FOLKESTONE REAL ESTATE OUTLOOK JULY 2015 1
ECONOMIC OUTLOOK 2
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 $bn ECONOMIC CONDITIONS NATIONAL GROWTH Australian GDP Growth: 1990 2017 Private New Capital Expenditure: 2000 2015 6.0% Mining Manufacturing Other Industries 5.0% 25.0 4.0% 3.0% Average = 3.1% 20.0 2.0% Average = 2.8% 15.0 1.0% 0.0% -1.0% 10.0 5.0-2.0% 0.0 Source: ABS, Bloomberg, RBA Economic growth remains below trend the transition from mining has been slow Businesses appear reluctant to invest until the economy improves The RBA has pushed the timing out for a recovery in non-mining investment until later in 2016 3
VIC WA NSW QLD ACT SA TAS Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 ECONOMIC CONDITIONS STATE GROWTH Population Growth: Year to Dec 2014 State Final Demand: 2000 2015 No. of People % Increase NSW VIC QLD WA 120,000 100,000 80,000 2.0% 1.8% 1.6% 1.4% 1.2% 15.0% 12.0% 9.0% 6.0% WA 60,000 40,000 1.0% 0.8% 0.6% 3.0% 0.0% NSW VIC 20,000 0 0.4% 0.2% 0.0% -3.0% -6.0% QLD Source: ABS Population growth has slowed in the past year but still high for a developed nation VIC recorded the strongest growth (1.8%) and was just below NSW in terms of absolute growth WA and QLD population growth has slowed due to mining downturn Economic growth across the States reflecting the economic transition from mining 4
Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 FINANCIAL MARKET CONDITIONS - YIELDS Yields: 2005 2015 Cash Rate Expectations: 12 Months to December 2016 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 90 Day Bills 3 Yr Bonds 10 Yr Bonds 2.0% 1.9% 1.8% 1.7% 1.6% 1.5% 1.4% 1.3% 1.2% 1.1% 0.0% 1.0% *As at 10 July 2015 Source: IRESS, The Yield Report Yields have fallen to historic lows across the yield curve Markets now factoring in another rate cut by late 2015/early 2016 following RBA cuts in February and May For investors, key to look at long-end of curve (10 year yields) will this increase as economic recovers and/or follow global yields higher 5
PROPERTY MARKET OUTLOOK 6
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Mar-15 Australian Industrial Australian Other Australian Retail All Property Australian Office Rolling Annual Returns AUSTRALIAN MARKET CONDITIONS NON-RESIDENTIAL Non-Residential Property Total Returns: 2003 2015 Total Returns by Sector: 1 and 3 Years to March 2015 20.0% Capital Return Income Return Total Return 14.0% 1 Year 3 Years 15.0% 12.0% 10.0% 5.0% 0.0% 10.0% 8.0% 6.0% 4.0% -5.0% 2.0% -10.0% 0.0% March 2015 - total return was 10.7% underpinned by strong income return of 6.9% Direct property has provided stable returns for past 5 years in a period of financial market volatility Capital values in upswing phase driven by further cap rate compression rather than real estate fundamentals Industrial has been the best performing sector over 1 and 3 years likely to continue in FY16 7 Source: MSCI, IPD
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Secondary Office Bulky Goods Neighbourhood Retail Prime Office Sub-Regional Retail Regional Retail Syd Secondary Syd Prime Industrial AUSTRALIAN MARKET CONDITIONS CAP RATES 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% Cap Rates vs. 10 Year Bond Yields: 2005 2015 CBD Office Neighbourhood Retail 10 Year Bonds Major Regional Retail Industrial Warehouse Still not back to pre-gfc levels Cap Rates vs. Historical Peak and Average: June 2015 2.0% 1.5% 1.0% 0.5% Spread From Historic Avg. Spread From Previous Peak 3.0% 0.0% 2.0% Source: MSCI, IPD Disconnect between capital markets and space markets highlighted in recent sector dynamics: cap rates have firmed while vacancy rates remain elevated and income growth is subdued prices being driven by weight of money not underlying real estate fundamentals Cap rates have fallen most for industrial lowest spread from historical average Expect further cap rate compression in FY16 driven by weight of money 8
2008 2009 2010 2011 2012 2013 2014 2015 $bn AUSTRALIAN MARKET CONDITIONS TRANSACTIONS Non-residential Transaction Volume By Key Sector: 2008 2015 Domestic vs. Foreign Investment Activity: 2012-2015 Office Retail Industrial 30.0 25.0 20.0 15.0 10.0 5.0 0.0 * *Six months to June 2015 Source: DTZ In 6 months to June 2015, just under $10bn was transacted in the office, retail and industrial sectors Activity running below levels in 1 st half of 2014 due to stock availability rather than capital drying up Foreign investors accounted for 45% of transaction value in the past six months Office remains the key target for foreign investors (Sydney and Melbourne), although growing interest in prime industrial and hotels 9
C. London Manhattan San Francisco Tokyo Los Angeles Paris Melbourne Washington DC Boston Chicago Sydney Hong Kong Dallas Singapore Miami AUSTRALIAN MARKET CONDITIONS GLOBAL CAPITAL Investment in Major Global Cities: Q2 2014 Q1 2015 Investor Target Markets by Region: 2015 40.0 30.0 North America Europe Asia Pacific 100% 90% 80% Brazil Canada Mexico Other CEE Nordics Benelux Other Hong Kong S. Korea 70% Spain/ Italy Singapore 20.0 60% 50% France China 10.0 40% 30% US Germany Australia 0.0 20% 10% UK Japan 0% Americas EMEA Asia Pacific Low interest rate environment, strong relative pricing and quantitative easing in some markets have led to strong growth in global capital targeting real estate Global investment activity is set to close in on 2007 peak levels by end of 2015 Global capital focusing on gateway cities - Melbourne and Sydney rank high on the shopping list Japan followed by Australia and China are the main targets by institutional investors in Asia Pacific region 10 Source: DTZ
AUSTRALIAN MARKET CONDITIONS OFFICE CBD Office Vacancy Rates: Dec 2014 Jun 2015 Dec-14 Jun-15 Prime Effective Rental Growth: Year to March 2015 Sydney Melbourne CBD Melbourne Sydney CBD Brisbane Canberra Adelaide Brisbane CBD Canberra Adelaide CBD Perth Perth CBD 0.0% 5.0% 10.0% 15.0% 20.0% -20.0% -10.0% 0.0% 10.0% Source: JLL Vacancy rates reflect divergent economic growth prospects of the major markets Sydney the only CBD market to record a single digit vacancy 7.8% Effective rental growth has been subdued in Sydney and Melbourne and negative in other CBDs due to high vacancy and elevated incentives 11
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Index % Change pcp AUSTRALIAN MARKET CONDITIONS RETAIL Retail Sales vs. Consumer Confidence: 2002 2015 Retail Turnover by Type: Year to May 2015 Consumer Confidence (LHS) Retail Sales (RHS) 125 115 105 10.0 9.0 8.0 7.0 6.0 Houshold Goods Cafes, Restaurants & Takeaway Total 95 85 75 5.0 4.0 3.0 2.0 1.0 0.0 Food Retailing Clothing, Footwear & Accessory Other Retailing Department Stores 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Source: ABS Retail sales growth has improved but driven by household goods (impact of strong housing market) Consumer confidence remains weak therefore cautious on spending However, lower confidence partly offset by strong population growth, rising house prices and equity values (the wealth effect ) 12
Like for Like (Sales Growth) $ '000/sq.m. AUSTRALIAN MARKET CONDITIONS RETAIL Aldi, Coles & Woolworths Annual Sales Growth: 2011-2014 Aldi, Coles & Woolworths Sales per Sq.m: 2010-2014 ALDI Coles Woolworths ALDI Coles Woolworths 14.0% $20.0 12.0% 10.0% $15.0 8.0% $10.0 6.0% 4.0% $5.0 2.0% 0.0% 2011 2012 2013 2014 $0.0 2010 2011 2012 2013 2014 Source: Company Reports and JP Morgan Competition in supermarket sector is increasing ALDI now a genuine third supermarket operator The competition between Coles and Woolworths is not new who is number 1 changes over time 13
Annualised Return AUSTRALIAN MARKET CONDITIONS INDUSTRIAL Investment Performance Across Industrial Sub-Sectors: 1 and 3 Years to March 2015 16.0% 1 Year Return 3 Years Return 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Warehouse Distribution Industrial Estate Other Warehouse and distribution centres have performed strongly in recent years investors chasing prime assets Industrial performance being driven by: investors chasing higher yields relative to office and retail on-going transformation of industrial landscape more distribution centres and changing land-use of inner ring industrial areas industrial distribution centres demand high due to e-commerce, retail trade and change in transport networks 14 Source: IPD/MSCI
AUSTRALIAN MARKET CONDITIONS RESIDENTIAL Dwelling Values Major Capital Cities: 1 Year and 10 Years to June 2015 Sydney Melbourne Adelaide Brisbane Canberra Hobart Perth Darwin 12 Months to June 2015 Average 10 Years to June 2015 (p.a.) -10.0% 0.0% 10.0% 20.0% San Francisco Bengaluru Miami Vancouver Jakerta Tel Aviv Tokyo Dublin Los Angeles Sydney Melbourne Seoul Cape Town Hong Knog Madrid Bangkok London Mumbai Delhi Shanghai Prime Global Cities Index: 1 Year to March 2015 0.0% 5.0% 10.0% 15.0% Housing boom has not been uniform across Australia Sydney has been standout performer up 16.2% in the past year however over 10 years it is 5.4% p.a. one of the weakest Sydney and Melbourne, considered global cities - rank 10 & 11 on global basis based on growth in year to March 2015 (latest available nos.) 15 Source: Core Logic/RP Rismark, Knight Frank Residential Research, Douglas Elliman/Millare Samuel, Ken Corporation
May 95 May 97 May 99 May 01 May 03 May 05 May 07 May 09 May 11 May 13 May 15 Jun-91 Jun-93 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 $bn (s.a.) % No of Approvals (Rolling Annual) AUSTRALIAN MARKET CONDITIONS RESIDENTIAL Housing Finance by Type of Borrower: 1995 2015 12.0 Owner Occupier - Construction Owner Occupier - Purchase of New Dwellings Owner Occupier - Purchase of Existing Dwellings Investment - Construction Investment - Purchase of Dwellings Building Approvals and Monetary Policy: 1991-2015 12 Cash Rate (LHS) Tightening Cycles Building Approvals (RHS) 240,000 10.0 10 220,000 8.0 8 200,000 6.0 6 180,000 160,000 4.0 4 140,000 2.0 2 120,000 0.0 0 100,000 Source: ABS Investor activity is driving the residential market However, despite all the hype about apartments off-plan sales, investors are preferring established housing APRA macro-prudential controls on bank lending will impact the investor market Strong link between interest rates and housing sector investors need to be cognisant of interest rate increases down the track 16
Mar-1987 Mar-1989 Mar-1991 Mar-1993 Mar-1995 Mar-1997 Mar-1999 Mar-2001 Mar-2003 Mar-2005 Mar-2007 Mar-2009 Mar-2011 Mar-2013 Mar-2015 Mar Qtr 10 Sep Qtr 10 Mar Qtr 11 Sep Qtr 11 Mar Qtr 12 Sep Qtr 12 Mar Qtr 13 Sep Qtr 13 Mar Qtr 14 Sep Qtr 14 Mar Qtr 15 (Rolling Annual) AUSTRALIAN MARKET CONDITIONS RESIDENTIAL Multi-Unit Dwelling as % of Total Dwelling Completions: 1986-2015 Residential Land Sales and Medium Lot Values Capital Cities: 2010-2015 45.0% 12,000 Number of Sales (LHS) Price Per Lot (RHS) 270,000 40.0% 10,000 260,000 250,000 35.0% 8,000 240,000 230,000 30.0% 25.0% 6,000 4,000 220,000 $ 210,000 200,000 20.0% 2,000 190,000 180,000 15.0% 0 170,000 Source: ABS, HIA, CoreLogic RPData Apartments now key part of the market 41% of completions in year to March 2015 due to lifestyle/demographic changes, affordability (apartments 28% cheaper than houses in Sydney) and planning changes Inner Melbourne, Inner Brisbane & South Sydney apartment markets heading for an oversupply better value in middle/outer ring suburbs, mixed-use developments and around transport nodes Land sales falling across Australia since peaking in 2013 driven by Sydney where lot sales down 29.7% in March quarter and almost 50% below record set in December quarter 2013 Media lot price in Sydney now $365,000-64% higher than Melbourne ($222,000) and Brisbane ($228,000) 17
May-85 May-88 May-91 May-94 May-97 May-00 May-03 May-06 May-09 May-12 May-15 May-88 May-91 May-94 May-97 May-00 May-03 May-06 May-09 May-12 May-15 No. of Approvals (per month) No. of Approvals (per month) AUSTRALIAN MARKET CONDITIONS RESIDENTIAL House and Apartment Approvals NSW and Victoria: 1988 2015 NSW Houses NSW Apartments NSW Total VIC Houses VIC Apartments VIC Total 6,000 7,000 5,000 6,000 4,000 3,000 2,000 5,000 4,000 3,000 2,000 1,000 1,000 0 0 Source: ABS NSW approvals declined significantly between 2003 and 2008 leading to current undersupply and price pressures VIC approvals continue to run ahead of long-term average and also ahead of NSW better planning system Declining affordability, concerns of oversupply in some sub-markets, supply bottlenecks (Sydney planning) will see supply taper off in 2016 18
Jan-10 Oct-10 Aug-11 Jun-12 Apr-13 Feb-14 Dec-14 Yield AUSTRALIAN MARKET CONDITIONS SOCIAL INFRASTRUCTURE Performance of the Top Five A-REITs: Year to June 2015 National Storage REIT GrowthPoint Properties 15.0% 13.0% 11.0% Early Learning Centre Sale Yields: 2010-2015 Metro Yields Linear (Metro Yields) Regional Yields Linear (Regional Yields) Arena REIT 9.0% Folkestone Education Trust Hotel Property Investments 0.0% 20.0% 40.0% 7.0% 5.0% 3.0% Source: ABS More capital being allocated in both the listed and unlisted real estate markets to alternative assets such as early learning, medical/health and seniors living 4 of the top 5 performing A-REITs in the year to June 2015 were social infrastructure related Alternate sectors typically higher yields than office, retail and industrial, although yield gap closing due to growing investor interest in alternate assets Benefits of investing in social infrastructure typically include longer leases (often 10 years or more), net or triple net leases (whereby the operator/ tenant pays outgoings and is responsible for repairs and maintenance), often government backed cash flows & lower volatility compared to other assets 19
A-REIT SECTOR OUTLOOK 20
Industrial A-REITs Retail A-REITs Total A-REIT Office A-REITs Diversified (% p.a.) A-REIT SECTOR PERFORMANCE 30.0% A-REITs vs. Equities vs. Bonds: 2012-2015 A-REITs Equities Bonds 30.0% A-REIT Total Returns: to 30 June 2015 1 Year 3 Years 5 Years 25.0% 20.0% 15.0% 10.0% 25.0% 20.0% 15.0% 5.0% 10.0% 0.0% 5.0% -5.0% -10.0% 2012 2013 2014 2015 Year ending June 0.0% Source: UBS A-REITs outperformed equity and bonds in year to June 2015 2 nd time in 3 years Industrial A-REITs were the best performing A-REIT sector over 1 and 3 years 27.5% and 24.0% p.a. Expect performance to moderate in FY16 to longer-term averages circa 10% Short-term volatility (general equity flows in & out of sector/ market sentiment) will continue to be a feature of A-REITs in FY16 A-REIT s in better shape than pre GFC lower gearing, more sustainable pay-out ratios, focused strategies 21
Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 A-REIT SPREADS A-REIT Sector EPU and DPU Yields vs. 10 Year Australian Bond Yields: 1990 2015 10 Yr AU Bond Yield A-REIT EPU Yield A-REIT DPU Yield 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Despite strong price performance of A-REITs, spread between A-REIT yields and 10 year bonds still wide - DPU spread circa 225 bps well above long-term average of 60 bps A-REIT yield very attractive relative to other major global REIT markets on both absolute yield and relative spread to 10 year bonds a key reason for strong inflows into A-REITs from global investors High correlation with movement in bond yields A-REITs could come under short-term pricing pressure if bond yields move up 22 Source: JPMorgan, Bloomberg
SUMMARY Australia s economic growth to remain below trend Wall of money chasing real estate assets, especially non-residential assets will continue Biggest challenge for investors will be finding attractive investment opportunities in a competitive market place Industrial and real estate related social infrastructure to outperform Seniors living sector is expected to offer significant investment opportunities Wide divergence in performance of Australia s housing sub-markets to continue Momentum in the Sydney and Melbourne residential markets is set to slow Strong return from A-REITs in FY15 unlikely to be repeated move back to long-term average Investors need to identify and quantify the risk in their real estate portfolios and focus on the underlying real estate fundamentals This time it s different does not abolish the real estate cycle 23
FOLKESTONE S FOCUS IN FY16 Specific investment opportunities rather than focusing on top-down sector calls focus on mispriced assets; where we can add value; Look to manufacture core product rather than relying on competition lender process Focus on early learning, particularly developing centres within 15km radius of CBDs and outer growth corridors and look for opportunities in the seniors living sector Maintain conservative leverage levels and structures in our income and development funds Continue to stress test assets under various interest rate scenarios 24
REAL ESTATE IQ Register at: www.folkestone.com.au/real-estate-iq/ 25
DIRECTORY Folkestone Limited ASX Code: FLK Website: www.folkestone.com.au ABN: 21 004 715 226 Level 12, 15 William Street Melbourne Vic 3000 T: +61 3 8601 2092 Level 10, 60 Carrington Street Sydney, NSW 2000 T: +61 2 8667 2800 Board of Directors: Garry Sladden Non-Executive Chairman Mark Baillie Non-Executive Deputy Chairman Greg Paramor Managing Director Ross Strang Non-Executive Director Company Secretary: Scott Martin Investor Relations: Lula Liossi T: +61 3 8601 2668 Email: lliossi@folkestone.com.au DISCLAIMER: This paper has been published for information purposes only. The information contained in this paper is of a general nature only and does not constitute financial product advice. This presentation has been prepared without taking account of any person's objectives, financial situation or needs. Because of that, each person should, before acting on this presentation, consider its appropriateness, having regard to their own objectives, financial situation and needs. You should consult a professional investment adviser before making any decision regarding a financial product. In preparing this presentation the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which has otherwise been reviewed in preparation of the paper. The information contained in this paper is current as at the date of this paper and is subject to change without notice. Past performance is not an indicator of future performance. Neither Folkestone Limited, nor any of their associates, related entities or directors, give any warranty as to the accuracy, reliability or completeness of the information contained in this paper. Except insofar as liability under any statute cannot be excluded, Folkestone Limited and its associates, related entities, directors, employees and consultants do not accept any liability for any loss or damage (whether direct, indirect, consequential or otherwise) arising from the use of this paper. If a product managed by Folkestone Limited or its associates is acquired, Folkestone Limited or its associates and related entities may receive fees and other benefits. The author 26 of this paper does not receive commissions or remuneration from transactions involving the financial products mentioned in this paper. Registry: Boardroom Pty Limited PO Box R67, Royal Exchange NSW 1223 Telephone: 1300 131 856 or +61 2 9290 9600 E-mail: enquiries@boardroomlimited.com.au Website: www.boardroomlimited.com.au