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TRANSCRIPT
MAY 2015
AUSTRALIA PROPERTY MARKET OUTLOOK
Cushman and Wakefield Research
PFA ANNUAL CONFERENCE
2015
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EXPLORING THE NEXUS BETWEEN PROPERTY VALUE AND FUNDAMENTALS
Alex Pham PhD AAPI
National Research Manager
Cushman and Wakefield
Australia
Cushman & Wakefield
Research
1 CUSHMAN & WAKEFIELD
Cushman & Wakefield
Research
2 CUSHMAN & WAKEFIELD
OVERVIEW
1. THE NEXUS BETWEEN CAPITAL VALUE AND FUNDAMENTALS
2. WHAT IS HAPPENING IN THE CAPITAL MARKETS?
3. WHAT IS HAPPENING IN THE LEASING MARKETS?
4. WHAT’S NEXT?
Cushman & Wakefield
Research
3 CUSHMAN & WAKEFIELD
The nexus between capital value and fundamentals
Cushman & Wakefield
Research
4 CUSHMAN & WAKEFIELD
THE TAIL OF TWO PROPERTY MARKETS
Asset
Market
(Capital values, cap
rates)
Space
Market
(Rents, vacancy
rates)
Vendors Purchasers
Landlords Tenants
Rents Constructio
n
Cushman & Wakefield
Research
5 CUSHMAN & WAKEFIELD
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015
A$ p
sqm
pa
Average Grade A Face Rent
Average Grade A Rent
100
110
120
130
140
150
160
170
2010 2011 2012 2013 2014 2015
Index
Australia CBD Office Capital Return Index
CBD Office Capital Return Index
THE (DIS)CONNECTION BETWEEN ASSET PRICES AND
LEASING CONDITIONS…
Source: C&W, IPD
Asset prices have risen
significantly…
… despite the subdued
leasing conditions.
Cushman & Wakefield
Research
6 CUSHMAN & WAKEFIELD
…HAS BEEN DRIVEN BY A STRUCTURAL SHIFT IN THE
PROPERTY ASSET PRICING FUNCTION
Rent ($)
Construction (sqm)
Capital
Market
(Asset)
Leasing
Market
(Space)
Stock
(sqm)
Asset Price
($)
…and put a
downward
pressure on
rents.
Sources: C&W, Wheaton & DiPasquale
(1992)
…has
resulted in an
upward shift
in asset
prices…
This has created
the new price-rent
equilibrium.
“The new normal”
A structural
shift in the
asset
pricing
function…
Cushman & Wakefield
Research
7 CUSHMAN & WAKEFIELD
What is happening in the capital market?
Cushman & Wakefield
Research
8 CUSHMAN & WAKEFIELD
A STRUCTURAL DECLINE IN LONG-TERM INTEREST RATES
GLOBALLY…
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Policy Interest Rates in Major Economies
US Japan EU UK Canada Australia
Pre-GFC
Average (ex
JP) = ~4%
The rate disparity between
Aus and the rest of the
world have widen post
GFC.
Post-GFC
Average (ex
AU) = ~0.5%
Structural break in
interest rates
Sources: C&W, ABS
Cushman & Wakefield
Research
9 CUSHMAN & WAKEFIELD
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
A$ M
illio
n
Foreign Capital into Australian Property
Office Industrial Retail Others
…HAS PARTIALLY RESULTED IN SURGING DEMAND FOR
AUSTRALIAN PROPERTY….
Low offshore
interest Pre-
GFC
Rising
foreign
investment
Post-GFC…
Speculative
investment in
2007 despite
the high interest
rates. … As a result of
a rational
investor
response to a
lower cost base
and return
disparity.
Sources: C&W, RCA
Cushman & Wakefield
Research
10 CUSHMAN & WAKEFIELD
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
2008 2009 2010 2011 2012 2013 2014 2015
Australian Property Capitalisation Rates
All Property Cap Rate Office Cap Rate Industrial Cap Rate Retail Cap Rate
… WHICH LED TO A CONTINUAL COMPRESSION OF CAP
RATES.
Continual
compression of cap
rates across all
sub-classes.
Sources: C&W, RCA
Cushman & Wakefield
Research
11 CUSHMAN & WAKEFIELD
Are we heading for a crash?
Cushman & Wakefield
Research
12 CUSHMAN & WAKEFIELD
THE TWO EPISODES OF CAP RATE COMPRESSION
-200
-100
0
100
200
300
400
500
600
-3.50%
0.00%
3.50%
7.00%
10.50%
2008 2009 2010 2011 2012 2013 2014 2015
bp
Australian Property Pricing Trends
Yield spread (bp) All Property Cap rate (%) Bond yield (%) YoY Change in cap rate (bp)
Cap rates are
compressing while yield
spreads widen...
...in response to falling
bond yields.
1st phase of
compression is
largely a result of
lower risk
expectation
2nd phase of
compression is
mainly driven by
falling risk-free
rates
Sources: C&W, RCA
Cushman & Wakefield
Research
13 CUSHMAN & WAKEFIELD
-20
-15
-10
-5
0
5
10
15
20
25
30
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
All Property Capital Return Index
All Property
CAPITAL VALUES ARE GROWING AT THE “LONG-TERM”
TREND PACE
Capital values
have grown at a
normal pace since
the GFC.
100
120
140
160
180
200
220
240
260
280
300
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Index
All Property Capital Return Index
All Property
1989
Crisis 2007
GFC
Long-term trend
growth = 2.66%
Sources: C&W, IPD
Cushman & Wakefield
Research
14 CUSHMAN & WAKEFIELD
KEY TAKEAWAYS
• Capital values are determined by the asset market, while rentals are determined by the
space market.
• A structural shift in capital asset demand has resulted in the increase in capital values
while rentals are subdued.
• The low interest rate environment globally was the main cause of the structural shift in asset
demand.
• Australian interest rate (and return) disparity with the rest of the world has driven strong
interest from offshore investors…
• …leading to a gradual compression in the capitalisation rates,
• …however, property values are growing at a pace consistent with the long-term trend.
• Strong investor demand post-GFC is a rational response to lower interest rate
environment.
• Interest rates are expected to remain low going forward as the world economies
transitioning into a low-growth (low inflation) period (“the new normal”).
Cushman & Wakefield
Research
15 CUSHMAN & WAKEFIELD
What is happening in the leasing market?
Cushman & Wakefield
Research
16 CUSHMAN & WAKEFIELD
OFFICE MARKET CONDITIONS
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Grade A Office Vacancy Rates
Sydney Melbourne Brisbane Perth Adelaide
Forecast
Lower vacancies
in Sydney and
Melbourne
Rising vacancies
in Perth and
Source: C&W
Cushman & Wakefield
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17 CUSHMAN & WAKEFIELD
• Improving consumer spending
• Low interest rates
• Weaker domestic currency
• Strong interest from international fashion
brands
• Australian institutional investors and A-
REITs have been the net buyers
• Engagement of institutional investors in
regional towns and non-metro locations
• Super-regional shopping centres have
been in high demand as retail investors
seek higher yields
AUSTRALIAN RETAIL LANDSCAPE
Cushman & Wakefield
Research
18 CUSHMAN & WAKEFIELD
RETAIL SALES PICKING UP
Sources: C&W, ABS
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
%
Quarterly sales Non-discretionary Discretionary Year-ended sales
10-year trend
Retail sales have picked
up …
...supported by
strong growth in
discretionary
spending
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
%
Quarterly sales Non-discretionary Discretionary Year-ended sales
10-year trend
Retail sales have picked
up …
...supported by
strong growth in
discretionary
spending
Cushman & Wakefield
Research
19 CUSHMAN & WAKEFIELD
Supply
• Low vacancy
• Limited new construction – prime
industrial accommodation
• Strong precommitment
• Rezoning and residential conversions
INDUSTRIAL PROPERTY MARKETS
Demand
• Construction, retail, transport & logistics
& food industries drive demand
• Tenants looking for flexibility and
efficiency
• Location, infrastructure and design
remain the key features
Cushman & Wakefield
Research
20 CUSHMAN & WAKEFIELD
RESIDENTIAL MARKETS – IT’S ALL ABOUT SYDNEY
0
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
A$ '000
Median Price of Established House Transfers
Sydney Melbourne Brisbane Perth Adelaide Hobart Darwin Canberra
Sydney house prices
have risen
significantly in the
Sources: C&W, ABS
Cushman & Wakefield
Research
21 CUSHMAN & WAKEFIELD
KEY TAKEAWAYS
• Office – The tail of two extremes
• Improving office demand in Sydney and Melbourne - Incentives for prime and grade A
stock slowly decrease
• Leasing conditions remain soft in Perth and Brisbane - Flight to quality trend continues –
vacancies are expected to rise
• Retail – Improving consumer spending and low interest rates will drive retail sales
forward
• Industrial – Construction, retail, transport & logistics & food industries compensate the
declining demand from the manufacturing sector
• Residential – Overheating in Sydney – Increase in home building activity will limit the rapid
rise in house prices
Cushman & Wakefield
Research
22 CUSHMAN & WAKEFIELD
What’s next?
Cushman & Wakefield
Research
23 CUSHMAN & WAKEFIELD
OUTLOOK
• Strong investor demand, particularly from offshore investors, will continue to drive yields
lower and prices higher
• There is still room for further compression as the rate premium is still above long-term
average and capital growth is consistent with the long-term trend
• While the core assets remain attractive to both local and offshore investors, strong
competition will drive demand for secondary locations and alternative asset classes as
investors seek for higher yield
• Pockets of value remain available in regional locations and alternative assets – increasing
institutional engagement in “regional cities”
• The two-speed economy will remain the key feature of the market
• Leasing conditions are expected to improve in Sydney and Melbourne while falling mining
activity poses a drag on Perth and Brisbane