FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 1Intelligent Property Investment

Melbourne Residential Market Update

Future Estate investment products enable investors to cut out typical developer’s profit and access properties at near cost price.

This eBook does not constitute an investment offer. Prospective investors are recommended to read IM or PDS for further information. No guarantee with regard to future investment performance is made or implied. Whilst every effort has been made to ensure accuracy, no reliance can be placed upon it by recipients.

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE1

In this eBook, you will learn about the current conditions, drivers and outlook of the Melbourne residential market.

Ben AndersonManaging Director and Founder

Would you like to learn about the current conditions and outlook for the Melbourne residential market?

Would you like to learn the real story, supported by reliable statistics, rather than the media hype?

Do you own property in Melbourne, or are you an investor considering your next property investment?

If you answered ‘Yes’ to any of the above, please read on.

Yes No

Yes No

Yes No

1

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 2

Residential property investment in the Melbourne market is a sound long-term investment strategy underpinned by a diverse and robust economy and sustained high population growth.

WHY MELBOURNE?

Melbourne is Australia’s second largest city and was voted as the most liveable city in the world in 2011.

Melbourne is highly ranked in key economic indicators such as GDP per capita, GDP growth, employment and average household income.

As of June 2012, there are about 4.14 million people living in Melbourne, or some 77% of Victoria’s population.

At the current population growth rate (1.5% or 62,000 p.a.), Melbourne is forecast to surpass Sydney to become Australia’s largest city in the next few decades.

Melbourne boasts a diverse range of world-class entertainment centres, shopping, fine-dining, cultural events and sports venues. Melbourne remains the destination of choice for overseas property investors due to its long-term investment potential.

Melbourne remains more affordable than Sydney.

Melbourne’s economy is diverse and less industry dependent (i.e. resource sector for Perth and financial services sector for Sydney).

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE3

The current drivers of the Melbourne residential markets include the following:

Strong population growth - the highest of any Australian capital with 647,000 people moving to Melbourne over the past decade

Desirable lifestyle, diverse industries and employment opportunities

High investment return - Melbourne has performed strongly over the long term both in terms of capital gain and rental returns

Low rental vacancy is supporting rental growth - rents grew at an average of over 8% p.a. in the 5 years to 2011

Continuing supply shortage - in stark contrast to the alarmist media commentary

Strong market outlook, underpinned by robust fundamentals (such as low rental vacancy, continued demand growth and diminishing supply projections beyond 2013)

MARKET OVERVIEW

The Melbourne market has been one of the best performing residential markets among Australian capital cities in recent years. After significant capital growth in 2009-2010, the market softened and has been generally more subdued. From peak to trough, the median house price of the Melbourne market declined by 8% before rebouncing by almost 4% in the last few months. Many lead indicators show that the bottom has been reached with a positive outlook for capital growth going forward.

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 4

ANNUAL ASSET RETURNS AND VOLATILITY OVER THE LAST 20 YEARS

TIME FRAME 2008 - 2012 2002 - 2012 1992 - 2012

ASSET CLASSES RETURN VOLATILITY RETURN VOLATILITY RETURN VOLATILITY

Australian Shares -7.30% 12.40% 2.40% 11.40% 2.30% 9.60%

Australian Listed Property

-6.20% 15.90% 4.30% 11.50% 3.90% 10.80%

Australian Residential Property

8.20% 4.50% 12.80% 4.90% 11.60% 4.80%

Melbourne Apartments

8.50% 7.00% 13.40% 7.20% 12.30% 7.50%

UBS Bond Composite Index

8.17% 2.40% 6.79% 2.80% 9.20% 4.20%

Australian Cash Management Trust

5.90% 0.20% 5.50% 0.30% 6.80% 1.00%

Consumer Price Index 3.10% 0.90% 2.9% 1.20% 2.70% 1.40%

Average WeeklyEarnings

4.30% 1.00% 4.40% 3.40% 3.40% 1.50%

Source: RBA, ABS, UBS , Trading Economics

HISTORICAL RETURNS

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE5

POPULATION GROWTH

Dec-11Dec-07Dec-03Dec-99Dec-95Dec-91Dec-87Dec-83

Source: rpdata.com.au NSW VIC QLD SA WA

80,000

60,000

40,000

20,000

0

Net

Ove

rsea

s M

igra

tion

Annual Net Overseas Migration by Major States1983 - 2011

Net overseas migration has been increasing, particularly since 2003.

Population growth is exceeding dwelling completions, and this is forecast to continue well into the future.

120,000

140,000

160,000

180,000

100,000

80,000

60,000

40,000

20,000

0.0

Population and Number of Dwellings in Melbourne LGA2006-2031

2026 2028 2030202420222016 2018 202020142012201020082006

Total Population DwellingsSource: City of Melbourne

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 6

Source: M3Property, ABS

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0%

Metro & Inner Melbourne: Residental Vacancy Rates2005 - 2012

Mar

05

Jun

05

Sep

05

Dec

05

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

JUn

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Sep

10

Dec

10

Mar

10

Jun

10

Sep

11

Dec

11

Mar

11

Jun

11

Mar

12

Jun

12

Vac

ancy

Metro Melb Houses Inner Houses

Source: M3Property, ABS

$1,000,000

$950,000

$850,000

$800,000

$750,000

$700,000

$650,000

$600,000

$550,000

$500,000

$450,000

$400,000

$350,000

$300,000

Metro & Inner Melbourne: Median House Prices

Jul 0

7

Dec

07

Mar

08

Mar

07

Jul 0

6

Dec

06

Dec

05

Mar

06

Jul 0

8

Dec

08

Mar

09

Jul 0

9

Dec

09

Mar

10

Jul 1

0

Dec

10

Mar

11

Jul 1

1

Dec

11

Mar

12

Jul 1

2

2005 - 2012

Med

ian

Pric

e

Metro Melb Houses Inner Houses

The inner city region of Melbourne has consistently outperformed outer suburbs in terms of capital growth.

Rental vacancy rates are very low by comparison to historical levels, supporting rental income growth.

MELBOURNE METRO

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE7

CAPITAL GROWTH

Melbourne

Jan-11Jul-09Jan-08Aug-06Feb-05Aug-03=100Mar-02

Australia

Adelaide

Sydney Brisbane

Canberra

Perth Hobart

Darwin

250

200

150

100

50

0

House Price Index of Eight Australian Capital Cities2002-2011

Source: ABS

Melbourne house prices have grown consistently over the past decade, even during the post-GFC period.

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

Med

ian

Pric

es

Melbourne Median House and Apartment Prices2002 - 2012

HouseUnits and ApartmentsSource: REIV

Jun

'02

Dec

'02

Jun

'03

Dec

'03

Jun

'04

Dec

'04

Jun

'05

Dec

'05

Jun

'06

Dec

'06

Jun

'07

Dec

'07

Jun

'08

Dec

'08

Jun

'09

Dec

'09

Jun

'10

Dec

'10

Jun

'11

Dec

'11

Jun

'12

Median house and apartment prices in Melbourne have grown substantially over the past decade.

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 8

Num

ber

of V

acan

cies

14,000 7%

6%

5%

4%

3%

0

1%

2%

6,000

4,000

2,000

12,000

10,000

8,000

0

Melbourne Residential Vacancy Rates2007 - 2012

Jun 2012Jan 2012Jul 2011Jan 2010 Jul 2010 Jan 2011Jul 2009Jan 2009Jul 2008Jan 2008Jul 2007

Number of Vacancies Vacancy RateSource: SQM Research

In comparison with the Sydney and Brisbane markets, the Melbourne rental market has averaged a higher annual growth rate of over 8% in the last five years.

In contrast to media hype, Melbourne vacancies have been remained low and relatively constant near the long term average of 3%.

Source: SQM Research, ABS

Gro

wth

Per

Ann

um

14%

12%

10%

8%

6%

4%

2%

0

Melbourne Rental Growth1996 - 2011

NationalCanberra Sydney DarwinBrisbanePerthAdelaide

1996-2001 2001-2006 2006-2011

MelbourneHobart

RENTAL YIELD

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE9

Ann

ual A

part

men

t Com

plet

ions

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100.000

Australian Population Growth vs Growing Completions1976 - 2010

88 90 92 94 96 98 00 02 04 06 08 10868480 827876

Annual Population GainAnnual Dwelling CompletionsSource: ABS

400,000

160,000

120,000

240,000

200,000

320,000

360,000

280,000

80,000

40,000

0

-40,000

-80.000

Australian Housing Market Balance1986 - 2015

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0807 10 11 12 13 1409 15919088 898786

CompletionsHouse Surplus/Shortage Underlying DemandSource: ABS

National population growth has accelerated and this has not been met by higher dwelling completions, creating an undersupply.

The national housing shortage is expected to reach over 600,000 houses by 2030.

NATIONAL SUPPLY SHORTAGE

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 10

Contrary to market commentary, the supply of new dwellings is expected to decline as dwelling approvals has declined substantially in 2012.

Contrary to media hype, the actual number of apartments under construction is decreasing from 2012 and expected to be below the long-run average by 2014.

MELBOURNE SUPPLY SHORTAGE

Source: ABS

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Melbourne Total Dwellings Approvals vs Highrise Approvals2000 - 2012

Num

ber

of D

wel

ling

Uni

ts

HighriseTotal

Source: City of Melbourne

Ann

ual A

part

men

t Com

plet

ions

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Inner Melbourne Apartment Supply2002-2014

2014 201320122008 2009 2010 2011200720062004 200520032002

Completed Long-term Average Under Construction Mooted

Forecast

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 11

MARKET OUTLOOK

The market has been subdued over the last 12 months, with slight price declines across houses and units. The market appears to have bottomed - the peak-to-trough fall of 5.8% with 2.3% price increase over the last two months.

We consider this primarily a ‘crisis of confidence’ as the fundamentals and outlook remain strong.

Rents continue to grow (4.2% over the last 12 months) and vacancy rates remain relatively low at 3.5%.

Forecast supply is expected to decline from 2013 to well below the long run average. The reality is in stark contrasts to media commentary which suggests a sustained oversupply.

The Melbourne economy remains robust with the last reported (June 2012) year-on-year GDP growth rate at 2.3% and unemployment rate at 4.1%.

Population growth remains very high and is forecast to continue, which means strong demand for new housing.

We all know property is a long-term investment. So, given the positive long-term outlook of the Melbourne market, the astute investor is recommended to look beyond the ‘market beat-ups’ and invest for the long-term.

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE 12

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