CBRE RESEARCH | APAC PERTH2 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INT R O DU C T IO N Having formed a solid foundation in 2019, Western Australia and its economy is poised to build strong momentum throughout 2020 and beyond. Being kickstarted by the resources sector and its increasing pipeline of $82.4 billion worth of possible projects, the flow-on benefits are already being witnessed as key economic indicators improve. An uplift in demand, particularly from the major resource groups and mining related professional services firms, is driving net absorption in the Perth CBD, recorded at more than 48,500sqm in 2019. Continued take-up of space and sustained declines in the headline vacancy rate are contributing to the forecast 10.2% y-o-y average effective rental growth expected over the next five years, the highest growth rate in the region. The changing retail environment has brought with it subdued trading conditions, with many operators rationalising space or closing altogether. Despite this, retailing when done right with thought-out omnichannel processes have performed well. Investment into recent refurbishment programs has brought a number of shopping centres in line with broader national trends and highlighted confidence in an otherwise challenging sector. Investment into new mining projects is fuelling Perth’s industrial market as the majors award engineering and fabrication groups contracts, a trend set to continue as further projects are announced. The industrial core of Perth Airport, Kewdale and Welshpool will experience sustained demand as the logistics sector gains momentum in line with e-commerce growth. Steady growth in population will drive the improvement in the housing market, with more affordable debt and relaxed lending conditions expected to translate into greater transaction activity. A sustained low vacancy rate of sub-3% is likely to put upward pressure on pricing. An attractive yield differential, historically low financing costs, and improving economic fundamentals will see WA commercial property in high demand in 2020 from both domestic and international capital. Expect to see greater transaction volumes, particularly from the office and industrial sectors, as investors chase returns in a low-yielding environment. 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 goals in 2020.3 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 2017201820192020202120222023 WAAus EC O N O M Y The WA economy is set to improve over the course of 2020 with several positive economic indicators emerging. Gross State Product (GSP) is forecast to grow at 2.1% over 2020 as major projects transition out of the planning phase, before increasing to reach 3.0% by 2023. State Final Demand (SFD) prospects are also positive with 4.0% average annual growth over the medium-term outlook period, greater than both NSW (2.7%) and Victoria (3.0%) over the same timeframe. With 34% of the economy attributable to the resources sector, all eyes will be on China and its growth going forward. Although China is a key market for WA, particularly for iron ore, recent production from Gorgon (Chevron), Wheatstone (Chevron), Prelude (Shell) and Ichthys (Inpex) has serviced the major LNG customers of Japan, Korea, Taiwan, and Singapore. Global demand for LNG is forecast to double by 2025, boding well for major local players BHP and Chevron, and particularly Woodside and joint venture partners on the $27.3 billion Browse and $15.8 billion Scarborough LNG projects. RESOURCES AGAIN THE KEY GROWTH DRIVER $25.4 billion worth of resource projects have been committed to or are currently under construction in WA, many of which are replacement mines to continue current levels of output, with overall growth set to be steady and not as rapid as it was during the boom. For the new projects undertaken by FMG, BHP, Chevron and Rio Tinto alone, an estimated 9,600 workers will be required for construction, with the possibility of upwards pressure on wages growth to lure skilled labour across from the east coast’s infrastructure boom, a similar story from 2008 to 2012. GOVERNMENT INITIATIVES WILL COMPLEMENT RESOURCES UPTICK On top of income tax relief and interest rate cuts, further investment from the state and federal governments in the form of Metronet and other infrastructure programs will also generate job opportunities and drive economic activity. Population growth is expected to accelerate over the next five years, averaging annual growth of 1.3%, although this is primarily organic growth and the slowdown of people leaving the state. The number of overseas migrants is increasing and the gap in the growth rates between WA and Australia is converging. Unemployment levels are expected to trend downwards marginally over the course of 2020 as momentum in the jobs market continues. The improvement is not restricted to the resource sector, with both finance and professional services sectors expected to gain further ground. FIGURE 1: GROSS STATE PRODUCT – HISTORICAL AND FORECAST Source: CBRE Research, Deloitte Access Economics, Dept of Treasury RE S O U RC E S S E C T O R T O L E A D T H E S T A T E RE C O V E RY 4 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. OF F I C E After a continued recovery throughout the course of 2019, the Perth office leasing market is set to perform strongly over 2020 on the back of improving economic fundamentals. With WA a resource driven state, a rebound in mining activity is once again the catalyst of improvement in the leasing market after a number of major projects were announced in 2019, translating to increased demand for office space. MAJOR MINING GROUPS TO DRIVE LEASING ACTIVITY Demand from the resource sector is expected to be split between project space for the majors and new space for the professional services firms such as engineers and lawyers who service these groups. This trend is anticipated to continue, particularly as the resource sector gathers further momentum and an $82.4 billion pipeline of mooted projects is tapped into. The current flight-to-quality is expected to decelerate over the short term as landlords begin to offer less attractive terms in comparison to 18 months ago as market vacancy declines. This is especially relevant for a handful of prime grade assets, which will now compete on product rather than price over the course of 2020. Further tightening of vacancy will bring with it lower incentives, predominantly from the top end of the market, and will be the primary contributor to y-o-y average effective rental growth of 10.2% over the next five years. In addition to declining incentives, face rental growth of 3.0% is forecast for prime grade stock and 0.5% for secondary stock. FLIGHT-TO-QUALITY & CENTRE TO CONTINUE, ALBEIT SLOWER Another carrying theme for the market in 2020 will be the convergence of tenants to the CBD after being priced out during the boom; however, this is also expected to slow as lease terms become less competitive. West Perth, as a result, is likely to become a more-favourable option for some tenants from both a pricing and quality perspective after experiencing an exodus of occupiers to the CBD. Tenant enquiry of more than 400,000sqm, or 22.5% of the market, was recorded over 2019, with a significant majority unfulfilled, supporting the case for 28,300sqm of forecast net absorption over 2020. LIMITED SUPPLY ON THE HORIZON The lack of new supply over the coming three-year period is well suited for current vacancies to be absorbed. Despite several mooted developments subject to a precommitment, the 56,000sqm Chevron Headquarters and 22,000sqm Capital Square II for Woodside are the only definite supply injections to enter the CBD market in the coming four years. During this hiatus in stock delivery, we expect total CBD vacancy will decline to 16.3% by end-2020 and pushing lower beyond. 0% 10% 20% 30% 40% 50% 60% $0 $100 $200 $300 $400 $500 $600 $700 $800 201720182019202020212022 NFRNER Source: CBRE Research FIGURE 2: NET RENT (FACE & EFFECTIVE) AND INCENTIVES VA C A NC Y W I L L C O NT I NU E I T S D O W NW A R D T R A J E C T O R Y5 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RE T A I L The changing retail landscape in WA, and more broadly Australia, has resulted in subdued trading conditions for many retailers, particularly discretionary businesses who are at the mercy of customers’ willingness to spend. As more consumers are inclined to save in the current environment, we expect retailers to further rationalise their real estate footprints and, more drastically, the closure of businesses entirely. STORE CLOSURES ARE OPPORTUNITIES FOR LANDLORDS Woolworths announced in April 2019 the closure of 30 Big W stores across the country, or 16% of its store network, while Wesfarmers in June 2018 also announced the closure of 20% of its Target stores over the next five years. Owners with department stores and discount department stores will be exploring options to repurpose the backfill space that may come, adding value to assets. Uses include healthcare and medical uses, or the incorporation of office or coworking space, a suitable option considering the state government is seeking to decentralise departments into the suburbs. Residential is another potential use for centres with developable land, however may not currently stack up given current market conditions. The announcement of Kaufland planning to withdraw from the Australian market altogether in January 2020 will have little impact on WA. The German chain focused initially on Victoria and South Australia, while plans for WA market were in preliminary stages. CONFIDENCE REMAINS AS MAJOR INVESTMENT PROJECTS CONTINUE Investment into the state by institutions and global retailers is a sign of confidence in WA’s retail market. AMP’s $800 million expansion of Karrinyup Shopping Centre is well underway in doubling in size to 109,000sqm and will include 94 high-end apartments, with the residential component to begin construction in late 2020. In addition, Costco’s 14,000sqm facility at Perth Airport is due for completion mid-2020 and will complement the existing DFO. The Kings Square redevelopment in Fremantle is also set to be delivered in April of this year, opening approximately 5,500sqm of new retail space to the precinct. IMPROVING FUNDAMENTALS TO ASSIST CITY RETAILERS Current trading conditions in the CBD are challenging, however a declining office vacancy rate and initiatives to increase city visitation are welcomed changes for retailers. An accelerating population growth rate will support both discretionary and non-discretionary spending, with the flow-on effect into residential construction and transactions to lift household goods expenditure. Although the short-term outlook for the WA retail sector looks likely to remain subdued, the combination of tax cuts and the lowering of interest rates to encourage spending has the potential to improve overall retail turnover. This, in tandem with improving economic conditions and the bottoming out of the residential market, should see per capita spend growth accelerate over the year. State government initiatives in combination with an improving economy will aid WA retailers who remain under pressure as consumer spending habits continue to change. OU T LOOK R E M A I N S S U B D U E D6 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INDU S T R IA L & L O GIS T IC S Despite greater leasing activity, market metrics are likely to remain subdued in the short to medium-term as market rents and land values remain flat. That said, this is unlikely to continue as market sentiment improves and business confidence returns, with an upturn more likely than further downside. Remaining in a depressed state since the economic downturn some five years ago, Perth’s industrial market is again being driven by the resources sector. Investment in new major mining projects is now flowing through the local economy with improved levels of enquiry as groups begin to fulfill their awarded contracts. DEMAND IS ELEVATED FOR MINING RELATED ACTIVITIES On a leasing front, conditions have varied, with demand for workshops building strong momentum from the manufacturing sector, including fabrication and engineering groups. This is a trend that is expected to continue through 2020 as further projects are announced, translating into strong take up for quality workshop properties. Government spending on major road infrastructure in recent years to supplement the economy during a subdued period of growth has consolidated the Kewdale- Welshpool area as the logistics hub of Perth. Immediate access to Perth Airport, Kewdale Freight Terminal, and the arterial connections of Roe, Tonkin and Leach Highway are key for any logistics occupier, with the rise of e-commerce and last mile delivery heightening the need for strategically located sites. Demand has previously, and will continue to be, centered in this precinct over the course of 2020. TENANTS LOOKING TO UPGRADE SPACE TO MEET BUSINESS NEEDS Developing precincts outside of traditional industrial areas are experiencing success, particularly well-located land, with a number of tenants seeking to relocate from ageing stock to high quality space at competitive terms. As elevated pre- leasing activity occurred over 2019, a significant amount of backfill space is expected to come online in 2020, creating opportunities for tenants to move into quality buildings in core locations. An injection of new supply into the market will encourage owners to reposition stock to capture new tenant requirements as more product becomes available, a trend already being witnessed in key industrial areas. ProjectCompanyCostJobsTiming Scarborough LNG Woodside & BHP $15.8 billion3,200Decision Jun-20 Browse LNG Woodside & JV Partners $27.3 billion1,800Decision 2H-21 Urea Fertiliser Plant Perdaman Group $4.5 billion2,200Decision Q1-20 Earl Grey Lithium Covalent Lithium $1.0 billion1,000Decision Q1-20 Methanol Plant Coogee Chemicals $1.4 billion2,000Decision Q1-21 South Flank Mine BHP$4.7 billion3,100 Construction Commenced Iron Bridge Mine FMG$4.5 billion3,900 Construction Commenced Koodaideri Mine Rio Tinto$3.5 billion2,600 Construction Commenced Eliwana MineFMG$1.7 billion2,400 Construction Commenced Green Lithium Plant Talison Lithium$830 million650 Construction Commenced FIGURE 3: SIGNIFICANT RESOURCE PROJECTS Source: CBRE Research, ASX, Dept of Mines, Industry Regulation & Safety CO N DI T I O N S SU P P O R T T H E R E T U R N T O R E N T A L G R O W T H7 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RE S I D E N T I A L Perth’s housing market remains in a state of overall softness; however, the general consensus is that the bottom has been reached. A variety of factors including challenges accessing finance after the Banking Royal Commission, caution in the lead up to the May 2019 Federal Election, and generally weaker economic conditions all contributed to uncertainty over the year but 2020 is set to see an improvement. CONDITIONS TO BE BUOYED BY GOVERNMENT INITIATIVES In October 2019 the state government announced a 75% stamp duty rebate up to $50,000 on off-the-plan apartment sales. This coupled with substantial grants for first home buyers and a lifting of income thresholds for low deposit lending demonstrates a commitment to providing a boost to the market. A number of projects failed to get off the ground over recent years, but this combination of incentives will act as a catalyst for developers to secure financing and ultimately generate employment, with benefits flowing to the broader economy. DEMAND TO PICK UP AND CONVERGE ON SUPPLY LEVELS An improving labour market is set to underpin higher population growth and create stronger demand for housing. Easing credit conditions and the lower cost of debt will also lift demand, which will converge on supply over the medium term as dwelling commencements have declined over the past three years. Looking forward, new residential construction in 2020 is expected to be in-line with 2019, before trending upwards to approximately 16,250 dwellings from 2021 as population growth and general economic conditions improve. Infrastructure expenditure, in particular the ongoing Metronet project, will be a major driver to the recovery in dwelling commencements and the state government’s infill density target of 47%. Although current consumer preferences are slowly shifting towards transit orientated living, it is expected to take time until this translates into substantial demand for multi-residential living. RENTAL VACANCY TO REMAIN TIGHT AND SPUR BUYING After a halving over the past 24 months to 2.4% as at December 2019, the direction of Perth’s vacancy rate is a sign of things to come, with housing demand and prices generally rising with sustained high occupancy. With improving economic and market fundamentals expected to continue, combined with a relaxing of lending conditions and more affordable debt, tenants are likely to transition out of the rental market and into the owner occupier market over the course of 2020 and beyond. - 5,000 10,000 15,000 20,000 25,000 30,000 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Source: CBRE Research, ABS, HIFG FIGURE 4: DWELLING COMMENCEMENTS HI G HE R P OP U LA T I ON G R OW T H W I LL HE LP A B S OR B S U P P LY 8 ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. CA P I T A L M A R KE T S Perth commercial property is once again on the radar as an institutional investment destination, with its value proposition becoming more appealing as economic fundamentals improve and financing costs decline. A halving of interest rates since May 2019 to 0.75%, with a further 25bps cut likely in 2020, has made debt significantly more affordable, and the higher yielding assets in Perth more attractive. OFFICE THE BENEFICIARY OF IMPROVING ECONOMIC CLIMATE This is especially true for the office sector, and with yields set to tighten further in the short term, investors are looking to get in earlier to take advantage of yield compression and the improving leasing market. The yield premium of Perth to Sydney and Melbourne of approximately 170bps and 150bps respectively is set to converge as the weight of capital seeking high yielding investments drives this compression, a trend already being witnessed at the top end of the market. The steady decline of vacancy in the market is another factor heavily influencing demand for Perth office assets, with the lowering of incentives the catalyst of a forecast 10.2% average annual effective rental growth over the coming five years, attracting a number of groups’ interest. With prices trending upwards, value-add opportunities are likely to present themselves and be highly sought after as leasing prospects continue to improve. Well-located and well-leased prime stock will remain at the top of investors’ shopping lists due to their secure income nature and leasing capability. Due to the current upwards trend of the market, we would expect to see a handful of landlords take advantage of this and monetise stakes within assets. INDUSTRIAL PROPERTY TO BE HIGHLY SOUGHT AFTER Demand for industrial property remains strong as investors seek to reweight portfolios towards the booming logistics sector that is benefitting from the rise of ecommerce. Despite this, assets have and will continue to be difficult to acquire due to the private ownership profile of the key industrial areas and limited alternative investment options for these players if they were to be bought out. Portfolios will therefore be actively sought after by institutions to gain scale and exposure to different geographies and tenants, particularly for access into the Perth market where leased investment opportunities are limited. The trend away from private investors purchasing assets greater than $5 to $10 million will also continue as syndicates and funds with access to more affordable debt financing are able to bid together without impacting on distributions to investors. With limited sales of tenanted properties occurring over 2019, expected to be similar in 2020, acquisitions of well-located and longer WALE industrial properties will display signs of yield compression, while vacant properties are unlikely to be touched due to leasing risk. RETAIL OPPORTUNITIES TO PRESENT THEMSELVES On the retail front, neighbourhood and freestanding assets are expected to again perform strongly in 2020, with investors seeking passive investments securely leased to blue chip tenants on long leases. The relative ease of management associated with this product is another drawcard, particularly for private investors and syndicates, given the current challenging retail environment where discretionary retailers are facing difficulty. Meanwhile, sub-regional and regional shopping centres will continue to face headwinds due to the current cyclical and structural changes impacting the retail market, and investor sentiment towards the sector. Given a number of groups are seeking to reweight portfolios and divest retail property, opportunistic purchasers could possibly acquire assets at a discount and enjoy the greater yield premium to neighbourhood and freestanding assets and the wider office and industrial sectors. Several WA sub-regional centres were offered to market for sale to no avail which we may see trade in 2020 after suiters create asset-specific strategies in the search for yield. IM P R O V ING O C C UP IE R M A R K E T P UT S P E R T H B A C K O N T H E INV E S T O R R A D A RCONTACTS ABOUT THIS REPORT Nicholas Volk Senior Research Analyst Research nicholas.volk@cbre.com 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 Andrew Denny Senior Director Office Leasing andrew.denny@cbre.com.au Richard Cash State Director Retail Investments richard.cash@cbre.com.au Sean Milentis Director Tenant Representation sean.milentis@cbre.com FOLLOW CBRE Aaron Desange Head of Capital Markets Western Australia aaron.desange@cbre.com.au Lincoln Delahunt Senior Managing Director Western Australia lincoln.delahunt@cbre.com.au Jarrad Grierson Head of Industrial & Logistics Advisory & Transaction Services jarrad.grierson@cbre.com.au Michael Veletta Senior Director Residential Valuations michael.veletta@cbre.com.au CBRE BUSINESS LINESNext >