CBRE RESEARCH | APAC BRISBANEASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INT R O DU C T IO N There are positives for the Queensland economy at the start of 2020: non- dwelling construction will see a pick-up this year; retail trade appears in better shape than most other states; and the looming undersupply of housing stock will see residential price growth accelerate, lifting consumer confidence. Countering these, however, will be the impacts of the Coronavirus, which will reduce global growth in H1 2020. Queensland and Brisbane won’t escape those effects with tourism, retail and education being hardest hit. Office tenant demand has been healthy over the past couple of years, outperforming the 10-year average. The public sector and coworking providers have been the dominant sources of net absorption since 2017. We expect demand from these tenants will soften in 2020 and professional services becomes the main driver of net absorption. The start of 2020 has been challenging for the retail sector: several retailers with national footprints have entered receivership, creating vacancies in shopping centres. This trend will continue and conditions won’t be lenient to retailers that fail to innovate and move with the digital times. Landlords and retailers need to be dynamic and creative to ensure success. Tenant demand in the Brisbane industrial market has improved since the low point in 2017-18. An interesting point of difference in 2019 was a handful of manufacturers taking up space between 4,000sqm and 10,000sqm. In previous years the bulk of demand came from the logistics sector. Improved conditions in the construction sector augurs well for the industrial sector. The seeds are sewn for Brisbane to record relatively strong growth in residential values in 2020, in the order of 5%-10%. Residential vacancy is the lowest of the four largest capital cities, and dwelling approvals and construction starts are well below peak levels recorded over recent years. Brisbane commercial real estate yields haven’t compressed as much as Sydney and Melbourne and thus represent relatively good value. Investor demand in 2020 will predominantly be from domestic capital, with the increase of land tax to offshore investors in July 2019 likely reducing demand from offshore capital. At CBRE, we are realistic about the likelihood of short-term volatility but optimistic about the future. In this report, we provide our outlook for the year ahead and describe the factors that are driving the marketplace. We look forward to helping you achieve your real estate objectives in 2020. Don’t hesitate to contact us for further advice. 1ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. Growth in the Queensland economy slowed in 2019, similar to most other Australian states. The main contributors were weaker growth in private consumption and declining investment in buildings (residential and non- residential) and also engineering works. Business confidence doesn’t paint the rosiest outlook for 2020. The Suncorp Group CCIQ Pulse Index in Q3 2019 revealed the sentiment reading for the outlook for the state economy over the next 12 months is at its lowest level since March 2019. The state will be challenged by ongoing drought, lacklustre business investment and challenging conditions for retailers. BUT IT ISN’T ALL BAD NEWS Non-residential building approvals picked up from Q1 2019 leaving an annual total higher than previous years (figure 1). This augurs well for a pick- up in construction activity in 2020-21, similarly to the increased activity recorded in 2017 and the first half of 2018 that followed higher approvals in 2016-17. Retail trade growth in Queensland outperformed all other states for most of 2019 and entering into 2020. Despite structural (high levels of household debt / weak wage growth) and cyclical challenges with the Australian economy, Queenslanders appear more willing to shop. We expect another two interest rate cuts in 2020 that will lend further support to the retail sector. The Coronavirus will impact the Australian economy due to China being Australia’s number one export market, including tourism. Direct inbound flights from China have been banned until March 29. This will adversely impact turnover in accommodation and retail property, diminishing returns in 2020. Luxury retail and F&B will be hardest hit retail sectors. There may also be an impact on real estate transactions until the virus is contained, with some investors preferring to defer sales until travel restrictions are lifted and confidence returns to normal. CL O U DS I N G L O B A L E CO N O M Y W I L L I M P A CT T H E SU N SH I N E ST A T E TH E E C ON OM Y FIGURE 1: QLD NON-RESIDENTIAL BUILDING APPROVALS (ANNUAL) $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 Sep-16Sep-17Sep-18Sep-19 Billio ns RetailOffice Other commercialWarehousing Short-term accommodationOther Source: ABS, CBRE Research The recent bushfires in Australia’s southern states may result in some tourism in 2020 being redirected towards Queensland. Markets such as Cairns and the Gold Coast may see increases in domestic visitation. 2ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. PR I M E O F F I C E T O B E N E F I T F R O M T I G H T V AC AN C Y OF F I C E LEASING ACTIVITY POINTS TO STRONG NET ABSORPTION IN 2020 Despite weaker business confidence going into 2020, leasing demand carries strong momentum and net absorption will continue to be positive this year. In 2018 the CBD and Near-City markets combined recorded 38,000sqm of net absorption, growing to an impressive 62,000sqm in 2019, well above the 10- year average of 27,000sqm. Co-working accounted for 24% of net absorption in the combined CBD and Near-City markets since 2017, slightly lower than the national average of 29%. Combined with demand from the Queensland state government, co- working was a major source of net absorption (figure 2), but with the issues surrounding WeWork surfacing in the second half of 2019, there is good reason to question whether co-working providers underpinning demand is sustainable. So where will future tenant demand come from? Professional services is a broad sector that accounts for 13% of white collar employees in Brisbane. Typically this sector experiences stronger growth preceding rises in infrastructure and non-residential building investment, both of which Brisbane is about to experience. Brisbane CBD vacancy saw a slight uptick in H2 2019 due to the completion of 300 George Street (47,700sqm), which was ~12% leased upon completion and will soak up tenant demand in 2020-21. Both the CBD and Near City markets will remain tenant markets in 2020, with vacancy rates remaining double digit. Larger supply additions in 2021-22 (Midtown Centre and 80 Ann Street) will likely prevent vacancy pushing to extremely low levels (we forecast vacancy will be ~13% by end-22). Prime effective rents grew ~5% in 2019 but has been hindered by incentives that are proving sticky at ~35% for prime stock. Vacancy is, however, very tight in premium grade stock in the CBD (3.2%) and we expect this will be conducive to incentives contracting in that segment of the market, with premium effective rents growing ~10% in 2020. -15,000 -10,000 -5,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Public Adminstration and Safety CoworkingProfessional Scientific and Technical Services Financial and Insurance Services Education and Training Transport, Postal and Warehousing Arts and Recreational Services Electricity, Gas, Water and Waste Services Sq ua re m et re s FIGURE 2: NET ABSORPTION BY SECTOR SINCE 2017, BRISBANE CBD AND NEAR-CITY MARKETS COMBINED Source: CBRE Research 3ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RE T A I L QU E E N S LA N D LE A D I N G T HE N A T I ON I N R E T A I L T U R N OV E R G R OW T H -2% -1% 0% 1% 2% 3% 4% 5% 6% De c- 16 Ma r- 1 7 Ju n- 17 Se p- 17 De c- 17 Ma r- 1 8 Ju n- 18 Se p- 18 De c- 18 Ma r- 1 9 Ju n- 19 Se p- 19 De c- 19 An nu al Co nt rib ut io n FoodHousehold goodsClothing & footware Deptartment storesOtherF & B Retail turnover growth RETAIL TRADE GROWTH HOLDING UP Retail trade growth in Queensland outperformed all other states for most of 2019 and entering into 2020. Figure 3 illustrates the pick-up in retail turnover growth in 2019, driven by more drinking and eating in the discretionary (F&B) and non-discretionary categories (Food). The categories that remain challenging and are struggling to record growth are department stores and household goods, trends consistent with much of Australia. Big W has and will continue to close stores, but landlords should take these opportunities to reposition assets with a more-productive retail category. The past few months saw a number of large retailers enter receivership, including Harris Scarfe, Jeans West, Bardot and the Co-op bookshop. We estimate there has been over 80 major retailers either enter receivership or exit the Australia market since 2015, of which 41% is in the fashion sector which continues to suffer from the influx of offshore brands and online retailing.These exits are leaving holes in shopping centres, causing incentives to rise and predominantly stopping rental growth. This trend will continue in 2020, with more retailers expected to collapse. Retail is by no means dead but trading conditions won’t be lenient to retailers that fail to innovate and move with the digital times. Omnichannel retail platforms will increasingly become a must for larger retailers, particularly in the clothing and footwear category. But embracing the digital age needn’t be exclusive to large retailers. F&B operators of all tastes and sizes are improving sales by teaming up with online food delivery services such as Uber Eats, Menulog and Deliveroo. This has helped reduce the impact of an oversupply of F&B in recent years. Entertainment and services will continue to take up more shopping centre lettable area as the number of goods retailers decreases. FIGURE 3: CONTRIBUTION TO ANNUAL RETAIL CONTRIBUTION GROWTH Investor returns for retail assets over the near-term outlook period will continue to be impacted by market rents either declining or experiencing minimal growth. There are exceptions to the broader trends – some shopping centres continue to trade well and experience market rental growth – but the overall outlook for the sector is that 2020 will continue to be challenging in the retail sector. This will provide value-add buying opportunities to investors with firm ideas on how to improve turnover in struggling centres. Source: ABS, CBRE Research 4ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INDU S T R IA L & L O GIS T IC S SU P P L Y P I P E L I N E P I CK I N G U P Tenant demand in the Brisbane industrial market has improved since the low point in 2017-18. An interesting point of difference in 2019 was a handful of manufacturers taking up space between 4,000sqm and 10,000sqm. In previous years the bulk of demand came from the logistics sector. Effective and face rents on average have been static in most grades of logistics property over the past couple of years. Tenant incentives average around 15%. We had been expecting that incentives would start to fall in 2020 but increased supply of new stock is likely to quash that notion. Larger industrial owners had all but ceased speculative development towards the end of 2018 but more recently they have started again. WE FORECAST THAT RENTS WILL REMAIN STATIC AGAIN IN 2020 Industrial land supply has become limited in many of Brisbane’s industrial precincts, causing values to continue to rise, although the rate of growth slowed in 2019. Land values have increased ~45% over the past five years. Land supply is more abundant in Yatala and consequently there has been stronger demand in the area. Owner-occupiers are growing in number because of the low interest rate environment which is making mortgage repayments cheaper than market rents. This trend will continue in 2020 and could even accelerate if borrowing costs fall further, as we expect. We’re forecasting two further cuts to the base rate in 2020 and as a result logistics yields in Brisbane will likely compress a further 25-40bps. FIGURE 4: INDUSTRIAL SUPPLY PIPELINE BRISBANE AND GOLD COAST INDUSTRIAL CONTINUES TO GROW Queensland’s industrial economy remains in growth mode but the rate of growth slowed from 4.6% in FY2018 to 1.0% in FY2019. Non-dwelling construction and engineering have been in contraction, but we expect these parts of the industrial economy will improve in 2020 due to the ramp-up of construction activity on the Cross River Rail project and also the pick-up in non-building approvals noted in the Economy section of this report. 0 100,000 200,000 300,000 400,000 500,000 600,000 20172018201920202021 Sq ua re m et re s Western Corridor Outer South Outer North North Near City M1 Corridor Gold Coast Gateway South Gateway North Source: CBRE Research 5ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RE S I D E N T I A L 2020 T O S E E A RE S U RG E N C E I N P RI C E G RO W T H RESIDENTIAL RECOVERY HAS COMMENCED The Brisbane dwelling market is recovering after years of lacklustre price growth and recent oversupply in some sections of the apartment market, much of which has now been absorbed. The second half of 2019 saw confidence in the residential sector grow, largely due to macroeconomic and political factors: • Coalition’s victory in the May federal election (and the threat of changes to negative gearing removed) • Banks becoming less stringent in mortgage serviceability requirements • Three 25bps interest rate cuts (and potentially two more to come) The seeds are sewn for Brisbane to record relatively strong growth in residential values in 2020, in the order of 5%-10%. Residential vacancy is the lowest of the four largest capital cities, and dwelling approvals and construction starts are well below peak levels recorded over recent years, down 47% and 41% respectively. This shrinking of the activated pipeline means that growth in values and rents will likely continue beyond 2021 until a supply response kicks in. CBRE’s Residential Developments team in Brisbane this year has observed the most active January since 2017. There is an undersupply of good quality unit stock, a segment of the market that appeals to the downsizer market that continues to grow as more baby boomers reach retirement. To cater to this market, developments are providing a higher proportion of three- bedroom stock. By contrast, much of the inner-city unit market is still concentrated on one or two-bedroom units that are appealing to investors. The investor market is essentially the swing factor in residential markets, with the owner-occupier market experiencing more consistent levels of demand. Indeed it is the investor market that has picked up over the past six months, lifting overall demand. We expect this will continue in 2020. FIGURE 5: QUEENSLAND QUARTERLY DWELLING APPROVALS Over recent years interstate migration to Queensland has been at elevated levels, and has resulted in a slight pick-up in population growth. We expect this trend will continue as Brisbane dwelling prices remain (on average) about half those in Sydney. Housing affordability issues in Australia are predominantly a Sydney and Melbourne story, and while that remains the case Queensland will benefit from interstate migration. 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 De c-1 4 Ju n- 15 De c-1 5 Ju n- 16 De c-1 6 Ju n- 17 De c-1 7 Ju n- 18 De c-1 8 Ju n- 19 De c-1 9 D w ellin g ap pro va ls UnitsHouses Source: ABS, CBRE Research 6ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. CA P I T A L M A R KE T S BR I S BA N E TO R E M A I N I N D E M A N D D E S P I TE G L O BA L C H A L L E N G E S The increase of land tax to offshore investors in July 2019 will reduce demand from offshore investors. In 2019 overseas investors accounted for 15% of deals, not far behind the 17% average of the preceding five years, but this will likely be lower in 2020. POSITIVES FOR THE BRISBANE INVESTMENT MARKET: • Brisbane yields haven’t compressed as much as Sydney and Melbourne and thus represent good value • Prime office is expected to outperform (in terms of effective rent growth) Sydney and Melbourne over 2020-21. This will likely result in some yield convergence to the southern capital cities • Infrastructure and non-residential construction underway and over the coming years will increase the vibrancy of the CBD We’re expecting two further 25bps interest rate cuts in 2020 which will reduce the cost of capital and be the main driver of yield compression this year. Deep buyer pools of capital will also contribute to yield compression. There are large amounts of overseas capital looking to allocate into the APAC region, and Australia benefits from being relatively high yielding, transparent and liquid. Office and industrial will remain the preferred sectors this year due to the ongoing structural challenges in the retail sector and some major investors reducing weighting to the sector. This will, however, represent buying opportunities if vendor and buyer expectations align, which has been the main challenge to transaction volumes for retail. There is justifiable cause for concern around the impact the Coronavirus will have on investor markets in 2020. Already the hotel and retail markets are being impacted by reduced overseas tourist numbers to Australia due to the recent bushfires. If the Coronavirus isn’t contained reasonably soon, these sectors in some locations will face sharp declines in revenue, and for the overall investor market confidence will deteriorate and transaction volumes will be lower. FIGURE 6: AVERAGE DEAL SIZE GREATER BRISBANE Sales volumes in Queensland in 2019 recorded $6.9 billion and were 11% below the record 2017 levels but the number of deals at just 138 was 37% lower. Fewer but bigger deals was consistent with other states. The average deal size for domestic buyers increased sharply in 2019. Contributing to this was Australian investors buying large CBD office assets such as 400 George Street, 239 George Street & 15 Adelaide Street, and the Australian Government Centre. We expect that domestic groups will remain highly competitive when larger assets come to market this year. $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sa le s Pric e ($ m ) DomesticForeign Source: CBRE Research 7CONTACTS ABOUT THIS REPORT Bradley Speers Head of Research, Australia bradley.speers@cbre.com.au Ally McDade Associate Director ally.mcdade@cbre.com.au Tom Broderick Associate Director tom.broderick@cbre.com.au Bruce Baker Executive Managing Director, Queensland bruce.baker@cbre.com Chris Butters Managing Director, Brisbane Advisory & Transactions, Office Leasing chris.butters@cbre.com.au Flint Davidson Head of Capital Markets Office, Pacific flint.davidson@cbre.com.au © 2020 CBRE, Inc. CBRE RESEARCH This report was prepared by the CBRE Australia Research Team, which forms part of CBRE Research – a network of preeminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe. All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication. To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/research-and-reports CBRE CONTACTS FOLLOW CBRE Mark Curtain Regional Director – Pacific Office Leasing, Advisory & Transactions mark.curtain@cbre.com.au Graeme Wakefield Head of Retail Advisory & Transaction Services, Property Management Pacific graeme.wakefield@cbre.com.au Meagan Wakefield Regional Director, Property Management meagan.wakefield@cbre.com.au Michael Hedger Director, Capital Markets Retail michael.hedger@cbre.com.au Joe Tynan Director, Capital Markets Retail joe.tynan@cbre.com.au Paul Barratt Managing Director, Residential Projects, Queensland paul.barratt@cbre.com.au Mark Gilbride Director, Advisory & Transaction Services, Industrial & Logistics mark.gilbride@cbre.com.auNext >

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