CBRE RESEARCH | APAC MELBOURNEASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INT R O DU C T IO N Victoria’s strong population growth has driven solid economic and job growth and allowed the state economy to weather a slowdown in the residential sector across 2018 and 2019. The Melbourne CBD is due to see the largest boost to new office supply in over 25 years, with eight new office buildings totalling 338,000sqm due to reach completion. Supply will remain elevated in 2021 with a further four buildings totalling 140,000sqm due for completion. 2019 was a difficult year for the retail sector, with several national retailers entering insolvency, particularly those with a limited online presence. As a result, a number of non-traditional retail uses have popped up taking their place. As retailers continue to rationalise their physical store footprint, it is expected 2020 will see more unique retail spaces open that will provide increased foot traffic, especially from younger, tech savvy consumers. The Melbourne industrial and logistics sector has seen significant growth in recent years. This has been driven in part by the growth of ecommerce driving demand and also the resurgence of the manufacturing sector. The dwindling supply of industrial land across Melbourne has also supported growth in rents and values. Rents are forecast to continue to grow in 2020, albeit at a slightly slower pace. After a 12 month decline, the second half of 2019 saw Melbourne’s residential market emerge from the bottom of the cycle with a return to positive price growth. This growth is likely to accelerate over the first half of 2020 with median house and unit prices set to recover their peak to trough declines and reach new highs in 2020, supported by an increase in buyer confidence. Melbourne's strong economic credentials are continuing to attract both domestic and offshore capital to the market. This demand, combined with declining bond rates, should result in further yield compression over 2020 from already historic lows. 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. BUSHFIRES AND CORONAVIRUS TO IMPACT GROWTH What impact the bushfires will have on the overall economy remains to be seen, but the drag in growth in Q419 and Q120 will be partly offset by subsequent investment in the rebuilding stage. Property sectors to be heavily impacted will be tourism and retail, particularly in the immediate surrounding areas that have been affected as uncertainty and safety keep local and international visitors away. The Coronavirus will impact the Australian economy due to China being Australia’s number one export market, including for 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. There may also be an impact on real estate transactions until the virus is contained, with some investors preferring to defer sales until confidence returns to normal. 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 200 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8 201 9 Pe rs on s Natural IncreaseNet Overseas Migration Net Interstate MigrationTotal POPULATION GROWTH HAS HELPED VICTORIA WEATHER ECONOMIC STORMS Victoria’s strong population growth has driven solid economic and job growth and allowed the State economy to weather a slowdown in the residential sector across 2018 and 2019. Victoria’s population growth is the highest in Australia at 1.7% with Melbourne expected to grow to the largest city in Australia by 2026. Comparatively lower house prices than Sydney, strong growth in international students and an influx of young families and first home buyers has seen the profile of Melbourne become considerably younger with 23.7% of the population aged between 20 and 34 compared to 21.1% in Australia. This is significant as this group is more likely to have disposable income and frequent shopping and entertainment areas. However, growth in state final demand has slowed significantly in the past 12 months from 4.8% to 1.8% (Sep 19). It is forecast that this sluggish growth will continue throughout 2020. INFRASTRUCTURE AND URBAN REGENERATION PROJECTS WILL DRIVE JOBS GROWTH Melbourne has a number of major infrastructure and urban regeneration projects which is helping to drive continued economic growth and low unemployment. Projects including the Metro Tunnel, West Gate Tunnel, North East Link and Suburban Rail Link are providing ongoing employment opportunities and supporting investment into the Victorian economy. To support population growth and to limit urban sprawl, major urban regeneration projects in Fishermans Bend and the Arden precinct have begun planning. At completion they will provide housing for 95,000 people and 114,000 jobs. These areas will transform Melbourne’s commercial landscape and help grow the economy by supporting job growth. FIGURE 1: VICTORIA POPULATION GROWTH PO PU L AT I O N G R O W T H D R I V I N G V I C T O R I AN E C O N O M Y Source: ABS, CBRE Research 2 TH E E C ON OM YASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. NE W S UP P L Y T O P E A K IN 2 0 2 0 A ND T R A NS F O R M T H E C B D OFFICE SUPPLY TO PEAK IN 2020 The Melbourne CBD is due to see the largest boost to new supply in over 25 years, with eight new office buildings totalling 338,000sqm due to reach completion. Supply will remain elevated in 2021 with a further four buildings totalling 140,000sqm due for completion. Given the completion of these new builds will see several existing CBD occupiers relocate within the market, much of the vacancy risk over 2020-21 will be driven by their vacating backfill space. While the level of backfill space will be a major risk for landlords over this time, the reintroduction of this space is likely to be staggered which should help to contain the rise in vacancy. This is because the bulk of major backfill space is owned by institutional investors who may use this opportunity to refurbish their offices, and so delay the return of this space to the market. Additionally, occupier demand, supported by white collar employment growth, is predicted to remain strong, which will aid in the absorption of backfill space when it comes back online. YIELDS WILL SEE FURTHER COMPRESSION AS INVESTORS EYE PROSPECTS FOR LONG-TERM RENT GROWTH Rent growth is expected to taper off in 2020 as a result of increased vacancy driving incentives up. Over the mid-to-long term, however, Melbourne’s prospects for rent growth are strong, as by the end of the current supply cycle there will be few development sites left and developers will increasingly need to withdraw or amalgamate existing office buildings, pushing up economic rents. Yields are relatively high in an international context, and with strong long- term rent growth prospects, Melbourne remains a popular investment destination. Opportunities for investment, however, are likely to remain scarce, which will drive yields further down and continue the convergence of prime and secondary yields. Source: CBRE Research New Supply 2020Total GLA (sqm) 311 Spencer Street65,000 447 Collins Street50,000 477 Collins Street50,000 80 Collins Street 43,000 130 Lonsdale Street55,000 180 Flinders Street12,000 85 Spring Street11,000 Two Melbourne Quarter52,000 TABLE 1: NEW MELBOURNE CBD OFFICE SUPPLY IN 2020 3 OF F I C EASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. ST R U CT U R A L CH A N G E S B R I N G O P P O R T U N I T Y STRUCTURAL CHANGES TO THE RETAIL SECTOR WILL SEE THE TRANSFORMATION OF SHOPPING CENTRES 2019 was a difficult year for the retail sector, with several national retailers entering insolvency, particularly those with a limited online presence. As a result, a number of non-traditional retail uses have popped up taking their place. Catch of the Day opened a physical retail presence in Target at Highpoint Shopping Centre, leveraging off the recent acquisition by Westfarmers. Vicinity will replace the vacated Topshop box at Emporium with Australia’s first Esports arena in early 2020. Fortress Esports will open with a 200 seat arena, more than 10 screens broadcasting live tournaments, 160 esport gaming PCs and a tavern. As retailers continue to rationalise their physical store footprint, it is expected 2020 will see more unique retail spaces open that will provide increased foot traffic, especially from younger, tech savvy consumers. Increased pressure on household incomes may see retailers reduce their reliance on food and beverage retailers and instead look to online retailer pop ups and entertainment. As a result rents in sub regional centres are expected to remain under pressure in 2020 as retailers see increased pressure on margins and slowing footfall. 2020 will see 408,000sqm of new retail space enter the Melbourne market, an increase of 84% on 2019.The majority of the new space will come from neighbourhood (125,500sqm) and large format centres (98,600sqm). This retail space is a direct result of strong population growth. LANDMARK TRANSACTIONS WILL BUOY THE MELBOURNE CBD MARKET A number of landmark transactions will test the Melbourne market in 2020 and may lead to record yields. A major transaction in 2020 will be David Jones in Bourke Street Mall which is expected to see significant global interest. Luxury retailers continue to seek space in Melbourne’s CBD with Mulberry, YSL and Tory Birch to open at 80 Collins Street and Balenciaga at 181 Collins Street. Continued demand from tourism will support this market, which is currently seeing solid growth that is expected to continue across 2020, albeit with a blip in the first half of the year due to external factors. 4 RE T A I LASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RECENT RENT GROWTH DRIVEN BY SHRINKING INDUSTRIAL LAND AVAILABILITY WILL BE SLOWED BY SUPPLY PIPELINE Melbourne’s industrial and logistics sector has seen significant growth in recent years. This has been driven in part by the growth of ecommerce driving demand and the resurgence of the manufacturing sector. The dwindling supply of industrial land across Melbourne has also supported growth in rents and values. Rents are forecast to continue to grow in 2020, albeit at a slightly slower pace with super prime rents forecast to increase by 2.4% in 2020. This slowing in rent growth is predominately due to an increase in supply rather than a slowing of demand as total new industrial supply will increase by 140% in 2020 when compared to 2019 (Figure 2). The bulk of this supply will be located in the West which will see an additional 402,000sqm of new industrial floorspace, 60% of Melbourne’s total new supply. This is a reflection of the availability of land in Melbourne's West compared to other industrial markets. Furthermore, the second river crossing provided by the West Gate Tunnel project will provide better access to the port and to the western industrial market which is driving the attractiveness of this market. ECOMMERCE WILL CONTINUE TO TRANSFORM THE LOGISTICS MARKET According to Australia Post, Victoria saw online shopping growth increase by 22.2% in 2019, above the Australian average of 20.2%. This trend is expected to continue in 2020 placing increased demand on supply chains and increasing the need for distribution networks that can facilitate fast delivery. The Melbourne market has seen retailers make significant investment into their larger distribution centres; however, despite predications, there has yet to be a significant rollout of last mile infill developments. As demand for same day delivery grows, 2020 could see development of last mile warehouse facilities in inner and middle ring suburbs to facilitate this. FIGURE 2: MELBOURNE FORECAST INDUSTRIAL SUPPLY (SQM) INC R E A S ING O C C UP IE R D E M A ND S E E S A S P IK E IN S UP P L Y 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 20192020202120222023 EastInnerNorthSouth EastWest Source: CBRE Research 5 INDU S T R IA L & L O GIS T IC SASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. STRONGER INVESTOR CONFIDENCE TO DRIVE THE MARKET TO NEW HIGHS IN 2020 After a 12 month decline, the second half of 2019 saw Melbourne’s residential market emerge from the bottom of the cycle with a return to positive price growth. This growth is likely to accelerate over the first half of 2020 with median house and unit prices set to recover their peak-to-trough declines and reach new highs in 2020, supported by an increase in buyer confidence. Buyer sentiment is being driven by the following factors: - The Coalition’s victory in the May federal election which ruled out changes to negative gearing and CGT, removing a great deal of uncertainty from the market - The continued loosening of APRA’s credit constraints which has included removing both the cap on the new interest-only loans banks can provide, and the limit of 10% annual growth in investor lending. Most recently there has been the proposed removal of the guidance that ADIs assess borrowers’ capacity to meet repayment obligations using a minimum rate of 7% - Three 25bp interest rate cuts by the RBA to the historic low of 0.75%, with the likelihood of a further cut 2020 - The announcement of a new assistance package for first home buyers available from the start of 2020 POPULATION GROWTH SUPPORTING DEMAND FROM OWNER OCCUPIERS Despite high levels of completions over 2017-19, metropolitan vacancy remained tight, at just 2.2%, with strong population growth supporting absorption. Non-house approvals, after peaking in 2016 and remaining elevated over the following two years, steadily declined over 2019, bringing Melbourne close to the end of the supply cycle. As a result, while the supply of new apartments will remain elevated in 2020, completions will likely taper off in 2021. A large pipeline of mooted apartment projects, however, could quickly reignite the supply cycle should demand continue to strengthen. Strong population growth in Melbourne will drive growing demand from owner occupiers. This, combined with a shortage of available stock for sale, will drive house prices higher over the coming years. BU O Y E D I N V E S TO R C O N FI D E N C E D R I V E S R E C O V E R Y 6 RE S I D E N T I A LASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. HOW LOW CAN OFFICE YIELDS GO? With the RBA delivering three 25bps rate cuts since the federal election, the cost of borrowing has continued to fall, with investors now benefitting from sub-2.75% debt. The cost of debt will remain low over 2020 and may decrease further, with scope for further rate cuts over the next 12 months. In the office sector, Melbourne's strong economic credentials are continuing to attract both domestic and offshore capital to the market. This demand, combined with lower bond rates and borrowing costs, should result in further yield compression over 2020 from already historic lows, with prime yields expected to decline 25bps over 2020 to 4.5%. Melbourne's office market is likely to remain tightly held, which will drive further convergence in prime and secondary yields as investors seek to enter the market. INVESTORS RE-WEIGHTING PORTFOLIOS DRIVE INDUSTRIAL YIELDS TO RECORD LOWS Industrial yields have trended downwards to reach record lows, driven by falling borrowing costs and a scarcity of stock for sale. One trend driving this decline is the growing demand from institutional and offshore investors to re-weight their portfolio exposure away from retail to industrial and logistics assets. This trend is expected to continue over 2020 and industrial yields are forecast to see a further 20bps compression to 4.8%. While this re-weighting has seen growing demand for industrial assets, it has conversely driven an increase in the level of institutional grade retail stock on the market. As a result, in contrast to office and industrial, yield compression in Melbourne’s retail sectors has not been as pronounced, with yields relatively static for shopping centres and Prime CBD retail. FIGURE 3: MELBOURNE SALES VOLUMES WE I G H T O F C A P I TA L FO R M E L B O U R N E ’ S C O M M E R C I A L S E C TO R $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 HotelIndustrialOfficeRetail Source: CBRE Research 7 CA P I T A L M A R KE T SCONTACTS ABOUT THIS REPORT Kate Bailey Associate Director Head of Logistics and Retail Research Kate.Bailey@cbre.com.au Bradley Speers Head of Research, Australia Bradley.Speers@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 FOLLOW CBRE Dean Hunt Executive Managing Director dean.hunt@cbre.com.au Kiran Pillai Senior Director, Capital Markets Office Kiran.Pillai@cbre.com.au Mark Wizel Director Mark.Wizel@cbre.com.au CBRE BUSINESS LINES James Jorgensen State Director - Advisory & Transactions, Industrial & Logistics James.Jorgensen@cbre.com.au Ashley Buller Senior Director, Office Leasing Ashley.buller@cbre.com.au Andrew Leoncelli Managing Director - Residential Projects Andrew.Leoncelli@cbre.com Next >

NOTE: This publication is pending deletion. The account which was used to upload this publication needs to be renewed in order for this publication to stay online.