Economic Report. New South Wales. December Savills Research. NSW - Key Economic Indicators. Highlights

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1 Savills Research Economic Report New South Wales Highlights The NSW economy grew by 2.6% over FY-18 (looking at Gross State Product), whilst on State Final Demand numbers, the NSW economy grew by 3.5% (on a rolling annual basis) in the year to September NSW s population grew at a rate of 1.4%, with approximately 113,000 people added to the state over the year to March 2018 with 90,000 being overseas migrants. Sales in residential property were down considerably in the 12 month period to June 2018, as macroprudential policies placed earlier in the year led to a significant slowdown in investor loans. The Sydney CBD office market returned 17.1% on the back of near record high capital returns (11.7%) as investor appetite for CBD assets remained strong. NSW - Key Economic Indicators Date AUS NSW GDP Growth** Sep (2.6) 3.5 (2.7) Population Growth Mar (1.6) 1.4 (1.4) Inflation Sep (2.0) 2.0 (2.2) Employment Growth Oct (1.6) 3.5 (1.8) Unemployment Rate Oct (5.6) 4.8 (5.3) Retail Trade Sep (3.7) 3.5 (4.5) Job Ad Growth Total Oct (-4.6) 4.5 (-3.3) House Price Growth Jun (4.8) (6.2) Attached Price Growth Jun (4.2) -6.6 (6.0) Earnings Growth May (318.6) 3.7 (3.5) **On a rolling annual basis

2 Savills Research Economic Report - New South Wales Report Contents Executive Summary 2 Treasury Growth Forecast Table 3 State Summary Table 3 Gross State Product 4 Population & Retail Trade 5 Employment 6 Residential Property 8 Property Performance Metrics 10 National Key Economic Indicators 12 Shrabastee Mallik smallik@savills.com.au Director - Research & Consultancy For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please research@savills.com.au Key Contacts 14 Executive Summary Historically, New South Wales has been the main driver of economic growth nationally and continues to be so. Accounting for one-third of Gross Domestic Product nationally, NSW is the largest state economy in the country. Over the past 5 years, NSW s economy has been buoyed by strong population growth (with the highest rate of overseas migration in the country), strong construction activity (on the back of increased spending on infrastructure by the state government and record high rates of residential construction), sound household consumption and a strong labour market. There was a notable improvement in full-time job creation from mid-2017, as corporate profits provided the impetus for companies to fill increasing labour requirements, though this was mainly concentrated in white collar jobs, which account for the majority of jobs in the state s capital, which continues to define itself as the economic powerhouse of the country. However, no real wage growth continues to have a dampening effect on the retail sector was also the year that the inevitable slowdown in the residential housing sector began, with median house and attached dwelling prices in Sydney falling 12.1% and 6.6%, respectively, in the year to June 2018, though median house prices in non-metro NSW rose 1.1% over the same period. Looking forward, on NSW Treasury forecasts, the state will continue to have economic growth in line with historical averages and will largely be driven by increasing business and public investment and more broad-based strength in exports. Whilst forecasts for inflation remain muted for the next 3 years, wages growth is expected to rise steadily over the same period to 3.25%, as a tightening labour market and already evident increases in advertised salaries help to boost household incomes. There remain concerns about elevated debt levels and tightening financial conditions inhibiting residential property prices. Increasing interstate migration out of NSW will reduce population growth from record high levels to 1.4% in 2021, though overseas migration is expected to remain strong. NSW Treasury Growth Forecast Table Outcome Forecasts Projections FY-17 FY-18 FY-19 FY-20 FY-21 FY-22 Real State Final Demand Growth (%)* Real Gross State Product Growth (%)* Employment (%) Unemployment Rate (%) Sydney Consumer Price Index (%) Wage Price Index (%) Nominal Gross State Product (%) Population (%) Source: NSW Treasury * SFD = State final demand is the estimate obtained by summing government final consumption expenditure, household final consumption expenditure, private gross fixed capital formation and the gross fixed capital formation of public corporations and general government; GSP = Gross State Product, which is State Final Demand + Net Exports (as defined by the Australian Bureau of Statistics). 2

3 Ec. Growth (Year to Sep-18) Retail Trade (Year to Sep-18) Population (Year to Mar-18) Inflation (Year to Sep-18) 3.5% 3.5% 1.4% 2.0% State Summary Table Economic Growth Latest 10yr Avg SFD / GDP Growth ($) Sep b (3.7) b (2.9) b (4.6) b (2.7) b (3.5) Population Population Growth Mar m (1.4) 7.67m (1.4) 7.80m (1.7) 7.92m (1.5) 7.96m (1.4) Employment Employment Growth Oct k (1.2) 149.8k (4.1) 41.9k (1.1) 101.6k (2.7) 136.1k (3.5) Full Time Emp Growth Oct k (1.7) 136.0k (5.4) -46.4k (-1.7) 123.6k (4.7) 57.5k (2.1) Part Time Emp Growth Oct k (-0.2) 13.9k (1.3) 88.3k (8.0) -22.0k (-1.8) 78.6k (6.7) Unemployment Rate Oct Consumer Price Index Inflation (%) Sep Retail Trade Total Growth (%) Sep Food (%) Sep Department Stores (%) Sep Household Goods (%) Sep Clothing (%) Sep Cafes (%) Sep Job Advertisements Total Growth Oct ,645.2k 0,696.6k (8.0) 0,776.7k 0,779.3k (0.3) 0,814.7k (4.5) Office Oct k (10.2) 199.3k (8.6) 221.1k (11.0) 218.5k (-1.2) 239.1k (9.4) Industrial Oct k (12.9) 102.9k (9.4) 119.7k (16.3) 124.6k (4.0) 128.2k (2.9) Retail Oct k (8.0) 38.9k (12.1) 41.2k (6.1) 40.2k (-2.6) 38.7k (-3.6) Residential Property Prices Detached House (%) Jun Attached Dwellings (%) Jun Development Approvals Total Residential ($) Oct k (16.2) 69.57k (27.8) 76.71k (10.3) 71.74k (-6.5) 66.85k (-6.8) Residential Houses ($) Oct k (20.4) 27.23k (11.1) 29.40k (8.0) 29.25k (-0.5) 29.75k (1.7) Office ($) Oct b (-26.1) 1.28b (-26.7) 1.72b (34.4) 2.71b (57.1) 2.49b (-8.0) Industrial ($) Oct b (4.6) 1.38b (17.9) 1.54b (11.2) 1.94b (26.2) 1.97b (1.6) Retail ($) Oct b (-34.2) 2.19b (66.1) 2.71b (23.3) 1.67b (-38.4) 1.55b (-6.9) Source: ABS/DOE/RBA/Savills Research; 10yr Averages shown in brackets; *Median prices quoted savills.com.au/research 3

4 Savills Research Economic Report - New South Wales GSP Record infrastructure spending in New South Wales has also spilled over into private investment, jointly working to drive growth since 2015, with nearly half of infrastructure activity nationally concentrated in New South Wales. Gross State Product (Annual Growth to FY-18) The NSW economy grew by 2.6% over FY-18 (looking at Gross State Product), whilst on State Final Demand numbers, the NSW economy grew by 3.5% (on a rolling annual basis) in the year to September Looking at GSP by sector, moderating construction activity in the residential property sector tempered growth in the industry, growing by 4.6%, compared to 10.6% in the previous financial year. Economic growth in NSW was boosted by growth in the Business Services and Finance & Insurance sectors, which are the 2nd and 4th largest industries in the state respectively, (accounting for 17.5% and 14.5%, respectively of NSW s GSP in FY-18). Positively, looking at GSP per capita (a measure of the standard of living in an economy), NSW s economy grew at 1.3% in per capita terms (second only to the much smaller SA). This was also underpinned by Sydney having the highest rate of labour productivity in the nation. 14.1% 7.4% 4.9% 4.7% 4.6% 4.6% 4.3% 4.2% 2.6% 2.6% -0.4% -0.6% 4 Mining & Utilities Finance & Insurance Business Services Health / Edu / Rec Manuf / Logistics / Cons. Other Dwellings Wholesale & Retail Trade Food & Accomm Total IT / Comms Public Admin -2.9% Agriculture

5 Population & Retail Trade Population Growth NSW s population grew at a rate of 1.4%, with approximately 113,000 people added to the state over the year to March The majority of this was due to ongoing the immigration cycle, with over 90,000 overseas migrants settling in NSW over the same period (circa 40% of all overseas migrants that settled in Australia). Interestingly, of all the overseas migrants, 85,000 chose to settle in Sydney, bringing the Harbour city s population to approximately 5.2 million. However, interstate migration is increasingly negative as residents abandoned Sydney in numbers not seen since the last residential housing boom in the early 2000s, with nearly 20,500 residents moving interstate. Retail Trade Growth Total retail turnover growth in NSW was recorded at 3.5% over the year to September Retail growth in all sub-categories remained well below long term averages, except Café & Restaurant retailing, which had the highest growth rate at 7.6%. A moderating residential housing sector led to notably softer growth across Household Goods and Hardware & Garden retailing, returning 1.9% and 0.8% respectively, well below their 5 year CAGRs (6.2% and 7.1% respectively). Positively, the last 3 months of the year are traditionally the strongest for retailers and we are likely to see a strong finish to the year. 175, , , ,000 75,000 50,000 25,000 - (25,000) (50,000) Natural Increase Overseas Migration Interstate Migration 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% savills.com.au/research 5

6 Savills Research Economic Report - New South Wales Strong construction activity in conjunction with expanding white collar work force and health services helped to create more than 500,000 jobs in New South Wales since 2011, with ongoing strength in the labour market forecast over the next 3 years. Employment Full Time & Part Time A surge in part-time employment in NSW drove total employment growth in the 12 months to October 2018, after retailers increase their requirements for workers going into the Christmas retailing period, with part-time employment growth recorded at 6.7% over the same annual period. Historically, employment growth in NSW averages 1.8% per annum, but the current annual rate is nearly double that, at 3.5%. NSW continues to dominate in terms of job creation nationally, driven mainly by jobs being created in the Professional & Technical services sector, which dominant the labour market in Sydney. This level of job creation is a major reason for overseas migrants choosing to settle in the nation s major cities, with employment growth in the state capitals outstripping that in their respective regional areas. 200,000 F/T Employed P/T Employed 150, ,000 50,000 - (50,000) (100,000) 6

7 Job Advertisements by Sector (5yr Indexed) Growth in job advertisements for the industrial sector has been notable over the last 5 years, after falls in the 5 year period after 2008, boosted by increased labour requirements in the construction industry. Professional job advertisements grew by 9.4% in the year to October 2018, driven by requirements in Financial Services and Health Care industries. Declines in the Retail sector were largely as a result of increasing moves towards online shopping and muted retail trade growth. Looking forward, initiatives by the state government to increase funding to support the expansion and growth of small businesses in NSW on a competitive basis are likely to keep job advertisement growth buoyant. 160 Job Ads - Total Job Ads - Office Job Ads - Industrial Job Ads - Retail Employment by Industry (May-18) The makeup of NSW s labour market is largely in line with that of Australia s, with the Public Sector, Education & Recreation sectors jointly accounting for 27.2% of the total (29.5% nationally). Ongoing interest in Australian universities from international students has meant that jobs in Higher Education are numerous, particularly in Sydney, which is home to the country s top universities. A pickup in activity reported by the manufacturing sector comes as the state government increases funding to increase the useability and viability of NSW Ports, which will in turn to an increase in labour requirements for the industry. Requirements in Healthcare and Aged Care are going to increase significantly over the next 10 years, in line with an increasingly ageing population. Public, Edu & Rec (27.2%) Retail Trade (10.6%) Prof & Tech Services (9.8%) Construction (9.0%) Manufacturing (7.9%) Hospitality (7.0%) Fin & Ins Services (5.1%) Logistics (4.9%) Other Services (3.6%) Wholesale Trade (3.3%) Admin & Support (3.2%) IT & Telco (2.6%) Rental, Hire & R/E (2.0%) Agriculture (1.8%) Mining (0.9%) Utilities (0.9%) Source: DOE / Savills Research savills.com.au/research 7

8 Savills Research Economic Report - New South Wales Residential Property Residential Property Prices (10yr Indexed) According to the latest available data from the ABS, median house prices in Sydney fell 12.1% in the 12 months to June 2018, with the median house price recorded at $945,000 (down from the peak of $1,075,000 hit in June 2017). Median prices for attached dwellings in Sydney fell 6.6% over the same period, with the average median price recorded at $710,000 (down from a record high of $760,000 in June 2017). More recent data from CoreLogic point to ongoing falls, largely owing to falls in Sydney s outer ring suburbs. Looking at the numbers on an indexed basis, house prices in Sydney have grown by 182% over the past 10 years, one of the highest growth rates in the developed world. Ongoing credit tightening in conjunction with rising prices in 2017 has meant that we are now seeing the inevitable slowdown of the residential housing market. Median house prices are forecast to grow by approximately 2-3% over the next 3 years as supply is now largely in line with demand. Volume Sales (Annual Growth to Jun-18) Sales in residential property were down considerably in the 12 month period to June 2018, as macroprudential policies placed earlier in the year led to a significant slowdown in investor loans. Whilst the cash rate remains at record low levels, Westpac raising interest rates (and other banks likely ot floow suit soon) means that the residential housing market is in for some turbulence yet. Of greater concern is that not only are transaction volumes lower than historical averages, but nearing record low levels reached the Global Financial Crisis. Adding greater policy uncertainty (with an impending election) into the mix, we are now at a point where the long called for slowdown in the residential housing market may be accelerating at a pace that is above comfort levels. 0.0% $1,000,000 House Price (Sydney) Attached Dwellings Price (Sydney) House Price (Non-Metro NSW) Attached Dwellings Price (Non-Metro NSW) -5.0% -10.0% -4.1% $800, % -14.2% -15.2% $600, % -20.3% $400,000 $200, % House Vol (Sydney) Attached Dwellings Vol (Sydney) House Vol (Non- Metro NSW) Attached Dwellings Vol (Non-Metro NSW) Residential Statistics (Houses) by State METROPOLITAN NON-METROPOLITAN STATE Median Price* Sale Volume* Median Price* Sale Volume* DAs* DAs / 100** AUS 693 (-5.7%) 171,871 (-11.7%) 417 (0.2%) 130,780 (-3.4%) 119,473 (2.5%) 0.89 (0.83) NSW 945 (-12.1%) 44,264 (-14.2%) 470 (1.1%) 49,983 (-4.1%) 29,754 (1.7%) 0.84 (0.68) VIC 732 (-1.7%) 54,712 (-16.4%) 353 (4.4%) 27,809 (2.1%) 39,572 (8.1%) 1.16 (1.01) QLD 526 (2.1%) 33,903 (-12.2%) 430 (-3.2%) 34,037 (-8.1%) 25,234 (-0.1%) 0.84 (0.81) WA 500 (-1.0%) 5,860 (-0.8%) 310 (-4.6%) 5,860 (-0.8%) 12,416 (-11.4%) 0.67 (0.98) SA 468 (2.1%) 24,240 (3.4%) 275 (0.7%) 6,385 (4.2%) 8,055 (-0.1%) 0.70 (0.69) ACT 690 (2.6%) 4,362 (-7.8%) n.a n.a 1,315 (36.0%) 1.58 (1.22) ; *12 month growth rates in brackets; **10yr Averages shown in brackets 8

9 DAs per 100 vs. DAs (split) Development approvals for residential housing fell 6.82% in the 12 months to October 2018 on the back of more pronounced falls in approvals for attached dwellings (which fell 12.7%). Development approvals for detached houses have remained largely flat over the same period, with 29,754 recorded in the current annual period (which was largely in line with the long-term average). Following recent changes to planning announcements by the NSW government, we are likely to see a shift towards more low rise medium density housing such as townhouses, away from the high density / high rise apartment approvals that have been so prolific over the past 3 years. Despite current supply being largely in line with demand, it is apparent that with continuing population growth in NSW, residential development slowing too much will lead to another scenario of demand outstripping supply, leading to another unsustainable residential housing boom with double digit growth year on year. 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Residential Statistics (Attached Dwellings) by State METROPOLITAN NON-METROPOLITAN STATE Median Price* Sale Volume* Median Price* Sale Volume* DAs* Total (%) AUS 556 (-3.8%) 102,002 (-16.5%) 384 (0.3%) 36,898 (-10.6%) 103,223 (-1.1%) 46% NSW 710 (-6.6%) 34,878 (-20.3%) 390 (-3.1%) 11,491 (-15.2%) 37,091 (-12.7%) 55% VIC 550 (1.3%) 34,706 (-18.1%) 280 (2.9%) 4,800 (-4.7%) 34,793 (15.5%) 47% QLD 398 (0.0%) 11,224 (-13.3%) 385 (1.3%) 17,621 (-11.5%) 16,533 (0.0%) 40% WA 410 (0.0%) 6,942 (0.4%) 210 (-19.2%) 635 (15.5%) 4,864 (-18.7%) 28% SA 374 (-2.9%) 8,403 (-5.0%) 182 (-11.2%) 1,097 (8.5%) 4,115 (-3.9%) 34% ACT 430 (-3.6%) 3,890 (-21.7%) n.a n.a 5,315 (31.5%) 80% ; *12 month growth rates in brackets savills.com.au/research 9

10 Savills Research Economic Report - New South Wales Property Performance Metrics Office Sector - Historical Annual Returns National performance of the sector was clearly driven by outperformance of Sydney s office markets. The Sydney CBD office market returned 17.1% on the back of near record high capital returns (11.7%) as investor appetite for CBD assets remained strong. It was clear that the ongoing yield compression cycle in the CBD spurred investor activity in Sydney s fringe office markets, with total returns in these markets exceeding those in other CBDs nationally. The North Sydney, Parramatta and North Ryde office markets recorded total returns of 14.2%, 18.0% and 16.6% respectively (over the year to September 2018). Parramatta s total return was the strongest of all the office markets (both CBD and non- CBD) nationally. 25% 20% 15% 10% 5% 0% -5% -10% -15% North Sydney North Ryde Office Parramatta Office Sydney CBD Industrial Sector Returns 10yr Indexed Total returns in NSW were reported at 12.5% over the year to September Sydney s Central West precinct outperformed all other markets nationally as ongoing demand for industrial property and less available industrial zoned land saw demand for industrial assets in the precinct far outstrip available supply, driving intense competition for the limited stock available for sale. Capital returns in the precinct were recorded at 8.7%. We are seeing greater capital growth in Sydney than in any other industrial market nationally as developers and investors compete for limited available assets for sale. A growing ecommerce market in Australia, with ongoing storage and distribution facility requirements means that we will see this level of demand continue, with a shift to Sydney s Outer West precinct, which is likely to be the next beneficiary of limited available developable industrial land. 50% 40% 30% 20% 10% 0% -10% -20% Sydney Central West Industrial Sydney Outer West Industrial Sydney North Industrial Sydney South Industrial -30% Source: MSCI IPD / Savills Research Source: MSCI IPD / Savills Research 10 Source: MSCI IPD / Savills Research

11 Australian Property - Performance Metrics Compound Return Standard Deviation Sharpe Ratio Equities Correlation 1yr I 5yr I 10yr I 20yr 5yr I 10yr I 20yr 5yr I 10yr I 20yr 5yr I 10yr I 20yr Aus Property 11.1% I 11.6% I 8.9% I 1.3% I 5.0% I 4.7% 6.35 I 0.86 I % I 17% I 36% - Office 14.4% I 12.5% I 9.0% I 2.0% I 5.9% I 5.6% 4.35 I 0.74 I % I 12% I 28% - Retail 7.5% I 10.0% I 8.4% I 1.1% I 4.0% I 4.5% 6.36 I 0.96 I % I 24% I 42% - Industrial 11.6% I 12.8% I 9.3% I 2.2% I 6.3% I 5.2% 4.33 I 0.73 I % I 19% I 33% Bonds 5.3% I 5.8% I 6.6% I 6.7% I 8.0% I 6.8% 0.31 I 0.42 I % I -69% I -59% A-REITS 13.3% I 12.8% I 7.0% I 9.7% I 21.1% I 18.2% 1.01 I 0.09 I % I 75% I 72% Aus Equities 13.5% I 8.0% I 7.8% I 8.6% I 16.1% I 14.8% 0.78 I 0.13 I 0.31 n.a Source: Savills analysis of MSCI / IPD Data; As at September 2018 Retail Sector Returns (State Comparisons) Whilst investor demand for retail assets remained strong in 2018, a muted retail sector kept income returns low. NSW s retail sector returned 9.0% over the year to September 2018 (on latest available MSI / IPD data). A slew of neighbourhood centres are said to offered up for sale in the last quarter of 2018 as owners look to capitalise on demand for food-based centres as returns for Neighbourhod centres led all other retail property types. Sydney property continued to outperform all other states across all sectors, backed by strong economic fundamentals and robust consumer and business sentiments and confidence. 20% NSW VIC QLD WA SA 15% 10% 5% 0% -5% -10% Source: MSCI IPD / Savills Research savills.com.au/research 11

12 Savills Research Economic Report - New South Wales National Key Economic Indicators NORTHERN TERRITORY WESTERN AUSTRALIA SFD: 0.3% Inflation: 1.2% Retail Trade: -0.8% Pop. Growth: 0.8% SOUTH AUSTRALIA SFD: 3.1% Inflation: 1.8% Retail Trade: 3.7% Pop. Growth: 0.7% SFD: 4.2% Inflation: 2.7% Retail Trade: 5.6% Pop. Growth: 1.0% 12

13 SFD: 3.2% Inflation: 1.8% Retail Trade: 2.2% Pop. Growth: 1.7% QUEENSLAND SFD: 3.5% Inflation: 2.0% Retail Trade: 3.5% Pop. Growth: 1.4% NEW SOUTH WALES SFD: 3.7% Inflation: 2.5% Retail Trade: 3.9% Pop. Growth: 2.1% VICTORIA SFD: 4.4% Inflation: 2.2% Retail Trade: 5.9% Pop. Growth: 2.2% TASMANIA savills.com.au/research 13

14 Savills Research Economic Report - New South Wales Methodology Figures written in this report may not coincide with numbers published by entities such as the Australian Bureau of Statistics, as a result of differing calculation methods (such as on a rolling year basis, consolidating numbers from a number of entities, etc.). Key State Contacts Valuations Sandra Peachey +61 (0) speachey@savills.com.au Office Leasing Rob Dickins +61 (0) rdickins@savills.com.au Capital Transactions Ian Hetherington +61 (0) ihetherington@savills.com.au Project Management Gavin Boswarva +61 (0) gboswarva@savills.com.au Metro & Regional Sales Tom Tuxworth +61 (0) ttuxworth@savills.com.au Industrial Darren Curry +61 (0) dcurry@savills.com.a Asset Management Howard Chapman +61 (0) hchapman@savills.com.au The Savills Research & Consultancy team has years of experience, and is supported by our extensive agency, property management and valuation professionals. For national-level consultancy or subscription requirements please contact: Capital Strategy & Research Shrabastee Mallik +61 (0) smallik@savills.com.au Savills is a leading global property service provider listed on the London Stock Exchange. Trusted since 1855, we have extensive experience across the Asia Pacific, with over 50 offices, and in Australia, we have over 800 staff focused on meeting all your property needs. This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills. savills.com.au/research 14