Australian Real Estate Quarterly Review
2017: Upside and downside risks finely balanced Q1/2017 In summary Investment climate - Upside/downside risks finely balancedThe 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 expectationsThe 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 activityTransaction 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.
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Performance - Property returns end on a weaker noteBoth 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.
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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.
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Industrial - Supply chain dynamics drive demandFollowing a subdued start, the second half of 2016 saw tenant demand improve, supported by retail and transport occupiers optimising their East Coast distribution networks.
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Retail - 'Placemaking' is the future of retailIn 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.
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Investment climate Upside/downside risks finely balanced Figure 1. Australia - components of growthThe 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 growthFinal 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 2016Jun-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 subduedIndex 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 growthDwelling 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 easingPer 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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