1 WINTER 2015 MARKET TRENDS Demand remains robust. Population growth and low interest rates remain key market drivers. Dwelling investment remains high but should slow. Price growth is continuing. Long-term fundamentals of the residential market remain sound. IN THIS REPORT Market overview 1 Market trends & indicators 2 Focus 5 Outlook 9 MELBOURNE RESIDENTIAL MARKET The Melbourne residential market continues to experience price growth and high levels of sales and building activity. Low interest rates, population growth, positive buyer sentiment and an improving state economy is supporting market activity. The inner city apartment market continues to see significant new levels of supply being delivered which is affecting both prices and rents. At the metropolitan level price growth is expected to slow as affordability and investment returns deteriorate. The Victorian residential market is the state s largest asset class with an estimated value of over $1.37 trillion according to the Australian Bureau of Statistics (ABS) as at March Dwelling supply remains at high levels. Continued strength in building approvals, especially for inner city apartments, suggests dwelling supply will remain buoyant in the short-term. However, we are likely nearing the peak of the construction cycle following several years of growth. The momentum in price growth continues driven by low interest rates (and expectations of low interest rates for the foreseeable future), continued population growth (albeit slowing) and positive buyer sentiment (especially amongst investors). Affordability remains an issue with price growth, especially in inner and middle suburbs, offsetting much of the impact of lower interest rates. KEY INDICATORS VICTORIAN RESIDENTIAL MARKETS Victoria s gradually improving economy, which is benefitting from a lower dollar and lower interest rates, is supporting property market sentiment and activity. However consumer confidence remains fragile and the labour market remains soft. The long-term prospects for Melbourne s residential property market remain robust although caution needs to be exercised in the short and medium term given a range of factors which suggests we may have now entered into a new market environment. These factors include continued price growth (despite declining rental yields), a range of new regulatory measures designed to slow both overseas purchaser and domestic investor demand, slowing population growth and low interest rates which are expected to increase in the medium term. This edition of comm3ntary examines selected current and emerging overseas investment and development trends that are shaping the Melbourne residential property market. Median House Price Median Unit & Apartment Price Median Weekly Asking Rents Houses* Median Weekly Asking Rents Units & Apartments* Gross Rental Yield - Houses* Gross Rental Yield - Units & Apartments* Vacancy rate** Inner Metro Middle Metro Outer Metro Melb. Metro Regional Vic. $1,239,500 $545,500 $565 $ % 3.9% 2.8% $827,500 $574,000 $392 $ % 3.3% 3.3% $525,500 $399,000 $357 $ % 4.1% 2.2% $706,000 $520,000 $398 $ % 3.9% 2.9% $346,000 $257,500 $290 $ % 4.9% 2.4% Source: Real Estate Institute of Victoria (REIV). June quarter *Gross yield calculated using April, May and June 2015 monthly rents.**july m3property Research.
2 MARKET TRENDS AND INDICATORS Dwelling approvals remain at record highs, led by the unit and apartment sector, but the construction cycle is nearing its peak. BUILDING APPROVALS Victorian building approvals remain at historically high levels with total annual dwelling approvals exceeding 67,000 in the year to June 2015 (26% higher over the year). Growth in approvals is being led by the non-house sector (mostly units and apartments) which exceeded 34,000 approvals in the year to June 2015 (47% higher). House approvals exceeded 33,300 dwellings (up over 9%). Following several years of strong growth, it is considered we are nearing the peak of the construction cycle which will be driven by declining non-house approvals (to more sustainable levels), affordability constraints and slowing population growth and housing starts. No. of Approvals 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Victorian Monthly Dwelling Building Approvals Source: ABS, m3property Research. Total House Total Non-House Total Dwelling Victoria s population is the fastest growing in Australia but growth is expected to decline as net overseas migration slows. POPULATION National population growth remains at high levels albeit below recent peaks. As at 31 December 2014 the preliminary estimated resident population (ERP) of Australia was over 23.6 million people having increased by 330,200 people over the year (1.4%). The preliminary estimate of net overseas migration for the year ended 31 December 2014 (184,100 people) was 32,000 people (-14.8%) lower than the previous year (216,200 people). Victoria is the fastest growing jurisdiction. Victoria s ERP as at December 2014 was nearly 5.9 million people reflecting an annual increase of around 101,500 people (1.8%). Victoria recorded the highest net interstate migration in over four decades with 9,300 people (net) moving to the State from the rest of Australia in Victoria s net interstate migration is being driven by a range of factors including employment losses in mining and resources industries (which has impacted population growth in Queensland and Western Australia especially.) Going forward, Victoria s population growth is expected to slow as both net overseas and interstate migration moderate. Comm3ntary Winter 2015 P2
3 MARKET TRENDS AND INDICATORS Melbourne continues to see robust price growth. MEDIAN HOUSE AND UNIT PRICES Prices provide important information on market trends and imbalances including differences in demand and supply. CoreLogic RP Data reports that Melbourne dwelling values were up 10.2% over the year to June 2015 with annual growth outstripping annual average growth over the last five and ten years. Melbourne Dwelling Values - Growth Country Houses Units Dwellings Past 12 months 11.2% 2.4% 10.2% Annual over five years 3.4% 1.5% 3.2% Annual over ten years 6.7% 4.8% 6.5% Source: CoreLogic, m3property Research. Melbourne dwelling price growth was led by houses (11.2% over the year to June 2015) with units experiencing more subdued growth (2.4%) being affected by continued increases in new apartment supply. Melbourne s value growth has been led by the inner and middle ring suburbs. Melbourne s value growth has been led by inner and middle ring suburbs. The Real Estate Institute of Victoria (REIV) reports that inner Melbourne region (0-10 km from the CBD) house prices increased by 13.6% (to $1,239,500) in the year to the June quarter Over the same period middle Melbourne (10-20 km from the CBD) house prices increased by 11.2% (to $827,500). Outer Melbourne (20+ km from the CBD) house prices increased by 5.8% (to $525,500). The high levels of new apartment supply continue to affect the prices of units and apartments. As shown in the graph below the gap between inner and middle region houses and units/apartments has continued to widen in recent quarters reflecting the relative scarcity of houses compared to the growing apartment stock. 1,400,000 1,200,000 Melbourne median dwelling prices by region Inner Houses Middle Houses Inner Apartments* Middle Apartments*. Median Prices ($) 1,000, , , , ,000 0 Source: REIV, m3property Research. *Units/and Apartments. Comm3ntary Winter 2015 P3
4 MARKET TRENDS AND INDICATORS MAJOR RESIDENTIAL REDEVELOPMENT PROJECTS Dwellings in buildings of four plus storeys has driven the growth in dwelling supply in major residential redevelopment projects over the last decade. This trend is expected to continue. The Victorian Government s Urban Development Program (UDP) report (October 2014) highlights the type and extent of residential redevelopment activity currently underway and expected to occur in metropolitan Melbourne going forward. It is estimated there were over 203,000 dwellings in major residential redevelopment projects, that were either under construction or anticipated to commence construction over the next ten years, in mid-2014 (see the following graph). The pipeline of new dwelling supply in major residential redevelopments has increased from to with an increasing proportion of anticipated dwellings to be in buildings of four or more storeys. Number of dwellings anticipated over the nex ten years 250, , , ,000 50,000 0 Annual major residential redevelopment pipeline of dwellings by built form Detached Attached 1 Storey 2-3 storeys 4+ Storeys Source: Urban Development Program (UDP) - Victorian Government, m3property Research. Inner Melbourne municipalities have seen the strongest growth in the number of dwellings under construction or anticipated to be completed. Inner Melbourne municipalities, especially the City of Melbourne, have seen the strongest growth in the number of dwellings under construction or anticipated in the next ten years (from around 47,000 in to over 111,100 in ) as shown in the following graph. Number of dwellings anticipated over the nex ten years 250, , , ,000 50,000 0 Residential redevelopment pipeline by region Inner Middle Outer Growth Areas Source: Urban Development Program (UDP) - Victorian Government, m3property Research. Comm3ntary Winter 2015 P4
5 FOCUS OVERSEAS INVESTMENT Overseas investment, especially that originating from Asia and specifically China, is playing an increasingly important role in the Melbourne residential property market. Focus Overseas Investment into Residential Property Overseas investment, especially that originating from Asia and specifically China, is playing an increasingly important role in the Melbourne residential property market. In recent years overseas investment interest in Australian property especially that originating from China, but also from other Asian countries has intensified and often due to different reasons. In recent weeks this interest has been partly driven by stock market / financial volatility in China raising questions about the short term outlook for the world s second largest economy and, by implication, the potential impact on Australian residential property markets. This edition of comm3ntary considers a range of current and emerging trends which will influence overseas investment into residential property markets. These include: The increasing importance of Asian (and especially Chinese) investment The increasing role of overseas developers and The increasing role of Asian immigration and the nexus between immigration and the property market. Although most property professionals are cognisant of these trends they are perhaps less aware of their magnitude or rate of change. Comm3ntary Winter 2015 P5
6 FOCUS OVERSEAS INVESTMENT China is now the largest source of approved foreign investment in Australia driven mainly by significant increases in residential real estate approvals. 1. The Rise of Chinese Investment The Foreign Investment Review Board s (FIRB) most recent annual report notes that, for the first time in , China was Australia s largest source of proposed foreign investment due to a significant increase in residential real estate approvals. As shown in the following graph, China was the largest source country for approved real estate sector investment in accounting for 16.6% of all approved investments (by value) in the sector ($12.4 billion out of $74.6 billion). Other large source real estate investment destinations were the United States ($6.1 billion), Singapore ($4.3 billion), Canada (over $2.9 billion) and Malaysia ($2.0 billion). Across all sectors (real estate and other industries) China ($27.7 billion) was the largest source country for approved proposed investment (16.5% of total value), followed by the US ($17.5 billion), Canada ($15.4 billion), Malaysia ($7.2 billion) and Singapore ($7.1 billion). In the same year real estate investment dominated approvals by sector accounting for 45% of all approved investment ($74.6 billion out of $167.4 billion). Real estate approved investments rose 44% ($51.9 billion to $74.6 billion) over the period to Growth was driven by an increase in residential real estate investment which rose by 102% (from $17.2 billion to $34.7 billion). Investment in commercial real estate increased by 15% (from $34.8 billion in to $39.9 billion in ) Foreign Investment Review Board (FIRB) real estate approvals by country of investor, $ billion China USA Canada Malaysia Singapore UK Source: FIRB Annual Report , m3property Research. Comm3ntary Winter 2015 P6
7 FOCUS OVERSEAS INVESTMENT Overseas developers are increasingly active in the Australian market. 2. The Rise of Overseas Developers Although overseas buyers of completed residential dwellings remain among the most visible signs of foreign investment, overseas developers are also becoming increasingly important. Currently, Chinese developers are playing a leading role with these firms representing the second wave of modern Asian development investment flows following the first wave of Singaporean and Malaysian developers. The overseas expansion by Chinese developers is part of a broader national structural investment shift currently underway in China which has seen private firms increasingly take over from state owned enterprises (SOEs) across a range of industry sectors. Private Chinese capital is now a major element in global property and other markets following earlier waves of SOE investment. Research by the University of Sydney and KPMG finds that 2014 was a threshold year for Australia. For the first time total investment from China s private enterprises across various sectors exceeded investment from SOEs (both in terms of deal number and deal value). In the case of Melbourne overseas developers have been especially active in the inner city residential market acquiring numerous development sites. Over the period January 2013 to June 2015, for example, it is estimated that overseas developers acquired nearly three quarters of all development sites in the Melbourne CBD and Southbank/South Melbourne markets (by value). As shown in the following chart, the largest overseas buyers were all from Asia and specifically China (27%) followed by Singapore (21%). CBD and Southbank Development Site Acquisitions by Value* Malaysian, 17% Unknown/not disclosed, 7% Singapore, 21% Australia, 28% China, 27% Source: m3property Research. *From January 2013 to June In recent years overseas developer activity has been buoyed by a unique mix of factors including a low cost of capital, a higher tolerance for debt (and better funding capacity compared to local developers) and the ability to market units off the plan to Asian buyers. In some cases, issues in foreign developers domestic markets have forced firms to look abroad for opportunities. High profile developments in and around Melbourne s CBD have provided an opportunity for overseas developers to build their brand in the local market and in their home market both important sources of buyer demand. Although overseas developers have traditionally been focused on the CBD and surrounding areas, often outbidding local developers who are forced to consider more removed locations, overseas developers have also been increasingly active in markets beyond the CBD including the city fringe. Some overseas developers are characterised by a long term view being content to land bank in Australia and hold assets with potential redevelopment/conversion potential (for example older secondary commercial office stock). Comm3ntary Winter 2015 P7
8 FOCUS OVERSEAS INVESTMENT One of the most important reasons driving property purchases is as a step to permanent migration or citizenship. 3. Immigration and Residential Property Overseas investors purchase Australian real estate for a range of reasons including investment, lifestyle and safe-haven drivers. In some cases these buyers might be restricted in their home or other markets. One of the most important reasons is as a step to permanently migrating to Australia. Changes in Australia s demographic profile can provide information on migration trends and underlying demand for Australian property in Melbourne, Sydney and other capital cities. This is especially the case as most immigrants settle in the major cities and often in particular regions in these cities. The following table shows the growth in the number of people living in Australia, but born in other countries, over the period 2001 to Growth in the number of people born in China and India outstripped growth in all other ethnic groups over the period. Population, Country of Birth Australia Rank Country Change ( ) Persons % No. 1 United Kingdom* 1,036,245 1,038,160 1,101,082 6% 64,837 2 New Zealand 355, , ,397 36% 127,632 3 China** 142, , , % 176,189 4 India 95, , , % 199,910 5 Italy 218, , ,403-15% -33,315 6 Vietnam 154, , ,036 20% 30,205 7 Philippines 103, , ,234 65% 67,292 8 South Africa 79, , ,682 83% 66,257 9 Malaysia 78,858 92, ,196 47% 37, Germany 108, , ,001 0% -219 Source: ABS Census, m3property Research. *Includes Channel Islands and Isle of Man. **Excludes the Special Administrative Regions of Hong Kong and Macau. Excludes Taiwan. Australia s international education sector is both a direct and indirect driver of local property demand. Some international students opt to stay in Australia (direct impact) after their studies while our large overseas student population helps to build Australia s reputation in student source countries (indirect impact). Mirroring broader migration trends, Asian students (especially those from China), represent the bulk of Australia s international education enrolments across all education sectors (e.g. higher education, vocational education and training (VET), English Language Intensive Courses for Overseas Students (ELICOS), schools etc.). In particularly, the top five nationalities (accounting for over 51%) of Australia s international enrolments in all sectors were Asian with students from China and India making up over 38% of all enrolments (as at May 2015). Recent changes by Australian Government in easing visa requirements may see more students choosing to stay once they graduate. In particular, many student visa holders are now able to undertake further temporary work experience following graduation for periods of 18 months to four years. Increasing the ability of students to work after graduation may assist some students and their families in seeking permanent residency or citizenship either soon after their studies or sometime in the future. Comm3ntary Winter 2015 P8
9 m3property Research OUTLOOK The outlook for residential is cautiously positive. GSP annual growth (%) 3.5 Economic Growth - Victoria For more information please contact: Research Contact George Bougias P M Valuation Contact Luana Kenny P M (a) (f) (f) (f) (f) Source: Victorian Government Budget Update. Department of Treasury and Finance, m3property Research. The long-term outlook for the Melbourne residential property market is positive but caution needs to be exercised in the short to medium term. Supply levels are forecast to remain buoyant in the short-term, as suggested by continued strength in building approvals, although the construction cycle is expected to be nearing its peak. High levels of new supply in the inner city apartment market will continue to place downwards pressure on rents and prices in this sector. Population growth, a key market driver, should slow as net overseas migration and net interstate migration inflows decline from recent peaks. A range of factors suggests we may have now entered into a new market landscape which could see market demand moderate and price growth slow. These factors include low investment yields, new regulatory measures designed to slow both overseas purchaser and domestic investor demand and slowing population growth. Definitions Auction Clearance Rates: are a measure of demand. It is the ratio of successful sales compared to the total properties reported as auctioned over a defined period of time. Median Unit Price: Middle value from a set of unit sales over a defined period of time. OFFICES Adelaide Brisbane Melbourne Level 3 44 Waymouth Street Adelaide South Australia 5000 T 61 (8) F 61 (8) Level 2 15 James Street Fortitude Valley Queensland 4006 T 61 (7) F 61 (7) Level Bourke Street Melbourne Victoria 3000 T 61 (3) F 61 (3) Perth Sydney Disclaimer Unit Stirling Highway Nedlands Western Australia 6009 T 61 (8) F 61 (8) Level 23, MLC Centre 19 Martin Place Sydney New South Wales 2000 T 61 (2) F 61 (2) This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate.