Investment focus on Melbourne December 2016
Melbourne is experiencing a phase of extraordinary positivity that is extending across all of its property markets. This is illustrated in the Q316 take-up figures for office and industrial markets, rental growth in all sectors, yield compression in investment markets and price growth in residential markets. This is also illustrated by Melbourne s position in the JLL Global Investment Intensity Index which went from rank 38 in 2014 to 18 in 2016. So what is setting Melbourne apart from other global cities? Victoria s economy is the envy of other states but what characteristics are making Melbourne tick? This paper discusses the key aspects that are setting Melbourne apart: a. Exposure to a strong, stable and diverse economy; b. Leading employment growth; c. Significant leading population growth set to continue; d. The most liveable city in the world; e. Melbourne as an innovation capital; f. Expanding Business sector, retail and logistics sectors; g. Major infrastructure projects supporting employment growth and liveability; and h. Value proposition and low property market volatility. As a result of the key aspects listed above, Melbourne s property markets have thrived. Decade long records have been broken in office net absorption, strong levels of take-up in industrial markets (even though manufacturing is facing headwinds), leading retail turnover growth, rental growth in all sectors and a booming housing construction sector. The demand drivers discussed in this paper are long term trends that are creating a positive momentum. How can we expect property markets to perform in the future? Investment focus on Melbourne - December 2016 2
Introduction: Melbourne s increasing relevance Over the last two years Melbourne has continued to increase its relevance on the global investment stage. The JLL Global Cities Research Centre has undertaken multiple studies which cement Melbourne s position as a global city. Melbourne is ranked 18th in the world in JLL s City Momentum index 1, 24th for direct commercial investment 2 and as at June 2016, is 18th in the JLL Investment Intensity Index 3. In this paper we will review Melbourne s positon on the world stage and explore the reasons behind the increasing interest, held by both global and domestic investors, in Melbourne s property markets. Section 1: Up the rankings in investment intensity Total global real estate investment activity reached nearrecord levels in 2015, recording US$704 billion worth of sales transactions, only 7% below the all-time high in 2007 (US$758 billion) 2. The Big Six4 accounted for 22% of global real estate investment in terms of US$ invested in real estate over three years to 2015. Melbourne ranked 24th with an estimated USD$15 billion invested over this time. A more informative metric, however, is investment intensity, which makes an adjustment for the size of the investable universe. JLL s Investment Intensity Index compares the volume of direct real estate investing in a city over a three-year period relative to the city s current economic size. Melbourne maintained its position in the top 20 to rank 18th as at June 2016. Investment has been particularly focused on European destinations over the last three years with 10 European cities featured in the Index s top 20. This figure compares to seven Cities in the US and just three markets in the Asia-Pacific region. To put this into context, Melbourne is ahead of established cites, Berlin (20 th ), Hong Kong (36 th ) and Singapore (40 th ). Figure 1: JLL Investment Intensity Indices TOP 20: Rankings compared June 2014 to June 2016 London, 1st Oslo, 2nd Munich, 3rd Copenhagen, 7th Dublin, 8th Frankfurt, 10th Edinburgh, 12th Stockholm, 14th Paris, 15th Berlin, 20th Sydney, 4th Auckland, 11th Melbourne, 18th Denver, 19th Honolulu, 5th New York, 9th San Francisco, 13th Boston, 16th Austin, 17th Asia-pacific 0 10 20 30 40 50 JLL Ranking June 2014 JLL Ranking June 2015 JLL Ranking June 2016 Over the last two years Melbourne (from 38 th to 18 th ), is one of only three cities in the Asia-pacific region to move up the rankings. Auckland (from 40 th to 11 th ) has also been on an upward trajectory and Sydney (from 6 th to 5 th ) is seen to maintain a strong position also. This is in stark contrast to relative performance of other Asia-pacific cities over the last two years. Taipei, Singapore and Hong Kong all previously placed in the top 20 but have all now slipped significantly down the rankings. 1 JLL City Momentum Index, 2016. 2 JLL New World of Cities Globalisation and Completion, 2015. 3 JLL Investment intensity index, June 2016. 4 London, New York, Tokyo, Paris, Singapore & Hong Kong. JLL
Figure 2: JLL investment intensity indices: Global Rankings June 2014 to June 2016 Global Rank 0 5 10 15 20 25 30 35 40 45 50 2014 Q3 2014 Asia pacific context Q4 2014 Q1 2015 2015 Q3 2015 Q4 2015 Q1 2016 Melbourne Sydney Brisbane 2016 Auckland Taipei Singapore Hong Kong In an Asia Pacific (AP) context, Melbourne and other cities in Australia have an advantage. Australia is ranked second in the world behind the UK as having highly transparent real estate investment markets 5. The only other AP region to Australia that is categorised as a highly transparent market is New Zealand. Transparency, as it provides visibility over the transaction and regulatory processes, is a hugely important consideration for investors. The correlation between market transparency and investment intensity is clear. Only those locations classified as highly transparent are in the top 20 cities globally for investment intensity. These include Sydney, Auckland, Melbourne and Brisbane. Estimates of total global funds under management vary but in July 2015 was estimated at US$74 trillion 6. A report prepared by PwC 7 in 2014 predicted that by 2020 global funds under management will total over US$100 trillion 8. Trends in asset allocation have an impact on the weight of capital competing for particular asset classes or regions. In recent times real estate has become a prominent asset choice. A typical allocation for global investment into real estate is approximately between 7-9% and that may be apportioned according to geographical region. The 2016 annual report of Singaporean Sovereign wealth fund GIC, provides a good example. GIC has an estimated US$350 billion of assets under management 9, making it the world s eighth-biggest sovereign wealth fund. GIC Portfolio for example, has had 7% allocated to Real Estate assets over the last three years. Geographical allocation trends change over time. GIC has increased its allocations towards Asia over the last three years. A 2% allocation to Australasia suggests approximately US$490 million is allocated to real estate in Australasia. 31/03/2014 (%) 31/03/2015 (%) 31/03/2016 (%) Americas 42 43 42 Europe 29 25 25 Asia 27 30 31 Australasia 2 2 2 100 100 100 Source: JLL Research, GIC Portfolio Annual reports The reality is, investment destinations across the Asia Pacific region are limited. Investors in recent times have increased their exposure to this region. Intra-regional investment flows, from Asia Pacific investors located inside the trade area, has further elevated the already rising inbound international capital outside the region targeting assets. JLL s analysis of intra-regional cross border transactions in 1H16 indicate that Chinese (USD 0.3bn), South Korean (USD 0.3bn) and Singaporean (USD 0.9bn) investors were net buyers of real estate assets in Australia. 5 JLL Global Real Estate Transparency Index 2016* measures transparency using 139 different factors grouped in five categories: Performance Measurement, Market Fundamentals, Governance of Listed Vehicles, Regulatory, and Legal and Transaction processes. 6 The Financial Times. 7 Price waterhouse Coopers. 8 PwC Asset Management 2020: A Brave New World. 9 Sovereign Wealth Fund Institute. Investment focus on Melbourne - December 2016 4
Sydney and Melbourne, as Australia s gateway capital cities, have benefited from these global investment trends. Since 2015, foreign investors have made up approximately 35% of buyers in Melbourne s property assets which is well above the long term average of 25% since 2007 10. Figure 3: Melbourne Transaction volumes by buyer cohort Millions 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Foreign investors are an important group of property asset owners in Melbourne. Their increasing interest in Melbourne is particularly pronounced in Melbourne s CBD office market. Over the last 18 months 67% (AUD$2.84 billion) of purchases by transaction volume were by overseas groups Five major USA Investors; Blackstone, J P Morgan (CalPERS), Pembroke Real Estate and La Salle Investment Management have dominated transaction activity totalling AUS$1.5 billion. Singaporean entities such as Frasers Commercial Trust, ARA Asset Management and Straits Real Estate have been the next biggest group investing AUS$0.9 billion in six transactions We expect demand from offshore groups, particularly intra-regional, to remain strong. AUS Overseas Unknown *as at 3Q16, Retail, Industrial & Office Transactions $5million. Excluding portfolio transactions accross mulitple states Section 2: So Why Melbourne? Victoria s diverse economy Victoria forms a large proportion of Australia s national economic output: 22% in September 2016 (Figure 4). Victoria s share of national output has held a consistent 22.8% share over the past 20 years, highlighting the diversity of the Victorian economy and its performance throughout different economic cycles. Figure 4: State contributions to Australian GDP SA 6% WA 17% NSW 31% Langton McHarg Head of Sales & Investments, VIC Victoria recorded SFD of 4.0% in the year ended June 2016, above the national 1.2% average. Deloitte Access Economics has forecasted a more subdued growth path over the next three years (2017-19), an annual average of 2.2% SFD growth, revised down from a previous 2.4% in earlier releases. Victoria is forecasted to contribute around 24.3% of Australia s economic growth over this period and remain consistent at this share until 2026. The state has contributed 22.6% in the three years to June 2016. QLD 19% VIC 22% As of September 2016 Source: JLL Research, ABS 10 Investments $5million in Office Industrial & Retail assets. Excluding portfolio transactions across multiple states. JLL
Figure 5: State Final Demand Growth for the 2013-2015 calendar years 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% Victoria is one of the most diverse state economies in Australia. Both NSW and VIC specialise in finance and insurance, communication and professional services - meaning both states benefit most from a low interest rate environment - and services sector growth. Diversity protects a state s economy from individual sector downturns and minimises fluctuations in the overall economic performance of a region. Victoria has seven different sectors that contribute to almost half (49%) of the state s output (Gross State Product - GSP), with its greatest dependency on the finance and insurance sector (10.4%) (Figure 6). Figure 6: Industry Gross Value contributions to VIC Gross State Product 2015 FY (GSP) '000s NSW VIC QLD SA WA 2013-14 2014-15 2015-16 *Forecast Next 5 yrs (Annual %) 180 130 80 30-20 NSW VIC QLD SA WA ACT Job Vacancies as at August 16 Number of Jobs Created (year end SEPT 2016) Source: JLL Research, Australian Bureau of Statistics(ABS) Figure 7: Jobs Created and Vacancies 12% 10% 8% 6% 4% 2% 0% Top 7 sectors contribute to 49% of VIC GSP Financial and ins Professional services Manufacturing Health care Construction Education and training Retail trade Wholesale trade Transport, postal and Public administration Information media and Real estate services Agriculture Administration Utilities Accommodation Mining Other services Arts and rec VIC Source: ABS, JLL Research Victoria is transitioning to a consumer lead service sector economy. Manufacturing now forms 6.9% of the state s GSP and in recent years has slipped to third behind the finance and insurance sector (which has been Victoria s lead sector for close to a decade) as well as the professional services sector. The relative decline of the manufacturing in Victoria is well documented, however, the decline appeared to reach a trough in 2014. Victoria financial accounts are rated by two independent credit rating agencies. Standard & Poor s reaffirmed Victoria s triple-a credit rating in August 2015 and highlighted the state s financial strength and prudent approach to debt and liquidity management. On 22 February 2016, Moody's also re-affirmed Victoria's triple- A credit rating 11. Economic growth translating into leading employment growth Victoria is at the centre of the national jobs boom. The total number of employed reached 3,056,200 people in September 2016, with over 108,000 jobs created in the last 12 months (+3.7%), the strongest rate of growth across Australia. Relatively, NSW witnessed a +1.9% increase in the total number of employed whilst QLD remained flat and WA decreased -1.1% over this period 12. Healthy job vacancy numbers bode well for Australia s property markets. Rapid population growth set to continue 11 Only NSW and VIC are rated by both Standard & Poor s and Moody s as Triple A. However, the State s reliance on revenue from the Federal government and the weak state of the federal budget is a concern. 12 ABS. Investment focus on Melbourne - December 2016 6
Mar-1996 Mar-1997 Mar-1998 Mar-1999 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Mar-2004 Mar-2005 Mar-2006 Mar-2007 Mar-2008 Mar-2009 Mar-2010 Mar-2011 Mar-2012 Mar-2013 Mar-2014 Mar-2015 Mar-2016 Victoria leads the nation in terms of population growth, with 114,865 new residents (+1.9% 13 ) in the 12 months to March 2016, significantly above the 1.4% national average growth rate. Victoria is only just shy of 6 million residents. Overseas migration continued to form the major component of annual growth, accounting for 54.7% y-y in 1Q16 (62,800 new residents). Net Interstate Migration (NIM) has become increasingly more important to Victoria s annual growth, recording its highest net level on record of 14,530 new residents in the 12 months to March 2016. This was a +49% increase of new immigrants than the previous year. Figure 8: Components of annual Population growth 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - -20,000-40,000 Net Interstate Migration (LHS) Natural Increase (LHS) Population Growth y-y (RHS) Source: JLL Research, ABS The Australian Bureau of Statistics forecasts that Greater Melbourne s population will increase on average by 107,000 new residents per year from 2016-2030 and then accelerate to an average of 120,000 new residents from 2030-2061. In 2030 Greater Melbourne is forecasted to be Australia s largest capital city with 6.1 million residents 14. Liveability and Human Capital 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Net Overseas Migration (LHS) Melbourne was ranked as the The world s most liveable city out of 140 cities by the Economist Intelligence Unit in 2016. This is the sixth consecutive year Melbourne has been awarded the most liveable city ranking. The ranking is based on 30 factors spread across five areas: Stability Infrastructure Education Health care Environment Australian cites all perform well in these areas, however, Melbourne has achieved a perfect score (100) for Infrastructure 15, Education and Healthcare in addition to very high scores in Stability (95) and Culture and Environment (95.1). The last of these measures includes climate factors but also levels of corruption, sport and culture availability, food and drink and availability of consumer goods and services. A strong correlation is apparent in high quality of life cities and population growth figures. Auckland, Melbourne, Vancouver and Vienna have similar characteristics. Melbourne as an education and innovation capital Melbourne has maintained its reputation as second best city for students in the QS Best Student Cities 2016 rankings, placing in front of Tokyo and behind Paris. Each of the 75 cities in consideration are graded on an index of five measures: university rankings; affordability of student accommodation; student mix; desirability; and employer activity. Victoria is home to three of Australia s largest universities by student numbers: Monash University (1); RMIT University (3); and the University of Melbourne (4). Located north of the CBD in Parkville, the University of Melbourne is Australia s top ranked University and ranked33 in the world 16. RMIT University is within the CBD. Together with a number of other education institutions, these universities have attracted a significant number of students to reside in the precinct. Monash University, which is ranked 73 globally 17, akin to the University of Melbourne is also a Group of eight 18 university located in Clayton to the south east of the CBD. 13 ABS, JLL Research. 14 ABS. 15 Infrastructure includes - Quality of roads, public transport, international links, utilities provision and the availability of good quality housing. 16 Times Higher Education World University Rankings 2015-2016. 17 Times Higher Education World University Rankings 2015-2016. 18 The Group of Eight (Go8) comprises Australia s eight leading research Universities. JLL
Melbourne s knowledge precinct is world class. The Victorian Government and multiple local councils have made a conscious strategic planning decision to regenerate existing educational precincts specifically the University of Melbourne and RMIT University. The 2016/17 State budget has allocated $111 million to help Victoria take advantage of six of its fastest-growing industries, which include: 2014 to 2016 headquartered in Melbourne four of the IPOs were in the health care sector a growth sector of the Australian economy. The total market capitalisation of these companies is over $24 billion. Melbourne arguably has the ingredients for innovative businesses to thrive and grow. Figure 9: Number of ASX-200 firms floated since 2014 by location of HQ Medical technologies and pharmaceuticals; New energy technology; Food and fibre; Transport, defence, and construction; technologies; International education; and Professional services. 44% 8% 36% $33.8 million will be invested in a landmark strategy to drive jobs in creative industries whilst $31.9 million will strengthen Victoria s position as the leading destination for international students. City of Melbourne has projected the number of people travelling to Melbourne s knowledge precinct for study or to undertake studyrelated activities will increase to 100,000 people by 2030 19. Victoria has two distinct education/innovation precincts focused on the University of Melbourne and Monash University. In terms of employer activity (top choices among graduate employers), Melbourne is 6 th in the world. Tokyo is 1 st, Boston 2 nd and Sydney 9 th. The rapidly growing education sector in Melbourne has impacted the property market in a number of ways. Firstly, education growth creates demand for office space and other property assets as the education institutions themselves expand. Secondly, a strong educational sector improves the local catchment for talent. This allows businesses to source its workforce from the local community. Thirdly, a growing student population drives dwelling demand in the immediate suburbs and demand for retail and other goods and services. Melbourne is the home of corporate Australia with 57 or 28% of the ASX-200 companies headquartered in Victoria (36% by market capitalisation). Victoria is growing its market share with almost half (11/23) of the ASX 200 firms that held an initial public offering from NSW VIC QLD SA TAS WA FOREIGN Business community in Melbourne Professional services is the largest industry sector in Melbourne s CBD and accounts for 22% of white collar employment, while finance and insurance (19%) public administration (13%), accommodation (13%) and information services (9%) are relevant industry sectors of metropolitan Melbourne 20. Major employers in Melbourne include NAB, ANZ, Telstra and Government. Melbourne CBD Underlying office demand 2016-2021 5 yr growth Sector (%) Sqm Financial and Insurance Services 15% 112,500 Professional Services 12% 104,500 Public Administration and Safety 12% 57,600 Accommodation and Food Services 15% 49,300 Administration 23% 37,600 Education and Training 21% 30,900 Information Media and Teleco 7% 19,100 Transport, Postal and Warehousing 13% 16,200 Health Care and Social Assistance 28% 16,100 Construction 36% 15,100 Other 36,200 Total White collar 12% 458,800 Source: JLL Research, Deloitte Access Economics 19 Vic government daily population estimates and forecasts reports. 20 Deloitte Access Economics. Investment focus on Melbourne - December 2016 8
Through an analysis of Deloitte Access Economics employment forecasts, and by applying a conservative estimate of 14.5 sqm/per person, it is indicated that over the next five years approximately 458,800 sqm of office space will be required to satisfy demand. Workplace practices, however, are changing. Technology enables employees to choose whether to work in the office, in a coffee shop or from home. Activity based working reduces the amount of space required per employee. The long term average since 1980 has been 17 sqm/person with a peak in 1993 when Melbourne s CBD white collar workforce occupied approximately 20.3 sqm/person. In 2015 this had declined to 14.8 sqm/person. New projects are designed to accommodate ratios of 8-10 sqm person. The decline in workplace ratios is likely to continue and this has implications for demand for conventional office stock. Workplace Scenarios for Underlying demand 2011-2016 Long term average since 1980 (sqm/person) 17 580,301 Current ratio (sqm/person) 14.8 505,204 New workplace scenario (sqm/person) 10.5 358,421 Source: JLL Research, Deloitte Access Economics Melbourne s occupier market is in a positive phase and businesses are expanding. One of the most interesting statistics is the volume of office tenancies in the small category <1,000 sqm. The amount of space absorbed by this group is at a high accounting for 67,500 sqm (44%) of net absorption in the CBD in the first nine months of this year (average since 2007, 19,600 sqm pa). Small tenant expansions are a good barometer of the market. However, we are seeing a change in how small tenants choose to operate. The co-working model has proved phenomenally successful in Melbourne and this provides greater flexibility and choice for tenants. As a result landlords will need to be nimble to benefit from expanding small businesses in the context of new workplace trends. Melbourne is arguably becoming Australia s innovation capital. Melbourne is Australia s leading tertiary education capital and as illustrated by eleven ASX 200 companies that floated since 2014 Melbourne provides the ingredients for success. David Bowden International Director Managing Director Victoria JLL
Jun-2006 Jun-2007 Jun-2008 Jun-2009 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Retail Retail turnover volumes have continued to vary across Australia throughout 2016, with a two-speed economy evident. Total domestic retail turnover growth has slowed across the nation to 3.5% year on year to August 2016, from 4.6% (year on year) recorded in the previous year. The retail turnover rate in Victoria has stabilised at 4.7% y-y as at August 2016, marginally decreasing from 5.0% in January 2016. Whilst Victoria s turnover growth has slowed in recent months it follows six consecutive months of at or above 5.0% growth (January to June) and continues to be Australia s 2 nd strongest retail growth figure behind ACT: a trend that has persisted since May 2016. Prior to this, New South Wales had held a stronger retail turnover growth figure relative to Victoria since August 2000 21 (Figure 10). The flow on effects from low interest rates and dwelling price growth, particularly in Sydney and Melbourne, is continuing to support household wealth and consumer confidence. The Westpac Melbourne Institute of Consumer Sentiment Index has remained stable in October 2016 rising 1.0% to record an index of 102.4. Five of the past six readings have recorded an index above 100 indicating signs of a general optimistic economic outlook. Figure 10: Retail Turnover growth by State 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-20 NSW VIC QLD SA WA As a lead indicator of the retail market the number of job vacancies in the sector has remained well above long term averages since August 2015. The ABS recorded 19,400 retail job vacancies in Australia in May 2016. This is a 53% increase in retail job vacancies over 12 months. The impact of the lower Australian dollar has driven large tourism numbers and aided in reducing the leakage of online retail spending overseas. This has bolstered already elevated domestic spending levels. Over 1.8 million tourists visited Victoria in during the 2016 financial year, this is 198,000 (12.0%) more visitors than the previous financial year) 22. Tourism numbers have almost doubled since 2003 as Victoria has become an increasingly popular destination. The number of visitors to Victoria exceeded the number visiting Queensland for the first time in 2015 (Figure 11). Interestingly, the tourist profile for Victoria has shifted with a large portion of visitors arriving from Asia (predominately China). Chinese visitors had the highest expenditure of all international visitors to Victoria with $2.2 billion spent in the 12 months to December 2015, a 59.2% annual increase 23. Figure 11: Short term visitor numbers (per annum) 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 NSW Victoria Queensland Source JLL Research, ABS Melbourne CBD retail offering has been through a phase of refurbishment and redevelopment over the last three years. Myer Emporium was completed in 2014. St Collins Lane was completed in June 2016 and the Grid at 367 Collins Street. International retailers are increasingly being drawn to Melbourne with Zara, H&M and Uniqlo all establishing a retail footprint in recent years. Melbourne real estate transparency, strong domestic sales and domestic brands, stable growth outlooks and affluent consumer base are appealing to international brands looking to 21 ABS. 22 ABS Table 11: Short-term Movement, Visitor Departures - State Where Spent Most Time: Original. 23 Victorian government of Economic development, Jobs, transport and Resources. Investment focus on Melbourne - December 2016 10
expand beyond mature global retail cities such as New York, Hong Kong and London. The expansion in Melbourne s retail sector in both bricks and mortar and online retailing is heavily supporting the industrial logistics and warehousing sectors. Industrial occupier character is changing JLL Research recorded the highest level of industrial take-up ever recorded in 2015 with a total of 730,560 sqm of space absorbed over the year (transactions >5,000sqm). 2016 is likely to be another strong year with 501,525 sqm of take-up recorded in the first 9 months. Analysis of the industrial take-up data by sector over time tells an interesting story. Three key sectors dominate take-up in the industrial sector: Transport, Postal and Warehousing Retail Trade Manufacturing Businesses that fall into the transport, postal and warehousing and retail trade sectors have significantly expanded in Melbourne s industrial markets. Since the start of 2013, the transport and logistics sector has accounted for the largest proportion of industrial take-up with 35% of take-up for businesses in this sector (up from 29% over the previous six years). Whilst the proportion of take-up from businesses in the Retail Trade or Manufacturing sector have changed little by percentage, in absolute numbers, take-up has risen significantly. Retail trade businesses accounted for an average 109,000 sqm per annum prior to 2012 and 143,400 per annum over the last 3 years. Manufacturing is still an important sector in Victoria contributing 164,000 sqm per annum (27%) of take-up over the last three years but is changing in character (e.g. growth in pharmaceuticals, cosmetics and prepared food segments particularly in Melbourne s south-east) and is declining in relative contribution. The shutdown of Australia s car manufacturing base will be complete by the end of 2017.The structural change experienced by manufacturing has made it harder to define manufacturing in some facilities. It may be classified as a manufacturing company but in reality they are importing semi-processed goods and assembling. Figure 12: Changing Industrial occupier composition (take-up by sector) 23% 0% 7% 21% 8% 14% 5% 2% 27% 28% 29% 35% Transport, Postal & Warehousing Manufacturing Retail trade Wholesale Trade Information Media & Telecommunications NOTE: Outer Ring: Last 3.5 yrs (2013-2016), Inner Ring: Previous 6 yrs (2007-2012) Major infrastructure projects to be rolled out by the Andrew s government over the next decade will further support Melbourne s industrial markets. The Port of Melbourne completed a $1.6 billion Port Capacity Project redevelopment of Webb Dock in recent months. This increases the capacity of the port by a million TEU 24. The Regional Rail Link was completed in 2015 and has improved rail connections for both freight and passengers in the Western suburbs of Melbourne. The Western distributor road project, which will include a second river crossing, will also improve connectivity for industrial precincts in the North and West. Phased removal of 50 level crossings has begun in the south eastern suburbs and will benefit south east industrial markets, suburban office and retail markets when completed. 24 Twenty Foot Equivalent Units - Standard unit for describing a ship's cargo carrying capacity, or a shipping terminal's cargo handling capacity. JLL
Public Sector debt and infrastructure retaining liveability. In a highly and increasingly leveraged world, the State of Victoria has lower public sector debt per capita than NSW, QLD and WA (See figure 13). The $11 billion sale of the Port of Melbourne also adds to the State s financial capabilities. This makes the state relatively well placed to embark on a number of major infrastructure projects. Figure 13: Public Sector Debt per Capita $20,000 $15,000 $10,000 $5,000 $0 NSW VIC QLD WA SA Source: ABS, 5512.0 Non-financial Public Sector borrowings Major Infrastructure projects include 1. The Regional Rail Link. This $3.2 billion project was completed in 2015 and improves connectivity for residents located in Melbourne s western corridor to the CBD. 2. The Western Distributor. 2006/07 2014/15 This is a $5.5 billion joint venture project with Transurban in three parts: Extension to the Western Ring Road (estimated completion by 2022), improved access to Webb Dock (Port of Melbourne) and upgrade to the Monash freeway by 2018. 3. 50 Level Crossing removals. Half of these are funded ($2.4 billion) for completion by 2022. Works started. 4. Melbourne Metro Rail Link. ($10.9 billion) Value proposition and low property market volatility Melbourne is Australia s second largest economy and in property market occupier and investor terms, offers relative value compared to Sydney and in many sectors to Perth and Brisbane. Melbourne Sydney Prime CBD office Gross Face rents* $601 $1,085 Prime CBD Retail rents* $3,570 $3,660 Prime Regional Shopping Centre speciality rents* $1,477 $1,932 Prime Industrial Rents (Mel West & Sydney Outer south)* $73 $106 Median Unit Price $483,000 $670,000 Median House Price $587,500 $780,000 *$ per sqm p.a. Investors are seeking exposure to sectors and markets with security of income. Analysis of CBD prime office sector gross effective rents illustrate Melbourne s low volatility. The stability of the occupier market has resulted in less volatility in Melbourne CBD prime office market rents compared with CBD office markets in other Australian states. Table 5 is an assessment of the volatility of effective rents across CBD office precincts over the past 10, 20 and 25 years. A low standard deviation implies that numbers are close to the average and provides investors with confidence in market rents in CBD office markets. Over all time periods, Melbourne s CBD office market is the least volatile. CBD Prime Office Gross Effective Rent y-o-y Return Sydney Melbourne Brisbane Perth St.Dev 25 years 15.7% 10.4% 18.8% 21.0% St.Dev 20 years 13.6% 7.9% 27.3% 29.6% St.Dev 10 years 8.9% 8.6% 19.9% 21.3% Source: JLL Research Connecting Melbourne s inner south to north. Underground 9km railway tunnel and 5 stations. Estimated start date 2017. Final completion by 2026. Investment focus on Melbourne - December 2016 12
Section 3: What does this mean for Property? Figure 15: Regional Shopping Centre Annual Rental Growth (%) Melbourne is experiencing a period of strong economic growth and this is translating into significant activity in all property sectors. Expanding business sector and white collar job growth has resulted in the strongest quarter of Melbourne CBD office net absorption since 2005 (67,500 sqm). Net absorption for the 12 months to 3Q16 totals 159,000sqm. This compares to long term average net absorption of 60,600 sqm p.a.. 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% Figure 14: CBD office Quarterly Net Absorption Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 154,500 sqm Melbourne Sydney 60,000 Perth SE Queensland 50,000 120,500 sqm Square Metres 40,000 30,000 20,000 10,000 0-10,000-20,000 47,400 sqm Melbourne Sydney Brisbane Perth Dec-15 Mar-16 Jun-16 Sep-16-21,600 sqm Strong retail turnover figures have supported incremental rental growth across all Victorian shopping centre categories during a period where shopping centre rents have been broadly flat in other states (some NSW shopping centre categories have also recorded growth over this period). Melbourne s regional shopping centres increased slightly over the year recording the first positive movement since 2012. Melbourne s Industrial sector is benefiting from expanding logistics and retail sectors and the changing character of the manufacturing sector. Take-up in Victoria for the first nine months of the year was 552,300 sqm. This is 97% of the long term average level of annual take-up. Figure 16: Industrial Sector take up by State SQM ('000s) 1,000 800 600 400 200 115% 97% 42% 36% 49% 0 Sydney Melbourne Brisbane Adelaide Take-up YTD 2016 *As at 3Q16 Perth Strong investor interest has pushed yields (upper end) to record lows below the pre-gfc yield trough in 2007. On average, Melbourne property yields are significantly more attractive compared to market yields for other gateway global cites. JLL
Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Jun-16 Figure 17: Prime office yields (mid) Global Cites 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 In addition, the yields spread to the Indexed 10 year Australian Treasury bond rate is still wide. Most economists forecasts suggest indexed bond rates will remain lower for longer and over the next decade are likely to continue to stay low and average 1.2% compared to 2.0% over the last decade 25. This would suggest that property yields have further room for compression if the relationship between property yields and bond rates remains consistent. Figure 18: Melbourne Prime yields (upper end) and 10 year index bonds 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2006 2007 Lehman Bros. 324 basis points 2008 2009 2010 2011 2012 450 basis point average spread post GFC 2013 Indexed 10 year bonds Melbourne Prime CBD Office Melbourne Retail Neighbourhood Melbourne Industrial (West) 2014 2015 451 basis points 2016 New York Paris Frankfurt London Tokyo Melbourne Sydney Due to differences in reporting metrics across the globe, data is not strictly comparable. Finally, the residential sector is also performing strongly in a national context. Melbourne is currently witnessing a large volume of apartment construction, however, while there is plenty of commentary around the potential oversupply, price growth continues to be recorded. Greater Melbourne s median unit prices increased 2.5% y-o-y to 2Q16 in line with the average 10 year average (Figure 19). Figure 19: Unit Price growth across Australia As of June 2016 Canberra Perth 3.5% -1.5% -6.5% past 12 months 8.5% Sydney Adelaide Melbourne Brisbane 10 year average annual Source: JLL Research, CoreLogic RP Data Similarly, Greater Melbourne house prices recorded an 8.9% y-y increase, an accelerated rate relative to the 6.3% long term average. Rental vacancy remains close to equilibrium, tightening the most over the past 12 months of any Australian state. The positivity that surrounds the housing market is fuelled by strong population growth and job security as well as the expansionary monetary policy of the RBA. However, the Australian Prudential Regulation Authority regulatory controls and recent additional Foreign Investment Rule Changes at Federal and State government level are having a moderating impact on the residential market. Section 4: The Outlook for Property The medium and long term outlooks for Victoria s property sectors are positive. Melbourne is well placed to attract and retain tenants and occupiers across all property sectors. At a simplistic level the biggest driver of economic activity in Victoria is population growth. Population growth is generating demand for goods and services and growth in multiple sectors of the economy. The forecasts are for the population growth rate to continue to lead the nation for the next decade and beyond with Greater Melbourne overtaking Greater Sydney in 2030. The education sector plays an important role in Melbourne s increasing population. International 25 Deloitte Access Economics. Investment focus on Melbourne - December 2016 14
students are attracted to world class institutions. Melbourne s liveability, residential affordability and employment prospects are important drivers for both interstate and overseas migration. Having a number of Australia s leading research universities located in Greater Melbourne is setting Melbourne up to become Australia s innovation capital. Disruptive technologies will continue to change the way businesses operate and will change how they use and occupy property assets. Sourcing and retaining the brightest and best employees is going to be even more important over the next decade. Both the Australian Federal and Victorian State Governments have policies to support innovative industries. The Victorian State government is rolling out a number of major infrastructure projects that will help maintain Melbourne s high global liveability ranking and improve logistics and connectivity for Melbourne s growing population. In turn, such projects will also provide jobs. There are risks to the outlook that include the decline in traditional manufacturing and the exiting of the automotive sector from Victoria over the next 12 months. Population growth is a major driver of economic activity. A decline in annual overseas migration could be a factor if there are further State Government changes to foreign investor taxes and/or Federal Government changes to visa requirements. However such changes are unlikely and international immigrant demand is likely to increase rather than fade over the coming decade. Trends in asset allocation will continue to have an impact on the weight of capital competing for a particular asset classes or regions. In recent times real estate has become a prominent asset choice and Asia Pacific allocations are likely to increase. JLL office Melbourne Level 40 101 Collins Street Melbourne VIC 3000 tel +61 3 9672 6666 Authors Annabel McFarlane Associate Director Strategic Research tel: +61 3 9672 6683 Annabel.mcfarlane@ap.jll.com Annabelle Atkins Analyst Strategic Research tel: +61 3 9672 6519 annabelle.atkins@ap.jll.co JLL