CBRE RESEARCH | APAC ADELAIDEASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INT R O DU C T IO N No longer “The City of Churches”, Adelaide is a city moving from strength to strength. The state government’s emphasis on infrastructure projects and creating innovative industries will ensure that the lifestyle factors that make the city great remain well into the future. Newly introduced tax reform to reduce the land tax rate payable for all landowners will inject funds back into the pockets of many investors and increase competitiveness of the Adelaide market. Lot Fourteen will create jobs and incubators for new industries, adding to the 4,200 additional jobs forecast to be created in Adelaide over the next five years. The popularity of the office market continues the momentum from prior years, with prime assets demonstrating low vacancy and secondary assets becoming a popular value-add play for domestic and overseas investors - a trend likely to continue as investment returns fall during this low-growth and low cost of debt environment. The industrial market is starting to see demand from interstate funds looking to acquire property in the outer north and west industrial precincts. Adelaide’s investment in road projects and relatively low traffic congestion will be a positive for industrial owners looking to save time and reduce bottom-line costs. Coupled with the expanding defence industry, industrial assets are set to become the most popular asset class in 2020. Refurbishments across Adelaide’s major shopping centres are expected to help retain tenants during an uncertain time for retailers. With discretionary income and spending lower than previous years, centre managers have provided amenity in the form of casual dining precincts and experiential retail to incentivise consumers. A quiet achiever, Adelaide’s residential market continues to see popularity in established character homes over new apartment developments, due to low purchase price and short commutes to the CBD. Price growth is likely to continue over the 2020 period, driven by low interest rates and the demand for property stimulated by the federal government’s First Home Loan Deposit Scheme. 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. INNOVATION NATION Subdued state final demand growth and low population growth over 2019 and the long term has motivated stakeholders in the South Australian economy to focus on innovative industries such as specialised manufacturing for defence, renewables, space travel, and medical science and technology. A key focus for 2020 will be a government strategy to increase population growth and stop the young professional ‘brain drain’ in Adelaide, with fewer young people living in the state than in the 1980s. This is in conjunction with the largest federal/state infrastructure spend ever secured by South Australia of $12.9b from 2020-2024, with the aim to stimulate the economy through job creation. Growth industries for SA are forecast to be: Professional, Scientific and Technical, Health Care and Social Assistance, Education and Training, Administrative and Support, and Public Administration. An additional 4,200 jobs are forecast to be created across these industries over the next 5 years. Contributing to this is the Lot Fourteen Implementation Plan which lays out the framework for the old Royal Adelaide Hospital precinct as the headquarters of the Australian Space Agency and Innovation Hub, with significant government investment to revitalise the important land asset in the Adelaide CBD. PAIN & GAIN FROM LAND TAX REFORMS The state government is creating a more competitive business environment by reducing the top land tax bracket marginal rate from 3.7% to 2.4% in line with the average of other states. Further changes include the amalgamation of site values in separate trusts and the inclusion of a trust surcharge. Under legislation to be implemented in 2020, land tax will increase by approximately 230% on a unit trust portfolio (of 4 equally valued assets) with a site value of $15m but will fall by approximately 36% on a single private portfolio with a site value of $15m. FIGURE 1: TOP FIVE EMPLOYMENT GROWTH INDUSTRIES AD E L AI D E - TH E C I TY O F S C I E N C E AND TE C H N O L O G Y TH E E C ON OM Y -0.5 0.0 0.5 1.0 1.5 2.0 2.5 Professional, Scientific and Technical Health Care and Social Assistance Education and Training Administrative and Support Public Administration and Safety '0 00 Ad dit io na l W hit e Co lla r Em plo ye es Next 12 monthsNext 2 yearsNext 5 years Source: Deloitte Access Economics 2ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. A TWO-SPEED MARKET Adelaide’s office market is divided into two categories: pre and post-2006 built assets. Leasing for post-2006 assets has continued to be popular, and with sub-4% vacancy expectations are that this will continue this year, despite net market supply increasing 31,500sqm, 2.2% of existing stock. Recent acquisitions of B grade assets which have undergone high-quality refurbishments to facades, lobbies and end-of-trip facilities, combined with improved occupier demand will ensure that B grade assets in prime positions will continue to be acquired over 2020. Incentives and vacancy in prime assets are likely to decrease until new supply is brought on in 2022-23 and as B grade to A grade conversions are completed. We forecast face rental growth of 2.7% for 2020. Spec suites have been of minimal interest in recent years in Adelaide due to return on fitout costs; however, for 80-150sqm spaces this has become viable or a necessity to attract tenants in ageing assets. Tenant demand for assets with spec suites will help alleviate potential vacancy increases in secondary grade buildings due to extensive backfill occurring over the next year from government occupiers centralising multiple tenancies into single A grade spaces across the CBD. OVERSEAS BUYERS LOOK TOWARDS ADELAIDE In an opportunity-starved and low-return environment, Adelaide’s office market is increasingly becoming a popular investment market for overseas investors, particularly from Singapore and the USA. Overseas buyers have made up 8% of Adelaide office buyers over the last 13 years, with this doubling over the last 5 years. Low cost of debt is forecast to continue, lowering discount rates, notwithstanding a decrease in effective rents, which are likely to shine an even brighter spotlight on the city internationally. Expect metro assets to increase in popularity for interstate privates and small syndicates looking to bolster returns and to diversify and hedge their portfolios against macro economic and local business headwinds. Local land tax changes as well as the recent stamp duty concession will ensure that this asset type will become more accessible to private investors and owner occupiers. FIGURE 2: ADELAIDE HISTORICAL AND FORECAST PRIME RENTS & INCENTIVE SI G H T S SE T O N A DE L A I DE A S O F F I CE M A R K E T CO N T I N U E S T O P E R F O R M OF F I C E 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 100 200 300 400 500 600 201 5 201 6 201 7 201 8 201 9 202 0 202 1 202 2 202 3 202 4 In ce nt iv e Rent ($/sqm) NFR ($/sqm)NER ($/sqm)Incentives (%) Source: CBRE Research 3ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INDUSTRIAL ACTION Further yield compression and a lower entry price will see investors from interstate, including funds and asset managers, look to Adelaide as an opportunity to bolster risk-adjusted return, in what is primarily an owner- occupier industrial market. Because of this, sales are expected to increase in total volume; however, the number of sales is likely to decrease as investors hold on to assets for capital value growth as cost of debt decreases and industrial assets become the most popular asset class over then next several years. Over 2020, 91,500sqm of new supply is forecast to be delivered to market, a decrease of 21% over the previous year. The Metcash Distribution Centre in Adelaide’s north will comprise 73% of this. The Outer North Precinct will see greater popularity as transport links and infrastructure investment across the state is fully realised. MANUFACTURING GROWTH Over 2020, infrastructure-focussed investment is forecast to reach $2.5b, with total committed investment growing 35% y-o-y. Potential for greater interest in the South precinct, historically in lower demand compared to other precincts, will benefit from the completion of the Darlington Interchange resulting in reduced travel cost through time and distance savings. Specialised manufacturing projects including the $50b Future Submarines program, and the popularity of Adelaide’s food manufacturing industry, will reinforce demand for assets in surrounding areas, include the Outer North and the Adelaide Hills, where prominent food bowls and cold storage facilities are already established. The Adelaide Industrial market has seen major capital value growth over the last year, driven by the West precinct. Land values across 0.25ha and 1.6ha sites are forecast to show minimal increase over 2020. However, underlying occupier demand will continue due to restricted supply in a city fringe location and greater connections to Port Road, the completed Torrens-to-Torrens link, and the CBD. FIGURE 3: SOUTH AUSTRALIA COMMITTED INVESTMENT DE M A N D F O R I N DU ST R I A L A SSE T S I N CR E A SE INDU S T R IA L & L O GIS T IC S $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 20192020202120222023 Inv es tment (m) Source: Deloitte Access Economics 2019 4ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. SLOW AND STEADY WINS THE RACE Retail owners of secondary grade assets will probably need to dig deep as discerning occupiers demand high-quality fitouts in a challenging retail market, despite signs of recovery in 2018. This slowdown has been driven by weaker discretionary spending, changing consumer preferences and the ongoing rise of ecommerce. Minimal rental growth is forecast across the board, except for assets with value-add potential in prime locations along Rundle Mall, and some premium strips in the city fringe. But flat rental growth will create a strong value proposition for international brands looking to get a foothold in the tightly held Rundle Mall, such as H&M and recently Sephora, as well as larger domestic retailers like Mecca. Westfield Centres, now with fully rolled out casual dining and experiential retail facilities across SA, are expected to place greater emphasis on lease terms and incentives. Ironclad lease terms are especially important with the closure of large retailers such as Harris Scarfe, with the loss of its flagship Rundle Mall store adding to market vacancy. REFURB IS THE WORD Sub-Regional centres continue to be challenged by tenant mix due to risks associated with discount department stores and will need to increase demand through appealing to service-based occupiers via refurbishments. This is already occurring in the Port Canal Shopping Centre with a full 9,153sqm refurbishment, and the planned refurbishment to Burnside Village (commencing early 2020), contributing to a supply increase by 30,250sqm. Strip Retail will benefit from the urbanisation of precincts, and placemaking at a local government level, as ways to incentivise foot traffic in main streets. The recent upgrade of King William Road is seeing benefits through greater walkability and lowered vacancy levels. Demand will continue from tenants wanting to be close to the precincts’ higher-density main hubs rather than the low-density fringes of those areas. FIGURE 4: SOUTH AUSTRALIA - CONTRIBUTION TO RETAIL TURNOVER GROWTH A S T R O N G PR O PO S I T I O N F O R O C C U PI E R S RE T A I L Source: ABS, CBRE Research -2 -1 0 1 2 3 4 5 6 De c-1 7 Ju n- 18 De c-1 8 Ju n- 19 De c-1 9 An nu al Co nt rib ut io n (% ) FoodHousehold goodsClothing & footware Deptartment storesOtherF & B Retail turnover growth 5ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. APARTMENTS A TOUGH SELL TO ADELAIDE MARKET Adelaide residential property has historically been a slow and steady performer compared to its eastern state counterparts, with house prices moving a marginal 2% y-o-y, and unit growth remaining flat. Forecast demand for residential assets is likely to decrease with the housing slowdown in the eastern states coming to an end. Higher returns and capital growth in a select few suburbs in the city’s inner west following Port Road, and middle- fringe suburbs in the east will be the standout performers over the coming year. This is due to substantial infrastructure upgrades, the rising incomes of local residents’, proximity to the CBD, and the gentrification of suburbs with character homes. Building approvals for apartments will continue to trend downwards (they were 13% lower in 2019) on the back of the slowdown in the construction industry, as well as the relative unpopularity of the asset class in Adelaide. This is due to the affordability of established housing on large land components close to the CBD, the purchase of which have seen a slight increase over the same period (1%). We expect the majority of new-build property to be in middle- ring northern suburbs and coastal southern pockets. INTEREST RATES TO DRIVE DEMAND The income to price ratio for Adelaide remains relatively low in comparison to the eastern states at 7.17, illustrating the affordability in the Adelaide market. This is forecast to increase over the next year due to stagnant wage growth and increasing median house prices. Expectations of lower interest rates are likely to spur demand and capital growth for the residential property market, as it becomes more cost effective to purchase property in some Adelaide suburbs rather than rent. Lending to owner occupiers is forecast to increase over 2020, following 5.6% growth over the year ending September 2019. Credit growth strongly correlates with house price growth, and the federal government’s First Home Loan Deposit Scheme may also place upward pressure on prices. However, a further rate cut may have the opposite effect if combined with weaker economic conditions and consumer confidence. Rather than transacting, some potential buyers may sit on the sidelines in 2020 as Adelaide wage growth becomes the lowest in the nation. FIGURE 6: POPULATION GROWTH & DWELLING APPROVALS AF F O R D AB I L I T Y U N D E R PI N S T H I S L I F E S T Y L E C I T Y RE S I D E N T I A L - 2 4 6 8 10 12 14 16 4 6 8 10 12 14 16 18 20 22 200 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 D w ellin g Ap pro va ls '0 00 Po pu la tio n Ch an ge '0 00 Population changeDwelling approvals Source: ABS, CBRE Research 6ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. SECURE RETURNS FOUND IN ADELAIDE Adelaide assets have been shown to reduce risk in a diversified portfolio due to minimal variance in the city’s historical total returns and low correlation with core cities - a fact that overseas investors have caught onto in recent years. The 10-year average of foreign purchases in Adelaide is close to $450m, with 2019 more than doubling this with $1.04b worth of foreign buyer spending. As cost of capital trends downwards, and the uncertainty of global economic policy intensifies, overseas investors will continue to shift capital to areas providing the highest risk-adjusted returns, with non-core locations such as Adelaide providing greater security against global economic headwinds. LOW COST OF DEBT FUELLING YIELD COMPRESSION Despite this, vendors are likely to hold assets longer to realise growth fuelled by low cost of capital. It is likely that sales will be restricted in the capital markets sector in Adelaide, noting that the office sector in Adelaide underpins the majority of $100m+ sales across the city. Prime and secondary office yields are forecast to compress between 20-40bps over 2020 due to increased demand for the asset class and a lower cost of debt. Super Prime yields in the industrial sector are forecast to compress 15-30bps, underpinned by ongoing demand for distribution, cold storage and alternative asset classes in the sector. Retail asset yields are forecast to remain stable, notwithstanding yield expansion in most sub-regionals, due to the structural changes in the retail industry, waning consumer confidence, and slow wage growth across South Australia limiting discretionary spending. OV E R S E A S I N V E S T OR S C HA S E R I S K - AD J U S T E D R E T U R N CA P I T A L M A R KE T S 0 10,000 20,000 30,000 40,000 50,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sa le s Vo lu m e ($ m ) DomesticForeign FIGURE 5: FOREIGN BUYER DEMAND – AUSTRALIA Source: CBRE Research 7CONTACTS ABOUT THIS REPORT Aiden Bresolin SA state lead, Research aiden.bresolin@cbre.com.au Bradley Speers Head of Research, Australia bradley.speers@cbre.com.au Alistair Laycock Managing Director Capital Markets Alistair.laycock@cbre.com.au Ian Thomas Director Capital Markets Ian.Thomas3@cbre.com.au Andrew Bahr National Director Advisory & Transaction Services – Office Leasing Andrew.Bahr@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. 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