FOLKESTONE MARKET UPDATE A Specialist Funds Manager And Developer Providing Real Estate Wealth Solutions 1
FOLKESTONE OVERVIEW 2
BUSINESS STREAMS AN ASX LISTED REAL ESTATE FUND MANAGER AND DEVELOPER PROVIDING REAL ESTATE WEALTH SOLUTIONS FOR PRIVATE CLIENTS AND SELECT INSTITUTIONS Funds Management Direct Direct Balance Sheet Balance Sheet Income, Value-add & Development Funds Social Infrastructure Residential Office Retail Listed & Unlisted Funds A-REIT Securities Fund Debt Fund Value-add & Development Social Infrastructure Residential Office Retail Underwriting Funds Fees Acquisition Management Performance Returns & Fees Dev Profits Pref Equity Interest Income Development Mgt Fees Offers listed and unlisted real estate funds to private clients and select institutional investors $917 million in funds under management 1 On balance sheet activities focus on value-add and opportunistic (development) investments Market capitalisation of $155 million 1 1 As at 30 June 2015 3
FUNDS MANAGEMENT Public Markets Equity (Listed) Listed A-REITs Folkestone Education Trust (ASX: FET) A-REIT Securities Funds Folkestone Maxim A-REIT Securities Fund & SMA $917 Million in FUM and 7,291 Investors 1 A menu of real estate funds across: public (listed) and private (unlisted) markets, debt and equity to meet the various risk/return requirements of our clients sectors - office, retail, residential and social infrastructure Private clients and select institutions Private Markets Equity (Private Funds) Income Funds Altona North CIB Oxley Sydney Olympic Park Wollongong Development Funds West Ryde Truganina 1 As at 30 June 2015 and includes Folkestone and all its funds. 4
ECONOMIC OUTLOOK 5
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 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 $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 6
NSW VIC QLD WA SA ACT TAS Jun-2000 Jun-2001 Jun-2002 Jun-2003 Jun-2004 Jun-2005 Jun-2006 Jun-2007 Jun-2008 Jun-2009 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 ECONOMIC CONDITIONS STATE GROWTH Population Growth: Year to March 2014 State Final Demand: 2000 2015 120,000 100,000 No. of People % Increase 1.8% 1.6% 1.4% 15.0% 13.0% 11.0% NSW VIC QLD WA WA 80,000 60,000 1.2% 1.0% 0.8% 9.0% 7.0% 5.0% 3.0% VIC 40,000 0.6% 1.0% 20,000 0.4% 0.2% -1.0% -3.0% -5.0% NSW QLD 0 0.0% 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 7
PROPERTY MARKET OUTLOOK 8
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 Jun-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 Capital Return Income Return Total Return Total Returns by Sector: 1 and 3 Years to June 2015 1 Year 3 Years 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% June 2015 - total return was 11.3% underpinned by strong income return of 7.0% 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 9 Source: MSCI, IPD
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 June-15 Secondary Office Bulky Goods Neighbourhood Retail Prime Office Sub-Regional Retail Regional Retail Syd Secondary Syd Prime Industrial AUSTRALIAN MARKET CONDITIONS CAP RATES Cap Rates vs. 10 Year Bond Yields: 2005 2015 Cap Rates vs. Historical Peak and Average: June 2015 CBD Office Major Regional Retail Spread From Historic Avg. Spread From Previous Peak 10.0% Neighbourhood Retail 10 Year Bonds Industrial Warehouse Still not back to pre-gfc levels 2.0% 9.0% 8.0% 1.5% 7.0% 6.0% 1.0% 5.0% 4.0% 0.5% 3.0% 2.0% 0.0% 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 10
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 11 Source: DTZ
AUSTRALIAN MARKET CONDITIONS OFFICE Sydney CBD Office Vacancy Rates: Dec 2014 Jun 2015 Dec-14 Jun-15 Prime Effective Rental Growth: Year to June 2015 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 12
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 June 2015 125 115 105 Consumer Confidence (LHS) Retail Sales (RHS) 10.0 9.0 8.0 7.0 6.0 Houshold Goods Cafes, Restaurants & Takeaway Total 95 85 5.0 4.0 3.0 2.0 1.0 Food Retailing Clothing, Footwear & Accessory Other Retailing 75 0.0 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 ) 13
Annualised Return AUSTRALIAN MARKET CONDITIONS INDUSTRIAL 16.0% Investment Performance Across Industrial Sub-Sectors: 1 and 3 Years to June 2015 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 September 2015 Sydney Melbourne Brisbane Canberra Hobart Adelaide Perth Darwin 12 Months to September 2015 Average 10 Years to September 2015 (p.a) -5.0% 0.0% 5.0% 10.0% 15.0% 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
A-REIT SECTOR OUTLOOK 19
A-REITS VS GLOBAL REITS A-REITs vs Global REITs and Australian Equities: Jun 2014 Jun 2015 S&P/ASX 300 A-REIT S&P/ASX 300 MSCI Global REITS Source: Capital IQ, Bloomberg Australia one of the best performing REIT markets substantially outperforming MSCI Global REIT Index Also strong relative outperformance compared to Australian equities 20
(% p.a.) A-REIT SECTOR PERFORMANCE Total Returns A-REIT vs Direct Property: to 30 June 2015 Source: IPD/MSCI and UBS Lower correlation between A-REITs and direct property markets in recent years: across 1, 3 and 5 years sector specific A-REITs have substantially outperformed their respective direct property sectors Industrial A-REITs were the best performing A-REIT sector across 1, 3 and 5 years delivering returns of 27.5% p.a., 24.0% p.a. and 20.9% p.a. respectively 21
(% p.a.) A-REIT SECTOR PERFORMANCE Slope of the Yield Curve vs. REIT Relative Performance: 2010-2015 Source: IRESS, Credit Suisse estimate Strong correlation between interest rates and A-REITs A-REITs have performed well since mid 2013 when bond yields fell A potential lift in global yields is likely to be a major catalyst for A-REIT under performance 22
A-REIT SECTOR PERFORMANCE A-REIT Price to NAV vs. 10yr Bonds: 2010-2015 A-REIT Price to NTA: 2001-2015 Source: IRESS, RBA, Credit Suisse estimate Source: IRESS, Credit Suisse estimate Recent sell-off has created better value in the A-REIT sector A-REITs trading on a: 3% premium to NAV (Stockland, Micvac and Dexus all at significant discounts) 26% premium to NTA 23
A-REIT SECTOR PERFORMANCE A-REIT Sector P/E Ratio: 2001-2015 A-REIT Sector DPS Yield: 2001-2015 Source: Company data, IRESS, Credit Suisse estimate Source: RBA, IRESS, Credit Suisse estimate A-REITs are trading on 6.35% prospective earnings yield and 5.41% dividend yield Payout ratios are not stretched and the dividend yield for most A-REITs remain cash covered FY16 outlook largely as expected in recent A-REIT outlook statements 24
A-REIT SECTOR OUTLOOK Positives: A-REITs will continue to provide investors with an attractive alternative to general equities in the year ahead In a lower for longer interest rate environment, general equity funds should continue to provide support for income producing assets including A-REITs We are of the view that the year ahead will be one for the stock pickers Continue to focus on A-REITs that maintain a strict acquisition discipline, and take advantage of the competition for assets, by selling underperforming assets and avoid the temptation to leverage up while debt costs remain low Risks: Key downside risk to the sector is interest rates. If investors begin to anticipate interest rates to rise, we would expect the A-REIT sector to come under pressure as investors transition out of the sector A-REITs gear up back to pre-gfc levels fuelled by cheap debt as cap rates continue to compress A-REITs embark on initiatives to generate earnings outside their stated investment strategy i.e. take on business risk, head off-shore etc. (2006 to 2007 revisited) 25
SUMMARY Australia s economic growth to remain below trend Wall of money chasing real estate assets, especially non-residential assets will continue, driven by off-shore more than domestic investors 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 26
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 27of 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