CBRE RESEARCH | APAC CANBERRAASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. 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. INT R O DU C T IO N The ACT was one of the better performing economies amongst the states and territories in 2019. Driving this performance was significant contributions from private consumption, the public sector and also building activity. There are signs, however, that growth in the economy is slowing, in part due to dwelling construction coming off peak levels. The Canberra office market will continue to be closely linked to the operations of the Commonwealth Government. Budget savings, co- location and the government mandating all departments to occupy buildings with high NABERS or Green Star ratings is expected to see ongoing flight-to-quality and also drive the development pipeline. The reintroduction of first home buyer stamp duty concessions from July 1 2019 has seen a positive impact on the market, with pent-up demand from first home buyers now flowing through. New policy on the Asset Recycling Initiative Program had helped to offset supply pressure; however, the unit completions cycle is yet to peak which likely means a further uptick in apartment vacancy over the near term and lower growth in rents and values in that part of the residential sector. The office market remains the key market for capital investment with just under $700 million transacted in 2019, eclipsing 2018 ($236 million). Although the high level of transactions resulted in further yield compression, the long WALE profile of the market and wide yield spread between Canberra and key investor markets (Sydney and Melbourne) has resulted in strong overseas interest for Canberra office assets. This interest will be sustained given the current low interest rate environment and also the new supply due for completion over the coming years. 1ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. STRONG ECONOMIC PERFORMANCE HERE TO STAY Strong fundamentals continue to see the ACT economy growing well above the long-term average and consistently outperforming most states. Robust economic growth over recent years has driven a rate of unemployment (3.3%) much lower than the national average (5.2%). Population growth over the past decade outperformed the national average, but in the second half of 2019 the rate of growth slowed to be consistent with the national average. The public sector is the lifeblood of the ACT economy, with public demand typically the main contributor to growth (figure 1). Private construction has made a positive impact over recent years but there are signs that dwelling construction has peaked and will drag on growth in 2020. A key driver of the rapid expansion of the ACT economy over recent years is the contribution from the higher education, tourism and professional services sectors. In 2018-19 services exports contributed a total of $2.3 billion to the ACT economy, an increase of 3.1% from the previous year. Education exports were the largest driver, contributing $1.04 billion over the same period, growth of 7.8%, followed by government goods and services exports at $549 million (up 2.6%) and inbound tourism at $258 million (up 3.2%). Home to five university campuses, including Australia’s highest-ranked education provider (Australian National University), education exports have increased 115% over the past five years, demonstrating Canberra’s excellent position in being a choice education destination for international students. The overseas student population in Canberra has helped drive population growth, lifting demand for housing and retail and necessitating improved infrastructure. As such, over $3 billion of infrastructure investment is expected over the next three years to 2022-23, including Stage 2 of the light rail to Woden, Source: ABS, CBRE Research FIGURE 1: CONTRIBUTION TO STATE FINAL DEMAND EC O N O M I C G R O W T H S T R O N G B U T S L O W I N G TH E E C ON OM Y upgrading road and bus transportation systems as well as better services and public amenity. These projects set the pace for the rapidly growing population in Canberra, translating into steady jobs growth over the near to medium term outlook period. -4 -3 -2 -1 0 1 2 3 4 5 6 7 Se p- 14 Ma r-1 5 Se p- 15 Ma r-1 6 Se p- 16 Ma r-1 7 Se p- 17 Ma r-1 8 Se p- 18 Ma r-1 9 Se p- 19 An nu al Co nt rib ut io n (% ) Non-Discretionary SpendingDiscretionary Spending DwellingsNon-dwelling Machinery & EquipmentOther GFCF Public DemandState Final Demand 2ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. VA C A NC Y S P R E A D C O NT I NU E S T O D I VE R GE OF F I C E NEW SUPPLY TO SEE A RE-RATING OF PRIME RENTS AS VACANCY REMAINS LOW The Canberra office market has historically been driven by the public sector occupying about 90% of office space. With the federal government mandating all departments to occupy buildings with a minimum 4.5-star NABERS rating, there was a significant increase in prime assets developed over the period of 2012-14. However, the market over recent years has effectively been in a new supply drought with the latest addition in 2017. Consequently, prime vacancy has been on a declining trend from the peak of 15.7% in 2014 and currently sits at 7%. Prime vacancy is forecast to increase over the near term with a pipeline of close to 205,000sqm potentially coming online between 2020-23; however, only five buildings or ~100,000sqm are currently under construction and fully committed. Given the substantial capital expenditure required to upgrade secondary assets, flight-to-quality will continue; hence the divergence between prime and secondary vacancy will remain. New additions of better-quality buildings will see a re-rating in the top end office assets. With underlying strong economic fundamentals and limited contiguous space available, leasing activity is expected to remain stable, supporting further prime net effective rental growth over the next five years, where incentives are forecast to stay in line with the long-term average. The office sector remained the most active sector in capital markets with nine office assets worth $664 million transacted in 2019. To benefit from Canberra’s growing tourism market, 40 Allara Street was purchased for hotel conversion. Investment interest for prime grade buildings with long WALE remains high because of the stable income growth profile, and this is complemented by the fact that the market also offers diversification benefits to investors. Prime office yields compressed 25bps in 2019, averaging 6.1% at the end of the year. Due to investor interest and the low interest rate environment, we expect yields will compress by a similar amount in 2020. FIGURE 2: VACANCY BY PRECINCTFIGURE 3: HISTORICAL TRANSACTION VOLUME AND VALUE Source: PCA CBRE Research 0 100 200 300 400 500 600 700 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8 201 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8 201 9 Canberra CBDCanberra Non CBD Sa le s Vo lu m es ($ m ) Qtr1Qtr2Qtr3Qtr4 Source: RCA, CBRE Research 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Ci vic Ai rp or t Ba rto n Be lc on ne n Br ad do n Br uc e Ca m pb el l De ak in Di ck so n Fo rre st Fy sh w ic k Gr iff ith Gu ng ah lin Ki ng sto n Ly ne ha m Ma w so n Mi tc he ll Pa rk es Ph ill ip Re id Ru ss el l Sy m on st on Tu gg er an on g Tu rn er We sto n Ya rra lu m la Va ca nc y (% ) Prime GradeSecondary Grade 3ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. NEW POLICY TO CURB SPECULATION AND STIMULATE CONFIDENCE The Canberra residential market has performed relatively well over recent years on the back of low vacancy and above-average population growth. The ACT tax reform programme and government initiatives to curb speculation and reduce household debt are anticipated to support the residential market, but the main risk looming is a slight oversupply in the apartment market. The reintroduction of the first-home buyer stamp duty concessions has caused a surge in demand with owner-occupier borrowing growing by 21% over the September quarter of 2019. That measure, along with other factors - such as lower interest rates and less-stringent lending requirements - has seen improved confidence in residential markets. Auction clearance rates increased over the December quarter, and we expect transaction volumes will continue to increase in 2020. The introduction of the Asset Recycling Initiative Program also helps lift pressure from dwelling approvals, which had been elevated for a long period of time but are now lower. Dwelling approvals (3mma) in December 2019 were half that of the previous corresponding period. But the unit completions cycle is yet to peak which likely means a further uptick in apartment vacancy over the near term and lower or negative growth in rents and values in the apartment market. Sub-1% vacancy from 2017 to March 2019 supported stronger rental growth, but more recently vacancy has increased and rents have fallen slightly. This is likely a sign of things to come in 2020 for the apartment market, with significant levels of supply hitting the market and delivery of new supply still trending up. Source: REIA, CBRE Research FIGURE 4: RESIDENTIAL RENTS AND VACANCY NE W A P A R T M E NT S UP P L Y T O P E A K IN 2 0 2 0 RE S I D E N T I A L 0 1 2 3 4 5 6 $0 $100 $200 $300 $400 $500 $600 200820092010201120122013201420152016201720182019 Va ca nc y (% ) M ed ia n Re nt ($ /w ee k) Median 3br house rent ($/week) Median 2br unit rent ($/week) Vacancy rate (%) With new tenancy laws impacting leases signed after 1 November 2019 - part of which will cap rent increase thresholds - the overall market rental growth rate is expected to moderate or ease slightly. Whilst strong underlying economic and population growth fundamentals will continue to drive demand, the cap on rental growth on the back of the new law may limit further yield growth from the current 3.3% for a three-bedroom house and 4.3% for a two-bedroom unit. 4CONTACTS ABOUT THIS REPORT Joyce Tiong ACT Lead, Research joyce.tiong2@cbre.com.au Bradley Speers Head of Research, Australia bradley.speers@cbre.com.au Zoe Ferrari Managing Director zoe.ferrari@cbre.com.au Philip Doyle Senior Director Property Management philip.doyle@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. 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