Property Industry Outlook for April 2008

Transcription

1 Property Industry Outlook for 28 April 28

2 Is this the late 198s revisited for property markets? 2 Much talk of Armageddon US in trouble plus Euro area and Japan slowing Interest rates/funding costs have risen sharply Geared investors highly exposed Investor sentiment has softened Residential auction clearance rates have slumped Weakened demand suggests commercial property yields could rise But, Australian economy remains broadly supportive Growth will be boosted by further (significant) gains in the terms of trade Labour market solid and unemployment at 33 year lows Corporate gearing very low cf 198s Property market fundamentals are very supportive Already record low res. vacancy rates will tighten further Office vacancies also very supportive in the near-term

3 We have shifted from a low volatility to a high volatility world in past 6 months VIX Index Current Cycle 35 3 Index previous cycle current cycle Sources: ANZ and Bloomberg

4 Declines in the value of mortgage-backed securities have led to substantial losses incurred by big global banks Losses announced by major banks since mid-27 Bank Merrill Lynch Citigroup UBS HSBC Morgan Stanley IKB Deutsche Bank of America Credit Agricole Washington Mutual Credit Suisse Wachovia Canadian Imperial (CIBC) Societe General JP Morgan Chase Mizuho Financial Group Royal Bank of Scotland * incl. smaller banks not shown separately. TOTAL* Total (US$ bn) Losses (to date vs. expected) US$bn 23.5 Source: Bloomberg. 6 To date OECD & G7 UBS

5 5 Swap spreads extended but have eased recently Spread between swaps and government bonds 15 Basis points 13 1-year year 5 3 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 Source: Bloomberg and Economics@ANZ

6 Developing countries well placed to withstand global financial upheavals 6 Current account balances Foreign exchange reserves 6 5 % of GDP Developing economies US$ trn Developing economies Advanced economies -2-3 Advanced economies Sources: IMF; ANZ.

7 China s and India s growth has been predominantly driven by domestic demand, not by net exports 7 Contributions to China s real GDP growth Contributions to India s real GDP growth 12 1 % pts 12 1 % pts Domestic demand Net exports Domestic demand Net exports Source: China National Bureau of Statistics, CEIC.

8 Australia s economic future is closely tied to Asia 8 Global economic growth Australian two-way trade weights 1 Annual % change Asia 7 Index Asia US Euro Euro Japan US Note: GDP is measured in US$ at purchasing power parities. Source: IMF; Economics@ANZ.

9 9 But no decoupling of equity markets so far US Australia Jun 27 = Jun 27 = 1 1 S&P 5 1 ASX All Ords Commercial banks 8 7 Banks 6 6 Diversified financials Investment banks & brokers 5 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 5 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Source: Bloomberg

10 Rising bulk commodity prices will boost the terms of trade even higher in Index *ratio of export prices to import prices Terms of trade* Sources: Reserve Bank of Australia and Economics@ANZ Second leg of boom driven by expected increases bulk commodity prices

11 Domestic growth accelerated in 27, and the labour market continues to tighten 11 Economic growth Labour market 7 6 ann. % change Gross domestic income 7 % participation rate unemployment rate record high 'potential' economic growth Gross domestic product year low Source: Australian Bureau of Statistics

12 Australia faces a critical shortage of housing in the years ahead 12 Housing demand is booming Population growth is accelerating Declining persons per household (ageing) But, supply remains constrained Rising interest rates/developer charges Building industry capacity? And housing markets continue to tighten rapidly Rental vacancies already well below long term averages and supply is now well short of demand driving vacancies lower & rents and prices higher A critical housing shortage for next 5 years (if not 1) Will continue to force rents and prices higher

13 Housing demand has accelerated boosted by rising population and fewer persons per household 13 Annual population gain Persons per household 33 ' (annual moving total) 2.8 number per hh Sources: Australian Bureau of Statistics; Economics@ANZ.

14 while rising interest rates continue to stymie any building recovery 1 Residential building approvals vs. interest rates 2 ' annualised approvals mortgage rate 1 dotted lines denote initial rate hikes in 'series' Sources: Australian Bureau of Statistics; RBA; Economics@ANZ 5

15 as do excessive developer charges $s 3.5% Mid 198s Source: HIA Proportion of charges to house price 1.9% Mid 199s Primary charges for lot development Sydney Melbourne Brisbane 16.9% $ Proportion of charges to house price 1.9% Mid 198s 5.3% Mid 199s 6.8% $ Proportion of charges to house price 1.9% Mid 198s 3.6% Mid 199s 8.% 27

16 Underlying housing demand is already outstripping new supply, and the gap is set to widen sharply 16 Housing market balance: Australia Underlying housing demand Completions Sources: Australian Bureau of Statistics; Economics@ANZ

17 and pent-up housing demand will rise to record (and potentially intractable) levels 17 Housing market balance: Australia Underlying Requirement Completions Shortage Surplus Sources: Australian Bureau of Statistics; Economics@ANZ

18 in all states, but particularly in New South Wales mths prod. 21 Pent-up housing demand by state 5 5 mths prod NSW Vic Qld SA WA Tas Sources: Australian Bureau of Statistics; Economics@ANZ

19 2 19 Moreover, capacity constraints may prevent building industry delivering the required stock Australia ' (annual rate) approvals Work yet to be done $billion (CVM) starts Source: ABS

20 The tightening is reflected in sharp falls in rental vacancy rates 2. %; qtr ma Rental vacancy rate Already at record low (1.% cf US 9.6%) Sources: Economics@ANZ; REIA

21 Moreover, advertised rents are already surging (way in excess of ABS average ) 25 annual % change House rents 21 2 Advertised rentals (Residex) Average rental (ABS) Syd Melb Bris Adel Perth Hobart Sources: Residex, ABS, Economics@ANZ

22 Capital city house prices have been remarkably buoyant - even Sydney has improved House prices* Index *common base Dec. 23 = 1 Bris. (+21.6%) Melb. (+18.1%) Sources: ABS, Economics@ANZ Sydney (+8%) Index Perth (+1.1%) Hobart (+11.1%) Adel. (+2.2%) 5 6 7

23 Note: aggregate house prices have virtually never fallen even in deep economic recessions Index ABS House price index Sources: ABS, Economics@ANZ National recessions NSW recession

24 House price relativities between inner-city locations and outer-areas continue to widen % growth in house prices between 2 and 27 % change 21.8 Inner Outer Sydney Melb Brisbane Sources: Residex, Economics@ANZ

25 Have commercial property yields fallen too far? % p.a. Commercial property yields* Industrial Retail Office 6 5 * capitalisation rates Nominal 1 yr gov't bond yield ('risk free' rate) Source: IPD/PCA, Economics@ANZ

26 We have witnessed a structural lowering of the real risk free benchmark in the past decade 26 9 % p.a. Real 1 year government bond yield s average (5.2%) 6 5 average since Mar. 2 (2.8%) Source: RBA, ABS, Economics@ANZ

27 and falls in commercial property yields have been broadly in line with the decline in the risk free benchmark Commercial property yields* % p.a s average (5.2%) Industrial Office Retail average since Mar. 2 (2.8%) 2 1 * capitalisation rates Real gov't bond yield ('risk free' rate) Source: IPD/PCA, Economics@ANZ

28 Nominal funding costs up while cap rates firming 28 Australian commercial property yields vs funding costs 2 % p.a. 16 * Used income yield prior to Nominal 5 year swap rate Commercial property cap rate* 9-day bill rate Source: Property Council/IPD, RBA, ABS, Economics@ANZ

29 ...but in real terms rise in cost of LT funds has been less dramatic and are still well below early 199s levels Australian commercial property yields vs funding costs % p.a. Commercial property cap rate* Real 5 year swap rate 1 * income yield prior Source: Property Council/IPD, RBA, ABS, Economics@ANZ

30 Recession, higher gearing and much higher interest rates (than now) saw income yields blow out 18bp 3 2 Composite income yield % p.a. Income yield change between 199 and day bill rate Office "A" basis points 16 Office"B" Office "C&D" 12 8 Tightest (6.6%) Softest (8.%) Super & Major Regn Regional Sub-regional Total retail +3 Total office +28 Commercial property income yield Source: Property Council/IPD, RBA, ABS, Economics@ANZ Neighborhood Industrial +31

31 Softening in yields expected but will be tempered by positive economic and market fundamentals 31 There is plenty of underlying support for cap rates Economy and labour market growth expected to remain healthy Property risk premium valuation tool suggests values are around where they should be given long-term real risk-free rate. Office markets are in a relatively more favourable position (PRP still above long-term average). Sound underlying property asset market fundamentals. Apart from tight demand/supply balance, quality of rental flow is underpinned by solid business conditions and retail spending. Despite the solid underpinnings, scope for some softening in yields Rise in cost of funding has reduced attractiveness of geared investments. Rise in real terms however, has been measured and pales into insignificance compared to late-198s experience Some stressed sales likely (LPTs) but will not be deep enough to set new benchmarks for broader market, particularly prime quality buildings. Expect 1-25bp for prime and 25bp to 5bp for secondary over next 6-18 months. Positive rental growth over this period minimises price declines.

32 Retail property risk premium has moved below it s long-term benchmark Australian retail property risk premium * 32 7 % p.a * Property 'risk premium' = sector cap rate less real risk free rate Source: Property Council, Economics@ANZ

33 Retail yield compression has been most marked at the smaller end of the market % p.a. Australian Retail by Size - Yield Neighbourhood Regional Sub Regional 7 6 Super and Major Regional Source: Property Council, Economics@ANZ

34 1 There are early signs that retail sales are softening as interest rates rise and sentiment softens Retail sales % change (trend) 3 Consumer sentiment & interest rates 13 index % consumer sentiment (lhs) 9 6 annual % ch annualised monthly 1 9 mortgage rate (rhs) Source: ANZ, ABS, Melb. Inst., RBA

35 But despite widespread doomsday commentary, the household sector remains very well placed 35 HH disposable income HH balance sheet 1 annual % change +9.6% 5 5 $bn Assets (+$35b) year average Liabilities (+$126b) Source: ABS

36 36 And although hikes will be restrictive in 27/8 these will be more than offset in 28/9 Interest rates versus tax cuts 16 $bn FY 27/8 12 $bn FY 28/ Additional household credit interest cost $73mn 1 8 Household income boost from tax cuts Household income boost from tax cuts Jul Sep Nov Jan Mar May 6 2 Additional household credit interest cost Jul Sep Nov Jan Mar May $1123mn Sources: Australian Bureau of Statistics; Economics@ANZ.

37 However, household disposable income growth has easily offset the monetary tightening 6 Annual change, $bn HDI growth, interest rates & tax cuts 37 5 Household disposable income increases 3 2 Income tax cuts 1-1 Interest costs -2 '3- '-5 '5/6 '6-7 '7-8 '8-9 Sources: Australian Bureau of Statistics, RBA and Economics@ANZ

38 Moreover, corporate balance sheets are far better shape than the late 198s 38 Corporate Gearing Ratio Corporate interest cover 18 % 7 % Sources: ABS, Economics@ANZ

39 Industrial property near fair value 39 Australian industrial property risk premium * 9 % p.a * Property 'risk premium' = sector cap rate less real risk free rate Source: Property Council/IPD, RBA, ABS, Economics@ANZ

40 ...but office property remains well placed Australian office property risk premium * 6 % p.a * Property 'risk premium' = sector cap rate less real risk free rate Source: Property Council/IPD, RBA, ABS, Economics@ANZ

41 CBD office market fundamentals generally tight across quality grades, especially in resource capitals CBD Office vacancy rates Premium A Grade B Grade C Grade D Grade Syd Melb Bris Perth Source: Property Council of Australia, office market report

42 Office market to remain tight over 28 and 29 but fundamentals will weaken at turn of decade 35 % CBD Office vacancy rates 35 % Perth 2 Melbourne 2 Adelaide Sydney 5 Hobart Brisbane Sources: Property Council of Australia, Economics@ANZ

43 Summary: risks have risen but solid economic and property market fundamentals provide some insurance 3 Armageddon bandwagon is gaining passengers Bearish sentiment building in US, finance sector and equity markets But some perspective required Heightened risks, but Australian fundamentals still strong Funding remains a pricing issue Australian prospects still tied to Asia Asian outlook, particularly China, remains solid Commodity prices and terms of trade still rising strongly Domestic growth slowing but far from recession Property market fundamentals are very supportive Heading for a critical (and intractable) shortage of housing Commercial property very well placed cf late 8s

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46 LPT sector is sound but it needs to adapt to more risk averse environment 6 Summary Listed Property Trust sector taken a hit since the Centro incident Attention has shifted to gearing levels, liquidity levels and fund structures. Unsettled financial market has stalled issuance, likely to create pent-up demand for funds for expansion over next year or so. Underlying property asset market fundamentals remain sound. Quality of rental flow is underpinned by solid business conditions and retail spending. Any stressed sales are likely to be minimal and offshore. Trusts will be consolidating balance sheets (deferring development, raising equity e.g. rights issues), creating more balance sheet and fund structure transparency. Its all about perceptions. Urgency of adapting to new environment varies within the sector depend upon refinancing requirements in 28 and condition of balance sheet. Short-term funding costs to rise but this is second order issue compared to securing rollover of existing debt. Opportunity for bank (on-balance sheet) finance to this sector Source: PIR, UBS reports and Economics@ANZ

47 which is already forcing rents sharply higher 7 Rental vacancy rate vs. real rents 1. % % real rents (rhs) rental vacancy rate inverted (lhs) Sources: Economics@ANZ; ABS, REIA

48 Correction in LPT sector market value has been substantial 8 Market performance cumulative % growth % growth between March 23 & Feb. 28 % growth between March 23 & Dec 27 2 Property values (a) LPT sector (a) (a) Estimated December 27 and March quarters 28 All Ords Source: IPD, ASX and Economics@ANZ

49 Tightening room availability has boosted average hotel room takings 9 Hotel occupancy rates vs. average takings 125 Real $/room % room occupancy rate (rhs) average takings per available room (lhs) Sources: ABS, Economics@ANZ

50 Office and retail building strengthening while hotels soften Office Retail 6 $bn approvals 5 commencements 3 2 vwd $bn commencements approvals vwd $bn commencements Industrial approvals 2 $bn Hotels commencements approvals vwd 1 vwd

51 Sydney CBD office market fundamentals protected over medium-term 51 3 Contributions to change in Sydney CBD vacancy rate, Jan-8 to Jan-9 s sqm 6 Contributions to change in Sydney CBD vacancy rate, Jan-9 to Jan-12 s sqm Vacancies Jan 28 New supply Withdrawals Absorption Vacancies Jan 29 Vacancies Jan 29 New supply Withdrawals Absorption Vacancies Jan 212 Sources: PCA, ABS, Economics@ANZ

52 Strong supply lines to weaken fundamentals in Melbourne CBD office market by turn of decade Contributions to change in Melbourne CBD vacancy rate, Jan-8 to Jan-9 s sqm 8 Contributions to change in Melbourne CBD vacancy rate, Jan-9 to Jan-12 s sqm Vacancies Jan 28 New supply Withdrawals Absorption Vacancies Jan 29 Vacancies Jan 28 New supply Withdrawals Absorption Vacancies Jan 29 Sources: PCA, ABS, Economics@ANZ

53 Resources boom drives office construction boom to alleviate chronic shortage. Trouble to emerge later Contributions to change in Brisbane CBD vacancy rate, Jan-8 to Jan-9 s sqm Vacancies Jan 28.6 New supply Withdrawals Absorption Vacancies Jan Contributions to change in Brisbane CBD vacancy rate, Jan-9 to Jan-12 s 3.9 sqm Vacancies Jan New supply Withdrawals Absorption Vacancies Jan Contributions to change in Perth CBD vacancy rate, Jan-8 to Jan-9 s sqm Vacancies Jan New supply Withdrawals Absorption Vacancies Jan Contributions to change in Perth CBD vacancy rate, Jan-9 to Jan-12 s sqm Vacancies Jan New supply Withdrawals Absorption Vacancies Jan 29 Sources: PCA, ABS, Economics@ANZ