Australian Real Estate Quarterly Review

2017: Upside and downside risks finely balanced Q1/2017 In summary Investment climate - Upside/downside risks finely balanced

The investment climate is characterised by a wider range of possible outcomes than usual. Allowing for divergent patterns of growth, the most likely outcome is continued positive leasing demand, but a slowing of capital gain.

Page 3

Interest rates and real estate - Implications of rising yield expectations

The prospect of rising interest rates has implications for pricing of all high yielding investments including real estate. However it is important to keep recent trends in perspective.

Page 5

Transactions - Lack of prime stock leads to easing activity

Transaction activity fell in the December quarter resulting in a total volume of sales of $24.5 billion in the 2016 calendar year. This trend mirrors a decline seen globally over the past 12 months.

Page 6

Performance - Property returns end on a weaker note

Both listed and unlisted property returns ended 2016 on a weaker note as the yield compression cycle tapered and value growth weakened. While returns are still above long term averages, capital growth is expected to soften in the year ahead.

Page 7

Office markets - Rents continue to surge, but for how long?

While the Sydney and Melbourne office markets are now in a strong growth phase, other markets are at or near the bottom of the rent cycle. This disparity will help smooth returns for diversified investors when the Sydney and Melbourne growth phase ends.

Page 8

Industrial - Supply chain dynamics drive demand

Following a subdued start, the second half of 2016 saw tenant demand improve, supported by retail and transport occupiers optimising their East Coast distribution networks.

Page 10

Retail - 'Placemaking' is the future of retail

In order to combat the online challenges, successful retail precincts are becoming places which provide a unique customer experience; where people want to visit, interact and shop.

Page 11

Investment climate Upside/downside risks finely balanced Figure 1. Australia - components of growth

The investment climate is characterised by a wider range of possible outcomes than usual. Allowing for divergent patterns of growth, the most likely outcome is continued positive leasing demand, but a slowing of capital gain.

Baseline assumptions

Investors should hope for the upside, but plan for

Per annum

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

Consumption Investment Stocks & Net exports Real GDP

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

the downside. Key assumptions include:

  • The US economy will continue to strengthen through to FY19 regardless of any extra stimulus from Trump policy changes. US growth is expected to benefit the Asia Pacific region

  • Rising US interest rate rises will lead both a strengthening of the US dollar and ongoing uncertainty in the pricing of assets globally

  • China is assumed to maintain its current moderate growth profile but its continued reliance on debt-financed property investment is a risk

  • The Australian economy is expected to grow only slowly, boosted by exports, but constrained by investment, particularly in mining and housing

  • NSW and Victoria will outperform in the short term; but by FY19 growth will slow relative to the sunbelt states of QLD and WA

  • NSW will become a victim of its own success with population growth easing as people migrate to more affordable regions

  • Residential construction activity, particularly apartments, is expected to slow and could be a significant headwind for growth in FY18

  • Employment growth is weakening from a high base and seems likely to weaken further by FY18 as subdued housing investment constrains full- time job creation

    Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

    Source: Deloitte Access Economics (DAE)

    Figure 2. NSW and VIC leading state growth

    Final demand p.a.

    NSW VIC QLD WA

    6.0%

    4.0%

    2.0%

    0.0%

    -2.0%

    -4.0%

    -6.0%

    -8.0%

    -10.0%

    Jun-16 Jun-17 Jun-18 Jun-19

    Source: Deloitte Access Economics (DAE)

    Table 1. Australian economic forecasts: Q4 2016

    Jun-16

    Jun-17

    Jun-18

    Real GDP %pa

    3.1%

    1.7%

    2.8%

    Final demand %pa

    1.6%

    0.2%

    2.4%

    Employment %pa

    1.9%

    1.1%

    1.3%

    Goods imports %pa

    -0.8%

    1.9%

    2.2%

    Retail sales %pa (real)

    2.2%

    1.5%

    3.2%

    CPI %pa

    1.1%

    2.0%

    2.2%

    90 Day bill %*

    1.9%

    1.3%

    1.6%

    10yr Bond %

    2.0%

    2.8%

    2.9%

    AUD/USD

    0.75

    0.72

    0.70

    Source: Deloitte Access Economics (DAE), *DEXUS Research

  • Service sector activity will remain a growth driver for the economy led by education, health, IT and tourism. The public sector, professional

    Figure 3. Confidence subdued

    Index NAB Business Conf SA Consumer Confidence - Index 20 140

    services and finance will see more moderate

    growth while the mining, construction and retail sectors will lag

  • Retail spending will be constrained in the short term by moderate confidence, weak wages

    15

    10

    5

    0

    -5

    -10

    -15

    -20

    130

    120

    110

    100

    90

    80

    70

    60

    growth and easing employment growth

  • Official cash rates are expected to move mildly lower in 2017 and remain low in 2018

  • Australian bond yields are expected to stablise at or near current levels and rise at a slower rate than in the US over the medium term, staying low by historical standards

    -25 50

    Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

    Source: Deloitte Access Economics (DAE)

    Figure 4. Housing to drag on growth

    Dwelling commencements Standard bank variable mortgage rate

    US economic growth strengthens more quickly

    160

    6.0%

    than expected, Chinese growth is sustained and

    140

    5.0%

    Australia benefits from a resurgence in Asian

    120

    4.0%

    100

    3.0%

    '000 per annum

    The upside scenario

    The most likely upside scenarios are:

    middle class consumption

    240

    220

    200

    180

    Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19

    10.0%

    9.0%

    8.0%

    7.0%

  • The Queensland economy improves more quickly than expected

    The downside scenario

    At face value the downside scenario appears to have a 'higher impact' than the upside, particularly given the potential effect on asset pricing. It includes:

  • A sharper than expected contraction in house prices and apartment construction triggered by a slump in confidence, legislative changes designed to increase affordability or a sharp lift in mortgage interest rates

  • A slowdown in China associated with a financial crisis and attempts by authorities to curb capital outflows

  • A trade war in the Asia Pacific as currency wars and concerns about competitiveness lead to higher tariffs and trade barriers by the US and China

  • Geopolitical crises either in the Asia Pacific region or the European union

Source: Deloitte Access Economics (DAE)

Figure 5. Employment growth easing

Per annum

Total Part-time Full-time

8.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Source: ABS

DEXUS Property Group published this content on 24 January 2017 and is solely responsible for the information contained herein.
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