Outlook for Australian Property Markets Canberra

Transcription

1 Outlook for Australian Property Markets Canberra

2 Outlook for Australian Property Markets Canberra residential

3 International migration continues to rise, but natural growth the steady driver. Population growth ACT Number of people 6, 5, 4, 3, 2, 1, -1, -2, -3, -4, Source: ABS Analysis: Westpac Property Natural increase International migration Interstate migration Although impressive at 5,631 people, population growth in the ACT is not setting records as it is elsewhere in the country. Total growth in the year to June 29 was down on the year to March 29 and also lower than in 27. While international migration continued to strengthen and set new records, with net growth of 3,4 in the year, the net loss of residents interstate totalled 822 in the year. Although this sector is quite volatile, it has been negative for most of the past two decades, compared to net growth in the 198s. However, a steady growth of around 3, per annum from natural growth (births less deaths) seems to underpin steady population growth for the region. At some stage international migration will slow, leaving natural growth a the driver.

4 Demand to buy or build new dwellings reach record levels Quarterly finance commitments - Canberra No of commitments (New & construct) 4 Construct New Dwellings Source: ABS Existing dwellings Analysis: Westpac Property No of commitments (existing) 2,5 2, 1,5 1, 5 The first home buyer (FHB) boost, plus low interest rates allowed the market to boom in 29. Finance to construct rose by 119% on implementation of the FHB boost, although the sector had been lifting since early 27. Similarly finance to buy new dwellings rose by 96% from Q3 28 and continued to rise in Q4. Finance to buy an existing dwelling, the largest sector of the market, rose by 33%. While slower in Q3 29, this sector rose in Q4, despite three interest rate hikes. The pull back of the stimulus and rising interest rates could slow demand, although expectations of continued job growth by Access Economics may mitigate this. However, our concern for the market is in 211 when possible Federal Government tightening to reign in the budget deficit could impact on job security and also migration.

5 Market appears to be heading towards over supply as approvals recover. Quarterly houses and other dwellings approvals Canberra Number Houses Other dwellings Dwelling approvals continued to increase through 2H 29. With almost 3,6 approvals during the year, future supply is the highest in over 1 years. Driving supply is largely new houses, although other dwellings, which include townhouse, villa and flats have seen strong growth,. However, these remain below levels seen in the mid 2s Population growth of 5,631 in the year to June 29 in ACT generates a need for 2,165 new dwellings at 2.6 persons per dwelling using Census 26 data. At 3,6 dwellings the market appears to be heading for oversupply, even allowing for demolitions and non starts, unless population growth picks up significantly. Source: ABS Analysis: Westpac Property

6 Rents to slow as vacancy rises Rentals and vacancy - Canberra Rental/week Vacancy rate (%) $45 7. $4 Rents Vacancy 6. $35 5. $3 4. $25 3. $2 2. $15 1. $1. Source: REIA Analysis: Westpac Property Vacancy trends do not appear to follow fundamentals. While approvals have been increasing over the past three years to levels that match population led demand, vacancy has been quite volatile. The REIA mentioned a different methodology for Q3 29, but even before this figures bounced around. As at Q3 29 the REIA vacancy was only 1% in Canberra, down from 3.1% a year earlier. If the supply/demand balance is taken from approvals and population growth, stability would have been more likely. However, rental growth of 8.2% suggest vacancy has tightened over 29. The possible supply into 21 and 211 is higher than that of the mid 2s, when vacancy surged to 5% plus. However, population growth is also much higher. Despite the lack of trend, we consider that vacancy will rise in 21, slowing rental growth

7 Prices to stabilise during 21. Median residential prices - Canberra Price ($s) 6 Houses 5 Other Dwellings Raw data: REIA and ABS Analysis: Westpac Property Following declines in Q3 28, Canberra median house prices have risen steadily to Q3 29, by 6.9%. The rate of growth accelerated in the final quarter. ABS data suggests the momentum has continued into Q4, albeit a little slower than Q3. Other dwellings prices fell in Q3, following close to 1% growth in the previous quarters. However, in Q3 29 they remained 9.5% higher than a year earlier. With a high average household income, affordability issues in the ACT do not seem relevant. In Q3, the REIA suggested that only 17% of household income is used to pay an average mortgage, compared with a national average of 25%. However, the rise in prices and interest rates through Q4 9 will have lowered affordability, which could impact on further price growth, particularly if supply increases as expected.

8 Gross residential yields steady through 29, possibly into 21 Gross residential yields against the mortgage rate - Canberra Yield 15.1% 13.% 11.% 9.% 7.% 5.% Gross yield Mortgage rate Similar growth rates for both other dwelling prices and rentals has led to little change in investment yields for Canberra during 29. As at Q3 29 yields were at similar levels to a year earlier. However, this masks the minor lifts and falls during the year. Our expectations of limited price or rental growth should ensure yields remain steady at around 5.3%, which is one of the highest in the country. 3.% Source: REIA & RBA Analysis and Forecast: Westpac Property

9 Outlook for Australian Property Markets Canberra offices

10 Canberra office market vacancy to peak in 21 Net absorption, net supply and vacancy Canberra Square metres 3, 25, 2, 15, 1, 5, -5, Source: Forecasts: Net absorption Net supply Vacancy rate Historical data: PCA Office market report Westpac Property Forecast Vacancy 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% Vacancy fell in 2H 9 in Canberra to 8.7% as positive net absorption exceeded low supply. However, over the year vacancy rose from 7.% By region Civic vacancy fell from 8.2% mid year to 7.4% due to positive demand, while non civic remained around 9.2%. Supply levels are forecast to lift to 152,m 2 in 21, most completing in 1H 1. While not as high as in 27, this amounts to just over 7.5% of stock. Supply slows after 21. Expectations for demand are healthy as Access Economics expect strong employment growth from 211. Given that we expect the government to cut spending from 211, using these employment forecast could provide a vacancy forecast on the optimistic side. Nevertheless, vacancy rises to a peak of 12.7% by end 21 before slowing gradually in the following years.

11 Canberra rents fall, further to go Prime net effective rents & incentives - Canberra Rents $ 6 Civic Non Civic 5 Incentives Civic Incentives Non Civic Source: CB Richard Ellis historic data to December 29 Incentives 6.% 5.% 4.% 3.% 2.% 1.%.% Canberra s prime rentals have fallen by between 18% in Civic and 22% in non Civic since early 28. Rents fell by 11% in Civic and 13% in non Civic during 29. While there were some falls in face rents, rising incentives were the driver. Although vacancy is now not expected to peak near 17% as expected in our mid 29 outlook, the rise from 8% to almost 13% this year will impact. Similarly as vacancy stays above the mid 199s peak of 1% into 211, pressure should increase on incentives to rise further and face rents to fall. Incentives of over 13% are already nearing the mid 199s peak of 15%. However, with vacancy expected to exceed the 199s peak of 1%, incentives could exceed their 15% peak. Assuming a 2% incentives in 21, effective rents would fall a further 14% in 21 in Civic,, providing a peak to trough of around 3%.

12 Prime office yields still not high enough Office yields and 1-year averages - Canberra Yield 12% 11% 1% 9% 8% 7% 6% 5% 4% Civic Source: CB Richard Ellis Non Civic 1 year avg Civic 1 year avg Non Civic Canberra s prime office yields continued to ease through the first three quarters of 29. Yields eased by a further 65 basis points in Civic and 42 in non Civic. However, yields remain below the longer term average by 25bps in Civic and 5 basis points in non Civic. While not considerable, given our expectations for vacancy and rents, yields still appear too low. However, at around 8.3% a prime, well leased office building could well attract interest of investors, suggesting that despite fundamentals prime office yield could stabilise. There were signs of stabilisation in Q4 29. Conversely, properties with short lease tails or vacancies could continue to see yields ease over 21.

13 Disclaimer Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Information current as at February 21. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac Banking Corporation (ABN ) ("Westpac") accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. If you wish to be removed from our mailing list please send an to westpacproperty@westpac.com.au. 21 Westpac Banking Corporation. CB Richard Ellis Ltd (CBRE) does not warrant the accuracy or completeness of the information in this publication, including any information sourced from CBRE, and CBRE accepts no, and disclaims all, liability for any loss or damage whether occasioned by reliance on such information or otherwise.