GRANT THORNTON BANKERS BOOT CAMP

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1 GRANT THORNTON BANKERS BOOT CAMP

2 Where are we in the cycle? Yield compression slowing, rents growing Yields bottoming but the bottom could last till 2020 The end of yield compression brings income return to the fore and higher-yielding assets outperform Sydney and Melbourne have outperformed in terms of rent growth this will continue over the medium term Brisbane recovery has started - countercyclical investment play now Perth recovery still a couple of years away - countercyclical investment play soon

3 Where are we in the cycle? Residential Industrial Office Retail Resi Approaching Rents Two-speed market at forecast market tends bottom to lag of bottom emerging cycle commercial sectors Vacancy Prime assets still begun further its High to slow, performing unwind end sustained of - well, market seeing impacted recovery strong recovery demand by supply Mid- additions Recovery Older to assets low-range to come resi Demand sooner continuing continues focused higher to face to in drag core grades rental locations market pressure downwards

4 Population growth Western Australia Interstate migration is bleak 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,000-10,000-15, Net Overseas Migration Total % Source: ABS, Deloitte Access Economics, CBRE Research Net Interstate Migration

5 Sydney housing at record relative expensiveness Another exodus imminent? 0-5,000-10,000-15,000-20,000-25,000-30,000-35,000-40,000 NSW net interstate migration and Sydney relative house prices Young families leave in droves NSW net interstate migration Buy a house elsewhere or 50% of a house in Sydney? 80% 75% 70% 65% 60% 55% 50% 45% 40% Source: REIA, ABS, CBRE Research

6 Employment growth - Western Australia Private sector jobs market growth the missing element Change in Employment - Public v Private Feb-17 to Aug-17 WA NSW VIC QLD Public Private Source: ABS (Original data series), CBRE Research WA employment growth positive in 6mths to Aug Driven by public sector - strongest of all states Added 40,000 jobs in 6 mths Private sector still a drag on employment Total employment growth roughly on par with Victoria

7 Housing sector lending Applying the brakes Motivations APRA, RBA: not targeting affordability but financial stability targeting investors and developers State Governments: improve affordability targeting overseas investors Result: decline in growth of bank property exposures 25% 20% 15% 10% 5% 0% -5% -10% -15% FY14 FY15 FY16 FY17 Three main commercial sectors Land development Residential (investor) Residential (own/occ) Source: APRA, CBRE Research

8 Commercial property sector lending Domestic banks all but retreated in FY17 Foreign banks filling the void resulting in exceptional growth Annual change in property exposures ($b) FY17 FY17 Three main commerical sectors Domestic Foreign Land development/subdivisions Other residential 60% 50% 40% 30% 20% 10% 0% -10% Annual change in property exposures (%) FY17 FY17 Domestic Foreign Three main commerical sectors Land development/subdivisions Other residential Source: APRA, CBRE Research Source: APRA, CBRE Research

9 Annual residential investor activity ($b) Housing sector lending Not a consistent story between the States Residential Investor Finance (rolling annual, excluding refinancing) 65% 60% 55% 50% 45% 40% 35% 30% New South Wales Victoria New South Wales and Victoria rebounded after initial APRA tightening, but are just starting to show signs of easing again. Queensland and Western Australia have steadily eased. Source: Australian Bureau of Statistics,

10 NATIONAL RESIDENTIAL MARKET BUILDING APPROVALS Shift in mix to apartments, particularly in Inner City locations 80% 70% 60% 50% 40% 30% 20% Proportion of Residential Building Approvals by Type 2016/17 apartment activity Perth ~ 35% of activity within 0-5kms of CBD Melbourne ~ 32% of activity within 0-5kms of CBD Sydney more decentralised only ~ 17% of activity within 0-5kms of CBD 10% 0% House Townhouses One/two Three storey 1996 storey flats 2006 flats storey flats Consumer preference shifting to higher density living. Source: ABS; CBRE Research analysis 10

11 Rolling 12 monthly approvals NATIONAL RESIDENTIAL MARKET BUILDING APPROVALS Shift in mix to apartments, particularly in Inner City locations 140,000 Australian Annual Residential Approvals 120, ,000 80,000 60,000 40,000 Australia Houses Australia Apartments 20,000 Source: ABS; CBRE Research analysis

12 % of total unit approvals Residential unit approvals Inner city share of unit approvals dropping on the east coast 60% Major metro building approvals - inner share (Units) 50% 40% 30% 20% 10% 0% Melbourne Sydney Brisbane Perth Source: ABS, CBRE Research Note: Data covers approximately a 5km radius of the GPO

13 GREATER PERTH BUILDING APPROVALS Apartment approvals dropping from their peak Greater Perth Annual Residential Approvals Rolling 12-month approvals 30,000 27,500 25,000 22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2, Greater Perth Houses Greater Perth Apartments Source: Australian Bureau of Statistics 13

14 Number of Approvals % of total unit approvals PERTH INNER CITY BUILDING APPROVALS Inner City share of total unit approvals still high 3,500 3,000 Perth Inner City Building Approvals Houses Units 40% 35% Perth Building Approvals - Inner Share (Units) 2,500 30% 2,000 1,500 25% 1,000 20% % 0 10% Source: ABS; CBRE Research analysis Note: Data covers approximately a 5km radius of the GPO 14

15 Annual approvals GREATER PERTH INNER UNIT BUILDING APPROVALS BY LOCALITY Perth City dominates 3,000 Greater Perth Inner Residential Approvals - Units Perth City 2,000 1,000 Victoria Park - Lathlain - Burswood South Perth - Kensington Subiaco - Shenton Park Wembley - West Leederville - Glendalough Maylands Yokine - Coolbinia - Menora North Perth Mount Hawthorn - Leederville Mount Lawley - Inglewood Como Source: Australian Bureau of Statistics 15

16 Median price ($'000) Residential price differential Sydney and Melbourne are at historic spreads $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Median house price (quarterly) Perth s median house price (REIA data) is just: 43% of Sydney s 63% of Melbourne s Historically, these spreads were last seen in around But in dollar terms, the spreads are two to three times as great. Sydney Melbourne Brisbane Perth Similar story for apartments. Source: Real Estate Institute of Australia Note: Data refers to Greater Capital City metropolitan areas

17 Settlement risk On-the-ground evidence Actual measures of settlement risk are difficult to quantify with certainty. But. evidence from the coal face suggests We are still in the early stages of the settlement cycle. Process is being carefully managed at present early engagement with purchasers and working through unit-by-unit. Tactics include help with broker contacts, developer finance through to more direct methods such as cash back incentives. Valuations tending to come in ~10% below contract price some much worse off. Project settlement has stretched from 6-weeks to 2 to 4 months. Project by project circumstances are different. Some issues with offshore buyers in fringe/suburban locations.

18 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Online retail North American case study Department stores have been hit the hardest 400 US retail trade Canada retail trade March 1992 = Jan 2004 = 100 Supermarket and grocery stores Department stores Pharmaceutical, cosmetic and toiletry goods retailing Cafes, restaurants and catering services Supermarket and grocery stores Other specialised food retailing Electrical and electronic goods retailing Department stores Pharmaceutical, cosmetic and toiletry goods retailing

19 Australian retailers preparing for disruption Online competition set to rise The rise of online retailing is not a new trend Local retailers have already lifted their games in the face of competition from online retail and also international brands Australia s retail assets are more defensive Lower concentration of department stores in shopping centres except for in sub-regional Supermarkets in shopping centres Large format insulated in the near term but that won t last But there will be disruption Market share could account for 1.5%-2.0% of retail sales Logistics providers will also be adversely impacted

20 GRANT THORNTON BANKERS BOOT CAMP