Economic Property Drivers June 2018

Transcription

1 Savills Research Australia Economic Property Drivers June 2018 Highlights The Australian economy grew at a rate of 2.6% (on a rolling year basis) over the year to March 2018, corresponding to a 3.1% QoQ annual growth rate; Superannuation assets increased by $165bn over the past 12 months, following growth of $409bn the year prior. This has placed persistent investment demand for real assets such as property; Institutional property provided an average total return of 11.5% with the Sydney CBD and Melbourne CBD office markets a standout at 15.3% and 13.6% respectively, eclipsing the 1% return seen for the equities market; The national unemployment rate fell to 5.5% in April 2018, with a surge in full-time employment; Currently standing at million, Australia s population is set to reach 25 million people this year, circa 30 years ahead of official forecasts made in 1998 by the ABS. AUS Key Economic Indicators Date Latest PCP* GDP Mar %** 2.4%** Population Growth Sep % 1.5% Inflation Mar % 2.1% Employment Growth Apr % 1.5% Unemployment Rate Apr % 5.7% Retail Trade Apr % 2.6% Job Ad Growth Total Apr % 3.4% House Price Growth Dec % 5.8% Attached Price Growth Dec % 0.9% Earnings Growth Nov % 2.2% Australian Property Mar % 11.7% AUD/USD Jun *PCP = Previous Corresponding Period; **On a rolling annual basis

2 Savills Research Economic Property Drivers Report Contents State Treasury Economic Forecasts 2 Executive Summary 3 Key Economic Indicators by State 3 GDP & Profits 4 Australian Property Performance Metrics 6 Superannuation Trends & Impacts 8 Rates & Inflation 10 Employment 12 Population 16 Retail Trade 18 Housing Trends 20 Household Sector 22 International Forecasts 24 Methodology 26 Key Contacts 26 National Head Capital Strategy & Research Chris Freeman cfreeman@savills.com.au Associate Director Capital Strategy & Research Shrabastee Mallik smallik@savills.com.au For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please research@savills.com.au WA* GSP: FY % FY % Emp: FY % FY % CPI: FY % FY % ACT GSP: FY % FY % Emp: FY % FY % CPI: FY % FY % Qld. GSP: FY % FY % Emp: FY % FY % CPI: FY % FY % NORTHERN TERRITORY QUEENSLAND NSW State Treasury Economic Forecasts WESTERN AUSTRALIA SOUTH AUSTRALIA GSP: FY % FY % Emp: FY % FY % CPI: FY % FY % SA GSP: FY % FY % Emp: FY % FY % CPI: FY % FY % VICTORIA NEW SOUTH WALES Vic. GSP: FY % FY % Emp: FY % FY % CPI: FY % FY % 2 *CPI estimates are for Perth only

3 June 2018 Executive Summary Economic performance saw an uplift over the year to Q1-18 with 2.6% growth (on a rolling annual basis) as the economy moved away from its two speed performance and began to normalise across sectors and states. This was aided by a global economic recovery that continued its trajectory and guided financial markets and demand for Australian resources upward. However, the spectre of improved economic performance globally with the US economy seemingly becoming great again and experiencing an unemployment rate of 3.8%, the lowest since 1969, while having more job openings than unemployed persons, is upward pressure on US interest rates becoming clearly evident. The impact this has on the world s fixed interest rate environment, and subsequently property return hurdles, is a key question moving forward for investors. Australia has now experienced 27 consecutive years without a recession, albeit largely due to materially stronger population growth than most developed peers, with this economic and population performance aiding international investor sentiment. This has been further enhanced with property sector returns being a standout according to the latest MSCI numbers, with an 11.5% total return for the sector overall (on an unlevered basis) materially outperforming the 1.0% performance seen in equities, that have been impacted by Australia s heavy weighting to financials. Forward drivers for tenancy demand appear broadly positive. Labour market indicators for demand in the office and industrial sectors remain buoyant with related job adverts up 9.7% and 15.0% respectively. While advertisements for retail employees were down slightly over the year given challenges facing the sector, expected improvements in wages following sustained growth in full-time employment over the last 12 months, should help to stimulate household consumption through the second half of The normalisation in economic performance that the Australian economy has needed is now at hand, with previously under-performing state economies of Queensland, South Australia and Western Australia benefiting from a resurgence in the mining sector. Most promisingly, WA posted its first positive growth figure at a domestic level (noting that the SFD basis excludes export gains) after 17 consecutive quarters of negative growth, with an annual growth rate of 0.7% (QoQ) and seeing job advertisements for the state rise by a nation-leading 13.9%. Key Economic Indicators by State SFD / GDP Growth Population Gowth Inflation Employment Growth Unemp. Rate House Price Growth Attached Price Growth Retail Trade Growth Mar-18 Sep-17 Mar-18 Apr-18 Apr-18 Dec-17 Dec-17 Apr-18 NSW 3.1 (2.7) 1.6 (1.4) 2.1 (2.3) 3.8 (1.6) 4.8 (5.3) -2.0 (6.1) 0.0 (5.8) 3.2 (4.1) VIC 4.8 (3.0) 2.4 (2.1) 2.2 (2.2) 2.1 (2.1) 5.7 (5.7) 7.8 (6.2) 6.8 (4.2) 5.3 (4.1) QLD 3.1 (1.8) 1.7 (1.8) 1.7 (2.3) 3.5 (1.4) 6.1 (5.8) 3.1 (2.5) 0.3 (1.1) 1.3 (3.1) WA 0.2 (1.9) 0.9 (2.0) 0.9 (2.0) 1.9 (1.6) 6.0 (5.0) -3.2 (0.6) -2.4 (0.5) -0.2 (3.3) SA 3.8 (2.0) 0.6 (0.9) 2.3 (2.2) 2.3 (0.8) 6.0 (6.1) 3.6 (2.7) 5.2 (2.6) 3.1 (2.7) ACT 3.2 (2.5) 1.8 (1.9) 2.4 (2.1) 2.7 (1.4) 4.0 (3.9) 6.1 (3.8) 2.3 (2.1) 2.0 (3.3) TAS 3.7 (1.4) 0.7 (0.5) 2.0 (2.1) 1.2 (0.4) 5.9 (6.2) 6.1 (3.1) 14.8 (3.0) 3.0 (2.8) NT 0.6 (3.6) 0.0 (1.4) 1.1 (2.0) -2.0 (2.0) 4.2 (3.9) -5.7 (1.8) -7.9 (1.3) 1.9 (3.4) AUS 2.6 (2.6) 1.6 (1.7) 1.9 (2.2) 2.9 (1.6) 5.5 (5.5) 1.9 (4.9) 2.6 (4.2) 2.9 (3.7) Source: ABS/DOE/RBA/Savills Research; 10yr Averages shown in brackets savills.com.au/research 3

4 Savills Research Economic Property Drivers Economic Growth NSW 3.68% Vic. 4.93% WA 0.75% GDP Growth vs. Inflation The Australian economy grew at a rate of 2.6% (on a rolling year basis) over the year to March 2018, bringing up 27 consecutive years without a recession. On a quarter on quarter basis, the annual growth rate was even more pronounced at 3.1%. Over the first quarter of the year, the Australian economy expanded 0.8%, beating market expectations and helping to push the Australian dollar to its highest level in a month (albeit well below the start of the year). Exports were the main driver of growth in the first quarter, accounting for half of the growth in GDP, with continued spending by the government also assisting economic performance. Household consumption was relatively muted, with continued uncertainty likely as a result of consistently high household debt hampering consumer spending in the face of historically low wages growth. 5.0% GDP Growth Inflation Qld. 3.08% 4.0% 3.0% 2.0% SA 2.12% 1.0% 0.0% 4 (On a rolling year basis)

5 June 2018 GDP Composition by State NSW % VIC % QLD % WA % SA - 6.5% ACT - 2.7% TAS - 1.8% NT - 1.8% State Final Demand (as at Mar-18) State Final Demand exceeded or matched their respective 5 year CAGRs. Victoria and South Australia remained standouts, with respective annual growth rates of 4.9% and 3.8%, far exceeding all long term average growth rates. Queensland s state economy continued to benefit from the resurgence in the mining sector, with several plants increasing production levels across LNG and coal projects in the sunny state. Most promisingly, WA posted its first positive growth figure (note the SFD basis that excludes exports) after 17 consecutive quarters of negative growth, with an annual growth rate of 0.7% (QoQ). Whilst private capital investment remained weak in the 1st quarter in WA, there are hopes of a turnaround later this year, which will continue to aid WA s recovery. Looking ahead, forecasted improvements to wages growth should help to stimulate household consumption through the second half of Corporate Profits (as at Mar-18) Following on from a stellar year for corporate Australia in 2017, gross corporate profits in the first quarter of 2018 remained buoyant and beat market expectations, growing 10.4% over the 12 months. The Utilities industry lead the pack, with company profits in the sector increasing by 28.6%, on the back of utilities retailers increasing prices to record high levels. Profits for the banking sector are likely to be muted, as a result of the ongoing bank royal commission, which has had a focus on bank lending practices. Revenue growth in the Mining sector remained strong as growing optimism in the world economy kept commodity prices stable. 5.0% 1yr 5yr 10yr 15yr 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% NSW VIC QLD WA SA ACT AUS Rental, Hire & R/E (6.9%) Arts & Recreation (2.6%) Logistics (1.6%) Construction (0.0%) IT & Telecommunications Manufacturing Retail Trade Total Other Wholesale Trade Admin & Support Mining Prof. & Tech Services Utilities 2.5% 8.7% 9.2% 10.4% 11.8% 13.9% 14.3% 19.0% 19.5% 28.6% savills.com.au/research 5

6 Savills Research Economic Property Drivers Australian Property Performance Metrics Office Sector - 10yr Indexed Returns With an 11.5% total return, Australian property performance eclipsed the 1.0% return of the Australian equity market, while showing significantly lower long term volatility. Looking at total returns for the office sector, it was clear that investor interest in the Sydney CBD and Melbourne CBD office markets drove outperformance of the sector. The Sydney CBD office market returned 15.3%, with capital returns of 9.8%, whilst in Melbourne CBD, capital returns accounted for 8.0%, compared to a total return of 13.6%. Moving forward, capitalisation of income growth expected in these markets will most likely drive overall returns over the short to medium term. Total returns in the relatively weaker investment markets of Brisbane CBD and Perth CBD were driven by the income component, though a renewal of investor interest in these markets will likely lead to greater capital performance over the short to medium term. 500 Sydney Melbourne 450 Brisbane 400 Perth JPM Global Bonds 350 A-REITS Source: MSCI IPD / Savills Research 6

7 June 2018 Industrial Sector Returns - Historical Returns for the industrial sector were driven by outperformance in NSW and Victoria, which jointly accounted for over 80% of the index weighting of Australia s industrial sector (based on capital values). All industrial markets in Australia performed above their respective long term averages, except for South Australia. Total returns in NSW and Victoria were reported at 12.6% and 11.2% (respectively) over the year to March 2018, whilst performance in Queensland was more subdued, with a return of 8.1% over the same period. As a whole, income returns have been driving total returns in the industrial sector since September 2016, after record transaction activity during the year. Retail Sector Returns by Category Whilst performance in Australia s retail sector has been soft over the last 18 to 24 months, investor demand for retail assets was strong, with 2017 a record year for investment sales in the Retail sector, particularly in NSW and Queensland. It was clear that steady growth in nondiscretionary food retailing helped to sustain overall returns for Neighbourhood centres, which outperformed all other sub-categories in the year to March Transactional evidence from 2017 and the first half of 2018 suggests demand for Regional and Super & Major Regional centres remains prolific, as investors are increasingly attracted to the high income returns on Retail assets. 30% 25% 20% 15% New South Wales Industrial Victoria Industrial Queensland Industrial Western Australia Industrial South Australia Industrial 14% 12% 10% 9.8% 11.7% 10.2% 13.6% 10.0% 9.4% 10% 8% 5% 0% -5% 6% 4% -10% 2% -15% 0% Super & Major Regional Regional Sub-Regional Neighbourhood Bulky Goods Retail Sector Source: MSCI IPD / Savills Research Source: MSCI IPD / Savills Research 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 11.5% I 11.5% I 8.4% 1.5% I 5.1% I 4.7% 5.54 I 0.86 I % I 11% I 36% - Office 13.2% I 11.9% I 8.3% 2.0% I 6.0% I 5.5% 4.22 I 0.74 I % I 4% I 28% - Retail 9.4% I 10.4% I 8.1% I 0.9% I 4.1% I 4.5% 7.73 I 0.98 I % I 22% I 42% - Industrial 11.2% I 12.8% I 8.6% 2.3% I 6.3% I 5.2% 4.02 I 0.72 I % I 17% I 33% Bonds 4.7% I 5.3% I 7.3% I 6.9% I 8.0% I 7.1% 0.28 I 0.42 I % I -66% I -55% A-REITS -.1% I 10.9% I 3.8% I 10.7% I 22.3% I 18.4% 1.05 I 0.00 I % I 76% I 72% Aus Equities 1.0% I 7.4% I 5.5% I 9.4% I 16.4% I 14.9% 0.81 I 0.06 I 0.30 n.a Source: Savills analysis of MSCI / IPD Data; As at March 2018 savills.com.au/research 7

8 Savills Research Economic Property Drivers Superannuation Trends & Impacts Superannuation Assets vs. Nominal GDP The below chart shows the total volume of Australian superannuation assets against nominal Australian GDP. As shown, while 15 years ago Nominal GDP was significantly larger than Australian Superannuation assets, Superannuation assets now total $2.61 trillion (as at March 2018), being nearly 1.5 times larger than nominal GDP and growing at circa double the rate over the period. This shows the quandary of investing largely financial gains from Superannuation (given the 72.1% weighting to equities and bond funds) into real assets such as property. Super Growth in Excess of GDP To put the prior chart in perspective, over the past 10 years GDP (including inflation) has grown by a total of 58% whereas Superannuation assets have increased by 128%. Reinvesting this excess capital into finite real assets such as property (as a comparable, office stock in the Sydney CBD has increased by just 7.5% over the past decade) inevitably puts pressure on pricing as shown by the relationship to property yields. With a current allocation to property of 8.3%, should super funds grow by the same quantum over the coming five years as seen in the prior five years (conservatively assuming a substantially lower rate of growth) real estate holdings would need to increase by $83 billion for the current weighting to be maintained. $3,000bn GDP ($bn) Superannuation Assets - Total ($bn) $400bn Super Growth Excess of GDP ($) Prime Office Yields (% Inverted RHS) 6.0% $2,500bn $300bn 6.5% $2,000bn $200bn 7.0% $1,500bn $100bn 7.5% $1,000bn $0bn 8.0% $500bn -$100bn 8.5% $bn -$200bn 9.0% Source: APRA / ABS / Savills Research Source: APRA / ABS / Savills Research 8

9 June 2018 Superannuation Industry Allocation Total Value* ($ million) Allocation Cash 179, % Fixed income 344, % Australian fixed income 209, % International fixed income 135, % of which: currency hedged 89, % Equity 832, % Australian listed equity 369, % International listed equity 396, % of which: currency hedged 118, % Unlisted equity 65, % Property 135, % Listed property 49, % Unlisted property 86, % Infrastructure 82, % Listed infrastructure 21, % Australian unlisted infrastructure 39, % International unlisted infrastructure 22, % of which: currency hedged 13, % Commodities 1, % Other 59, % of which: hedge funds 29, % Other - 3.6% Commodities - 0.1% Infrastructure - 5.0% Property - 8.3% Equity % Fixed income % Cash % Source: APRA; *Total value counts superannuation entities with more than 4 members savills.com.au/research 9

10 Savills Research Economic Property Drivers Rates & Inflation CPI by Sector (Mar-18) 8.0% Annual Growth 20yr CAGR 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Yield Spreads - 2yr to 10yr Bond (bps) Headline CPI grew by 1.9% over the year to March 2018, in line with market expectations. Whilst this was below the RBA s target band general consensus points to this being the new norm. Inflation in Australia increasingly being influenced by our global peers. With inflation in the US consistently below market expectations, we are seeing inflation in Australia mirroring these trends. In addition, inflation expectations remain subdued domestically. Overall inflation was driven by increasing prices in liquor and tobacco (as a result of increased government intervention) and health care price rises. Once again, inflation in clothing was significantly negative at -3.5%, driven by ongoing competition between clothing retailers. Source: RBA / Savills Research The spread between short term and long term bond rates are indicative of a normal, albeit somewhat flat yield curve. Long term (10 year) bond rates are currently trading approximately 76 basis points above short term (2 year) bond rates. Whilst there is growing concern that the world economy is facing a crossroads with US Bond yields moving upwards, the adjoining chart illustrates that market conditions are starkly different to those that precedes prior downturns. A differing monetary policy stance in Australia to the US has already pushed US 10yr bond rates higher than Australian 10yr bond yields for the first time since With bond yields in the US on an upward trajectory for the next months, what this means for Australia, which still has a lower for longer outlook on interest rates (over this same period), will be a key theme. Global Cash and 10yr Bond Rates (as at Jun-18) Cash Rates / 10 Year Bond Rates 1.50% 0.50% -0.10% 4.35% 0.83% 1.75% 1.75% 2.75% 1.28% 0.04% 3.69% 2.56% 2.93% 2.78% Cash Rates / 10 Year Bond Rates 1.50% 0.00% 0.00% -0.75% 0.00% 1.25% 0.00% 2.71% 0.36% 0.69% -0.01% 2.76% 2.25% 1.37% 10

11 June 2018 Exchange Rates $1.20 $ yr Avg - USD Interest Rates 10.0% Housing Govt. Bond Yield - 2yr Govt. Bond Yield - 3yr Govt. Bond Yield - 5yr Govt. Bond Yield - 10yr Cash Rate 8.0% Cash Rate Forecast $1.00 $0.90 $0.80 $ % 4.0% 2.0% $ % Source: RBA / Savills Research Source: RBA / Savills Research 1 AUD to: Current PCP 10yr Avg TWI USD GBP EUR JPY CNY SGD INR THB NZD MYR IDR 10,505 9,920 9,542 HKD CAD Interest rates have been on a downward trajectory globally since 2009 as central banks used lower interest rates to stimulate economic growth. In Australia, record low interest rates helped fuel the residential housing market as mining investments fell, helping to power the economy through 27 years of uninterrupted growth. Whilst there are calls from international authorities (e.g. the OECD) for the RBA to adopt a tighter monetary policy stance; a housing boom that appears to have run its steam, record high levels of household debt, historically low wages growth and inflation below target levels has prompted to the RBA to maintain their lower for longer outlook for the interest rates. Source: RBA / Savills Research Higher commodity prices and an increase in the global demand for iron ore has driven the Australian dollar up in recent months. The outlook for the dollar remains mixed. Strong forecast global demand for resources is likely to keep the Australian dollar up. On the other hand, with Australian 10yr bond rates now below US 10yr bond rates (for the first time since 1999), the interest rate differential is now working against Australia. savills.com.au/research 11

12 Savills Research Economic Property Drivers Employment Employment growth was recorded at 2.9% nationally NSW 3.82% Vic. 2.05% Qld. 3.50% WA 1.86% SA 2.30% Unemployment Rate by State (Apr-18) The national unemployment rate fell to 5.5% (in trend terms), from 5.7% a year prior. This is an impressive result considering a material rise in the number of Australians entering the workforce, primarily due to an increase in female participation rates. A growing workforce in Queensland, as a result of record levels of interstate migration, drove the unemployment rate higher in April 2018 in spite of strong employment growth. Victoria recorded the largest fall in its unemployment rate from the prior year (down to 5.3% from 6.1%), whilst WA posted the largest increase over the same period (up to 6.5% from 5.8%). Projections on sustained increases in employment on the back of record high levels of corporate profitability look likely to ease the unemployment rate lower over the remainder of Most promisingly, the rate of underemployment* fell from 15.0% in January to 9.6% in April, a promising sign for improved wages growth. 6.4% 6.3% 6.0% 5.9% 5.5% 5.3% 4.9% 4.3% ACT 2.72% * The International Labour Organization (ILO) defines underemployment as the underutilisation of the productive capacity of the employed population. The concept is part of the framework for measuring the labour force, with the underemployed being those in the employed population who are willing and available to work more 12 WA QLD TAS SA AUS VIC NSW NT

13 June 2018 Employment Composition by State NSW - 32% VIC - 26% QLD - 20% WA - 11% SA - 7% ACT - 2% TAS - 2% NT - 1% Employment Growth by State (Apr-18) After a record year in 2017, employment growth slowed moderately to 2.9%, over the year to April 2018 (compared to 3.5% in December 2017), though this was still significantly above all long-term CAGRs. Total employment growth in NSW was the strongest (3.8%), followed by Queensland (3.5%) and ACT (2.7%). Labour market statistics in Queensland remained overwhelmingly positive, as the production increases across key mining projects drove the need for workers. Whilst total employment growth in Victoria slowed over 2018, it is important to remember that this is following 3 consecutive years of above average growth and merely represents a moderation following outperformance. Employment opportunities in Victoria remain prominent as government organisations look to increase their presence in the southern state. Full Time vs. Part Time Employment Growth Labour market statistics remained positive after a notable turnaround in 2017, with over 350,000 jobs created in the year to April Positively, nearly three-quarters of total employment growth was attributable to full-time employment gains. After over 5 years of muted growth in full-time employment, full-time employment grew by 3.1% in the 12 months to April 2018, beating all longterm averages, providing further impetus for increasing wages. Strong revenue growth across key industries such as Mining and Professional & Technical Services in conjunction with low labour costs, has driven companies to increase the need for workers. Full-time employment growth was the strongest in ACT (5.4%), followed by Queensland (4.3%) and NSW (3.8%). 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1yr 5yr 10yr 15yr NSW VIC QLD WA SA ACT AUS 400,000 F/T Employed P/T Employed 300, , ,000 - (100,000) (200,000) savills.com.au/research 13

14 Savills Research Economic Property Drivers Employment (continued) Job Advertisements grew across all sectors, except for Retail Industrial 15.0% Office 9.7% Job Advertisement Growth by State (Apr-18) Job advertisements continued to grow at record high levels, with total job advertisements nationally increasing 7.9% over the year to April 2018, providing a healthy outlook for Australia s labour markets in the year to come. Albeit off a low base, job advertisement growth was particularly strong in WA as a result of the strength of the mining sector and an increase in production forecast to increase requirements for such workers. In Queensland, engineering requirements remain strong, which will likely keep labour market conditions buoyant over Victoria s performance was particularly notable, following consistent above average growth since October 2014, driven by gains in the Government and Education sectors. After muted growth over the latter half of 2017, job advertisements in NSW rebounded, growing at 4.7% over the current annual period, with growth in Professional & Technical Services and Financial & Insurance Services likely to keep job advertisements at record high levels. WA QLD 10.8% 13.9% VIC 10.1% AUS 7.9% Retail -1.4% NT SA ACT NSW 6.4% 5.9% 4.9% 4.7% TAS 0.3% Source: DOE / Savills Research 14

15 June 2018 Job Advertisement Growth by State (Apr-18) Following a rebound in job advertisements in the last 6 months of 2017, growth in job advertisements remained buoyant at the start of Job advertisements across all sectors were up strongly from 2013, with the exception of retail. Whilst down 1.4% over the 12 month period to April 2018, a recovery in retail trade in the last quarter of 2017 helped to lift employee requirements in the retail sector over recent months. There was a notable uptick in the number of job advertisements for the industrial sector, largely resultant from record high corporate sector profits in the mining sector and a turnaround now becoming evident in the manufacturing sector. Employment by Industry (Nov-17) Australia s agriculture industry led employment gains nationally, as illustrated in the adjoining chart. There was also a resurgence in construction jobs as a result of ongoing infrastructure projects in NSW, WA and Victoria. Reassuringly, growth in retail sector jobs was evident, after a year of muted retail trade growth. In particular, growth in retail sector employment was up 5.8% in NSW and 8.8% in Victoria over the year to November A recent report by the Department of Employment singled out the healthcare industry as the fastest growing industries in Australia as an ageing population increases requirements for healthcare workers, particularly in regional areas. 120 Job Ads - Total Job Ads - Office Job Ads - Industrial Job Ads - Retail % 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 9.8% 9.5% 4.8% 4.8% 4.4% 4.3% 3.7% 1.9% 1.3% 1.2% (0.8%) (2.1%) (6.6%) (8.9%) Source: DOE / Savills Research savills.com.au/research 15

16 Savills Research Economic Property Drivers Population Population Migration & Nat. Increase Population growth forecasts from the International Monetary Fund project Australia's population to grow by 8% over the next 5 years; double the average of the world's top 30 economies Currently standing at million (as at September 2017 latest available ABS data), Australia s population is set to reach 25 million people this year, circa 30 years ahead of official forecasts made in 1998 by the ABS. Whilst this has been aided by rising fertility rates and increasing longevity, overseas migration has largely been the reason for the strength in population growth numbers. Overseas migration is currently at record high levels, with 250,127 people migrating to Australia over the 12 months to September 2017, with nearly 90% settling in the Eastern cities of Sydney, Melbourne and Brisbane. We are seeing a direct impact in Sydney of this ever increasing population, with land being constantly rezoned for residential purposes to accommodate our growing numbers. 2,000 1,800 1,600 1,400 1,200 1, Overseas Migration ('000s) Natural Increase ('000s) Population (m) - RHS

17 June 2018 Total Population by State 10yr Avg NSW m (1.4) 7.57m (1.5) 7.68m (1.4) 7.80m (1.5) 7.90m (1.6) Vic m (2.2) 5.97m (2.2) 6.10m (2.2) 6.24m (2.4) 6.36m (2.4) Qld m (1.7) 4.75m (1.4) 4.81m (1.3) 4.88m (1.5) 4.95m (1.7) WA m (1.8) 2.53m (1.0) 2.55m (0.7) 2.57m (0.7) 2.59m (0.9) SA m (0.9) 1.69m (0.9) 1.71m (0.7) 1.72m (0.6) 1.73m (0.6) ACT m (1.5) 0.40m (1.8) 0.41m (1.7) 0.41m (1.8) 0.41m (1.8) Australia m (1.7) 23.67m (1.5) 24.01m (1.4) 24.39m (1.6) 24.70m (1.6) ; 12 month growth shown in brackets Population by State (as at Sep-17) The capital cities of NSW, Victoria and Queensland have been on the receiving end of record high levels of overseas migration. As an example, NSW s population increased by 123,110 people in the year to September 2017, with just over 100,000 people choosing to settle in Sydney alone. In response to growing concerns about rising congestion in our capital cities and added pressures on already record high residential house prices, federal government policymakers are increasingly considering the idea of binding immigrants to regional and rural areas, in an effort to redirect Australia s population growth out of our cities and help stimulate growth in regional economies in the long run. Interstate Migration by State (as at Sep-17) Strong interstate migration from NSW is helping population growth in other states, particularly Queensland and Victoria. Over the 12 months to September 2017, over 19,000 people migrated interstate to Queensland, followed closely by Victoria, which gained an extra 17,000 people from other states. Australians are increasingly drawn to these states as a result of relative affordability and greater employment opportunities. With Sydney house prices nearly double those in other capital cities, we are now seeing increased interstate migration to the more affordable cities of Brisbane and Melbourne. Whilst population growth in NSW has been largely attributed to overseas migration, Victoria and Queensland s populations are growing as a result of increased interstate migration. 2.5% 1yr 5yr 10yr 15yr 19,324 16, % 1.5% 1, % 0.5% -3,710-5,847-11, % NSW VIC QLD WA SA ACT AUS -16,433 QLD VIC TAS ACT NT SA WA NSW savills.com.au/research 17

18 Savills Research Economic Property Drivers Retail Trade Retail Trade Growth Retail trade grew by 2.9% (in trend terms) over the year to April Whilst still below long term averages, this was a pickup from the previous corresponding period (2.6%). Food and supermarket retailing drove total returns in the retail sector, accounting for 75% of total trade in April This was largely in line with expectations as latest GDP figures point to household consumption being driven primarily by spending on essential goods and services. Historically soft wage growth continues to impact consumers ability and willingness to spend. It appears that there is a growing tendency of Australians choosing to service their debt requirements rather than spending on discretionary goods, thus leading to slow growth in the retail trade. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Retail Trade Growth by State (Apr-18) Victoria recorded the highest level of retail trade growth at 5.3% in the year to April 2018 and was the only state to perform above its long-term averages. It was also the only state to record a significant increase in Clothing & Footwear retailing increasing 6.8% over the same annual period, more than double the 10 year CAGR. Once again, WA was the only state to record negative growth, with retail trade falling 0.25% over the 12 month period to April A slowdown in the housing sector across WA resulted in a significant fall in Household Goods and Hardware & Gardens spending, which declined 6.8% and 5.2% over the same period. After Victoria, retail turnover growth was the strongest in NSW (3.2%), followed by SA (3.1%), ACT (2.0%) and Queensland (1.3%). 6% 1yr 5yr 10yr 15yr 5% 4% 3% 2% 1% 0% -1% NSW VIC QLD WA SA ACT AUS Retail Trade by Sector (Apr-18) Broad based gains were evident across all key retail sectors, except for Department Store retailing, which fell 1.1% over the year to January Notably, department store sales have been steadily declining since 2016, with clothing retailers continuing to feel the pinch as Australian consumers focus on non-discretionary goods and services. As an example in May 2018, Espirit followed a slew of international clothing retailers announcing its exit from Australia and New Zealand, shutting all 67 stores across the region. There was a revival in Hardware & Garden retailing on the back of an increase in residential development approvals for freestanding houses, particularly in NSW and Victoria. 18 6% 5.0% 5% 4% 3.5% 3.5% 3.3% 3.1% 3.0% 3% 2% 1% 0% -1% -2% Hardware & Garden Clothing & Footwear Food Café & Restaurants Supermarkets Household Goods 2.3% Other (1.1%) Department Stores

19 June 2018 Retail Trade (10yr Indexed) There was a clear distinction in retail performances across discretionary and nondiscretionary retail sectors. Supermarket retailing still grew 50% over the past decade spurred by Australia s leading population growth. On the other hand, persistently low consumer sentiment and minimal wage growth since the Global Financial Crisis has had an ongoing dampening effect on non-discretionary retailing, (with the exception of Hardware & Garden retailing, which benefitted from a spike in residential development approvals for freestanding houses). Over the same 10 year period, Department Store retailing has remained largely unchanged. Growth in Food and Cafes & Restaurants retailing continues to support total retail trade in an otherwise challenging year for Australian retailers. Household Savings Rate Australia s household savings rate continued its downwards trajectory, falling to a 10 year low of 2.1% in March Growth in household consumption was notably low, growing only 0.3% in the first quarter of 2018, driven by spending on essential goods and services. With wages continuing to grow in line with inflation, it is understandable that Australians are now reducing their savings levels to fund expenditure. With record levels of indebtedness and little room to move on savings rates, future interest rate rises could dampen spending in a material way % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Total Supermarkets Food Household Goods Department Stores Hardware & Garden Retail Trade Growth by Sector & State (to Apr-18) Supermarket Food Clothing & Footwear Department Stores Household Goods Hardware & Garden Café & Restaurants NSW 4.2 (4.4) 4.5 (4.0) 0.8 (4.1) -2.5 (0.0) 4.1 (3.9) 5.6 (6.3) 5.0 (6.9) 0.4 (4.3) 3.2 (4.1) VIC 3.5 (4.5) 4.2 (4.6) 6.8 (3.3) 0.3 (0.7) 5.5 (3.7) 7.9 (6.9) 5.2 (5.3) 9.0 (4.5) 5.3 (4.1) QLD 1.8 (4.2) 2.3 (4.3) 4.9 (3.0) 0.7 (0.1) 3.4 (1.7) 7.4 (3.9) -2.6 (3.6) -1.6 (2.6) 1.3 (3.1) WA 1.0 (4.1) 1.6 (4.0) 4.4 (-0.8) -1.1 (-0.2) -6.7 (1.6) -5.1 (2.6) 1.4 (6.3) -1.1 (4.5) -0.2 (3.3) SA 3.9 (3.9) 3.2 (3.7) 0.1 (2.4) -2.4 (-1.4) 4.4 (0.0) 7.3 (0.9) 1.1 (4.3) 0.0 (3.2) 3.1 (2.7) ACT -0.9 (4.9) -0.7 (4.4) 8.1 (2.6) -4.6 (-0.5) 5.6 (2.6) 0.9 (5.0) 1.7 (4.7) 11.9 (2.6) 2.0 (3.3) TAS 8.6 (4.7) 7.5 (4.7) -1.8 (0.9) 0.0 (0.0) -2.2 (0.0) -9.6 (-0.3) 1.1 (4.3) 0.0 (0.0) 3.0 (2.8) NT 0.7 (3.7) 1.3 (3.8) 6.0 (1.6) 0.0 (0.0) 4.8 (0.6) 10.9 (3.2) 3.8 (8.5) 0.0 (0.0) 1.9 (3.4) AUS 3.1 (4.3) 3.5 (4.2) 3.5 (3.0) -1.1 (0.0) 3.0 (2.7) 5.0 (4.8) 3.3 (5.6) 2.3 (3.9) 2.9 (3.7) Other Total Source: ABS/DOE/RBA/Savills Research; 10yr Averages shown in brackets. savills.com.au/research 19

20 Savills Research Economic Property Drivers Housing Trends Median House Prices by State (Metro) Since 2011, the cash rate has fallen by 325 basis points and as a result, Australian households have increasingly leveraged themselves given accommodative monetary policy closer to its global peers. This has driven residential property to record levels. However, prices have also been fuelled by long periods of undersupply and exceptional population growth. Median house prices rebounded in the December quarter of 2017, after a fall from June to September across all capital cities. The median weighted average of eight capital cities went up to $710,000 in December from $687,000 in September. In Sydney, median house prices ($980,000) edged the million dollar mark once again, after falling to $955,000 in June House prices in Melbourne recorded the strongest growth in 2017, growing 7.8%, followed closely by Canberra, where house prices appreciated by 6.1%. Sydney and Perth were the only two cities to record falls in house prices over 2017, falling 2.0% and 3.2% respectively. Record rates of interstate migration in Brisbane are likely to stimulate house prices further over NSW VIC QLD WA SA ACT 180 AUS

21 June 2018 Residential Statistics (Houses) by State METROPOLITAN NON-METROPOLITAN STATE Median Price* Sale Volume* Median Price* Sale Volume* DAs* DAs / 100** AUS 710 (1.9%) 175,069 (-7.4%) 419 (4.2%) 127,613 (-1.8%) 119,916 (5.0%) 0.92 (0.82) NSW 980 (-2.0%) 46,361 (-8.0%) 465 (5.7%) 50,206 (-0.1%) 29,423 (1.5%) 0.90 (0.65) VIC 750 (7.8%) 54,898 (-12.3%) 352 (8.4%) 24,884 (-2.6%) 38,953 (9.2%) 1.17 (0.99) QLD 531 (3.1%) 35,042 (-9.4%) 440 (1.7%) 33,834 (-7.6%) 26,092 (8.8%) 0.86 (0.82) WA 508 (-3.2%) 5,725 (0.2%) 340 (-2.9%) 5,725 (0.2%) 13,304 (-6.7%) 0.72 (1.00) SA 466 (3.6%) 24,153 (6.9%) 273 (-2.4%) 6,337 (9.8%) 8,406 (7.0%) 0.72 (0.69) ACT 682 (6.1%) 4,227 (-5.8%) n.a n.a 1,083 (-7.3%) 1.27 (1.18) ; *12 month growth rates in brackets; **10yr Averages shown in brackets Housing Sales Volume (12 Month Growth) Housing sales moderated across metropolitan areas in the Eastern states over 2017, with total sales of houses falling 7.4% nationally, with Melbourne recording the largest fall. Lower housing volume sales over the last 12 months have been largely attributed to declining interest from foreign buyers amid capital tightening controls and housing affordability leading to a decrease in demand, particularly in Sydney. There are now growing concerns that the domestic economy, which has been riding the coat tails of the residential housing boom may be negatively affected, with the RBA and the IMF revising growth forecasts down for Median Attached Prices by State (Metro) Median prices for attached dwellings in Sydney remained flat over 2017, ending the year at $720,000. Perth was the only capital city to record falls in median prices for attached dwellings, falling 2.4% to $405,000 from $415,000 at the end of Melbourne recorded the largest increase in median prices for attached dwellings, growing 6.8% in Slowing residential development approvals for attached dwellings in Melbourne will likely keep median prices in the Victorian capital relatively high. On the back of a turnaround in economic indicators, prices for attached dwellings in Adelaide grew 5.2%, the second highest growth rate across the country. After recent falls in median prices in Brisbane, it appears record levels of interstate migration are translating to an uplift in demand for residential property in the sunny state s capital. SA TAS WA NT ACT AUS (4.6%) (5.8%) (7.4%) 0.8% 0.2% 6.9% 180 NSW VIC QLD WA SA ACT 170 AUS NSW (8.0%) 110 QLD (9.4%) 100 VIC(12.3%) 90 savills.com.au/research 21

22 Savills Research Economic Property Drivers Household Sector Recent scenario modelling suggests interest rates will need to rise by nearly 2% for the household interest payments to income ratio to go back to the 2008 high. Residential Development Approvals Total residential development approvals in Australia grew by 1.75% (totalling 227,900 approvals) over the year to April Approvals for freestanding houses drove overall growth in residential housing approvals, increasing 5% over the same period, which more than offset a 1.6% decline in approvals for attacahed dwellings. Victoria led the nation in terms of residential development approvals with 74,316 approvals in the current annual period, followed closely by NSW (70,838), reflecting a 3.8% fall on the previous corresponding period. Total residential development approvals rose by a record 11.7% in Victoria, in line with population growth surpassing all other states. 250, ,000 Houses Attached Dwellings Approvals Per 100p , , ,

23 June 2018 Residential Statistics (Attached Dwellings) by State METROPOLITAN NON-METROPOLITAN STATE Median Price* Sale Volume* Median Price* Sale Volume* DAs* % of Total AUS 562 (2.6%) 105,461 (-7.6%) 381 (3.5%) 36,997 (-6.6%) 107,984 (-1.6%) 47% NSW 720 (0.0%) 37,129 (-5.9%) 388 (3.3%) 11,862 (-4.9%) 41,415 (-7.2%) 58% VIC 550 (6.8%) 35,569 (-9.5%) 285 (3.6%) 4,392 (-4.5%) 35,363 (14.6%) 48% QLD 400 (0.3%) 11,478 (-17.2%) 380 (1.9%) 18,027 (-9.6%) 16,696 (-14.3%) 39% WA 405 (-2.4%) 6,991 (1.8%) 260 (-7.1%) 597 (6.4%) 5,415 (-7.9%) 29% SA 376 (5.2%) 8,583 (3.0%) 173 (-6.0%) 1,025 (18.9%) 4,106 (17.4%) 33% ACT 450 (2.3%) 3,468 (-15.8%) n.a n.a 4,153 (-5.1%) 79% ; *12 month growth rates in brackets Residential Housing Loans (YoY Change) After 55 years of uninterrupted growth in Australia s residential housing market, we are now seeing the inevitable slowdown. Macroprudential tightening on investor and interest only lending has led to a siginifcant slowdown in investment loans, alleviating some of the investor demand. The share of investor loans were at their lowest levels since 2013, with housing credit and thus the residential housing sector are now being driven by owner occupiers. Housing Indebtedness & Interest Payments The key area of concern for the Australian economy is the level of indebtedness, with Household Debt now at just under 130% of GDP being almost double that of most other advanced economies. Recently however a recent moderation in the residential housing market appears to have drawn out the requirement for future interest rate hikes to stem this growth and the impact of any such uplift in rates will be magnified due the extent of household leverage. However, when looking at household interest payments to income, concerns regarding mortgage stress appear to be overplayed. As a result of record low interest rates, the debt interest payment to income ratio remains nearly 30% below the peak reached in % 20% 15% 10% 5% 0% Owner Occupier Investment 140 Household Debt / GDP 130 Household interest payments to income (RHS) % 60 6 savills.com.au/research 23

24 Savills Research Economic Property Drivers 5yr Forecasts (IMF) Canada GDP: 10.7% Inflation: 10.0% Pop. Growth: 5.2% UK GDP: 8.4% Inflation: 13.4% Pop. Growth: 3.2% USA GDP: 10.3% Inflation: 12.3% Pop. Growth: 3.2% Germany GDP: 8.3% Inflation: 11.8% Pop. Growth: 0.4% 24

25 June 2018 South Korea GDP: 15.7% Inflation: 11.0% Pop. Growth: 2.1% Japan GDP: 4.0% Inflation: 6.5% Pop. Growth: -1.5% China GDP: 36.1% Inflation: 12.8% Pop. Growth: 3.0% Australia GDP: 14.4% Inflation: 13.2% Pop. Growth: 8.0% Singapore GDP: 13.8% Inflation: 10.3% Pop. Growth: 5.1% savills.com.au/research 25

26 Savills Research Economic Property Drivers June 2018 Note on 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.). 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 Chris Freeman +61 (0) cfreeman@savills.com.au Key State Contacts New South Wales Simon Fenn +61 (0) sfenn@savills.com.au Victoria Stuart Fox +61 (0) sfox@savills.com.au Queensland Anthony Ott +61 (0) aott@savills.com.au Western Australia Graham Postma +61 (0) gpostma@savills.com.au South Australia Rino Carpinelli +61 (0) rcarpinelli@savills.com.au Australian Capital Territory Andrew Stewart +61 (0) astewart@savills.com.au Australian CEO Paul Craig +61 (0) pcraig@savills.com.au Key Sector Contacts Capital Transactions Ian Hetherington +61 (0) ihetherington@savills.com.au Project Management Gavin Boswarva +61 (0) gboswarva@savills.com.au Valuations Sandra Peachey +61 (0) speachey@savills.com.au Residential Ged Rockliff +61 (0) grockliff@savills.com.au Hotels Michael Simpson +61 (0) msimpson@savills.com.au Retail Investments Steven Lerche +61 (0) slerche@savills.com.au Office Leasing Rob Dickins +61 (0) rdickins@savills.com.au Industrial Darren Curry +61 (0) dcurry@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 26