Real Estate Risks and Opportunities

Transcription

1 Real Estate Risks and Opportunities 1

2 Agenda The economy Valuation issues Market snapshots Risks and opportunities 2

3 Economy: selected sector trends 3

4 Economy in CY positive Headline growth +2.8% in 2006 (RNNDI +3.8%) Consumption deflator +2.5% y-y Big drivers (Dec 05 to Dec 06) consumer spending +3.8% - recovery after 05 slowdown public sector investment +17.0% state and local govt investment +25.9% private sector investment +2.0% - from 05 peak Some real estate drivers non-dwelling construction- all time high +14.3% real, 21.3% nominal stock to sales ratio all time low imports to domestic sales- all time high

5 Financial markets - mixed Cash rate up to 6.25% Inflation weighted / trimmed mean > 3% since June 06 Bond rates back to July 06 levels (5.9%) Inflation indexed bonds up to 2.6% - slight fall since Dec 06 Inverse yield curve since mid-05 - negative for residential, positive commercial Some risk indicators rising Federal Budget headline surplus FY06/07 now forecast +$23bn (incl. asset sales) - post-budget election war chest - impact? Election typically an excuse to delay spending and investment decisions 5

6 Inter-state performance Most diverse for 30+ years NSW probably bottoming out- SFD +1.8% Public sector expenditure boost in 07/08 (+1% growth contribution in NSW) Population shifts impact on NSW moderating because: housing affordability converging interstate total migration at 30-yr low big offshore migrant intake 6

7 The economy Valuation Market snapshots Risks and opportunities 7

8 Commercial sector valuation 8

9 Commercial sector investment returns - decomposition of IPD/PCA index DECOMPOSING PERFORMANCE: 12 MONTHS TO DEC 06 23% 18% Yield Growth Re-rating Total 13% 8% 3% -2% Sub-regional Retail CBDOffice Regional Retail Industrial Non-CBD Office 9

10 Broader impact of re-rating overlooked Values sustainable but investment returns will fall (17% to Dec 06) Every real estate asset undercapitalised Land (option) values rise: so do the values of secondary/obsolete assets Yield accretive investment so cheaper to develop than to buy temporarily Quantity and quality improvements (in residential sector, too) Long term impact of construction boom through 2007/08 and beyond rising supply, rental growth slows lower investment returns yield more important than growth 10

11 Impact of re-rating DECOMPOSITION OF RETURNS - COMPOSITE INDEX 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% GROWTH INCOME RE-RATING 0% Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 11

12 The economy Valuation Market snapshots Risks and opportunities 12

13 Residential sector: diverse trends HOUSING FINANCE Seasonally adjusted 12,000 $mill 10,000 8,000 Owner occupier (Excl re-finance) 6,000 4,000 Investor 2,000 - Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Source: ABS Investors; % decline continues First home buyers; +/- trend Excess supply now absorbed Strength in several markets top end, WA, empty-nesters 13

14 Residential construction outlook: role reversal? 14

15 Residential construction trends: NSW land an option on development 15

16 Residential: How expensive? RENT VS WAGES (MARCH 1988 = 100) Rents have tracked wages closely over past 20 yrs (in contrast to house prices) Renting is now relatively much cheaper than buying why? Vacancy rates lowest since series began in 1969 Looming housing shortage is the one common theme in all residential markets or is it an agents beat-up? 300 INDEX Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Sydney Melbourne Brisbane Adelaide Perth Wages 16

17 Residential housing and rental affordability Home loan affordabilty index 80 Index VIC 60 WA 40 QLD NSW 20 0 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Source: REIA Rental affordability index (MARCH 1988 = 100) Index 140 WA NSW VIC 80 QLD Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 All metro areas equally unaffordable for home-buyers Rents Sydney cheap, Brisbane and Perth expensive Scope for rents to rise in Sydney, Melbourne Big question: Are home-owning patterns about to change? superannuation changes HECS, 9% super contributions demographic shifts Source: REIA, RBA, Mirvac Research 17

18 Office: white collar employment - strong in all states AUSTRALIA White and Blue Collar Employment Growth Annual percentage change White collar 0 Feb-87 Feb-91 Feb-95 Feb-99 Feb-03 Feb-07-5 Blue collar NEW SOUTH WALES White and Blue Collar Employment Growth Annual percentage change White collar 0 Feb-87 Feb-91 Feb-95 Feb-99 Feb-03 Feb-07-5 Blue collar -10 Source: ABS -10 Source: ABS QUEENSLAND White and Blue Collar Employment Growth Annual percentage change White collar VICTORIA White and Blue Collar Employment Growth Annual percentage change White collar Feb-87 Feb-91 Feb-95 Feb-99 Feb-03 Feb-07-5 Blue collar -10 Source: ABS 0 Feb-87 Feb-91 Feb-95 Feb-99 Feb-03 Feb-07-5 Blue collar -10 Source: ABS 18

19 Office: vacancy cycles diverging NSW non-cbd markets remain weak Melbourne SE suburban markets strong Sydney CBD absorption stronger than expected will remain strong Long-term non-cbd office markets out-performed expect this to continue 19

20 Office - key themes Absorption to continue at high levels Suburban office markets offering more competition to CBD market First time an institutional market is emerging How does the yield differential play out? prime/secondary office yield differential 100bp = 25-year low average is 200bp prime yields another 75bp fall?? (Westpac) or maybe not? Top pick sector for

21 Retail: stabilising in 07? CREDIT CARD MOMENTUM - 6 Mnth moving average 2 Index 1 0 Aug Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 REPAYMENT Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 BORROWING Nov-06 Feb-07 Source: RBA, Mirvac Research Consumer spending bounce-back looks sustainable Anecdotal evidence supports this Recent credit card data shows stronger spending intentions Strong A$ will support demand for imported goods 21

22 Retail: supply impact 1.14 mill sqm of retail construction in June 06 = 7% increase esp. sub-regional and bulky goods But adjust for location and bulky goods T/O per sqm the increase is digestible esp in WA and Queensland Strong CBD rental growth - office recovery, tourism, resident population Regionals increasing share of retail dollar T/O growth + 6.9% in FY06 v 4.3% for retail overall sustainable? Retail Rental Growth (Annual to Dec 06) CBD Prime^ Regional Sub-regional NSW VIC QLD WA ^ 3 year average, Source: CBRE 22

23 Industrial: Long-running transformation Sustained rise in imports: containerisation means fewer, larger nodes Manufacturing zero or negative growth Domestic freight volumes up eg. +9 % this year between Perth and Eastern States despite fall in volume of grain and bulk goods Improved Brisb-Melb rail corridor over next 3 years will cut travel time from 36 to 26 hrs (ARTC) 23

24 The economy Valuation Market snapshots Risks and opportunities 24

25 Risk pricing Corporate BBB bond spreads widened through expected to continue (ANZ monthly survey) Rising risk aversions or does it imply risk now appropriately priced? Not confined to bond market similar trends in LPT debt market 25

26 Risk pricing the debt quadrant PROPERTY TRUST CORPORATE BOND SPREADS TO CGS Basis Points APPF (22-Sep-09) GAN (02-Sep-12) GAN (15-Oct-07) GAN (12-Nov-10) GAN (22-Dec-14) GPT (30-Mar-09) GPT (27-Jun-08) GPT (22-Aug-13) GPT (15-Oct-07) GPT (07-Nov-10) INV (23-Aug-12) INV (24-Sep-09) QIC (04-Jun-08) /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/2007 QIC (05-Jun-09) STOCKLAND (15- May-13) STOCKLAND (16- Jun-11) STOCKLAND (15- Aug-08) STOCKLAND (15- Oct-07) WFLD (16-Apr-07) WFLD (17-Jul-08) WFLD (15-Jul-10) 26

27 Opportunities Office market the top 2007/8 performer further yield compression possible non-cbd office markets to outperform Industrial location increasingly important Retail management, marketing and repositioning Hotels still in re-rating/restructuring phase vertical integration travel agents, airlines etc. Residential recovery in late 07 (early 08 in NSW) longer term structural changes? 27

28 Summary Net Present Value = cash flow discount factor Reasonable economic growth will drive top-line rents Key risk issue is VALUATION valuation escalator grinding to a halt supply a potential issue in some sectors/locations construction financing and debt products is this an issue? investment returns will decline (accelerated by rising supply) land banking holding costs? premium for risk and duration reappearing (from low levels) 28

29 Mirvac Property Clock Industrial Office (?) Retail 9 3 Hotels Residential 29

30 Mirvac Property Clock WA 12 QLD VIC 9 3 NSW SA 30

31 Real Estate Risks and Opportunities 31