Economic Property Drivers September 2018

Transcription

1 Savills Research Australia Economic Property Drivers September 2018 Highlights The Australian economy grew at a rate of 3.4% as a QoQ annual growth rate (corresponding to a rate of 3.0% on a rolling annual basis), the strongest result since September 2012; Total returns for the office, industrial and retail sectors were reported at 14.7%, 12.5% and 8.4% (respectively) over the year to June 2018 nationally; Headline CPI grew by 2.1% over the year to June 2018, slipping into the RBA s target band for the first time since 2014; Total employment grew by a strong 2.4% over the year to July 2018 buoyed by NSW, Victoria and Queensland; Australia s population reached 25 million people in August 2018, circa 30 years ahead of official forecasts made in 1998 by the ABS. AUS Key Economic Indicators Date Latest PCP* GDP Jun % 2.1% Population Growth Dec % 1.7% Inflation Jun % 1.9% Employment Growth Jul % 2.4% Unemployment Rate Jul % 5.6% Retail Trade Jul % 3.7% Job Ad Growth Total Jul % 2.3% House Price Growth Mar % 9.4% Attached Price Growth Mar % 3.6% Earnings Growth May % 2.1% Australian Property Jun % 11.9% AUD/USD Sep-18 $0.72 $0.78 *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 Chris Freeman cfreeman@savills.com.au National Head Capital Strategy & Research Shrabastee Mallik smallik@savills.com.au Associate Director Capital Strategy & Research 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 capital cities only

3 September 2018 Executive Summary Australia s economy grew 3.4% in the year to June 2018* on the back of stronger than expected household consumption. This was the strongest rate of economic growth Australia has experienced since the mining boom in September Notably, WA s economic performance was also at its strongest since September 2013, fuelled by a resurgence in the mining sector helping to drive public capital expenditure up. Positively, growth in GDP per capita was at its strongest level in 2 years, with every state (bar South Australia) recording gains in the June quarter. This result is particularly impressive considering declines in the Agricultural sector given the current extreme drought. The effect US economic performance will have on the global economy has become a key talking point. The US economy is now said to be operating beyond the full employment level, elevating consumer spending and sentiment. Forecasts for economic growth remain strong for the remainder of the year and into 2019, on the back of corporate tax cuts that helped to drive US corporate profits in the June quarter to 16.9% (year on year gain), the strongest result in 6 years. Whether these dual forces go onto spur wage related inflation remains to be seen, and will be monitored closely by central banks globally. This US strength and tightening cycle however is exacerbating the crisis among emerging markets, with developing-nation currencies sliding materially and driving concerning statistics such as Venezuela's experiencing hyperinflation, food prices in Argentina increasing 30% over the year, and Indonesia s Rupiah hitting its weakest level since the Asian financial crisis two decades ago. The extent to which such factors prove a drag on the broader global economy remain to be seen. In developed markets however, recent evidence suggests that as online retailers increase their share of total sales globally, we are seeing increased competition putting a cap on already low inflation rates. In Australia, the retail landscape appears to be at a juncture, with highly disparate performances across both states and asset classes. Online retailing is growing at a rapid (albeit volatile) pace and this effect on non-discretionary retailing is already being felt, with major department stores and clothing retailers reporting declining profits. With strong population growth however, food turnover remains a resilient standout. Economic growth, consumer and business sentiment at their strongest levels since before the GFC and a resurgence in mining stocks have helped to drive equity market performance up to their highest levels. This was also evident across property sector returns, with outperformance on the Eastern seaboard driving exceptional gains in Australian property across all sectors. We are also seeing the rise of alternate property classes (e.g. child care and medical centres) as investors look to diversify. However, business conditions (a forward looking indicator for business sentiment) ticked lower in September, on the back of a challenged retail landscape. Whether this goes on to temper equity (and other investment) market performance will be closely monitored by investors over the remainder of the year. * Quarter on quarter annual growth Key Economic Indicators by State SFD / GDP Growth Population Gowth Inflation Employment Growth Unemp. Rate House Price Growth Attached Price Growth Retail Trade Growth Jun-18 Dec-17 Jun-18 Jul-18 Jul-18 Mar-18 Mar-18 Jul-18 NSW 3.3 (2.7) 1.5 (1.4) 2.1 (2.2) 3.2 (1.6) 4.8 (5.4) -4.2 (6.2) -1.4 (6.0) 3.1 (4.3) VIC 5.0 (3.0) 2.3 (2.1) 2.5 (2.2) 2.5 (2.2) 5.4 (5.7) 6.8 (6.5) 5.1 (4.1) 4.9 (4.3) QLD 3.7 (1.8) 1.7 (1.8) 1.7 (2.2) 2.2 (1.3) 6.1 (5.8) 2.8 (2.0) -2.8 (0.8) 1.4 (3.1) WA 1.3 (1.8) 0.8 (1.9) 1.1 (1.8) 1.1 (1.4) 6.1 (5.0) -2.9 (0.6) -3.0 (0.7) -0.9 (3.1) SA 4.0 (2.0) 0.6 (0.9) 2.7 (2.1) 2.2 (0.7) 5.8 (6.1) 1.1 (2.6) 0.0 (2.2) 2.5 (2.5) ACT 4.4 (2.6) 2.2 (1.9) 2.8 (2.0) 2.1 (1.4) 3.8 (3.9) 4.5 (3.9) -1.1 (1.5) 3.2 (3.6) TAS 3.6 (1.3) 0.9 (0.6) 2.4 (2.0) 1.0 (0.4) 6.0 (6.3) 12.9 (3.6) 7.9 (3.3) 4.0 (2.8) NT -2.8 (3.1) 0.2 (1.3) 1.2 (1.9) 3.5 (2.1) 4.2 (3.9) -4.1 (2.1) -6.1 (1.3) 2.3 (3.1) AUS 2.9 (2.6) 1.6 (1.7) 2.1 (2.1) 2.4 (1.6) 5.4 (5.5) 0.4 (4.9) 0.0 (4.1) 2.7 (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 3.33% Vic. 4.97% WA 1.33% GDP Growth vs. Inflation The Australian economy grew at a rate of 3.4% as a QoQ annual growth rate (corresponding to a rate of 3.0% on a rolling annual basis). This is a very strong result considering the drought had a notably dampening effect on the Agriculture sector, which shrunk 9.1% over FY-18. Strength in household expenditure was evident, with a 0.7% gain recorded in the June quarter for household consumption. In spite of a cooling residential market, investment in new dwellings grew 3.6% for the quarter. Looking at performance by industry, the Health Care industry had the best performance with a growth rate of 6.4% in the 12 months to June 2018 (on a rolling annual basis), followed by Construction (5.2%), Professional & Technical Services (4.3%) and Financial Services (3.9%). 6.0% GDP Growth Inlfation 5.0% Qld. 3.67% 4.0% 3.0% 2.0% SA 3.95% 1.0% 0.0% 4 (On a rolling year basis)

5 September 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 Jun-18) State Final Demand increased in all states (bar the Northern Territory), with all states outperforming their respective 10 year CAGRs. Victoria was once again the top performing state economy, with a growth rate of 5.0% in FY18, followed by ACT (4.4%), SA (4.0%), Queensland (3.7%), NSW (3.3%) and WA (1.3%). Rising mining investments in the June quarter helped to boost economic performance in WA and Queensland. Household consumption drove total growth in NSW, Victoria and Queensland, whilst growth in SA was driven by private capital expenditure. In ACT and WA, government final consumption and government expenditure (respectively) were teh key drivers of growth. Corporate Profits (as at Jun-18) Corporate profits rose 9.0% over the year to June 2018, driven by ongoing gains for mining companies. Despite a stellar year for corporate Australia throughout 2017 and the first half of 2018, we are not seeing a translation into wages growth for workers. This is because of two main reasons: in FY-18 it was reported that nearly three-quarters of company profits (for listed companies) were redistributed to shareholders (this was reflected in dividends growth being recorded at 13.6% in the current financial year). Secondly, a rise in company profits has actually driven companies to hire more workers, rather than increase wages for existing workers, which is clearly reflected in the boost in employment that was witnessed in the last quarter of 2017 and first half of % 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 Hospitality (2.1%) Rental, Hire & R/E (1.1%) Logistics (0.6%) Construction (0.0%) IT & Telecommunications Arts & Recreation Prof. & Tech Services Manufacturing Total Retail Trade Mining Wholesale Trade Utilities Admin & Support 0.3% 6.8% 6.8% 7.2% 9.0% 10.6% 14.2% 15.1% 25.8% 30.7% savills.com.au/research 5

6 Savills Research Economic Property Drivers Australian Property Performance Metrics Outperformance on the Eastern seaboard drove total returns in Australian property, across all sectors Office Sector - 10yr Indexed Returns Total returns for the office sector were reported at 14.7% over the year to June 2018 nationally, (the highest recorded figure since March 2008) with capital returns of 8.7% driving overall performance. National returns were clearly driven by outperformance of Sydney s office markets. The Sydney CBD returned 17.6% on the back of near record high capital returns (12.1%), 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 17.6%, 14.2% and 16.0% respectively (over the year to June 2018). The Melbourne CBD office market returned 14.2% over the same period. 550 Sydney Melbourne 500 Brisbane 450 Perth 400 JPM Global Bonds A-REITS Source: MSCI IPD / Savills Research 6

7 September 2018 Industrial Sector Returns - Historical Returns for industrial markets nationally exceeded longterm averages, with the exception of WA. Total returns for the industrial sector were driven by income returns in all markets excepting for NSW, where capital returns drove total erformance to a 2 year high. Total returns in NSW were reported at 13.7% over the year to June 2018, with capital gains of 7.1%. In South Australia, the industrial market continued to be buoyed by income returns, which were the highest nationally (9.2%). The economic turnaround in Western Australia will likely help to pique investor interest in industrial assets in the state over the next months, aiding total returns in the market. Retail Sector Returns by Category Performance in Australia s retail sector continues to weigh down on total returns for the overall property sector. Whilst investor demand for retail assets remained strong through the first half of 2018, a muted retail sector kept income returns and thus total returns for the sector below trend. The retail sector in NSW was the only state market to perform above long-term trends, returning 10.3% over the year to June Neighbourhood centres, however, continued to outperform all other sub-categories, on the back of continued strength in non-discretionary retailing. 25% 20% New South Wales Industrial Queensland Industrial South Australia Industrial Victoria Industrial Western Australia Industrial 15.0% 15% 10% 5% 7.6% 10.7% 9.1% 10.3% 8.4% 0% -5% -10% -15% 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 11.7% I 11.7% I 8.6% I 10.6% 1.4% I 5.0% I 4.7% 5.89 I 0.86 I % I 15% I 36% - Office 14.7% I 12.4% I 8.7% I 10.1% 2.0% I 5.8% I 5.5% 4.22 I 0.74 I % I 9% I 28% - Retail 8.4% I 10.2% I 8.2% I 10.8% 1.0% I 4.0% I 4.5% 7.26 I 0.97 I % I 24% I 42% - Industrial 12.5% I 13.0% I 9.0% I 11.0% 2.2% I 6.3% I 5.2% 4.23 I 0.72 I % I 18% I 32% Bonds 4.0% I 5.9% I 7.6% I 6.4% 6.9% I 8.0% I 6.9% 0.25 I 0.42 I % I -67% I -58% A-REITS 13.3% I 12.6% I 6.7% I 6.2% 10.0% I 22.0% I 18.2% 1.04 I 0.03 I % I 75% I 72% Aus Equities 13.1% I 9.8% I 6.5% I 8.7% 9.1% I 16.3% I 14.8% 0.79 I 0.09 I 0.30 n.a Source: Savills analysis of MSCI / IPD Data; As at June 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 $2.71 trillion (as at June 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 72.5% 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 57% whereas Superannuation assets have increased by 140%. 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) $2,500bn $350bn $300bn $250bn Super Growth Excess of GDP ($) Prime Office Yields (% Inverted RHS) 6.0% 6.5% $2,000bn $200bn $150bn 7.0% $1,500bn $100bn $50bn 7.5% $1,000bn $0bn -$50bn 8.0% $500bn -$100bn -$150bn 8.5% $bn -$200bn 9.0% Source: APRA / ABS / Savills Research Source: APRA / ABS / Savills Research 8

9 September 2018 Superannuation Industry Allocation Total Value* ($ million) Allocation Cash 174, % Fixed income 359, % Australian fixed income 222, % International fixed income 136, % of which: currency hedged 89, % Equity 871, % Australian listed equity 397, % International listed equity 408, % of which: currency hedged 123, % Unlisted equity 63, % Property 141, % Listed property 51, % Unlisted property 89, % Infrastructure 86, % Listed infrastructure 22, % Australian unlisted infrastructure 40, % International unlisted infrastructure 23, % of which: currency hedged 13, % Commodities 1, % Other 61, % of which: hedge funds 29, % Other - 3.6% Commodities - 0.1% Infrastructure - 5.1% 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 (Jun-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 2.1% over the year to June 2018, slipping into the RBA s target band for the first time since The last 3 years has seen the CPI grow at an average annual rate of 1.8%, compared to 2.5% annually for the 15 years prior, driven down by ongoing pricing pressures in the retail sector, slower growth in government administered prices and historically low wages growth. Indeed, actual CPI data may be overestimating inflation as they don t include online retailing. Studies show that a growing online retail market will keep pricing (and thus inflation) low. Forecasts for the remainder of 2018 are much more subdued, as increased regulation and competition in the Utilities sector are likely to ffset pressure on pricing. Source: RBA / Savills Research Latest statistics (31/08/2018) show long term bond rates (10 year) trading approximately 59 basis points above short term (2 year) bond rates. Differences in the yield spread domestically and with its peers is largely reflective of Australia s differing monetary policy stance to the rest of the developed world. Notably, whilst the spread between short term and long term US treasury notes hit a post-gfc low in late August, the spread in Australia is largely in line with the average over the last decade. Long and short term bond rates in Australia are likely to remain near their current levels in line with muted expectations on inflation and a lower for longer outlook on the cash rate. Global Cash and 10yr Bond Rates (as at September 2018) Cash Rates / 10 Year Bond Rates 1.50% 0.75% -0.10% 4.35% 1.73% 2.00% 1.75% 2.50% 1.40% 0.12% 3.62% 2.41% 2.85% 2.51% Cash Rates / 10 Year Bond Rates 1.50% 0.00% 0.00% -0.75% 0.00% 0.50% 0.00% 2.29% 0.34% 0.70% -0.10% 3.19% 2.23% 1.45% 10

11 September 2018 Exchange Rates $1.20 $1.10 $ yr Avg - USD Interest Rates 12.0% Housing Small business Large business Govt. Bond Yield - 2yr Govt. Bond Yield - 3yr Govt. Bond Yield - 5yr 10.0% Govt. Bond Yield - 10yr Cash Rate Cash Rate Forecast 8.0% $ % $ % $ % $ % Source: RBA / Savills Research Source: RBA / Savills Research The Australian dollar continued to depreciate on the back of growing uncertainty globally and domestically. Leadership concerns affecting Australia s political stability in conjunction with uncertainty about how Australia will be affected by the US trade war drove the AUD down to a 52 week low of USD 0.72 in late August. Speculations on the AUD remain mixed for the remainder of 2018 as currencies for several emerging markets fell following the implementation of tariffs by the US on key emerging market and developing economies. Historically, weakening currencies for emerging markets has been associated with consequent falls in commodity prices. Although commodity markets have thus far been immune to currency market movements, any negative effects will likely be felt the commodities reliant AUD sooner rather than later. 1 AUD to: Current PCP 10yr Avg TWI USD GBP EUR JPY CNY SGD INR THB NZD MYR IDR 10, , , HKD CAD Source: RBA / Savills Research Although our global peers have earmarked interest rates to rise, swap markets domestically are pricing the cash rate in Australia to remain at 1.50% until December 2020 as tightening financial conditions achieve what rising interest rates would otherwise have done. Growing macroprudential policies from regulatory authorities and tightening financial conditions have helped to soften the residential housing market in The focus of the RBA is now to ensure a monetary policy that will aid economic growth and complement wages growth savills.com.au/research 11

12 Savills Research Economic Property Drivers Employment Labour force participation is notably higher in capital cities compared to regional areas NSW 3.18% Vic. 2.48% Qld. 2.17% WA 1.15% SA 2.20% Unemployment Rate by State (Jul-18) The national unemployment rate fell to 5.4% (in trend terms) and 5.3% on a seasonally adjusted basis, largely as a result of a fall in the labour force participation rate. The unemployment rate in Queensland remained stubbornly high at 6.1%, offsetting healthy employment growth with a growing workforce, following record numbers of people moving interstate to the sunny state (circa 22,500 people moved to Queensland in 2017). With continued such projections, there will be need to considerably higher employment growth to sustain any falls to the unemployment rate. More concerning for the economy is the rate of underemployment, which although falling slightly to 8.4% in July 2018 (after reaching a record high of 8.7% in February 2017), still remains elevated by historical standards and is a contributing factor for wage price growth remaining near record low levels (2.0% as at June 2018). 6.2% 6.1% 6.1% 5.6% 5.4% 5.1% 4.9% 4.0% ACT 2.09% * 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 TAS WA QLD SA AUS VIC NSW NT

13 September 2018 Employment Composition by Sector Mining & Agri - 4.5% Manuf / Util / Cons % Retail / Wholesale % Hospitality / Rec - 9.2% Logistics - 4.9% IT & Telco - 1.9% Finance & Business % Gov / Health / Edu % Other - 3.8% Employment Growth by State (Jul-18) Total employment grew by a strong 2.4% over the year to July Total employment growth nationally was buoyed by NSW, Victoria and Queensland. NSW recorded growth of 3.2% over the year to July 2018, well surpassing all long-term CAGRs, though this was largely as a result of a boom in part-time employment growth. In Victoria and Queensland, total employment grew by 2.5% and 2.2% over the same period, with full-time employment growth higher than part-time employment growth in both states. Mining project completions spurred employment growth in WA, with an increase in engineering job advertisements in the western state pointing to ongoing strength in their labour market. Political uncertainty surrounding public sector jobs led total employment growth to fall to 2.1% in ACT after highs of 4.5% at the start of the year. Full Time vs. Part Time Employment Growth After considerable improvements in labour market statistics in the latter half of 2017 and the first quarter of 2018, we are seeing a natural easing of labour market indicators. Whilst full-time employment growth ticked higher in the month of July, this was slightly below market expectations. Full-time employment growth accounted for approximately 60% of total employment growth, with an additional 177,500 fulltime workers added to the labour force in the 12 months to July 2018, compared to 121,600 more part-time workers. However, the general consensus is that whilst employment metrics are good and will continue to be supported by healthy growth in job advertisements for the remainder of 2018, we would need to make considerable headways to support growth in wages to levels that would be beneficial to the economy. 3.5% 1yr 5yr 10yr 15yr 400,000 F/T Employed P/T Employed 3.0% 300, % 2.0% 1.5% 1.0% 0.5% 0.0% NSW VIC QLD WA SA ACT AUS 200, ,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 13.1% Office 11.3% Job Advertisement Growth by State (Jul-18) Job advertisements grew by 8.3% over the year to July 2018, surpassing all long term averages, indicating continued growth in employment metrics over the short term. Though off a lower base, job advertisement growth in WA was particularly strong, on the back of a 33% increase in the number of advertisements for engineering jobs on new iron ore projects. Victoria s performance remains a standout, benefitting from a surge in labour requirements in the Government, Community Services & Education sectors. NSW s performance remains positive, particularly as the market is circa 1.4 times as large as Victoria (the second largest market nationally in terms of the number of jobs advertised). Following muted growth over the latter half of 2017, increased requirements in the Health Care and IT & Telecommunications sectors have driven total growth in job advertisements across NSW. WA NT 12.4% 15.8% VIC 11.0% QLD 8.9% Retail -0.6% AUS ACT NSW 5.6% 5.5% 8.3% TAS 4.1% SA 2.2% Source: DOE / Savills Research 14

15 September 2018 Job Advertisement Growth by Sector (Jul-18) Rapid growth in job advertisements in the office and industrial sectors, has been particularly evident over the past 12 months on the back of growth in corporate profits nationally. Advertised roles for workers in the Office and Industrial sectors were up 11.3% and 13.1% respectively over the year to July Job advertisements for the Retail sector were flat over the same period, with gains in WA, SA and Victoria largely offset by losses in other states. Overall growth in job advertisements was spurred by a hiring boom in the mining and agriculture sectors. There was a notable fall in advertisements in the banking industry as a result of ongoing macroprudential policing of the big banks and in real estate, largely due to slowing in the residential housing market. Employment by Industry (Mar-18) Australia s Utilities and Manufacturing industries drove employment gains nationally, as illustrated in the adjoining chart. Whilst growth in retail sector jobs was flat over the same period nationally, there was a large amount of disparity between the states. NSW and Queensland were the only states to report growth in retail sector jobs over the same period (1.0% and 9.5% respectively), with all other states recording notable job losses in the retail sector. 130 Job Ads - Total Job Ads - Office 125 Job Ads - Industrial Job Ads - Retail % 8% 6% 4% 2% 0% -2% -4% -6% -8% 8.1% 7.2% 5.9% 5.5% 5.1% 5.0% 4.1% 3.3% 2.3% 1.9% 1.4% 0.0% (4.7%) (5.8%) Source: DOE / Savills Research savills.com.au/research 15

16 Savills Research Economic Property Drivers Population Population Migration & Nat. Increase Over the last 20 years, Australia s population has increased by one-third from 18.4m in 1998 to 25m people in August 2018*, circa 30 years before official projections made in 1998 by the ABS Whilst Australia's population growth has been aided by rising fertility rates and increasing longevity, overseas migration has been the main drivers. Overseas migration is currently at record high levels, with 240,400 people migrating to Australia over Of this total, over 85% have settled in the Eastern cities of Sydney, Melbourne and Brisbane. However, with the government now providing financial and employment incentives to immigrants to settle in regional areas, we should see population growth start to aid economies outside of the capital cities and help to alleviate some of the stress caused on the residential housing markets and ballooning cost of living in migrant hotspots of Sydney and Melbourne. * Note: August population figures are an estimate at this stage Overseas Migration ('000s) Natural Increase ('000s) Population (m) - RHS

17 September 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 (1.8) 0.39m (1.5) 0.40m (1.8) 0.41m (1.7) 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 Growth by State (as at Dec-17) Melbourne s status as the most liveable city in Australia, relative affordability over Sydney and an increase in job creation (particularly in the public sector) has seen population growth in Victoria outperform all other states. Whilst this has aided the Victorian economy overall, such a strong level of population growth is clearly affecting living standards, with Melbourne one of only 3 regions in Australia to record falls in GDP per capita over FY17. We are now seeing a rebound in population growth in Western Australia in line with a resurgence in the mining sector. Increasing requirements for mining workers in WA are attracting residents to the state and we will likely see a turnaround in negative interstate migration for the state over Interstate Migration by State (as at Dec-17) A wave of interstate migration from NSW to Victoria and Queensland has been evident over the last 12 months as a result of the residential housing boom in Sydney and growing living costs driving residents out of the Harbour city. A surge of job creation in South East Queensland is providing further incentive for people to move north. Just as we saw with the last residential property boom in Sydney in 2000, a wave of interstate migration to the north eventuated. 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% 2.0% 1yr 5yr 10yr 15yr 22,510 16, % 1, % -3,263-6, % -12, % NSW VIC QLD WA SA ACT AUS -19,299 QLD VIC TAS ACT NT SA WA NSW ; Note that CAGRs are shown above savills.com.au/research 17

18 Savills Research Economic Property Drivers Retail Trade Retail Trade Growth Retail trade remained flat (in trend terms) in the month of July, reflecting an annual growth rate of 2.7%. Online retail turnover continues to consistently account for a greater proportion of total retail turnover. In July 2018, online retail turnover contributed to 5.5% of the total, compared to 4.3% in the year prior (on latest available ABS data). Whilst online retailing remains in its infancy in Australia, it is growing at a staggering (albeit volatile) pace. Understandably, nondiscretionary retailing has been the first victim of a growing online retail marketplace, with department stores reporting a decline in profitability. It is evident that traditional (bricks & mortar) retailing is going to have to adapt to gain market share in the changing retail landscape. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Retail Trade Growth by State (Jul-18) Whilst positive, retail turnover growth remained below historic averages across all states. Expectations of strong employment growth translating to higher wages growth have thus far been unrealised. Retail turnover growth in Victoria (4.9%) was the strongest nationally, followed by ACT (3.2%), NSW (3.1%), SA (2.5%), Queensland (1.4%) and WA (-0.9%). However, looking at more recent credit card and debit card transaction data from the Commonwealth Bank spending is at a 12 year high (as at July 2018), with Queensland leading the charge on this account. This forward looking indicator bodes well for retail turnover growth in the months to come. In tourism reliant states, a lower AUD is likely to further boost retail spending levels. 6% 1yr 5yr 10yr 15yr 5% 4% 3% 2% 1% 0% -1% -2% NSW VIC QLD WA SA ACT AUS Retail Trade by Sector (Jul-18) Broad based gains were evident across all key retail sectors, including Department Store retailing, which was marginally positive after dipping into negative territory in the the last quarter. Once again, Food & Supermarket retailing led all other sub-categories, with turnover growth recorded at 4.0% in the 12 months to July A surge in Clothing & Footwear retailing corresponded to mid-year and end of season sales, which was further reflected by the highest annual rise in volume terms of all retail sub-categories. Growth in retail turnover for Department Stores was disparate among the states, with a rise in tourists visiting Queensland helping the sector grow by 4.3%. 5% 4% 3% 2% 1% 0% 4.0% Food 3.8% 3.8% Supermarkets Clothing & Footwear 2.3% Café & Restaurants 2.0% 1.9% Other Hardware & Garden 1.6% Department Stores 0.9% Household Goods 18

19 September 2018 Retail Trade (10yr Indexed) There remains a clear distinction in retail performances across discretionary and nondiscretionary retail sectors. In spite of ongoing pricing competition amongst major supermarket chains over the last 2 years, Supermarket and food retailing still grew circa 50% over the last 10 years. On the other hand, persistently low consumer sentiments and low wage growth since the Global Financial Crisis has had an ongoing dampening effect on nondiscretionary retailing, except for the Hardware & Garden sector, which has been materially aided by the residential housing boom. Growth in Food and Cafes & Restaurants retailing continues to support total retail trade in an otherwise challenging year for Australian retailers Total Supermarkets Food Household Goods Department Stores Hardware & Garden Household Savings Rate Australia s household savings rate continued to fall, with the savings ratio recorded at 1.6% in June 2018, the lowest level since June The falling savings ratio in the current quarter was largely a result of continued strength in household consumption, which grew 0.7% in the June quarter, whilst net disposable income for households only grew 0.4%. With wages growth now largely in line with inflation over the past 3 years, it is clear that Australians are not benefiting from any real growth in wages. Ongoing falls to the savings ratio appear likely, particularly as Australian households are faced with increasing mortgage repayments as Westpac recently increased interest rates (with other banks likely to follow suit). 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Retail Trade Growth by Sector & State (to Jul-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) The weighted average median house price of the the capital cities remained largely flat (growth of 0.4%) over the 12 months to March 2018 (latest available on ABS numbers). Median house prices in Sydney and Perth fell 4.2% and 2.9% respectively, whilst they grew in Melbourne, Brisbane, Adelaide and Canberra (6.8%, 2.8%, 1.1% and 4.6% respectively) over the same period. Net interstate migration was the highest in Melbourne and Brisbane, with residents migrating en masse out of Perth and Sydney in Migration into regional areas was also evident, driving median house prices up in non-metro areas of NSW, Victoria and Brisbane. Median house prices in regional areas grew 2.2% nationally in the year to March 2018, driven by outperformance in regional Victoria, where median house prices grew 6.5% over the same annual period. Median house prices are likely to remain at their current levels for at least the next months, until a renewal in demand, rising incomes and an increase in consumer confidence once again buoys the residential housing market. 210 NSW VIC QLD WA SA ACT 190 AUS

21 September 2018 Residential Statistics (Houses) by State METROPOLITAN NON-METROPOLITAN STATE Median Price* Sale Volume* Median Price* Sale Volume* DAs* DAs / 100** AUS 679 (0.4%) 174,587 (-9.9%) 419 (2.2%) 128,975 (-4.2%) 120,409 (5.0%) 0.93 (0.82) NSW 905 (-4.2%) 45,197 (-12.4%) 465 (2.2%) 49,950 (-4.2%) 29,481 (1.0%) 0.90 (0.66) VIC 722 (6.8%) 56,294 (-13.1%) 355 (6.5%) 26,577 (-0.2%) 39,373 (10.1%) 1.18 (1.00) QLD 519 (2.8%) 34,140 (-12.3%) 440 (0.8%) 33,667 (-9.7%) 26,067 (7.3%) 0.86 (0.82) WA 500 (-2.9%) 5,767 (-1.7%) 334 (-3.2%) 5,767 (-1.7%) 12,978 (-9.2%) 0.71 (0.99) SA 465 (1.1%) 24,280 (5.5%) 280 (-1.8%) 6,381 (6.4%) 8,489 (9.4%) 0.74 (0.69) ACT 690 (4.5%) 4,319 (-7.9%) n.a n.a 1,161 (12.6%) 1.36 (1.19) ; *12 month growth rates in brackets; **10yr Averages shown in brackets Housing Sales Volume (12 Month Growth) Housing sale volumes moderated across metropolitan areas nationally (excepting for Adelaide) with total sales of houses falling 9.9% nationally over the 12 month period to March Melbourne recorded the largest fall in sales volumes for houses nationally (-13.1%), followed by Sydney (-12.4%). Sales volumes for attached dwellings fell nationally by 13.3%, as a result of sustained falls across all state capitals (bar Perth, which remained flat). It is clear that after a period of undersupply from the 1990s to 2014 (particularly in Sydney and Melbourne) residential developments have increased supply considerably and are now close to meeting demand. However, affordability concerns have led to a moderation in the residential housing market, which should remain the case for the next 2-3 years. Median Attached Prices by State (Metro) Median prices of attached dwellings fell across all the major capital cities, though increases in Melbourne and Hobart led the weighted average of the 8 capital to remain flat in the year to March In Melbourne, median attached prices grew 5.1% over the same period. Median apartment prices in Sydney and Melbourne have grown 1.8 and 1.5 (respectively) times over the last 10 years, following strong demand from overseas buyers, strong population growth and rapid density increases across the inner suburbs. Forecasts across the board point to an ongoing slowing of the residential housing sector over the next 2-3 years largely on the back of muted wages growth, tighter lending restrictions and rising cost of living. SA WA ACT AUS QLD NSW VIC Attached Volume - Capital Cities Housing Volume - Capital Cities 190 NSW VIC QLD WA SA ACT 180 AUS (25.0%) (20.0%) (15.0%) (10.0%) (5.0%) 0.0% 5.0% 10.0% savills.com.au/research 21

22 Savills Research Economic Property Drivers Household Sector Australian households are increasingly dipping into their savings to fund expenditure, particularly for servicing mortgage repayments. Residential Development Approvals Total residential development approvals were up 4.7% over the year to July 2018 (on a rolling annual basis). Of the 230,000 residential developments that were approved in the 12 months to July 2018, 52% were for freestanding houses, with NSW and ACT the only 2 states where residential DAs for attached dwellings was more numerous than for freestanding houses. In spite of a cooling residential property market nationally, the volume of approvals for new detached houses remain near their strongest levels in 20 years. 250, ,000 Houses Attached Dwellings Approvals Per 100p , , ,

23 September 2018 Residential Statistics (Attached Dwellings) by State METROPOLITAN NON-METROPOLITAN STATE Median Price* Sale Volume* Median Price* Sale Volume* DAs* % of Total AUS 550 (0.0%) 104,100 (-13.3%) 384 (1.3%) 36,704 (-10.6%) 109,682 (2.2%) 48% NSW 710 (-1.4%) 35,782 (-15.9%) 390 (1.4%) 11,663 (-13.0%) 42,017 (-4.1%) 59% VIC 536 (5.1%) 35,924 (-13.0%) 280 (1.8%) 4,589 (-5.9%) 36,238 (22.5%) 48% QLD 390 (-2.8%) 11,149 (-16.8%) 385 (0.0%) 17,609 (-12.3%) 16,417 (-13.0%) 39% WA 407 (-3.0%) 7,039 (0.5%) 248 (-17.5%) 625 (11.4%) 5,417 (-10.8%) 29% SA 365 (0.0%) 8,504 (-2.1%) 176 (-7.4%) 1,039 (8.8%) 4,350 (14.9%) 34% ACT 430 (-1.1%) 3,664 (-22.1%) n.a n.a 4,483 (-0.2%) 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 growth in investment loans, alleviating some of the investor demand. Growth in invetor loans was recorded at 1.0% in the 12 months to June 2018, whilst growth in loans for owner occupiers was up 7.0% over the same period. Positively, it appears that the macroprudential policies implemented in 2017, tightening of housing credit and restrictions on foreign buyers have jointly had the desired slowdown effect on the residential housing sector (without raising interest rates) and is now being driven by owner occupiers. Housing Indebtedness & Interest Payments The adjoining chart is a good illustration of why concerns regarding mortgage stress affecting the overall economy may be overplayed. Lower interest rates have helped to keep the debt interest to income ratio well below the high reached in 2008, in spite of rising household indebtedness. Debt interest payments are currently approximately 30% below the peak reached just after the Global Financial Crisis. However, with Westpac increasing interest rates recently, and the other banks soon to follow suit, it appears that Australian households will have to contend with rising household interest payments, with the ratio to income likely to rise if wages growth doesn t become a reality soon. 25% 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 September 2018 South Korea GDP: 15.7% Inflation: 11.0% Pop. Growth: 2.1% Japan GDP: 4.0% Inflation: 6.5% Pop. Growth: -1.5% Singapore GDP: 13.8% Inflation: 10.3% Pop. Growth: 5.1% China GDP: 36.1% Inflation: 12.8% Pop. Growth: 3.0% Australia GDP: 14.4% Inflation: 13.2% Pop. Growth: 8.0% savills.com.au/research 25

26 Savills Research Economic Property Drivers September 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