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Outlook for Australian

Property Markets 2010-2012

Perth



Perth residential

Population growth expected to remain at above

average levels through to 2012

-10,000

0

10,000

20,000

30,000

40,000

50,000

Natural increase

International migration

Interstate migration

• Annual population growth in WA has been

growing at above the long-term average of

2.0% since mid 2006. Population growth of

3.0% in the year to June 2009 was the

strongest recorded growth since 1982.

• International migration remains the driver of

WA’s population growth, increasing by a

23.4% annually, or some 42,800 people.

• While natural population levels remain high at

18,073 people annually, the rate of growth

has slowed.

• Net interstate migration numbers continue to

grow annually, however the rate of growth

has also slowed. A net 4,825 interstate

people moved to WA, an annual rise of 0.4%.

• Access Economics are forecasting for

population growth to remain at above average

levels over the forecast period. International

migration is likely to remain the driver.

Source: ABS

Analysis: Westpac Property

Number of people

Annual population growth – WA

Owner occupier demand is up on 2008 levels

however began to slow over Q4 2009…

3 month rolling totals - housing

finance for owner occupiers - WA

Source: ABS


• Overall owner occupier demand levels have

improved over the year, increasing by some

22.1%. Demand to purchase or build a new

dwelling was the driver, which increased by

55.5% annually.

• Demand to purchase an existing home also

improved, albeit to a lesser extent than new

homes, growing by 12.4% annually.

• Owner occupier demand was largely driven

by first home buyers (FHBs) for the most

part of 2009. However, the number of FHB

approved for housing finance dipped in Q4,

falling by 9.0% as the FHB boost was

phased out.

• Non FHB demand stabilised over Q4, with

growth of just 0.4% recorded. However,

overall demand fell by 2.8% over Q4. Total

owner occupier demand (FHB and non

FHB) is likely to stabilise over 2010 as

interest rates rise and affordability issues

mount.

Existing

-

1,000

2,000

3,000

4,000

5,000

6,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Existing Dwellings

New Dwellings

New and Construct

Whilst investor demand held up over Q4 2009

and is likely to underpin demand into 2010

• Unlike owner occupier demand, annual

investor demand has not improved on

2008 levels. Price adjusted investor

finance for 2009 is 4.0% lower than a

year ago.

• Investor demand was at its weakest over

1H 2009 at -10.3%, which is when owner

occupier demand began to recover.

• A notable pickup occurred over 2H 2009

when investor demand increased by

some 13.0%. Whilst total owner occupier

demand fell over Q4 2009, investor

demand held up, increasing by 0.5%,

despite three interest rate rises.

• Demand in 1H 2010 is likely to be held

up by investors, however as rental

growth slows and interest rates rise

further, demand is likely to stabilise from

mid 2010.

Source: ABS


Price adjusted 3-month rolling total

investor finance - WA

Price adjusted

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Investor Finance

Despite improvement in demand and high

population growth, approvals remain weak

-

1,000

2,000

3,000

4,000

5,000

6,000 Houses

Other dwellings

• Despite continued strong population growth, total

dwelling approvals for 2009 were lower than 2008

by 5.8%. Weak approvals for units drove the

overall decline. Unit approvals for 2009 were 51%

lower than a year ago while housing approvals

are up by 8.7%.

• Population growth of some 65,704 in the year to

June 2009 generated a need for 26,282 new

dwellings at 2.5 persons per dwelling using

Census 2006 data.

• Dwelling approvals of 19,938 in the year to

December 2009, with a 95% conversion rate,

would supply some 18,941 dwellings. This leaves

WA undersupplied by some 7,341 dwellings.

• Supply levels have however seen an

improvement over 2H 2009. Total dwelling

approvals over 2H 2009 increased by 16.9%,

driven by housing approvals. Approvals are

unlikely to pick-up to levels required to satisfy

population growth over the forecast period.

Source: ABS


3 month rolling houses and other

dwellings approvals – WA

Number

Vacancy increase further over 2009 despite the

under supply of dwellings

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

$0

$50

$100

$150

$200

$250

$300

$350

$400

Rent

Vacancy rate

• Despite dwelling approvals not matching the

demand generated by population growth, Perth’s

vacancy rate increased 220bps in the year to

September 2009, to 4.8%

• On a quarterly basis, vacancy increased by

130bps. Perth’s vacancy rate is currently above

its 3.3% long-term average and is the highest

rate recorded since Q41993.

• The increase in the vacancy could be as a result

of tenants moving into first time ownership as a

result of low interest rates. This is likely to

reverse in 2010 as ownership becomes less

affordable and renting more attractive.

• Annually rents have increased by 2.9%, however

most of this growth occurred in Q4 2008. Rents

remained fairly stable between Q1 and Q3 2009.

• As renting becomes more attractive over 2010

due to rising interest rates, the potential for rents

to increase will occur, albeit at a minimal rate.

Source: REIA – Q3 2009

Rent per week Vacancy rate

Median other dwellings rent and

vacancy rates - WA

Rising prices cause affordability to decline over

Q4

20

25

30

35

40

45

50

55

60

65

HLAI

Long term average

• Affordability deteriorated over Q3 2009

as a result of the proportion of family

income to meet monthly loan

repayments increased to 26.4% from

26.0%.

• Affordability is likely to have deteriorated

further over Q4 2009, at a quicker pace

than what occurred in Q3. Rising

interest rates and continued price

growth is to have been the driver of

weaker affordability over Q4.

• With the cash rate forecast to increase

from a current 3.75% to 4.50% by the

end of 2010 coupled with continued

price growth in 1H 2010, affordability is

set to fall further. We do not however

anticipate affordability to reach the lows

of 2007/08.

Affordability index

Home loan affordability against long

term average - WA

Source: REIA


Forecast

Median unit prices reach record high in Q3

2009; house prices not far behind

• Median house prices performed better than we

had expected, increasing by 5.5% in the year

to September 2009. Quarterly, house prices

grew by 2.2% in Q3 with the ABS suggesting

growth continued into Q4 at 5.7%.

• Perth’s median house price is currently sitting

just 2.1% below the peak of Q4 2007. Should

the ABS suggested growth of 5.7% have

occurred in REIWA figures for Q4 2009,

Perth’s house prices will reach record levels.

• The median price for other dwellings reached a

record high in Q3 2009 after increasing by

7.8% annually.

• The current momentum is likely to continue

over early 2010 as interest rates remain at low

levels. We do however expect prices to

stabilise around mid year as interest rates rise

and affordability deteriorates further. However,

a correction in prices over 2H 2010 should not

be ruled should the Q4 rate of growth be

maintained.Raw data: REIA


Median residential prices - Perth

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Median other dwelling price

Median house price

Price ($’000s)

Gross yields fall over 2009 as price growth

outstrips income growth

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.1%

17.1%

19.1%

Gross yield

Mortgage rate

Forecast

• Gross investment yields fell by 30bps in

the year to September 2009 to 4.7%.

Higher growth in unit prices versus the

growth in unit rents was behind the fall.

• With price growth forecast to have

continued over Q4 2009 and rental

growth to have been weak, yields are

expected to have fallen to around 4.4%

by the end of 2009.

• Yields are forecast to remain around

4.4% for the most part of 2010 as rents

and prices grow at similar levels

overall.

Gross residential yields against the

mortgage rate

Source: REIA

Analysis and Forecasts: Westpac Property

Yield



Perth offices

CBD supply to exceed demand resulting in a

peak vacancy of 15.4% by the end of 2012

• Vacancy in Perth’s CBD increased from1.3% a year ago to 8.3% by year’s end,close to our forecast of 8.5%. Thecompletion of some 85,336m2 came atthe worst of timing over 2009, whendemand was negative at 17,461m2.

• Supply this year is forecast to be evenhigher than 2009, as 144,140m2

completes. Although it should be notedthat recent closure of Raine Square(42,500m2), although expected torestart and complete in 2010, may slipinto 2011. However, it will have littleimpact on our peak vacancy forecast.

• Expectations are for a recovery indemand however, with 10.5% supplybeing added in 2010, demand isunlikely to match supply.

• Vacancy is set to increase to 13.6% byyear end, before rising further to 14.0%in 2011. Vacancy is expected to peakin 2012 at 15.4%.Source: Historical data: PCA OMR – January 2010

Forecasts: Westpac Property

Net absorption, net supply and

vacancy – Perth CBD

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-100,000

-50,000

0

50,000

100,000

150,000

200,000

Net absorption

Net supply

Vacancy rate

Forecast

Vacancy rateSquare metres

-10%

-5%

0%

5%

10%

15%

20%

25%

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000Net absorption

Net supply

Vacancy rate

Forecast

West Perth vacancy to peak at 8.4% in 2010

before falling to 4.3% by the end of 2012

• Demand over 2009 was not as weak as we

had anticipated which meant our forecast

vacancy of 8.0% by the end of 2009 did not

eventuate. Instead, vacancy increased from

1.9% a year ago to 6.1% by late 2009.

• Supply was high in 2009 as 21,254m2

completed. This came at a time when

demand was negative at 2,737m2, the

second consecutive year of negative

demand.

• Supply is forecast to slow over the forecast

period with only 20,540m2 currently under

construction. Only 1 project of 6,800m2 has

DA approval, however it has been put on

hold.

• Demand is forecast to turn positive over

2010 although will not exceed supply. As a

result, we expect vacancy will peak in 2010

at 8.4% before falling to 7.3% in 2011 and

4.3% in 2012.

Source: Historical data: PCA OMR - January 2010

Forecasts: Westpac Property

Net absorption, net supply and

vacancy – West Perth CBD

Square metres Vacancy rate

Rents fall by 29.0% in prime and 37.5% in

secondary over 2009, further falls expected

Raw Data: CB Richard Ellis PTY Ltd

Analysis and Forecasts: Westpac Property

Rents ($)

Net effective rents – Perth CBD

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Prime CBD

Secondary CBD

Forecast

• Net effective rents fell close to levels wehad forecast over 2009. Prime CBD rentsdeclined by 29.0% over the year whilesecondary rents fell by 37.5%.

• We had expected that a jump in incentivesto around 20% to 25% would have beenbehind the falls in rents. This was not thecase. While incentives did increase frombeing non existent to 10% in Q2 2009, itwas the decline in face rents that drove thesignificant falls.

• We continue to believe that incentives willreach up to 20% in prime and secondarygrades. This, along with continued, butminor, falls in face rents will ensure effectiverents decline further over 2010 by around12-14%.

• This would see effective rents down by upto 37.5% in prime and 46.0% in secondary,peak to trough. This is below the 50% to60% peak to trough declines we wereexpecting a year ago.

The easing cycle appears to be over – yields

expected to stabilise over 2010

• Yields continued to ease over 2009, however

the rate of easing has slowed significantly in

comparison to 2008. Office yields in Perth

are now all above their 10-year averages by

between 40bps in West Perth and 155bps in

secondary CBD.

• Over 2009, prime CBD yields eased by

55bps whilst secondary CBD eased by

50bps and West Perth yields by 12bps. The

majority of easing occurred in Q1 2009.

• Yields appear to have reached their peak,

with secondary CBD and West Perth yields

stabilising from Q2 2009. Interestingly, prime

CBD yields firmed over Q4 2009 by 12bps

however this appears to be out of line.

• Westpac Property are of the view that as

income levels continue to decline and

vacancy increases, yields are unlikely to firm

in 2010. Yields are expected to remain

stable over the year.

Source: CB Richard Ellis & RBA

Office yields and 10 year bond rate

– Perth CBD

Yield

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

Dec-07

Current (Dec 2009)

10-year average

Peak to trough value falls of between 36%

and 46% likely in Perth’s CBD

• With yields continuing to ease over 2009

and rentals falling significantly from the

peaks of late 2008, values have

declined substantially in the CBD and

West Perth markets.

• Values have so far fallen by 26.0% in

prime CBD and 35.0% in secondary

CBD since peaking in late 2008.

• Values in West Perth have so far fallen

by around 27.0% since peaking in Q3

2008.

• With rents forecast to decline further

over 2010, peak to trough value falls of

around 36% to 46% in Perth’s CBD are

likely.

• West Perth is likely to see further falls in

value over 2010, but not the extent of

the CBD.

Source: CB Richard Ellis

Capital Values – Perth CBD and West

Perth

Values ($/m2)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

CBD Prime

CBD Secondary

West Perth



Perth retail

Retail sales to jump from 2H 2011, driven by

continued strong population growth

• Quarterly retail sales in WA were weak

in Q2 and Q3 2009, growing at 0.9%

and -0.4% respectively, well below the

1.8% average. Q4 2009 lifted, but

remained below average, growing at

1% over Q3.

• Annually, retail sales are forecast by

Access Economics to continue to grow

at below trend levels over 2010 before

picking up to above trend from 2H

2011.

• It appears as though population growth

is a major driver behind the jump in

retail sales from 2011. On a per capita

basis, retail sales are actually forecast

to remain fairly stable from 2010 to

2012.

Source: ABS & Access Economics


Retail sales growth annual change -

WA

Retail sales growth

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Nominal retail sales Real retail sales

Forecast

Retail supply levels low in 2010 however

potential supply levels need to be watched

0

50,000

100,000

150,000

200,000

250,000 Mooted

DA Approved

Under Construction

Complete

• Supply levels fell significantly over 2009, with just

72,201m2 completing during the year. This is

approximately 60% lower than a year earlier. The

supply was evenly spread across centre types.

• Supply under construction has increased slightly

since mid 2009 although levels are some 43%

lower than a year ago. Supply under construction

for bulky goods has fallen substantially after an

influx of supply in 2007 and 2008.

• Overall supply levels for 2010 is not of any

concern. However, mooted projects have risen by

57% since mid 2009 as projects were placed on

hold during the economic uncertainty

• With weak sales growth forecast for 2010, new

starts are unlikely to be of a major concern.

However, as sales growth lifts from 2011, the

level of potential supply will need to be watched a

confidence grows. In particular bulky goods

which has some 181,661m2 in the early feasibility

stage or on hold.



Square metres

Retail supply 2009 to 2011 - Perth

Retail rents recover in 2H09 however strong

growth unlikely to occur until 2011

• With the exception of regional centres, retail net

effective rents declined over 2009 by between

6.2% in neighbourhood centres and 8.4% in

Prime CBD centres.

• Rental declines occurred in 1H 2009, when

economic confidence was at its weakest. Rents

have since begun to recover through stabilisation

or minimal growth in 2H 2009. Bulky Goods have

however continued to decline over 2H 2009, a

likely result of excess supply.

• Although retail sales are expected to continue to

grow, they are forecast to grow at below average

levels. This would more likely result in rents

remaining stable over 2010. However low supply

levels may deliver limited growth in the larger

centres, should they continue to capture greater

market share.

• Growth should pick up from 2011 as sales revert

to above average levels, although if supply

increases faster than expected it may put a cap

on the extent of growth achieved.Source: CB Richard Ellis


Growth

Retail net effective rental growth

– Perth

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

1H 2008 2H 2008 1H 2009 2H 2009

Prime CBD

Regional

Sub regional

Neighbourhood

Bulky Goods

Yields appear to be around right levels now

however risk premium to narrow over 2010

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Dec-07

Current (Dec 2009)

10-year average

• Annually, yields eased by between 38bps

in regionals and 75bps in CBD prime and

neighbourhood centres. While yields

eased in Q3 2009 by between 9bps in sub

regionals and 19bps in neighbourhood

centres, they remained stable in Q4.

• Since the market peak, yields have

increased by between 80bps in regionals

and 175bps in neighbourhood centres,

reverting back to around 2005/06 levels.

• Despite the amount of easing, which

appears in-line with national easing

levels, Perth yields continue to sit below

their 10-year averages. While this would

generally indicate yields need to ease

further, it is more likely that increased

investor demand over the year will ensure

yields remain around current levels.

Source: CBRE & RBA


Retail shopping centre yields - Perth

Yield (%)



Perth industrial

Industrial demand indicators rebound faster

then anticipated over 2H 2009…

• GSP rebounded faster than anticipated,

growing at above average levels over 2H 2009.

Despite the rebound, GSP for 2009 was the

weakest on record at -2.9%. Access Economics

expects the rebound to continue over 1H 2010,

bringing annual GSP to above long term

average levels at 5.6%.

• While not negative, consumption growth rates

were also at their weakest on record in 2009, at

0.3%. Consumption is forecast to remain weak

over 1H 2010 before growing at around long

term average levels from 2H 2010.

• Industrial production was weak for the most

part of 2009 before picking up to around long

term average levels in Q4.

• With demand from China and GSP having

recovered, the need for industrial property

should improve over 2010.

Source: Access Economics, Q4 2009


State economy indicators - WA

Annual change (%)

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%GSP

Private consumption

Industrial production

Forecast

Which means vacancy may fall as supply levels

drop over 2010

• Industrial supply in Perth remained steady in

2009 in comparison to the previous year, with

175,024m2 completing. The majority of this

supply came online in 1H 2009.

• Expected supply levels in 2010 will however

be significantly lower as only 28,426m2 of

industrial space is currently under construction

and a further 15,215m2 has DA Approval. The

significant falls in activity is backed by ABS

data, which suggests a 39% drop in work

commenced in comparison to a year ago.

• With demand expected to improve over 2010

and supply to remain limited, vacancy rates

are likely to decrease. We do however

suggest a watch is maintained on Unit

Estates, particularly should the major

development in Hazelmere, Perth North

(120,000m2 development, currently in early

planning) commence and not be staged.

Source: ABS


Value

Annual industrial construction values -

WA

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

Work Completed

Work Commenced

Improving demand and low supply should allow

rents to increase from 2H 2010

• Overall net effective rents fell over 2009 by15.4% in Perth, with the majority of declineoccurring in Q2. Despite rents continuing tofall in Q4 2009, the rate of decline on aquarterly basis is slowing.

• Rents are now 14-16% below the peaks ofmid 2008. Considering rents more thandoubled in the four years to mid 2008, Perth’sindustrial market has experienced a limitedcorrection in 2009. Rents are now back toaround mid 2007 levels.

• With demand indicators suggesting the needfor industrial property should improve,coupled with a low supply pipeline, rents areunlikely to continue to fall over 2010. WestpacProperty is of the view that rents are likely tostabilise over 1H 2010 with growth to occurfrom mid 2010 as demand picks up andvacancy levels fall. Growth levels are nothowever expected to be as strong as whatoccurred between 2004 and 2008.


Industrial Net Effective Rents - Perth

Rent ($/m2)

$0

$20

$40

$60

$80

$100

$120

$140

Warehouse A

Warehouse B

Prime yields to stabilise however secondary

yields may encounter further pressure

Industrial yields continued to ease over Q4

2009, however the pace of easing has slowed

significantly. A grade warehouse eased by

55bps over 2009 while B grade eased by

42bps.

Since peaking in Q4 2007, yields have

increased by 169bps in secondary and 205bps

in prime. Prime warehouse yields are amongst

the highest nationally, and are now sitting

above their 10-year average by around 15bps.

Secondary warehouse yields sit 60bps below

their 10-year average and nationally appear too

low.

Further pressure, albeit minimal, is likely in the

secondary market in order to bring yields in line

with national levels.

Prime yields are likely to remain stable over

2010, however increased investor appetite due

to the high yield may cause some firming to

occur late 2010 or early 2011.

Source: CB Richard Ellis & RBA


Industrial warehouse yields - Perth

Yield

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Warehouse A

Warehouse B

10-year Bond

Prime values likely to stabilise while secondary

remains under pressure in early 2010

• Industrial capital values in Perth fell on

average by between 17.5% in secondary

grades and 20% in prime grades over 2009.

While most of the weakness occurred in 1H

2009, values continued to fall in 2H 2009,

albeit at a slower pace.

• After growing at unsustainable rates (by

140% between 2004 and 2008), values

peaked in 1H 2008. Since then, values have

fallen by up to 25% in secondary and 30% in

prime. Values are now back to early 2007

levels

• Prime values are likely to enter a period of

stabilisation as rents and yields remain

around current levels through to mid 2010.

While likely to be minimal, growth should

occur once rents begin to rise in 2H 2010.

• Secondary values may see further downward

pressure in 1H 2010 as yields continue to

ease . Further falls are likely to be minimal.


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Warehouse A

Warehouse B

Industrial capital values – Perth

Values ($/m2)

Land values begin to stabilise

• Industrial land values fell in Perth by

between 4.7% in the North East to

20.8% in the North over 2009. The

majority of weakness occurred in 1H

2009.

• Values began to stabilise in Q4 2009

in the East and North East while the

North and South recorded further falls

of 4.4% and 4.0%, respectively.

• Since the peak, land values have

declined by between 15.2% in the

North East and 29.1% in the East.

• Land values are expected to remain

stable over 2010, which may begin to

attract developers to start building

again from 2011.


$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

East Perth

South Perth

North Perth

North East Perth

Average industrial land values - Perth

0.25ha sites

Value ($/m2)

Disclaimer

Past performance is not a reliable indicator of future performance. The forecasts given in this document are

predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts

are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks

and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Information current as at

February 2010. This information has been prepared without taking account of your objectives, financial situation or

needs. Because of this you should, before acting on this information, consider its appropriateness, having regard

to your objectives, financial situation or needs. The information may contain material provided directly by third

parties, and while such material is published with permission, Westpac Banking Corporation (ABN 33 007 457

141) ("Westpac") accepts no responsibility for the accuracy or completeness of any such material. Except where

contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to

change without notice and Westpac is under no obligation to update the information or correct any inaccuracy

which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of

investment business in the United Kingdom by the Financial Services Authority. If you wish to be removed from

our e-mail mailing list please send an e-mail to [email protected]. © 2010 Westpac Banking

Corporation.

CB Richard Ellis Ltd (CBRE) does not warrant the accuracy or completeness of the information in this publication,

including any information sourced from CBRE, and CBRE accepts no, and disclaims all, liability for any loss or

damage whether occasioned by reliance on such information or otherwise.

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