Outlook for Australian Property Markets 2010-2012. Perth

Outlook for Australian Property Markets 2010-2012 Perth

Outlook for Australian Property Markets 2010-2012 Perth residential

Population growth expected to remain at above average levels through to 2012 Annual population growth WA Number of people 50,000 Natural increase 40,000 International migration Interstate migration 30,000 20,000 10,000 0-10,000 Annual population growth in WA has been growing at above the long-term average of 2.0% since mid 2006. Population growth of 3.0% in the year to June 2009 was the strongest recorded growth since 1982. International migration remains the driver of WA s population growth, increasing by a 23.4% annually, or some 42,800 people. While natural population levels remain high at 18,073 people annually, the rate of growth has slowed. Net interstate migration numbers continue to grow annually, however the rate of growth has also slowed. A net 4,825 interstate people moved to WA, an annual rise of 0.4%. Access Economics are forecasting for population growth to remain at above average levels over the forecast period. International migration is likely to remain the driver. Source: ABS Analysis: Westpac Property

Owner occupier demand is up on 2008 levels however began to slow over Q4 2009 3 month rolling totals - housing finance for owner occupiers - WA Existing 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Source: ABS Analysis: Westpac Property Existing Dwellings New Dwellings New and Construct 6,000 5,000 4,000 3,000 2,000 1,000 - Overall owner occupier demand levels have improved over the year, increasing by some 22.1%. Demand to purchase or build a new dwelling was the driver, which increased by 55.5% annually. Demand to purchase an existing home also improved, albeit to a lesser extent than new homes, growing by 12.4% annually. Owner occupier demand was largely driven by first home buyers (FHBs) for the most part of 2009. However, the number of FHB approved for housing finance dipped in Q4, falling by 9.0% as the FHB boost was phased out. Non FHB demand stabilised over Q4, with growth of just 0.4% recorded. However, overall demand fell by 2.8% over Q4. Total owner occupier demand (FHB and non FHB) is likely to stabilise over 2010 as interest rates rise and affordability issues mount.

Whilst investor demand held up over Q4 2009 and is likely to underpin demand into 2010 Price adjusted 3-month rolling total investor finance - WA Price adjusted $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Investor Finance Unlike owner occupier demand, annual investor demand has not improved on 2008 levels. Price adjusted investor finance for 2009 is 4.0% lower than a year ago. Investor demand was at its weakest over 1H 2009 at -10.3%, which is when owner occupier demand began to recover. A notable pickup occurred over 2H 2009 when investor demand increased by some 13.0%. Whilst total owner occupier demand fell over Q4 2009, investor demand held up, increasing by 0.5%, despite three interest rate rises. Demand in 1H 2010 is likely to be held up by investors, however as rental growth slows and interest rates rise further, demand is likely to stabilise from mid 2010. Source: ABS Analysis: Westpac Property

Despite improvement in demand and high population growth, approvals remain weak 3 month rolling houses and other dwellings approvals WA Number 6,000 Houses 5,000 4,000 3,000 2,000 1,000 - Other dwellings Despite continued strong population growth, total dwelling approvals for 2009 were lower than 2008 by 5.8%. Weak approvals for units drove the overall decline. Unit approvals for 2009 were 51% lower than a year ago while housing approvals are up by 8.7%. Population growth of some 65,704 in the year to June 2009 generated a need for 26,282 new dwellings at 2.5 persons per dwelling using Census 2006 data. Dwelling approvals of 19,938 in the year to December 2009, with a 95% conversion rate, would supply some 18,941 dwellings. This leaves WA undersupplied by some 7,341 dwellings. Supply levels have however seen an improvement over 2H 2009. Total dwelling approvals over 2H 2009 increased by 16.9%, driven by housing approvals. Approvals are unlikely to pick-up to levels required to satisfy population growth over the forecast period. Source: ABS Analysis: Westpac Property

Vacancy increase further over 2009 despite the under supply of dwellings Median other dwellings rent and vacancy rates - WA Rent per week $400 $350 $300 $250 $200 $150 $100 $50 $0 Rent Vacancy rate Vacancy rate 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Despite dwelling approvals not matching the demand generated by population growth, Perth s vacancy rate increased 220bps in the year to September 2009, to 4.8% On a quarterly basis, vacancy increased by 130bps. Perth s vacancy rate is currently above its 3.3% long-term average and is the highest rate recorded since Q41993. The increase in the vacancy could be as a result of tenants moving into first time ownership as a result of low interest rates. This is likely to reverse in 2010 as ownership becomes less affordable and renting more attractive. Annually rents have increased by 2.9%, however most of this growth occurred in Q4 2008. Rents remained fairly stable between Q1 and Q3 2009. As renting becomes more attractive over 2010 due to rising interest rates, the potential for rents to increase will occur, albeit at a minimal rate. Source: REIA Q3 2009

Rising prices cause affordability to decline over Q4 Home loan affordability against long term average - WA Affordability index 65 60 55 50 45 40 35 30 25 20 HLAI Long term average Forecast Affordability deteriorated over Q3 2009 as a result of the proportion of family income to meet monthly loan repayments increased to 26.4% from 26.0%. Affordability is likely to have deteriorated further over Q4 2009, at a quicker pace than what occurred in Q3. Rising interest rates and continued price growth is to have been the driver of weaker affordability over Q4. With the cash rate forecast to increase from a current 3.75% to 4.50% by the end of 2010 coupled with continued price growth in 1H 2010, affordability is set to fall further. We do not however anticipate affordability to reach the lows of 2007/08. Source: REIA Analysis: Westpac Property

Median unit prices reach record high in Q3 2009; house prices not far behind Median residential prices - Perth Price ($ 000s) $500 $450 Median other dwelling price $400 Median house price $350 $300 $250 $200 $150 $100 $50 $0 Raw data: REIA Median house prices performed better than we had expected, increasing by 5.5% in the year to September 2009. Quarterly, house prices grew by 2.2% in Q3 with the ABS suggesting growth continued into Q4 at 5.7%. Perth s median house price is currently sitting just 2.1% below the peak of Q4 2007. Should the ABS suggested growth of 5.7% have occurred in REIWA figures for Q4 2009, Perth s house prices will reach record levels. The median price for other dwellings reached a record high in Q3 2009 after increasing by 7.8% annually. The current momentum is likely to continue over early 2010 as interest rates remain at low levels. We do however expect prices to stabilise around mid year as interest rates rise and affordability deteriorates further. However, a correction in prices over 2H 2010 should not be ruled should the Q4 rate of growth be maintained. Analysis: Westpac Property

Gross yields fall over 2009 as price growth outstrips income growth Gross residential yields against the mortgage rate Yield 19.1% 17.1% 15.1% 13.0% 11.0% 9.0% 7.0% 5.0% Gross yield Mortgage rate Forecast Gross investment yields fell by 30bps in the year to September 2009 to 4.7%. Higher growth in unit prices versus the growth in unit rents was behind the fall. With price growth forecast to have continued over Q4 2009 and rental growth to have been weak, yields are expected to have fallen to around 4.4% by the end of 2009. Yields are forecast to remain around 4.4% for the most part of 2010 as rents and prices grow at similar levels overall. 3.0% Source: REIA Analysis and Forecasts: Westpac Property

Outlook for Australian Property Markets 2010-2012 Perth offices

CBD supply to exceed demand resulting in a peak vacancy of 15.4% by the end of 2012 Net absorption, net supply and vacancy Perth CBD Square metres 200,000 150,000 100,000 50,000 0-50,000-100,000 Source: Historical data: PCA OMR January 2010 Forecasts: Westpac Property Net absorption Net supply Vacancy rate Vacancy rate Forecast 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% Vacancy in Perth s CBD increased from 1.3% a year ago to 8.3% by year s end, close to our forecast of 8.5%. The completion of some 85,336m 2 came at the worst of timing over 2009, when demand was negative at 17,461m 2. Supply this year is forecast to be even higher than 2009, as 144,140m 2 completes. Although it should be noted that recent closure of Raine Square (42,500m 2 ), although expected to restart and complete in 2010, may slip into 2011. However, it will have little impact on our peak vacancy forecast. Expectations are for a recovery in demand however, with 10.5% supply being added in 2010, demand is unlikely to match supply. Vacancy is set to increase to 13.6% by year end, before rising further to 14.0% in 2011. Vacancy is expected to peak in 2012 at 15.4%.

West Perth vacancy to peak at 8.4% in 2010 before falling to 4.3% by the end of 2012 Net absorption, net supply and vacancy West Perth CBD Square metres 25,000 20,000 15,000 10,000 5,000 0-5,000-10,000 Net absorption Net supply Vacancy rate Source: Historical data: PCA OMR - January 2010 Forecasts: Westpac Property Vacancy rate Forecast 25% 20% 15% 10% 5% 0% -5% -10% Demand over 2009 was not as weak as we had anticipated which meant our forecast vacancy of 8.0% by the end of 2009 did not eventuate. Instead, vacancy increased from 1.9% a year ago to 6.1% by late 2009. Supply was high in 2009 as 21,254m 2 completed. This came at a time when demand was negative at 2,737m 2, the second consecutive year of negative demand. Supply is forecast to slow over the forecast period with only 20,540m 2 currently under construction. Only 1 project of 6,800m 2 has DA approval, however it has been put on hold. Demand is forecast to turn positive over 2010 although will not exceed supply. As a result, we expect vacancy will peak in 2010 at 8.4% before falling to 7.3% in 2011 and 4.3% in 2012.

Rents fall by 29.0% in prime and 37.5% in secondary over 2009, further falls expected Net effective rents Perth CBD Rents ($) $900 Prime CBD $800 Secondary CBD $700 $600 $500 $400 $300 $200 Forecast $100 $0 Raw Data: CB Richard Ellis PTY Ltd Net effective rents fell close to levels we had forecast over 2009. Prime CBD rents declined by 29.0% over the year while secondary rents fell by 37.5%. We had expected that a jump in incentives to around 20% to 25% would have been behind the falls in rents. This was not the case. While incentives did increase from being non existent to 10% in Q2 2009, it was the decline in face rents that drove the significant falls. We continue to believe that incentives will reach up to 20% in prime and secondary grades. This, along with continued, but minor, falls in face rents will ensure effective rents decline further over 2010 by around 12-14%. This would see effective rents down by up to 37.5% in prime and 46.0% in secondary, peak to trough. This is below the 50% to 60% peak to trough declines we were expecting a year ago. Analysis and Forecasts: Westpac Property

The easing cycle appears to be over yields expected to stabilise over 2010 Office yields and 10 year bond rate Perth CBD Yield 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% Source: CB Richard Ellis & RBA Dec-07 Current (Dec 2009) 10-year average Yields continued to ease over 2009, however the rate of easing has slowed significantly in comparison to 2008. Office yields in Perth are now all above their 10-year averages by between 40bps in West Perth and 155bps in secondary CBD. Over 2009, prime CBD yields eased by 55bps whilst secondary CBD eased by 50bps and West Perth yields by 12bps. The majority of easing occurred in Q1 2009. Yields appear to have reached their peak, with secondary CBD and West Perth yields stabilising from Q2 2009. Interestingly, prime CBD yields firmed over Q4 2009 by 12bps however this appears to be out of line. Westpac Property are of the view that as income levels continue to decline and vacancy increases, yields are unlikely to firm in 2010. Yields are expected to remain stable over the year.

Peak to trough value falls of between 36% and 46% likely in Perth s CBD Capital Values Perth CBD and West Perth Values ($/m 2 ) $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 CBD Prime CBD Secondary West Perth With yields continuing to ease over 2009 and rentals falling significantly from the peaks of late 2008, values have declined substantially in the CBD and West Perth markets. Values have so far fallen by 26.0% in prime CBD and 35.0% in secondary CBD since peaking in late 2008. Values in West Perth have so far fallen by around 27.0% since peaking in Q3 2008. With rents forecast to decline further over 2010, peak to trough value falls of around 36% to 46% in Perth s CBD are likely. West Perth is likely to see further falls in value over 2010, but not the extent of the CBD. Source: CB Richard Ellis

Outlook for Australian Property Markets 2010-2012 Perth retail

Retail sales to jump from 2H 2011, driven by continued strong population growth Retail sales growth annual change - WA Retail sales growth 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Nominal retail sales Real retail sales Forecast Quarterly retail sales in WA were weak in Q2 and Q3 2009, growing at 0.9% and -0.4% respectively, well below the 1.8% average. Q4 2009 lifted, but remained below average, growing at 1% over Q3. Annually, retail sales are forecast by Access Economics to continue to grow at below trend levels over 2010 before picking up to above trend from 2H 2011. It appears as though population growth is a major driver behind the jump in retail sales from 2011. On a per capita basis, retail sales are actually forecast to remain fairly stable from 2010 to 2012. Source: ABS & Access Economics Analysis: Westpac Property

Retail supply levels low in 2010 however potential supply levels need to be watched Retail supply 2009 to 2011 - Perth Square metres 250,000 Mooted DA Approved 200,000 Under Construction Complete 150,000 100,000 50,000 0 Supply levels fell significantly over 2009, with just 72,201m 2 completing during the year. This is approximately 60% lower than a year earlier. The supply was evenly spread across centre types. Supply under construction has increased slightly since mid 2009 although levels are some 43% lower than a year ago. Supply under construction for bulky goods has fallen substantially after an influx of supply in 2007 and 2008. Overall supply levels for 2010 is not of any concern. However, mooted projects have risen by 57% since mid 2009 as projects were placed on hold during the economic uncertainty With weak sales growth forecast for 2010, new starts are unlikely to be of a major concern. However, as sales growth lifts from 2011, the level of potential supply will need to be watched a confidence grows. In particular bulky goods which has some 181,661m 2 in the early feasibility stage or on hold. Source: CB Richard Ellis Analysis: Westpac Property

Retail rents recover in 2H09 however strong growth unlikely to occur until 2011 Retail net effective rental growth Perth Growth 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Source: CB Richard Ellis Analysis: Westpac Property Prime CBD Regional Sub regional Neighbourhood Bulky Goods 1H 2008 2H 2008 1H 2009 2H 2009 With the exception of regional centres, retail net effective rents declined over 2009 by between 6.2% in neighbourhood centres and 8.4% in Prime CBD centres. Rental declines occurred in 1H 2009, when economic confidence was at its weakest. Rents have since begun to recover through stabilisation or minimal growth in 2H 2009. Bulky Goods have however continued to decline over 2H 2009, a likely result of excess supply. Although retail sales are expected to continue to grow, they are forecast to grow at below average levels. This would more likely result in rents remaining stable over 2010. However low supply levels may deliver limited growth in the larger centres, should they continue to capture greater market share. Growth should pick up from 2011 as sales revert to above average levels, although if supply increases faster than expected it may put a cap on the extent of growth achieved.

Yields appear to be around right levels now however risk premium to narrow over 2010 Retail shopping centre yields - Perth Yield (%) 10.00% Dec-07 9.00% Current (Dec 2009) 10-year average 8.00% 7.00% 6.00% 5.00% Annually, yields eased by between 38bps in regionals and 75bps in CBD prime and neighbourhood centres. While yields eased in Q3 2009 by between 9bps in sub regionals and 19bps in neighbourhood centres, they remained stable in Q4. Since the market peak, yields have increased by between 80bps in regionals and 175bps in neighbourhood centres, reverting back to around 2005/06 levels. Despite the amount of easing, which appears in-line with national easing levels, Perth yields continue to sit below their 10-year averages. While this would generally indicate yields need to ease further, it is more likely that increased investor demand over the year will ensure yields remain around current levels. Source: CBRE & RBA Analysis: Westpac Property

Outlook for Australian Property Markets 2010-2012 Perth industrial

Industrial demand indicators rebound faster then anticipated over 2H 2009 State economy indicators - WA Annual change (%) 16.00% GSP 14.00% Private consumption 12.00% Industrial production 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% Forecast -6.00% GSP rebounded faster than anticipated, growing at above average levels over 2H 2009. Despite the rebound, GSP for 2009 was the weakest on record at -2.9%. Access Economics expects the rebound to continue over 1H 2010, bringing annual GSP to above long term average levels at 5.6%. While not negative, consumption growth rates were also at their weakest on record in 2009, at 0.3%. Consumption is forecast to remain weak over 1H 2010 before growing at around long term average levels from 2H 2010. Industrial production was weak for the most part of 2009 before picking up to around long term average levels in Q4. With demand from China and GSP having recovered, the need for industrial property should improve over 2010. Source: Access Economics, Q4 2009 Analysis: Westpac Property

Which means vacancy may fall as supply levels drop over 2010 Annual industrial construction values - WA Value $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Work Completed Work Commenced Industrial supply in Perth remained steady in 2009 in comparison to the previous year, with 175,024m 2 completing. The majority of this supply came online in 1H 2009. Expected supply levels in 2010 will however be significantly lower as only 28,426m 2 of industrial space is currently under construction and a further 15,215m 2 has DA Approval. The significant falls in activity is backed by ABS data, which suggests a 39% drop in work commenced in comparison to a year ago. With demand expected to improve over 2010 and supply to remain limited, vacancy rates are likely to decrease. We do however suggest a watch is maintained on Unit Estates, particularly should the major development in Hazelmere, Perth North (120,000m 2 development, currently in early planning) commence and not be staged. Source: ABS Analysis: Westpac Property

Improving demand and low supply should allow rents to increase from 2H 2010 Industrial Net Effective Rents - Perth Rent ($/m 2 ) $140 Warehouse A $120 Warehouse B $100 $80 $60 $40 $20 $0 Overall net effective rents fell over 2009 by 15.4% in Perth, with the majority of decline occurring in Q2. Despite rents continuing to fall in Q4 2009, the rate of decline on a quarterly basis is slowing. Rents are now 14-16% below the peaks of mid 2008. Considering rents more than doubled in the four years to mid 2008, Perth s industrial market has experienced a limited correction in 2009. Rents are now back to around mid 2007 levels. With demand indicators suggesting the need for industrial property should improve, coupled with a low supply pipeline, rents are unlikely to continue to fall over 2010. Westpac Property is of the view that rents are likely to stabilise over 1H 2010 with growth to occur from mid 2010 as demand picks up and vacancy levels fall. Growth levels are not however expected to be as strong as what occurred between 2004 and 2008. Source: CB Richard Ellis

Prime yields to stabilise however secondary yields may encounter further pressure Industrial warehouse yields - Perth Yield 14.00% 12.00% 10.00% 8.00% Industrial yields continued to ease over Q4 2009, however the pace of easing has slowed significantly. A grade warehouse eased by 55bps over 2009 while B grade eased by 42bps. Since peaking in Q4 2007, yields have increased by 169bps in secondary and 205bps in prime. Prime warehouse yields are amongst the highest nationally, and are now sitting above their 10-year average by around 15bps. 6.00% 4.00% 2.00% 0.00% Warehouse A Warehouse B 10-year Bond Secondary warehouse yields sit 60bps below their 10-year average and nationally appear too low. Further pressure, albeit minimal, is likely in the secondary market in order to bring yields in line with national levels. Prime yields are likely to remain stable over 2010, however increased investor appetite due to the high yield may cause some firming to occur late 2010 or early 2011. Source: CB Richard Ellis & RBA Analysis: Westpac Property

Prime values likely to stabilise while secondary remains under pressure in early 2010 Industrial capital values Perth Values ($/m 2 ) $2,000 $1,800 Warehouse A $1,600 Warehouse B $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Industrial capital values in Perth fell on average by between 17.5% in secondary grades and 20% in prime grades over 2009. While most of the weakness occurred in 1H 2009, values continued to fall in 2H 2009, albeit at a slower pace. After growing at unsustainable rates (by 140% between 2004 and 2008), values peaked in 1H 2008. Since then, values have fallen by up to 25% in secondary and 30% in prime. Values are now back to early 2007 levels Prime values are likely to enter a period of stabilisation as rents and yields remain around current levels through to mid 2010. While likely to be minimal, growth should occur once rents begin to rise in 2H 2010. Secondary values may see further downward pressure in 1H 2010 as yields continue to ease. Further falls are likely to be minimal. Source: CB Richard Ellis

Land values begin to stabilise Average industrial land values - Perth 0.25ha sites Value ($/m 2 ) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 East Perth South Perth North Perth North East Perth Industrial land values fell in Perth by between 4.7% in the North East to 20.8% in the North over 2009. The majority of weakness occurred in 1H 2009. Values began to stabilise in Q4 2009 in the East and North East while the North and South recorded further falls of 4.4% and 4.0%, respectively. Since the peak, land values have declined by between 15.2% in the North East and 29.1% in the East. Land values are expected to remain stable over 2010, which may begin to attract developers to start building again from 2011. Source: CB Richard Ellis

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 2010. 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 33 007 457 141) ("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 e-mail mailing list please send an e-mail to westpacproperty@westpac.com.au. 2010 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.