating in the housing market has fallen sharply, as rising prices, DWELLING PRICES HAVE MODERATED interest rates and the removal of federal Capital city dwelling price growth over the year to June 2010 government stimulus measures reduce housing 20 % 20 % * Hobart data is affordability. Investors have picked up the slack only over the year until May however, with the value of investor finance 2010 approvals increasing 42% over the year to June 15 15 2010. INVESTORS PICK UP THE SLACK All capitals average All capitals average 10 10 Victorian finance approvals: Investors vs owner $bn 4.0 occupiers 3.5 Owner-Occupiers 5 5 3.0 2.5 0 0 Sydney Melbourne Brisbane Perth Adelaide Darwin Canberra Hobart* 2.0 Source: RP Data/Rismark 1.5 After rising sharply following the introduction of 1.0 Investors government stimulus measures, residential building approvals have grown by a modest 5.2% in the six 0.5 months to June 2010, but remain 53% below their 0.0 01 02 03 04 05 06 07 08 09 10 2004 levels. By our calculation, NSW currently has a shortage of 86,000 dwellings (forecasted to rise to Source: ABS 126,000 by the end of June 2011). This is not After running at close to 90% earlier in the year, surprising considering the chronic under-building auction clearance rates have declined to below 60% that has been occurring in NSW, reflecting a in June as demand softens and unusually high levels combination of over-regulation imposing additional of stock have come on to the market. Indeed, development costs and soft economic activity. The Melbourne’s dwelling prices have cooled with softer influx of first home buyers into the market market activity, recording price growth of just 0.2% temporarily relaxed pressure on the rental market over the June quarter. with vacancies increasing marginally. Despite this, rental vacancies currently sit at 1.25% - the lowest The tight underlying fundamentals of Melbourne’s in Australia – and are forecast to fall to under 1% by housing market however, will continue over the medium to long term, with dwelling completions set to fall from 2012, exacerbating the chronic shortage 4 All property price data in this report refers to RP Data- of housing in Victoria. Rismark hedonic price data series.
    • Australian Property Outlook / August 2010 / 6 of 12 RESIDENTIAL PROPERTY QUEENSLAND SOUTH AUSTRALIA The Queensland economy was hit hard by the Robust economic conditions, along with low interest economic downturn with economic growth at a rates, affordable housing, population growth and meagre 1.4% over 2008-09 - its lowest level for 18 government stimulus combined to push house prices years. However, in recent times, there have been up by 9.1% over the year to June 2010. While this some causes for optimism. Despite a sharp decline is just shy of the all-capital-city average over the in business investment over 2009-10, the same period, it was better than expectations for a Queensland economy has exhibited moderate market that has generally underperformed in the economic growth, with exports and government past. This recent performance together with rising stimulus the main catalysts. Economic growth has interest rates and withdrawal of government rebounded to an estimated 3.0% for 2009-10, stimulus has impacted on affordability. Although dragging down the trend unemployment rate in the investors have provided some support this has been process from 6.0% last October to its current rate of outweighed by first home buyer finance approvals 5.4%. Strengthening demand for commodities from declining by 60% since May 2009. Price growth has the Asian region should drive export growth, with slowed as a consequence, recording just a 1.1% the Queensland economy expected to grow at 3.5% increase through the June quarter. and 5.0% over 2010-11 and 2011-12 respectively. After falling during the financial crises, South QUEENSLAND HOUSING FUNDAMENTALS TIGHT Australian building approvals and starts have increased by 9% and 8% respectively over the past Housing market balance: Queensland 150 ‘000 year, contributing to a healthy level building activity. The result is that in contrast to other states, South Australia is currently building enough 100 Shortage housing to suggest supply will actually exceed underlying demand by the end of 2010 ensuring Underlying demand that South Australia will have a housing surplus. In 50 conjunction with below average economic growth, Completions this should act to moderate both house price and 0 rental growth over the medium term. Surplus WESTERN AUSTRALIA -50 Western Australia’s economy has rebounded sharply 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 over the course of 2009/10 with employment growing by 3.8% and economic growth estimated to Sources: ABS, ANZ be 3.0% for 2009-10 up from just 0.7% in 2008-09. Private housing finance approvals have declined by Despite positive economic conditions, house prices 24% since August last year. Rising interest rates have not been supported to the same degree as and deteriorating affordability have seen first home other states with Western Australia experiencing buyers leave the market in droves, with their share house price growth of only 5.1% over the year to of the total number of home loans halving since June 2010. their peak in May 2009. Unlike Victoria however, It appears that the WA residential property market investors have remained on the sidelines, causing is catching its breath after the recent commodities an overall weakening in near-term market demand led boom in which residential property prices conditions. This has restrained price growth increased 76% between December 2004 and mid- compared to other capitals with residential property 2007. After recovering lost ground during 2009, prices gaining a modest 4.5% over the year to June recent interest rates rises combined with the (compared to all capitals’ growth of 10.5%). expiration of government stimulus measures have conspired to reduce affordability and put the kybosh Although private residential building approvals have on price growth over the first half of 2010. rebounded from their lows in 2008, they remain 34% below 2007 boom levels. Completions fell by Over the medium term, the fundamentals of Perth’s 17.5% over the course of 2009–10 pushing the property market will remain tight. Economic growth underlying Queensland housing shortage to just shy will be supported by an upsurge in business of 40,000 dwellings. investment with key major resource projects
    • Australian Property Outlook / August 2010 / 7 of 12 RESIDENTIAL PROPERTY ramping up over the coming years, whilst strong NORTHERN TERRITORY growth in the Asian region will boost demand for The Northern Territory has continued to surge Australian commodities supporting income growth ahead. Buoyed by favourable economic conditions, and domestic economic activity. Combined with housing finance approvals received a sizeable boost strong population growth, these conditions should after a raft of stimulus measures were introduced provide support to growth in WA house prices and by state and federal governments to be up 73%. housing market activity in the years ahead. Coupled with strong migration numbers, the BUSINESS INVESTMENT TO SUPPORT WA ECONOMY Northern Territory has seen residential property Engineering construction: work to Economic growth prices grow by 14.3% over the past year and 5.7% $bn be completed to date in 2010, pointing to relatively greater 70 8 % resilience, although prices have slipped in the June 56 WA quarter. Rising interest rates and deteriorating 6 affordability have sucked some of the momentum Western out of housing demand, with finance approvals 42 Australia declining 29% since their peak in October last year. 4 Of more concern is the decline in private residential 28 Total National building approvals which will worsen the Territory’s (Excluding WA and Territories) 2 chronic housing undersupply and place further 14 Australia pressure on already tight housing fundamentals. Rental growth continues to outperform, growing at 0 0 just under 10%. A plethora of energy projects on 01 03 05 07 09 08-09 09-10 10-11 11-12 the horizon should continue to provide impetus to Sources: ABS, ANZ the state economy which will boost demand for housing and underpin activity in the medium term. TASMANIA Tasmania’s economy remains in the doldrums with AUSTRALIAN CAPITAL TERRITORY private investment levels declining and household Canberra’s economy remains robust with its trend consumption remaining stagnant. The closure of unemployment rate declining from 3.7% at the manufacturing plants and the delay of key beginning of the year to 3.3%. After growing by renewable energy projects have reduced 61% between August and December 2009, housing employment with the trend unemployment rate finance approvals have since declined by a rising to 6.3% from 5.0% this time last year. relatively modest 8% to date in 2010, reflecting the Economic growth is expected to shrink by 1.0% over strong demand conditions. House prices have 2009-10 and grow by just 0.5% in 2010-11 making grown by 10.6% over the past year although some Tasmania the worst performer of all the states. slight decline has been recorded in the June quarter A mild upswing in investor interest has been along with other capitals. outweighed by the decline of first-home buyers. The high average median house price of $495,000 is First-home buyer finance approvals have fallen more supported by the largely professional workforce than 62% from their peak in September 2009. making Canberra’s housing market the most Weakening demand conditions have left Hobart’s affordable in the country (when we measure property prices at a standstill with falls of 0.5% affordability in terms of price as a proportion of the recorded to date in 2010. Tasmania’s sputtering city’s average household income). Consequently, economy along with an underlying surplus of recent rate rises and the removal of government housing supply means Hobart’s housing market is stimulus measures have had a smaller impact than likely to record negligible price growth over the in other capitals. The outlook for Canberra’s housing coming year. The weak housing market supply is also improving, with private residential fundamentals will persist, suggesting an easing in building approvals doubling from their lows of 2008. rental vacancies and moderating rental market Housing starts and completions have also edged growth over the coming years. upwards. The state government has also been proactive, releasing over 4,000 sites for development activity over 2009-10 and in excess of 5,000 sites over 2010-11.
    • Australian Property Outlook / August 2010 / 8 of 12 OFFICE PROPERTY SPRINGBOARD MADE OF SENTIMENT FUNDAMENTALS WERE GOOD TO START WITH employment growth soaking up capacity. The The supply-side has been a spoiler for office sector vacancy rate is trending down, with further conditions in past decades. Given the long lags tightening expected over 2011 and 2012. Average between a “go” signal on development proposal, rentals of $291 per sqm for prime office space still construction and ultimate occupancy, the balance compares favourably to Sydney ($385 per sqm) and between demand and supply is very difficult to Brisbane ($359 per sqm) even though relativities manage. Add the extra dynamic created when have restored to some degree. Stubbornly high multiple players in the industry perceive the same yields (PRP of over 5%) combined with low rentals opportunity at the same time, it is little wonder the present a double-whammy, offering considerable office market booms and busts like few other upside to values. Hints of market recovery suggest markets. Fortunately, we don’t have such a problem this process is already underway. Brisbane’s CBD this time around thanks largely to the GFC which office market fundamentals are not strong but along with monetary policy tightening through 2008 there appears to be a topping-out in vacancies at an stymied the supply-side considerably. historic high of around 11%. Short-term economic sluggishness in QLD suggests a long ride home for The economic slowdown reduced net absorption but this market. Rentals and capital values are expected without the traditional additional supply, vacancies to remain subdued. Evidence of yield tightening rose only moderately. The market feared more reflects a shift in broader investment benchmarks. substantial oversupply but our projections always VACANCIES TOPPING OUT characterised the prospect as a ‘mini-cycle’ - the national office vacancy rate lifting from an extreme CBD office vacancy rates 30 % low of 3% to an acceptable 8% in 2010. Signs of 30 % stability in market balance are re-emerging. Without 25 Melbourne a typical supply-pipeline issue, ongoing employment 25 Perth growth will see the market tighten from what is 20 already a healthy fundamental position. 20 Adelaide Capital values fell by between 16% and 25% 15 15 between late-2007 and September 2009, a far cry Sydney from the 50%+ declines in the early 1990s. From a 10 10 broader investment perspective, office prices seem low. ANZ’s measure of the office “property risk 5 5 Hobart premium” (PRP) suggests prices are around 28% Brisbane below what would achieve the long-term average 0 0 90 94 98 02 06 10 PRP. If we discount the impact of the early 1990s, 90 94 98 02 06 10 under-valuation shrinks to a lower but still significant 15%5. That prices are below this Sources: Property Council of Australia, ANZ benchmark suggests reticence among investors “Too much supply too late” has seen Perth CBD about future returns or a re-rating of risk is office market turn from acute shortage to sizeable occurring. We believe the former is more likely. oversupply in just 18 months. Rentals and values Sydney’s CBD office market vacancy rate has have plummeted from “penalty rate” levels at the edged up in the first half of 2010, yet rentals have height of the stock shortage. Recovery in the WA steadied after an incentive-driven collapse over economy will limit ongoing fallout but some 2008-09. With the economy showing signs of life volatility is expected around a positive medium- and new office supply being contained, vacancy term outlook with considerable upside. Adelaide rates edged down. Capital values and rents have not core office market is experiencing a softening in shown any notable sign of improvement but are fundamentals. A healthy run-up in rentals even poised to recover over the next year. Melbourne’s through the GFC has engendered some lasting CBD office market has improved markedly in the confidence in this market, reflected in tightening last six months with better than expected yields and higher values (+8%oy). Sluggish economic prospects suggest gains will be difficult 5 The PRP is gap b/w the office yield and real risk-free rate. despite a tightening in vacancies in 2010-11. “Fair” value equates the current PRP to its long-term average.
    • Australian Property Outlook / August 2010 / 9 of 12 RETAIL PROPERTY BACK ON COURSE With interest rates on the rise and government moderate and struggle at times with some “fear stimulus a distant memory, the retailing sector is discount” being maintained in valuations. bracing itself for a tough trading environment over The implication is that without a near-seismic positive 2010/11. Household spending growth has softened shift in sentiment, we are unlikely to see other than sharply in recent quarters and its trajectory is moderate increases in rentals, tentative re- expected to remain muted over this period. Despite compression in yields and acceptable but not the growth slowdown, retail turnover is nonetheless excessive increases in valuations. This is holding at healthy levels, 8% above the pre- GFC symptomatic of the very difficult set of circumstances level. While resource states have been lagging, this from which the sector is emerging and the generally should prove temporary with a revival in commodity less volatile behaviour this market displays (vis a vis markets likely to re-ignite spending conditions in other commercial sectors). those states form 2011. RETAIL PROPERTY VALUES WELL SUPPORTED From a property perspective, resilience in retail Retail property risk premium Retail property market indicators turnover has offered a relatively useful and benign 4.6 % 400 index operating back-drop for retailers who would have 4.4 faced the generally prescribed CPI adjustments to 350 4.2 rentals. Rental affordability has remained 300 comfortable, averting a tenant-led cry for higher 4.0 Long-term average incentives. By the same token, we do not expect 3.8 250 Capital value significant constraints to higher rentals once market 3.6 conditions improve. Property 200 3.4 Risk premium To date and true to form, the retail property sector 150 3.2 Return of PRP to blue- has weathered the property downturn considerably dotted line implies a 5% lift Rentals in value better than other commercial sectors, with values 3.0 91 93 95 97 99 01 03 05 07 09 100 86 88 90 92 94 96 98 00 02 04 06 08 10 dropping 11% from peak to trough and yields Sources: IPD, ANZ ‘softening’ by 100bp since 2007. Given the unique circumstances confronting the listed property trust Medium-term, the signs are encouraging. Retail sector in recent years (heavily retail-weighted), this vacancy rates are generally still at low levels, sector was dealt a heavier than usual blow but suggesting the supply/demand fundamentals remain maintained relative resilience. intact despite an extended period of solid retail construction in recent years. However, with the Encouragingly, there are signs of stability in yields, approvals pipeline collapsing since 2009 and and rentals are hinting at more significant upward continued reticence among lenders, there is every shifts in some markets, although generally, such prospect of a tightening in conditions ahead of a adjustments have been moderate to date. delayed construction cycle over 2012. Market values Investment fundamentals for retail property are also will shift more sharply through 2011 and into 2012, moderately supportive of further growth in values validating the building upswing. and yield re-compression. More specifically, ANZ’s SUPPLY PIPELINE IS ABOUT TO COLLAPSE measure of the “retail property risk premium” (PRP) Retail and wholesale building suggests prices are presently around 5% below fair 7000 $mn 2007/08 value.6 But history tells us markets can remain inert 6500 Approvals when various limiters are active. Today, markets are 6000 dealing with lingering and renewed uncertainties 5500 surrounding the prospects for the major economies 5000 and to a lesser extent, the resilience of our own 4500 economy in the face of higher interest rates. 4000 Value of work done Recovery in values in the year ahead will be 3500 3000 6 The PRP measures the gap between the retail 2500 property yield and the real risk-free rate. “fair” value 2000 requires measured PRP to equal long-term average 00 01 02 03 04 05 06 07 08 09 10 PRP. Source: ABS
    • Australian Property Outlook / 16 August 2010 / 10 of 12 TOURIST ACCOMMODATION DEMAND PICKING UP WHILE SUPPLY LAGS Australia with the combined impact of the GFC and Tasmania reported the lowest (59%), followed by a strong A$, indicators of tourism activity pointed Queensland (61%). Room occupancy rates were to a turning point in demand for tourist weaker in March 2010 for the two largest tourism accommodation in early 2010. The lagged supply states (NSW & Qld), while Victoria’s rate remained response should result in tighter market conditions steady. and upward pressure on property values. TOURISM ACTIVITY SHOWS SIGNS OF RECOVERY In March 2010, the number of large accommodation establishments (15+ rooms) in Tourist accommodation (15+ rooms) % national room occupancy % change p.a. Australia was down just 0.1% from a year earlier. 70 rate (left) 15 Over the same period, the number of rooms these total nominal takings (right) establishments provided was up 0.7%. These 65 10 growth rates were at their slowest in 5 years, and well below their 10 year average annual growth 60 5 rates of 1.6% (establishments) and 2.0% (rooms). 55 0 The supply of smaller accommodation (5-14 rooms) was even weaker over the year to March 50 -5 2010. The number of establishments and rooms employment (right) provided by these smaller operators was down 45 -10 2.8% and 2.0% respectively from a year earlier. 02 03 04 05 06 07 08 09 10 Looking forward, limited new supply is expected Source: ABS over the next 12 months. Both commencements and approvals have been slowing since end-2008 The number of accommodation establishments with the value (real annual dollars) of approvals grew in all states and territories except NSW (-1%) and commencements in March 2010 sitting at less and Tasmania (-0.6%) in the year to June 2009. than 70% of the 10 year average level. The strongest growth was in the ACT (+3.7%) and SUPPLY PIPELINE IS STILL SOFTENING the NT (+6.6%). annual % change $bn real, annual data Recovery in key tourism indicators has also 3 2.5 reflected increases in international arrivals. Short- Approvals (right) Rooms (left) term visitor arrivals to Australia have increased 2 2.0 1.2% since December 2009. As of May 2010, 1 monthly visitor arrivals were around 471,000 per 1.5 0 month (12mma), compared to 465,000 per month 1.0 (12mma) in December 2009. Of this growth, -1 Starts (right) 0.5 conference and business travel showed the -2 Establishments (left) strongest recovery to be up 6.5%. Holiday arrivals -3 0.0 (making up about 45% of all short term arrivals) 05 06 07 08 09 were still relatively weak in 2010, to be down 0.3% Source: ABS from December 2009 to May 2010. For large accommodation operators the national Growth prospects for the remainder of 2010 look room occupancy rate was slightly weaker (62.9%) significantly better, with the global and domestic in the quarter to March 2010, while total nominal economies both continuing to recover from the takings were growing again in annual terms for GFC. The Tourism Forecasting Committee (TFC) the first time since the end of 2008, to be up expects short-term international visitor arrivals to 2.2% in the year to March 2010. Industry grow by 5.5% in 2010, after 2 years of decline. employment was still falling to be down 1.4% in Domestic visitor nights should grow by a modest the year to March 2010. 1.5%, after falling more than 5% pa in both 2008 Room occupancy rates (for large establishments) and 2009. reflected differences in tourism activity across states and territories. Room occupancy rates remained highest in the ACT (79%) while
    • Australian Property Outlook / August 2010 / 11 of 12 INDUSTRIAL PROPERTY INDUSTRIAL PROPERTY HAS TURNED THE CORNER While industrial property suffered through 2009, partly leading indicators of supply as non-residential through weak import volumes and tighter access to building approvals improve into second half 2010 credit, signs through the first half of 2010 show an and industrial building commencements pick up improved outlook. Reflecting renewed confidence and after falling sharply throughout 2009. With a relatively strong economic outlook, the run down of expectations of subdued supply and strong growth inventories has ended. In the year to March 2010 in demand over the second half of 2010 vacant inventories were a paltry $71 million lower after being stock should be taken up relatively quickly and will $4 billion lower in 2009. begin to put upward pressure on rents. INVENTORIES RUNDOWN HAS ENDED Since December 2009 both prime and secondary yields have tightened moderately to be 8-8½% Inventories 10,000 $mn, C VM, 4-qtr rolling sum and 9½-10% respectively. These moves have 8,000 seen the premium on prime asset yields pushed 6,000 out to around 150-200 bps into Q2-2010 after 4,000 sitting at around 100 bps in the early part of 2009. 2,000 0 YIELDS FIRMING AND QUALITY PREMIUM HOLDING -2,000 Industrial yields -4,000 Prime asset yields Prime vs secondary yields 10.0% 12% -6,000 % p.a. % p.a. -8,000 9.5% Melbourne 11% Secondary asset -10,000 9.0% 87 89 91 93 95 97 99 01 03 05 07 09 10% 8.5% Sydney Brisbane Sources: ABS, ANZ Looking into 2010 a continued strengthening of 8.0% 9% the Australian dollar and solid domestic economy 7.5% Prime asset 8% is expected to drive further growth in imports and 7.0% a rebuilding in inventories over the next 12- 6.5% 7% months that will support demand for warehousing 6.0% 6% space. These factors are likely to provide a 00 01 02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10 favourable environment to promote recovery of Sources: JLL, ANZ capital values and rents. Despite signs of stronger demand and tighter SUPPLY REMAINS SUBDUED FOR NOW industrial property market conditions, any return Industrial building activity to 2007-08 levels of rental growth and yields is Real $million, sa (ann rolling 6,000 unlikely to be repeated. While industrial property Value of work done developers continue to be deterred in the short- 5,000 C ommencements term by tight lending conditions, any significant 4,000 Approvals easing of these conditions remains a risk to the 3,000 outlook for industrial property supply. 2,000 We anticipate that industrial yields will continue to 1,000 compress into 2010 and 2011. Expansion in supply 0 00 01 02 03 04 05 06 07 08 09 10 of industrial property is likely to improve from current levels into early-2011 although remain Sources: ABS, ANZ relatively subdued for the remainder of 2010. For now, supply of industrial space continues to While both prime and secondary industrial slow. The value of completed projects in the year property yields continue to fall, the prime asset to March 2010 fell to $3.3 billion, the lowest level premium is likely to be maintained in the short- in more then 7 years. However, industrial term supporting opportunities for asset class price construction is expected to improve into 2011, discrimination. following a thin 12-18 months of additions to industrial space, as large industrial developers have recapitalised and access to credit markets gradually eases. This is becoming evident in the
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