CBRE RESEARCH | APAC SYDNEYASIA 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 Despite fluctuating global markets and recent environmental concerns, the New South Wales economy is expected to perform better in 2020 than in 2019. Driving this performance will be an improving residential market and high levels of government infrastructure spending. The office sector is set to experience rental growth moderation following a number of years of strong growth. With limited contiguous space available on the market due to record-low vacancy rates, occupiers are struggling to find new space so will choose to renew leases and wait for new supply to enter the market thereby freeing up additional space. The retail sector will continue to face challenges which will likely see the closure of further retailers who have struggled to adapt to changing shopping patterns. This presents opportunities for owners to reposition assets and change the tenant mix in centres and offer more experience based retail to attract key demographics. The industrial sector might see a new kid on the block in the form of multistorey warehouses as owners seek to unlock value in land-constrained areas. This limited supply story is true for a number of markets in NSW so infill developments are also likely to feature prominently in 2020. Another rate cut is expected in 2020, which will reduce the cost of debt for both commercial and residential loans and have positive impacts on prices in both markets. The office market continues to be the most sought after commercial sector, with industrial closely following. With limited stock available in both these sectors, expect prices to increase and investors to move up the risk curve. 1ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. GDP GROWTH TO PICK UP The NSW economy is expected to pick up in 2020 after a relatively sluggish 2019, driven predominately by continued government infrastructure spend and improvement in the residential market. Roughly 60% of committed infrastructure spend will be on improving Sydney’s transport sector including the Sydney Metro and the North South Metro Rail Link. These are long-term projects and are expected to help drive the economy into the middle of the new decade. CBRE Research is forecasting Sydney will see GDP grow 2.3% in 2020 whilst the NSW economy will grow 2%. UNEMPLOYMENT REMAINS RESILIENT, BUT RETAIL CHALLENGES TO CONTINUE After several strong years, white-collar employment growth is set to stabilise in 2020 at 1.7%, after averaging 3% over the preceding three years. Overall unemployment levels are expected to remain steady, but if there is any movement it is more likely to be up than down as hiring in the financial services sector slows. The NSW government anticipates seeing the most jobs growth in the Health Care and Social Assistance sector followed by the Construction sector as the residential development cycle picks up again. One sector that is of concern to the overall health of the economy is the retail sector as consumers remain cautious about the state of the economy and opt to take advantage of low interest rates and pay off more of their mortgage instead of spending on retail. Several retailers have announced store closures already in 2020 and we anticipate this trend to continue, particularly in the mid-range fashion sector. 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 most significantly 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. Source: ABS, CBRE Research FIGURE 1: CONTRIBUTION TO STATE FINAL DEMAND INF R A S T R UC T UR E S P E ND ING W IL L C O NT INUE T O D R IV E E C O NO M Y TH E E C ON OM Y -6% -4% -2% 0% 2% 4% 6% 8% Se p- 09 Ma r-1 0 Se p- 10 Ma r-1 1 Se p- 11 Ma r-1 2 Se p- 12 Ma r-1 3 Se p- 13 Ma r-1 4 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 Annual Contribution (%) Non-Discretionary SpendingDiscretionary Spending DwellingsNon-dwelling Machinery & EquipmentOther GFCF Public DemandState Final Demand 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 the hardest hit retail categories. 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. 2ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RESIDENTIAL REBOUND TO SUPPORT OFFICE TENANT DEMAND Net absorption across Sydney office markets in 2019 was largely driven by co-working operators and the public sector, with the NSW Government relocating some departments to Parramatta Square. The Finance & Insurance Services sector contracted in the wake of the Hayne Royal Commission and also the slowing residential sector, but we expect this drag will cease in 2020 as the residential sector improves. Professional services such as legal services will also benefit, supporting tenant demand. STABILISATION IN RENTS After five years of stellar performance, Sydney CBD is anticipated to see more muted rental growth in 2020 as the market reaches peak rental levels. Driving this stabilisation will be increases in incentives as owners focus on retention, and tenants renew to avoid expensive fit-out costs if they relocate. Face rents are forecast to increase 4% for both prime and secondary markets, but incentives are expected to push up to 21% in prime and remain relatively flat in secondary. Low vacancy and lack of available contiguous space in the CBD will be another factor that will result in tenants renewing leases rather than relocating. Despite there being limited new supply entering the market in 2020, tenants are keenly aware that significant amounts of new stock are around the corner so may well choose not to relocate until it hits the market. SUBURBAN MARKETS SET TO BENEFIT FROM LOW CBD VACANCY The lack of available space in the CBD should see suburban locations benefit as tenants choose to move out of the city to more affordable areas such as North Sydney and Parramatta. The government’s decentralisation plan has seen them commit to moving significant numbers of staff to Parramatta which will keep downward pressure on vacancy despite the large development pipeline. This will create backfill space in the CBD, which will be a welcomed by tenants looking for more options. Source: CBRE Research FIGURE 2: ANNUAL CHANGE IN PRIME NET EFFECTIVE RENTS SU B U R B A N M A R K E T S T O SE E SO L I D G R O W T H OF F I C E -4% -2% 0% 2% 4% 6% 8% 10% Sydney CBDNorth Sydney Chatswood St Leonards Macquarie Park Parramatta 2019202020212022 3 The North Shore markets of Macquarie Park and Chatswood outperformed their peers in 2019 and are expected to see further decreases in vacancy and increases in rents as tenants take advantage of comparatively cheaper rents and improvements in transport links.ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. HOUSING STABILITY TO SUPPORT RETAIL TURNOVER Despite broader global and local economic challenges at the start of 2020, we expect conditions will improve by the second half of the year, improving business and consumer confidence. Dwelling prices stabilised in 2019 (after falling) and will grow again in 2020, improving the confidence of homeowners. Transaction levels will continue to improve in 2020, stimulating retail spending for household goods. INSOLVENCIES TO CONTINUE The retail sector will continue to face significant cyclical and structural headwinds that will likely result in further insolvencies in 2020. Indeed, a number of well-known brands have already announced they are going into administration as they struggle to adapt to the changing retail environment. The mid-tier apparel segment will likely see the most store closures in 2020 as retailers struggle to compete with international brands and increasing online penetration. As these store closures come through, shopping centre managers may be able to reposition vacant space and offer alternative retail experiences and turn themselves into lifestyle and activity centres which appeal to the younger generations. 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. RENTS STABLE IN 2020 CBD retail rents are likely to remain relatively stable in 2020 as tenants look to manage operating costs and are more cautious about expensive relocations. Stand-out performers are likely to be in the footwear category which saw strong growth in 2019 and continue to look for prime CBD sites. Source: Source: ABS, CBRE Research. Note: residential transfers momentum indicator (RTMI) is transactions latest quarter / average quarterly transactions for preceding 12 months. RTMI in chart above is lagged three quarters because over the long-term that is the strongest correlation with household good sales FIGURE 3: RESIDENTIAL TRANSFERS MOMENTUM INDICATOR VS NSW HOUSEHOLD GOODS SALES CH A L L E N G I N G T I M E S CA N P R O V I DE O P P O R T U N I T Y RE T A I L 4 -15% -10% -5% 0% 5% 10% 15% 20% Ju n- 09 Ju n- 10 Ju n- 11 Ju n- 12 Ju n- 13 Ju n- 14 Ju n- 15 Ju n- 16 Ju n- 17 Ju n- 18 Ju n- 19 Ju n- 20 Dwelling transfers momentum indicator Household goods retail - annual change Shopping centres are also expected to see limited rental growth in 2020 after a quiet 2019, and are also likely to bear the brunt of retailers going insolvent so will have to find new tenants or repurpose space. Large format centres are likely to be the only retail segment that will see meaningful rental growth in 2020 as the residential market improves in terms of values and the level of transactions.ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. INCREASE IN INFILL DEVELOPMENTS Developers will look to unlock value in tight markets due to limited availability of large undeveloped land parcels; consequently, 2020 will see an uptick in infill developments. Sydney’s Central West and Metro West regions will see the bulk of infill developments, as several REITs that hold large parcels of land are set to commence projects. Strong occupier demand and rents significantly more affordable than South Sydney will see solid take-up of provided space; however, rental growth is likely to be tempered due to the amount of new supply. Rental growth is expected to be more tempered in most markets in 2020 due to the significant growth they have seen over the last few years and large increases in supply that has occurred in some markets such as Outer and North West. MULTISTOREY TO SOUTH SYDNEY South Sydney benefited significantly from stock withdrawal for residential conversions and compulsory acquisition for infrastructure projects. This resulted in tenant displacement to the South West and Outer South West submarkets, driving rents there. This has also meant that there is limited space for new developments in South Sydney so consequently multistorey warehouses are expected to come into existence in the coming years with 2020 likely to see the first development application lodged. Whilst multistorey warehouse are commonplace across the globe, Australian developers have yet to embark on any projects, but with limited land available for development in key precincts we expect this type of development to start to increase in popularity. SU P P L Y ST O R Y A N D MU L T I S T O R E Y INDU S T R IA L & L O GIS T IC S Source: CBRE Research FIGURE 4: NSW INDUSTRIAL SUPPLY PIPELINE 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 2019202020212022 sqm South WestSouth SydneyOuter West Outer South WestNorthern SydneyNorth West North ShoreMetro WestCentral West 5ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. RENEWED PRICE GROWTH TO PUSH MEDIANS TO NEW HIGHS After registering declines for the better part of two years, Sydney residential prices rebounded in the back half of 2019 and are set to continue this trend and reach record highs by mid-2020. The median house price is once again back above $1 million as renewed confidence in the housing market and cheaper debt fuel consumer demand. Three interest rate cuts in 2019 and another cut expected in 2020 will continue to drive borrowing costs lower. The loosening of APRA’s macroprudential controls have not only benefited investors but also owner- occupiers. In the second half of 2019 transaction volumes in Sydney picked up and we expect this trend will continue in 2020. Due to rising prices and stronger auction clearance rates more sellers will be encouraged to enter the market in 2020 which increases available stock for purchase, thereby slowing the pace of price growth. Nevertheless, we expect demand will strengthen materially and prices will rise from 7- 12% for houses and 5-10% for units. Price rises of this extent will underscore affordability issues in Sydney and could influence the RBA to think twice about lowering interest rates further. SUPPLY CYCLE TO COME TO AN END After an extended supply boom which corrected Sydney’s underbuilding, the first half 2020 will see the continuation of a rapid slowing in residential construction and push the market back towards undersupply. Approvals for both houses and units are significantly down compared to levels just two years ago, indicating that developers lost confidence in the market. This slowdown in construction will allow the market to better absorb supply coming into the market and should see vacancy levels start to reduce from their record highs. Source: ABS, CBRE Research FIGURE 5: NON-HOUSE SUPPLY PIPELINE PR I C E G R O W T H R E T U R N S T O S Y D N E Y RE S I D E N T I A L 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Number Under construction (end of qtr) Completed (rolling annual) Commenced (rolling annual) 6 This slowdown is expected to be short-lived, however, as developer confidence is already starting to return and there are signs that the fall in applications has stabilised. Therefore, we expect to see an increase in housing approvals towards the back end of 2020 amid fears Sydney will once again return to undersupply. ASIA PACIFIC REAL ESTATE MARKET OUTLOOK 2020 | AUSTRALIA CBRE RESEARCH | © 2020 CBRE, INC. OFFICE & INDUSTRIAL YIELDS TO COMPRESS FURTHER The volume of capital seeking a home in the Sydney CBD office market is expected to drive yields further down. Three interest rate cuts in 2019 resulted in the cost of borrowing reducing considerably, thereby allowing investors to pay more for prized office assets. This trend is set to continue in 2020 as at least one more cut is expected and investor appetite has not waned, however, they will struggle to find quality assets for sale as owners remain reluctant to part with prized assets. Industrial development site sales hit record levels in 2019 as limited completed stock for sale pushed investors to go down the development path in order to unlock value in tight markets. This trend of “if you can’t buy it build it” is set to continue as owners appear unwilling to sell prized assets before the perceived peak of the cycle. Yields are expected to compress another 25bps in 2020 as a result of the weight of capital trying to break into the industrial sector, and NSW could see assets trading for sub-4% in the right location. RETAIL OPPORTUNITIES TO BE HAD The retail sector is evolving as spending habits change and operations evolve to include online retailing as a significant portion of an occupier’s business. This has resulted in the value of bricks & mortar retail coming under increasing pressure which in turn has dampened investor appetite in recent years. However, high quality assets that rarely trade have been coming to market and have garnered significant interest from buyers. This is set to continue in 2020 and beyond as current owners look to re-weight their portfolios to reduce exposure to retail, and potential buyers look to pick up quality assets at a discount to book value. A pick up in transaction activity would signal renewed confidence in the sector. Source: CBRE Research FIGURE 6: NSW SALES VOLUMES CO M P R E SSI O N & O P P O R T U N I T I E S I N 2 0 2 0 CA P I T A L M A R KE T S 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sales Volume ($m) HotelIndustrialOfficeRetail 7 SYDNEY REMAINS PREFERRED CITY FOR OVERSEAS CAPITAL Preliminary results in our Investor Intentions Survey reveal that for APAC cross-border investors in 2020 Sydney remains the preferred Australian city. We do expect, however, that the level of transaction activity in the first half of the year will be hindered by the onset of the Coronavirus emanating from Asia, although we don’t expect any impact on pricing of commercial real estate. CONTACTS ABOUT THIS REPORT Benjamin Martin-Henry Head of Capital Markets, Office & BTR Research ben.martin-henry@cbre.com.au Bradley Speers Head of Research, Australia bradley.speers@cbre.com.au Andrew Roy Executive Managing Director, NSW andrew.roy@cbre.com Michael Andrews NSW State Director, Capital Markets, Office michael.andrews@cbre.com.au Chris Fisher Director, Advisory & Transaction Services, Office Leasing chris.fisher@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 BUSINESS LINES FOLLOW CBRE Simon Rooney Executive Managing Director, Capital Markets, Retail simon.rooney@cbre.com Michael O’Neill Senior Director, Advisory & Transaction Services Industrial and Logistics michael.oneill@cbre.com.au Leif Olson Director, Advisory & Transaction Services, Retail Leasing leif.olson@cbre.com.au Jason Edge Senior Director, Capital Markets, Industrial and Logistics jason.edge@cbre.com.au Justin Brown Chairman, Residential Projects, justin.brown@cbre.com.auNext >