ISSUE ONE PROPERTY SECTOR INSIGHTS

Transcription

1 ISSUE ONE PROPERTY SECTOR INSIGHTS Developed by our in-house property research specialists, drawing on the expertise of a network of government agencies and commercial real estate agents. Insights across the office, retail and industrial property sectors are provided to assist property investment decisions. Property Sector Insights A

2 PROPERTY SECTOR INSIGHTS Key findings 01 Snapshot of the Australian economy and performance of the major property sectors. Economic update 02 Key statistics and analysis of economic growth, inflation, unemployment and interest rates. Feature article 05 Opinion piece on what rising government bond yields mean for unlisted property. Sector performance 05 Review of various asset classes, with a focus on returns and risks. Office 06 Focus on the office sector s total returns, vacancy, values and supply. Industrial 12 Focus on the industrial and logistics sector s total returns, development, sales and leasing activity. Retail 15 Focus on the retail sector, including shopping centres and automotive industry, and its total returns, growth, turnover and trade. The latter half of 2016 has been marked with major changes worldwide to the political landscape resulting in significant volatility across all global equities, commodities and currency markets. Although growth in the Australian property sector moderated over the Sep-16 quarter, returns were still above historical averages at 12.2% over the year (latest available IPD data). Property yield metrics tightened a further 43 basis points over the year to Sep-16 to 6.36%. Although prime property yields remained flat over the quarter, suggesting a stabilisation is likely (following a year of significant valuation uplifts as a result of strong investor demand for quality prime office assets). In spite of this, yields are still at historically low levels and likely to remain so. Contact 17 Front cover image: 1 Shelley Street, Sydney NSW Charter Hall

3 KEY FINDINGS 2.5 % ECONOMIC ANNUAL GROWTH RATE Australia s economic growth rate in the September quarter was at its lowest level since the global financial crisis, with a rolling annual growth rate of 2.5%, on the back of a 0.5% contraction from the June quarter. 5.7 % UNEMPLOYMENT RATE The national unemployment rate crept marginally higher to 5.7% in Nov-16 following an increase in participation and negative full-time employment growth, for the third month in a row. Victoria continues to be the state to watch with strong employment growth of 3.0% % AUSTRALIAN PROPERTY SECTOR Although growth in the Australian property sector moderated over the last quarter returns were still above historical averages at 12.2% (over the year to Sep-16). 1.3 % INFLATION After continuous falls to the inflation rate since Dec-15, inflation bounced back to 1.3% in Sep-16 from the previous quarter. This suggests a low point has passed, making it less likely to impact any interest rate decisions by the Reserve Bank of Australia in the coming year. Most economists are predicting interest rates remain steady throughout % PROPERTY YIELDS Property yield metrics tightened a further 43 basis points over the year to Sep-16 to 6.36%. Although prime property yields remained flat over the quarter, suggesting a stabilisation is likely (following a year of significant valuation uplifts as a result of strong investor demand for quality prime office assets). In spite of this, yields are still at historically low levels and likely to remain so. 326,000 TOTAL OFFICE SPACE NET ABSORPTION Total office space net absorption across the major capitals totalled 326,000sqm, which was the highest level it has been since Jun-07, driven by improving tenant demand in Melbourne. 3.6 % RETAIL TURNOVER GROWTH Retail turnover growth continued to moderate across the country with rolling annual turnover falling below the 5-year average for the first time in three years, to 3.6% over the year to Nov % INDUSTRIAL SECTOR RETURN The latest IPD data shows the industrial sector returned 11.9% over the year to Sep-16. Strong economic fundamentals in New South Wales supported the Sydney s industrial market, outperforming all the states with a total return of 13.2% over the same period. Property Sector Insights 1

4 ECONOMIC UPDATE KEY STATISTICS Australia is clearly outperforming its comparable peers in all key economic metrics. In its most recent statement, the Reserve Bank of Australia noted that threequarter s of the anticipated falls in mining revenue are now behind us and the drag on growth will be less hereon in, leading to forecasts of continued strong performance. Source: Bloomberg, Charter Hall Research ECONOMIC GROWTH INFLATION UNEMPLOYMENT INTEREST RATES YR FORECAST YR FORECAST YR FORECAST 2016 AUSTRALIA 2.4% 1.3% 5.7% 1.5% WORLD 3.1% 2.9% USA 1.6% 1.3% 4.8% 0.8% EURO AREA 1.8% 0.3% 9.1% 0.1% NEW ZEALAND 3.0% 0.6% 5.1% 1.8% 2 YR FORECAST ASIA 6.0% 2.4% 4.0% 4.3% CHINA 6.9% 2.0% 4.1% AUSTRALIAN SUPERANNUATION ASSETS VS. GDP The resumption of growth in the superannuation industry has emerged as a leading driver of the property market. The adjoining chart illustrates this point, looking at growth in Australian superannuation assets against national gross domestic product (GDP). A rebound in the share market in the second half of 2016 saw superannuation assets grow to nearly $2,150 billion, at a growth rate of 6.6% over nominal GDP. In the past decade, superannuation assets have grown by 8.2% p.a., significantly higher than the growth in nominal GDP (5.1% p.a.), highlighting the shortage of real investment options. Source: APRA, ABS, Charter Hall Research 2,500 2,000 1,500 1, SEP04 SEP05 SEP06 SEP07 SEP08 SEP09 SEP10 SEP11 SEP12 SEP13 SEP14 SEP15 Aus Super Assets ($b) Nominal GDP ($b) SEP16 MINING CAPITAL EXPENDITURE VS. DWELLING The dramatic rise and recent decline, in mining capital expenditure over the past ten years is illustrated in the adjoining chart along with the level of dwelling approvals in Australia. Few charts illustrate Australia s transitioning economy as well as this relationship. For the first time since the housing market took off in 2011, residential approvals decreased over the last quarter. In addition, with mining capital expenditure likely to decline further as major projects complete, these two factors are likely to put further downward pressure on the Reserve Bank of Australia s cash rate as the economy seeks new avenues for growth. Source: ABS, Charter Hall Research $25b $20b $15b $10b $5b SEP04 SEP05 SEP06 SEP07 SEP08 SEP09 SEP10 SEP11 SEP12 SEP13 SEP14 SEP15 Mining Residential Approvals (No RHS) 250, , , ,000 50,000 SEP16 2 Charter Hall

5 GDP BY STATE WESTERN AUSTRALIA NORTHERN TERRITORY QUEENSLAND The East Coast of Australia (NSW, Vic and Qld) contributes nearly three-quarters of final domestic demand. WA s share of the pie continues to fall as the mining sector struggles, with economic growth negative for the 12th consecutive quarter. SEP % SEP % SEP % SEP % SEP % SEP % Source: ABS, Charter Hall Research NT QLD WA SA NSW SEP % VIC ACT SEP % SEP % TAS SEP % AUSTRALIA NEW SOUTH WALES SEP % SEPT % SEP % SEP % SEP % SEP % SEP % SEP % SOUTH AUSTRALIA VICTORIA TASMANIA AUS CAPITAL TERRITORY Property Sector Insights 3

6 ECONOMIC UPDATE CORPORATE REVENUES BY SECTOR The adjoining chart shows corporate revenues across various sectors over the year to Sep-16, illustrating the divergent nature of the Australian economy at present. Corporate revenue for the Australian economy as a whole fell 2.8% over this period, dragged down by falling profits in the mining industries. Logistics continued its upward trend with expectations of continued outperformance as retail and wholesale trade enter the peak December season. Promisingly, as the result of higher commodity prices and a lower Australian dollar in the latter half of 2016, mining and energy exports are set to provide a much needed boost to company profits across the economy in Admin and Support Rental, Hire and R/E Transport and W/H Arts and Rec Wholesale Manufacturing Hospitality IT and Telco TOTAL Retail Utilities Banks Mining Professional and Tech -11.6% -7.4% -0.3% -0.7% -2.4% -2.8% -2.8% -3.0% -3.5% 2.0% 0.7% 8.9% 8.7% 12.4% Source: APRA, ABS, Charter Hall Research Other Construction -15.8% -14.3% -20% -15% -10% -5% 0% 5% 10% 15% LABOUR MARKET STATISTICS BY STATE (UNEMPLOYMENT RATE) VIC 6.0 % NSW 4.9 % QLD 6.0 % Although the national employment rate remained low at 5.7% in Nov-16 (latest available), this was primarily due to a shift towards part-time employment. Notable shifts in employment patterns have been evident, particularly in white-collar and services oriented jobs, with part-time workers now accounting for one in every four office employees across Australia. Victoria once again remains the exception on this front, with 73,700 full-time jobs added over the year to Nov-16. Correspondingly, the aggregate hours worked across the country were also down over the last quarter, dragging on net national disposable income for the 8th consecutive quarter. 73,700 37,300 NOV-16 SA 58,000 15,900 NOV % 165,500-65,900 NOV-16 WA 64,000 10,300 NOV % 45,900 24,600 2,700-11,800 NOV-16 NOV-15 Full-time employment growth Part-time employment growth Source: APRA, ABS, Charter Hall Research 19,300 22,100 25, ,000-9,700-25,300-32,900 NOV-16 NOV-15 NOV-16 NOV-15 4 Charter Hall

7 FEATURE ARTICLE Rising government bond yields: what does it mean for unlisted property? Globally the consensus view is that bond yields (interest rates) are rising. With 10-year Australian government bonds at their lowest point in history only four months ago, yields rose 1% from 1.82% in Aug-16 to 2.82% in Dec-16. In line with this increase, listed Australian Real Estate Investment Trusts (A-REITs) were negatively affected, declining on average 9-15% over the same period. Unlisted (direct) property returns are not highly correlated with bond market movements or short term movements in the listed A-REIT sector (see above chart for A-REIT returns compared to unlisted property funds). Indeed, our research indicates that historically unlisted property in Australia has been largely immune to historical fluctuations in bond yields. Charter Hall research analysed the performance of the unlisted property fund sector over the last half a century and found a very low correlation between total returns in the unlisted property fund sector and movements in 10-year Australian bond yields. Further to this, we note four distinct bond events over the same period (periods of significant rising Australian bond yields) where Australian unlisted property funds continued to provide positive total returns during and after the bond event. These specific periods included , , and Movements in bond yields have not significantly impacted movements in total returns from unlisted property. Market conditions in the commercial real estate sector are the major driver of performance for unlisted property funds. Valuations of assets in unlisted property are driven by fundamental market conditions in the property sector more so than short term movements in capital and bond markets. Property valuations are usually annual or semi-annual and are not subject to the daily fluctuations of bond yields in the same way that A-REITs are. Demand for and supply of commercial real estate space is the major determinant of how rents move, how occupancy rises or falls and in turn, how unlisted property funds perform. With the office sector vacancy in Sydney and Melbourne at 8%, limited upcoming supply in these CBDs suggest rising rents. Industrial rents have been stable for some time across the nation, with greater investment demand driving property values upwards, particularly on the east coast. Additionally, positive economic indicators point to an economy that will continue to assist unlisted property returns, with interest rates to remain low (on a historical basis). The gap or spread between the risk free rate (i.e. government bond yield) and the yield on unlisted Australian property remains near historical highs. Remembering that a larger spread implies stronger relative returns from property, there is reason to believe that the Australian unlisted property market in 2017 will continue to be an attractive place to invest. A-REITS VS. AUSTRALIAN PROPERTY FUNDS TOTAL RETURNS Over the period from 1996 to 2016, the average total return of A-REITs was 9%, while the average total return of Australian unlisted property funds was 10%. A-REIT returns declined as bond yields rose. Unlisted property is not highly correlated with bond market movements. Source: Charter Hall analysis of IPD and Mercer data TOTAL RETURN (12 MONTHS) 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% A-REITs 12 MONTH UNLISTED PROPERTY TOTAL RETURN -60% Property Sector Insights 5

8 SECTOR PERFORMANCE AUS PROPERTY OFFICE RETAIL INDUSTRIAL BONDS AUS EQUITIES COMPOUND RETURN % 1 year year STANDARD DEVIATION % CHANCE OF NEGATIVE % SHARPE RATIO % EQUITIES CORRELATION % 15 year year year year NA 15 YEAR COMPOUND TOTAL RETURNS & VOLATILITY COMPARISON The compound return of various asset classes along with the major property sectors is shown in the below chart. As can be seen, direct property has outperformed over the last 15 years, with a more stable growth profile than the other represented asset classes. Whilst direct property returned 12.2% over the year to Sep-16 (latest IPD data) compared to 11.9% for Australian equities, the 5-year standard deviation for direct property was significantly less at 1.5% compared to 12% for Australian equities, indicative of a significantly lower risk profile. On a risk-adjusted basis, looking at implied chances of a negative result and Sharpe ratios in this case, property s performance stands out further. Of the property classes, Office property outperformed the other asset classes with a total return of 13.4% over the year. Strong performance was also evident from the Industrial (11.9%) and Retail (10.5%) sectors, significantly outperforming their respective 10-year averages Aus Property MSCI Aus Equities JPM Global Bonds Office Retail Industrial A-REITs Charter Hall

9 OFFICE 12.0 % WEIGHTED AVERAGE VACANCY RATE The weighted average vacancy rate for the major capitals recorded in Dec-16 was 12%, up marginally from the previous quarter % TOTAL OFFICE SECTOR RETURN The office sector was the strongest performer over the last 12 months with a total return of 13.4% to Sep-16 (latest available IPD data). This was driven by strong tenant demand on the East Coast % PRIME CAPITAL VALUES Prime capital values rose 11.7% on average across the capitals over the last 12 months, with increases across all the major CBDs except Perth. Prime capital values rose 18.0% in Melbourne, 12.8% in Sydney, 6.3% in Brisbane and 2.2% in Adelaide, with -0.3% in Perth. 326,000 sqm TOTAL OFFICE SPACE NET ABSORPTION The total office space net absorption was driven by improving tenant demand in Melbourne (189,000 sqm), Sydney (82,000 sqm) and Brisbane (42,000 sqm). Image: 900 Ann Street, Fortitude Valley Qld TOTAL RETURNS SYDNEY CBD MELBOURNE CBD BRISBANE CBD PERTH CBD 0.7% 9.4% 13.2% 17.7% -0.6 % WHITE COLLAR EMPLOYMENT GROWTH Professional job advertisements moderated considerably over the last year, with negative growth rates in all states except for Victoria and South Australia. ADELAIDE CBD CANBERRA CBD OFFICE SECTOR N/A 13.4% 13.4% Strong growth in job ads in Victoria, at 7.0% over the year to Nov-16 predicate strong leasing activity in 2017 in the Melbourne office market. Income Capital -5% 0% 5% 10% 15% 20% Source: Charter Hall Analysis of Jones Lang LaSalle Research data and IPD data. Property Sector Insights 7

10 OFFICE LONG TERM METRICS Growth in the New South Wales and Victorian economies remained above the national average supporting occupier demand. An increase in iron ore prices in the latter half of the year coupled with a lower Australian dollar, also saw the Brisbane and Perth office markets gain momentum in their recovery. Higher commodity prices improved miners profitability leading to a long awaited improvement in Perth, which recorded positive net absorption over the quarter (9,500sqm) for the first time since the resources downturn began in late This was largely because of reduced sub-lease space available in Perth, a positive for sentiment and resulting in improved leasing conditions in the resources reliant state. Total Stock '000sqm (Prime %) Vacancy Rate % (Prime / Secondary) 12-Month Absorption (10-year average) Supply Under Construction (% Committed) Prime Net Face Rent $/sqm (Outgoings) Prime Net Effective Rent $/sqm (Incentive %) 12-Month Net Effective Growth % (10-year CAGR) Average Prime Yield % (5-year Bond Spread) SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE BRIS FRINGE 5,143 (59.4) 7.7 (8.7 / 6.3) 81,570 (40,221) 160,178 (50) 962 (183) 675 (25) 19.5 (3.6) 5.32 (362) 4,730 (63.1) 8.1 (7.9 / 8.4) 188,672 (80,374) 53,540 (62) 504 (137) 343 (32) 11.4 (2.4) 5.63 (393) 2,239 (48.8) 17.2 (14.7 / 19.7) 41,543 (15,137) 93,400 (80) 573 (124) 319 (36) -3.2 (-2.5) 6.50 (481) 1,768 (61.0) 24.1 (22.3 / 27.0) -12,706 (6,196) 49,734 (99) 623 (174) 311 (50) (-3.0) 7.00 (531) 1,415 (35.3) 16.9 (11.8 / 19.8) 1,988 (14,341) 12,265 (12) 382 (107) 251 (34) -6.0 (1.9) 6.88 (518) 2,164 (57.1) 11.7 (7.0 / 18.4) 25,123 (39,767) 35,500 (100) 351 (75) 291 (20) 1.3 (1.1) 7.75 (606) Source: Jones Lang LaSalle Research, RBA, ABS, Charter Hall Research Prime Capital Value $/sqm (12-month Growth %) 16,479 (12.8) 11,293 (18.0) 8,126 (6.3) 9,666 (-0.2) 5,479 (2.2) 5,055 (2.0) PROFESSIONAL JOB ADS BY STATE The adjoining chart shows a clear lagged relationship between growth in professional job advertisements and net absorption. Growth in professional job advertisements in 2014 and 2015 foreshadowed increases in net absorption evident over the past 12 months. Professional job advertisements moderated considerably over the last year, with negative growth rates in all states except for Victoria and South Australia. Strong growth in job ads in Victoria, at 7.0% over the year to Dec-16 predicate strong leasing activity in Source: APRA, ABS, NEW SOUTH WALES VICTORIA QUEENSLAND SOUTH AUSTRALIA WESTERN AUSTRALIA -14.2% AUSTRALIA -7.8% -5.9% -1.2% -0.6% 7.0% 7.2% 6.4% 9.2% 13.1% 13.7% 30.6% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 1yr Change 2yr Change 8 Charter Hall

11 VACANCY LEVELS BY CBD Leasing enquiry and activity was robust in Melbourne with the CBD recording a reduction in vacancy to 8.1%. Although the vacancy rate in Perth remains elevated at 24.1%, this figure was down slightly from 24.7% the previous quarter, potentially signalling that peak vacancy has past. Improving market conditions in Perth in conjunction with no upcoming supply until 2018 is likely to help vacancy rates trend downwards in Whilst the vacancy rate in Sydney went up to 7.7% over the quarter, this was largely due to 113,000sqm of stock added in the Sep-16 quarter with the completion of Barangaroo-Tower 1 and 333 George Street. However, this will most likely be the peak of Sydney vacancy rates until at least 2018 given significant upcoming withdrawals. Source: Charter Hall Analysis of Jones Lang LaSalle Data 25% 20% 15% 10% 5% 0% DEC04 DEC05 DEC06 DEC07 DEC08 DEC09 DEC10 DEC11 DEC12 DEC13 DEC14 DEC15 DEC16 Sydney Brisbane Adelaide Melbourne Perth SUPPLY UNDER CONSTRUCTION The current quantity of stock under construction, as a relative percentage of the total CBD stock base is highlighted in the adjoining chart. Upcoming supply in the CBDs are 66% committed and represent 1.2% of existing stock on average. Compared to the start of 2015 when upcoming supply represented 4.7% of existing stock, it is clear that the current supply cycle is moderating. This is especially true in Perth, where 97% of supply under construction (the Woodside building) is not due till late With a pre-commitment rate of 99% in Perth, it is clear that developers are acting in a highly risk averse manner as the resources downturn had a significantly detrimental effect on profitability in the mining state across all companies over the past four years. Source: Charter Hall Analysis of Jones Lang LaSalle Data SYDNEY 0.9% 0.4% PERTH 2.8% 0% MELBOURNE 1.1% 0.4% Stock under construction as % of existing stock 0.1% 0.1% BRISBANE 0.8% 0.8% 0.8% ADELAIDE 1.9% 0.5% FRINGE/SUBURBAN Uncommited stock as % of existing stock CANBERRA 2.1% 0.4% TOTAL CBD 1.2% Property Sector Insights 9

12 INDUSTRIAL 11.9 % TOTAL INDUSTRIAL SECTOR RETURN The latest IPD data shows the industrial sector continued its strong performance, returning 11.9% over the year to Sep % NSW TOTAL RETURNS As expected, New South Wales was the top performer with a total return of 13.2% over the year to Sep-16 (latest available IPD data), on the back of strong capital growth and tenant demand. 1,730,000 sqm TENANT DEMAND CONDITIONS 2016 finished the year below the 10-year average with major leases totalling 1.73 million square metres, following a below average first half of the year. Occupier activity in Q4-16 was actually in line with historical averages, with gross take-up of 504,600sqm recorded. Image: 120 Hume Highway, Chullora NSW 1,240,000 sqm DEVELOPMENTS COMPLETED Development activity was strong in 2016 with completed developments at 1.24 million square metres, which was marginally lower than total completed developments for 2015 (1,270,000sqm). Strong pre-lease activity in 2016 has led to an active construction pipeline in 2017 with 1.1 million square metres of industrial space under construction in 2017 nationally. 95% of this upcoming supply is on the East Coast, with the forward pipeline in Perth and Adelaide remaining subdued % INDUSTRIAL DEVELOPMENT APPROVALS Real Industrial development approvals grew by 11.8% over the year to Nov-16 to $4.04 billion, up from $3.61 billion the same time last year, spurred by growth in Victoria (25.6%) and Queensland (43.1%). Whilst project approvals in Western Australia remained below the longterm average, there was a slight recovery over the last quarter as higher commodity prices helped improve miners profitability. >63 % LOGISTICS SECTOR AND WHOLESALE AND RETAIL TRADE Tenant demand was clearly driven by industries that experienced growth above their long-term averages. The logistics sector and wholesale and retail trade, which accounted for over 63% of leasing activity, were the only industries that performed above their respective 10-year averages in terms of corporate revenue. $ 5.2 billion TOTAL RETURNS INDUSTRIAL SALES There is still considerable demand for quality industrial assets across the country with $5.2 billion of industrial sales in 2016, 90% for investment purposes. Foreign interest remains strong, representing 30% of total sales nationally. NEW SOUTH WALES VICTORIA QUEENSLAND WESTERN AUSTRALIA SOUTH AUSTRALIA N/A 8.0% 11.0% 11.3% 13.2% INDUSTRIAL SECTOR 11.9% Income Capital 0% 5% 10% 15% 10 Charter Hall Source: Charter Hall Analysis of Jones Lang LaSalle Research data and IPD data.

13 LONG TERM METRICS Source: Jones Lang LaSalle Research, Charter Hall Research Net Rent $/sqm Prime (Secondary) SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE 137 (126) 90 (67) 117 (88) 109 (92) 89 (64) Prime 12-month Growth % (10-year CAGR) 1.1 (1.2) 0.8 (1.5) -0.4 (0.8) -6.1 (1.8) -0.8 (1.9) Average Yield Prime (12-month change) 6.30 (-43bps) 6.50 (-31bps) 6.65 (-35bps) 6.75 (-25bps) 8.30 (-25bps) Prime 5-year Bond Spread (10-year Average) 484 (377) 487 (376) 509 (367) 521 (356) 676 (463) Sqm Under Construction (% Available) 370,735 (19%) 546,824 (10%) 120,518 (22%) 80,377 (0%) 10,000 (0%) State Development Approvals $ current (10-year Average) 1,010 (990) 1,581 (1,181) 851 (871) 478 (604) 120 (184) State Industrial Job Advertisements Monthly (Average) 9,727 (9,073) 6,974 (7,448) 5,956 (8,635) 3,001 (4,599) 1,506 (2,196) Capitalised Value $/sqm (10-year CAGR) 2,156 (2.4) 1,403 (3.0) 1,760 (1.9) 1,616 (3.0) 1,070 (2.5) SUPPLY UNDER CONSTRUCTION Strong pre-lease activity in 2016 has led developers to keep the national construction pipeline active in % of this upcoming supply is on the East Coast, with the forward pipeline in Perth and Adelaide remaining subdued. Importantly, of the 66,600sqm of space under construction in Perth and Adelaide, none is available. Developers remain highly risk averse on the East Coast too, adding stock with a high precommitment rate, though this is significantly lower in Sydney (60%) than it is in Melbourne (96%) and Brisbane (83%). TOTAL CBD 1,074,000 sqm PIPELINE 14.0 % UNCOMMITTED PERTH SYDNEY 341,000sqm 68,000sqm 0.0% 15.3% BRISBANE 253,000sqm 17.3% MELBOURNE 402,000sqm 13.5% ADELAIDE 10,000sqm 0.0% Source: Jones Lang LaSalle Research, Charter Hall Research Supply under construction % available Property Sector Insights 11

14 INDUSTRIAL LEASING ACTIVITY BY INDUSTRY Large retailers and transport and logistics companies continue to support industrial demand, taking advantage of the competitive precommitment market to improve and consolidate their supply chains. Continued growth in ecommerce markets with online retail sales up 29% over the last year (ABS data), will see logistics continue to grow and soon become the primary driver of the industrial market. Higher commodity prices coupled with a lower Australian dollar in the latter half of 2016 led to a recovery in the manufacturing industry, accounting for over 30% of leasing demand in the industrial space. Chart Source: Charter Hall Analysis of Jones Lang LaSalle Research data 8% Other 23% Logistics 30% Manufacturing 5% Construction 25% Retail Trade 8% Wholesale Trade MAJOR LEASING ACTIVITY BY STATE & TYPE The adjoining chart shows an analysis of major leasing activity over the past 12 months, split by city and type of lease. Sydney is outperforming with nearly 700,000sqm of major activity. Market uncertainty regarding the resources sector and lower than average employment growth led to a fall in leasing activity in Perth, compared to this time last year. Similarly in Adelaide, leasing activity remained soft. A high pre-commitment rate remained a feature in 2016 with design and construction and pre-lease deals represented 55% of major activity. A lower Australian dollar coupled with higher commodity prices in the latter half of the year (with iron ore almost doubling from USD39.60 in January to USD107.14) will likely boost tenant demand in the Perth industrial market in the coming year. SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE 48, , , , , , ,000 Design and construction Pre-lease Occupier Leased Sub-Lease 575, ,357 Chart Source: Charter Hall Analysis of Jones Lang LaSalle Research data 12 Charter Hall

15 RETAIL 10.5 % TOTAL RETAIL SECTOR RETURN Latest IPD data shows the retail sector performing above the long term average, returning 10.5% over the year to Sep-16, driven by growth in non-discretionary retailing. Bulky Goods and Neighbourhood retailing returned 13.2% and 13.1% respectively. Discretionary retailing continued to perform inline with long term averages. 3.6 % RETAIL GROWTH Retail trade grew by 3.6% nationally over the year to Nov-16 (latest available). While this is below long-term averages, it is a good result in the current economic climate, being over double the current inflation rate. The national figure was depressed by the struggling Western Australia economy, where retail trade growth fell to a historic low of 0.7%. Image: Renmark Square, Renmark SA 2.0 % GROWTH IN NEW CAR SALES New car sales in Australia rose to a record high level in Nov-16, growing 2% over the year, with demand remaining strong in New South Wales, Victoria and South Australia. Changing consumer preferences are evident with the proportion of passenger vehicles declining as SUVs grow in popularity, increasing their share of total sales. It is notable that in spite of the changing economic environment, the quantity of new car sales has been largely stable over the last four years % RETAIL YIELDS JLL reported further tightening on retail yields across all retail categories over 2016, with Large Format retailing and Neighbourhood centres the standouts, tightening 48 and 69 basis points respectively. $ 7.1 billion RETAIL DEVELOPMENT APPROVALS There is significant development activity across with country with retail development approvals back at pre- GFC levels ($7.1 billion over the year to Nov-16) in response to increased leasing enquiries from international luxury retailers on the East Coast at prime retail locations. TOTAL RETURNS 7.0 % SUPER & MAJOR REGIONAL REGIONAL SUB-REGIONAL NEIGHBOURHOOD BULKY GOODS 8.8% 9.8% 11.0% 13.1% 13.2% GROWTH IN HARDWARE & GARDEN RETAILING Whilst Hardware & Garden retailing moderated over the quarter to 7.0%, this was still well above the long-term average, as the residential housing market showed no signs of slowing. RETAIL SECTOR 10.5% Income Capital 0% 5% 10% 15% Property Sector Insights 13

16 RETAIL LONG TERM METRICS Retail trade was driven by New South Wales and Victoria where they remained inline with longterm averages at 4.4% in both states. Negative retail trade growth in Western Australia (-0.7%) was largely due to growing redundancies in the once booming mining companies, elevating the state s unemployment rate (6.9% in Nov-16) to its highest level since May-01. Changing consumer tastes and preferences will drive a changing retail experience across all sectors. Online retailing proved to be the biggest winner in 2016, with NAB reporting online sales grew 13.3% over the year to Nov-16. Although online retailing still only represents a small proportion of total retail sales, it is clearly growing at significantly faster than traditional retail stores. Source: Jones Lang LaSalle Research, Charter Hall Research, ABS, RBA Population '000 (12-month Growth %) Retail Trade Growth % 12-month (5-year CAGR) Retail Development Approval Value $M (% above average) Average Full Time Earnings (12-month Growth %) Retail Spend Per Person (% of Full Time Earnings) Current Yield % (10-year Average) Current 10-year Bond Spread (10-year Average) NSW VIC QLD SA WA 7,726 (1.4) 4.4 (4.5) 2,658 (49.1) 82,638 (1.8) 12,603 (15.3) 6,068 (2.1) 4.4 (4.3) 1,520 (-4.8) 78,322 (3.9) 12,536 (16.0) 4,844 (1.4) 2.5 (4.3) 1,565 (9.1) 78,941 (0.8) 12,569 (15.9) 1,708 (0.5) 3.8 (3.6) 240 (-21.5) 76,258 (4.8) 11,520 (15.1) 2,617 (1.0) 0.7 (4.5) 1,090 (65.4) 93,356 (0.6) 12,957 (13.9) REGIONAL SUB-REGIONAL NEIGHBOURHOOD BULKY GOODS 5.4 (6.1) 349 (168) 6.4 (7.3) 450 (289) 6.4 (7.9) 451 (349) 7.7 (8.9) 586 (451) RETAIL TURNOVER BY SECTOR The adjoining chart shows annual growth in Supermarkets against the combined performance of Clothing and Department Stores, as a proxy for the key anchors of discretionary against non-discretionary centres. Clothing and Department Store retailing (3.6%) continued to outperform Supermarket retailing (2.7%) on an annual basis in Nov-16. Food and Supermarket trade growth was below average at 2.7%, driving these retailers to consider new strategies to boost sales in Supermarket giants Coles, Woolworths and Metcash (IGA) recently announced plans to cut their product range by 10-15% in order to reduce costs and provide more space for fresh food. Source: ABS, Charter Hall Research 10% 8% 6% 4% 2% 0% -2% NOV06 NOV07 NOV08 NOV09 NOV10 NOV11 NOV12 NOV13 NOV14 NOV15 NOV16 Total Supermarkets Clothing and Department Stores 14 Charter Hall

17 RETAIL TURNOVER & DRIVERS BY STATE Retail turnover continued to show strong growth across New South Wales and Victoria, in line with their respective long term averages. Victoria s population growth (2.0% over the year to Jun-16) was the highest of all the states and considerably above the national average (1.3% over the same period). Add its strong employment growth (3.0% over the year to Nov-16) and Victoria is likely to outperform in Weak labour markets in Western Australia and Queensland led to continued consumer caution and moderated spending in these states. Source: ABS, Charter Hall Research 5% 4% 3% 2% 1% 0% NEW SOUTH WALES VICTORIA QUEENSLAND SOUTH AUSTRALIA WESTERN AUSTRALIA Retail Trade Growth (Nov-16) Population Growth (Jun-16) Employment Growth (Nov-16) RETAIL TRADE & RESIDENTIAL HOUSING PRICES The adjoining chart shows a positive, but lagged relationship between residential house prices and retail trade. Falls in retail trade growth over the year to Nov-15 (latest available data from the ABS) mimics falls in growth of residential property prices a year ago. Results for Australian housing finance approvals remain disparate, with the total number of owner occupier loans down 4.2% over the month in Jul-16 compared to a 0.5% increase in housing finance approvals to investors. Indeed, expectations of further falls to owner occupier loan approvals over the remainder of the year point to a firming in housing market conditions over % 15% 10% 5% 0% Source: ABS, Charter Hall Research SEP06 SEP07 SEP08 SEP09 SEP10 SEP11 SEP12 SEP13 SEP14 SEP15 SEP16 Retail Trade Residential Property Prices Property Sector Insights 15

18 RETAIL NEW VEHICLE SALES The adjoining chart shows the composition of new car sales by the main types of cars. It is notable that in spite of the changing economic environment, the quantity of new car sales has been largely stable over the last 4 years. New car sales in Australia rose to a record high level in Nov- 16, growing 2% over the year, with demand remaining strong in NSW, Vic and SA. Changing consumer preferences are evident with the proportion of passenger vehicles declining as SUVs grow in popularity, increasing their share of total sales. Source: RBA, Bloomberg, Charter Hall Research 1,200,000 1,000, , , , ,000 0 DEC06 DEC07 DEC08 DEC09 DEC10 DEC11 DEC12 DEC13 DEC14 DEC15 DEC16 Passenger Vehicles SUVs Other RETAIL TRADE BY CATEGORY (20-YR INDEX) The adjoining chart illustrates growth in retail trade by sector indexed over 20 years. Over the long term, Hardware and Garden retailing has clearly outperformed all other retail categories in terms of growth in trade, driven primarily by the residential housing boom. While residential housing approvals for apartments have grown significantly over the last two years, aiding Household Goods (excluding Hardware and Garden) retailing, this starting to taper off in all states except for New South Wales. In contrast, approvals for freestanding homes is still growing at a steady rate, indicative of continued outperformance in Hardware and Garden retailing. 250% 200% 150% 100% 50% 0% NOV96 NOV98 NOV00 NOV02 NOV04 NOV06 NOV08 NOV10 NOV12 NOV14 NOV16 Supermarkets Hardware and Garden Clothing and Department Stores Household Goods (Ex H&G)

19 CONTACT US To learn more contact Charter Hall directly on: research@charterhall.com.au charterhall.com.au IMPORTANT INFORMATION Charter Hall Limited (ABN ) Charter Hall Funds Management Limited (ABN ) This report has been prepared by the Charter Hall Group for discussion purposes only. This presentation does not constitute and should not be interpreted as either an investment recommendation or advice, including legal, tax or accounting advice. This presentation expresses our current intentions only; it is non-binding in all respects and is not an offer capable of acceptance. We do not warrant the accuracy or completeness of information contained in this presentation. In preparing these materials, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information obtained from third party sources. CHARTER HALL GROUP Property Sector Insights 17

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