The Australian economy is facing overseas and domestic headwinds that will slow economic growth in 2019 and adversely impact property markets. But typically there are two sides to every story, and although change can represent a threat to some, others may deem it an advantage.
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CBRE RESEARCH
This report was prepared by the CBRE Asia Pacific 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.
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Economy
Still Growing, But Slowing
The economy performed well in 2018 but headwinds that emerged in the latter part of the year suggest economic growth in 2019 will be lower. The slowdown in residential construction will impact the office and retail sectors downstream, and falling dwelling prices will weigh on consumer confidence.
Economy
STILL GROWING, BUT SLOWING
There was much to like about the Australian economy in 2018. Economic growth accelerated, unemployment moved lower (to 5.0%) and construction activity added to growth, contrasting its 3-year drag post the mining construction boom. But leading indicators point to weaker conditions this year; we forecast growth in the global and local economies will slow in 2019.
A number of bellwethers for the economy are indicating a bias towards slower economic growth in 2019:
- Commodity prices are trending downwards
- The yield curve has flattened
- ASX indices fell in 2018
- Downward pressure on the AUD continues
Additionally, the geopolitical landscape contains uncertainty that could continue to weigh on global economic growth. In Australia we have federal and New South Wales state elections coming up, and globally the US / China trade war and Brexit are denting confidence.
Our forecast is that GDP growth in Australia will decrease from 3.0% in 2018 to 2.4% in 2019. The slowdown will be led from the industrial sector, where growth has already slowed and Ai Group’s performance indicators for construction and manufacturing have moved into ‘contraction’ territory. The industrial sector accounts for roughly one-quarter of the economy but generates downstream activity for white collar and retail sectors.
All residential markets are in decline, in terms of construction activity and/or prices. The correction underway will continue to impact the finance sector, professional services, construction and retail trade; thus the three largest commercial property sectors will also be impacted by the slowdown in the residential sector.
HAVE WE BORROWED TOO MUCH?
One of the biggest risks to the Australian economy is the high level of private debt. Total household debt currently sits at 189% of household disposable income (figure 1), the highest level on record. As residential property values increased rapidly from 2012 to 2017, so too did mortgage borrowing and repayment obligations. Australia’s household debt service ratio – the share of income used to service household debt – is at a historical high and at one of the highest levels globally (figure 2).
High levels of household debt are manageable if interest rates don’t rise or Australia avoids an economic or financial shock. Our view is that the RBA base interest rate will remain on hold at 1.5% until 2021 – there could even be rate cuts in 2019-20. But we’re less certain about Australia avoiding a downturn; hence we expect lower economic growth over the next two years. This will likely see unemployment rise and higher levels of mortgage stress and default. The threat of mortgage stress isn’t new to the economy but has gathered weight in light of recent economic indicators.
THE WEALTH EFFECT IN REVERSE
The stock market declined in value in 2018 and dwelling prices in many markets are currently doing likewise. Diminished wealth will cause Australians to tighten their belts in 2019, especially those at the margins. This bodes poorly for the retail sector and will also cause some Australians to avoid expensive holidays.
STATE ECONOMIES GROW
AND SLOW IN UNISON
Similarly to the acceleration of economic growth in 2018, we expect the slowdown in 2019 will be felt across the country rather than one or two states bearing the brunt.
But despite our view that the rate of economic growth will be 20% lower in 2019, 2.4% still reflects solid growth. Public investment in major infrastructure projects will support the construction industry as the residential sector slows. Most states have sizeable road and rail projects underway, and although South Australia lost its car manufacturing, federal government investment is moving it closer to supplying other types of passengers: sailors, sub-mariners and astronauts.
China’s annual growth (17%) in LNG imports surprised in 2018, and a global LNG shortage post-2022 is possible. There are a number of smaller LNG projects in Western Australia that could receive the green light in 2019-20.
The prospect of a slowing Chinese economy will likely result in more infrastructure spending in China, which will be a boon for Australia’s resource sector. Despite that, China’s growth in consumption and travel will likely slow and will be detrimental to the Australian economy.
Figure 1: Australian household debt to income ratio

Source: RBA, CBRE Research, February 2019
Figure 2: Household debt service ratio

Source: Bank of International Settlements, CBRE Research, February 2019
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Ben Martin-Henry
Associate Director, Head of Capital Markets,
Forecasting and BTR Research
Australia
[email protected]
Office Sector
Continued Growth Ahead
2019 will see the supply pipeline turned back on after being virtually dormant for two years. The number of flexible office centres will continue its strong growth trajectory. Australian corporates surveyed expect to decrease their traditional leased office footprint over the next two years, whilst increasing their use of coworking space.
Office Sector
GROWTH CONVERGENCE
TO CONTINUE
Using growth in effective rents as a measure, Sydney and Melbourne were again the best performing markets in 2018. But separating 2018 from previous years was that Brisbane, Perth and Adelaide recorded effective rental growth for the first time in five years. Momentum of growth will continue in these markets in 2019 whereas growth in Sydney and Melbourne will slow due to increased supply and softer demand amidst the slowing economy.
SMALLER MARKETS TURN TO GROWTH
2018 was the first year since 2011 that five of six capital city CBD office markets recorded prime net effective rent (NER) growth (noting that Canberra rents were static in 2018). Growth in Brisbane, Perth and Adelaide was modest but marked a turnaround nonetheless, and given that it occurred in H2 2018 we deem it positive momentum going into 2019.
Sydney CBD prime NER growth of 14.6% in 2018 outperformed all other markets. Since 2014 prime NERs have grown 78%, and secondary, 111%. These extraordinary rates of growth have made the CBD market relatively expensive compared to Sydney’s non-CBD markets; we expect this will influence leasing decisions over coming years, with some CBD tenants relocating to North Sydney, Parramatta or Macquarie Park, which will all receive a boost in new supply in 2019-20.
We forecast a greater rate of convergence in effective rent growth (figure 3) between markets as the effects of a slowing economy and a new supply cycle begin to temper the pace of rental growth in Sydney and Melbourne. A slowing economy will impact all cities but we expect the impact to be less pronounced outside of Sydney and Melbourne whilst the somewhat countercyclical resource markets of Adelaide, Brisbane and Perth continue to improve, especially in prime office.
The federal election in H1 2019 will have implications for tenant demand in Canberra. The Australian Labor Party (currently in opposition) generally prefers a bigger public sector, and if they win the election we expect ACT white collar employment will grow at a faster clip over the medium-term outlook period.
SUPPLY CYCLE RAMPING UP
Net supply across the 15 office markets we cover was negative 121,000sqm and 18,000sqm in 2017 and 2018 respectively. This shrinking of the market has been most pronounced in Sydney which (across six markets) shrunk by 143,000sqm over the past two years, contributing to vacancy being well below historical averages.
But over the next few years the national supply pipeline is ramping up: net supply over 2019-20 will total 744,000sqm. The Melbourne CBD will account for 54% (399,000sqm) of growth, and in conjunction with our view of slower economic growth and softer tenant demand for 2019-20, we expect vacancy will rise and net effective rents will start to fall (figure 3). We forecast Melbourne CBD vacancy will bottom at 3.1% in H1 2019 and then peak at 9.3% in 2022.
Sydney markets will see a combined 285,000sqm of net supply over 2019-20, fully accounted for by North Sydney, Parramatta and Macquarie Park. Sydney CBD will see new supply of 123,000sqm but stock withdrawals will result in the market shrinking in size by 17,000sqm. The CBD will remain supply constrained over the near term.
Stock withdrawals will offset the modest levels of supply in Brisbane and Canberra over 2019-20; thus we don’t expect upward pressure on vacancy. Likewise for Perth, which will see no new supply over the next two years. The Precinct GPO building in Adelaide will be completed in 2019 but supply is muted in following years.
CAPITAL MARKETS WILL REMAIN ACTIVE;
PRICE GROWTH TO CONTINUE
$16.6 billion of office sales in 2018 was slightly lower (6%) than in 2017 but capital markets continue the good run that commenced in 2013. The trend of a declining number of sales over the past two years will likely persist in 2019.
REIT share prices fell in 2019 (along with the broader ASX). Coinciding with rising property values, this resulted in many REITs trading at discounts to net asset value (NAV). If this persists we expect more corporate acquisitions in 2019.
The headline corporate deal in 2018 was Oxford Properties Group, a Canadian pension fund, acquiring the Investa Office Fund of 20 office assets across Sydney, Melbourne, Brisbane and Perth for a total sale price of ~$3.4 billion. We expect that some assets within this portfolio will be sold separately in 2019.
Figure 3: Australia CBD office prime net effective rental growth

Source: CBRE Research, February 2019
The volume of sales in 2019 will depend on the number of landlords willing to divest. We don’t envisage a dearth of buyers. At the broader APAC level, many Australian office markets still offer superior yield spreads and prospects for rental growth over the medium-term outlook period; consequently, we expect buyer interest will remain strong from overseas investors.
Yields continued to compress in 2018 and most markets are now at historical lows. We expect further compression in all office markets in 2019, ranging from 10bps to 30bps. Perth, Canberra and the Sydney markets will sit at the upper end of those ranges.
EXPANSION OF FLEXIBLE WORKSPACE TO CONTINUE
The number of flexible office centres (coworking, serviced offices, meeting/event space or incubators) has more than tripled in Australia over the past five years, with over 550 centres now operating. This rapid growth has been amplified by the rise of coworking centres, not only in Australia but globally. While coworking initially evolved as a solution for start-up businesses, entrepreneurs and freelancers, it has rapidly gained traction with corporate users, with WeWork reporting ~25% of their memberships are held by corporates.
In our 2018 report – CBRE Pacific Corporate Coworking Survey: The Future is Flexible – occupier demand for flexibility was identified as the top driver for using coworking space. Some 58% of Australian corporates surveyed said they expect to decrease their traditional leased office footprint over the next two years, with 55% expecting to increase their use of coworking space. This was even more pronounced amongst larger corporates with portfolios in excess of 30,000sqm: 75% plan to reduce their leased office footprint and 100% plan to take on more coworking space for their staff.
5G IS ALMOST HERE
Telco networks around the globe will roll out the 5G network in 2019. 5G has the potential to transfer data 20 times faster than 4G and will be an enabler of new technologies that will make buildings smarter and change workplace practices. IoT implementations within buildings will increase, mobile communication latency will become virtually non-existent, and mobile connectivity will improve. As with previous network upgrades, the possibilities visible upon network activation prove just the tip of the iceberg.
BUSINESS SECTOR SLOWDOWN
The deteriorating business climate will see corporates increasingly focus on cost in 2019. Following labour costs, rent represents one of the biggest costs to business, so opportunities to reduce footprint and access more affordable flexible space on an ‘as needed’ basis (particularly meeting/event space) will be more appealing. The implementation of IFRS 16, the new leases accounting standard, from January 2019 will also likely increase the demand for coworking space because now most leases need to be reported on balance sheet.
OUTLOOK
The deteriorating business climate will see corporates increasingly focus on cost in 2019. Some 58% of Australian corporates intend to decrease their traditional leased office footprint over the next two years. |
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Felice Spark
Associate Director, Head of Office Research
Australia
[email protected]
Retail Sector
Survive or Thrive
Retailers will increasingly employ omnichannel strategies in order to capture a slice of the ongoing growth in online retail. The number of major retailer defaults has been on the rise in Australia and we expect this will continue, given the economic headwinds that will impact consumers in 2019.
Retail Sector
SURVIVE OR THRIVE?
The retail environment is changing dramatically, putting pressure on retailers and transforming the way consumers shop and spend money. Landlords and tenants continue to adapt in order to remain relevant and capture trade from consumers whose spending is under pressure from increasing costs of living and deteriorating balance sheets. In a changing retail environment, will retailers merely survive or will they thrive?
Australia’s retail spend improved in 2018, averaging 3.0% growth compared to 2.7% in 2017. But these results are well below the 5-year average of 3.9% and consequently retailers are rightly feeling current conditions are challenging – conditions that will persist in 2019-20.
Of the six broad retail categories the biggest improver in 2018 was clothing, footwear and accessories – improvement that echoes the fact consumer confidence reached a 4-year high in mid-2018. Momentum in sales looks positive going into 2019, but consumer confidence has slipped and this will likely dampen growth. Cafes, restaurants and takeaway food maintained consistent growth as consumers continue to spend healthily on leisure and experience-based retail such as dining out. However, spending in this category is slowing and will likely continue unless consumer confidence rebounds.
Going into 2019 – and compounded by the fact conditions for retailers will likely deteriorate – innovation, customer experience and omnichannel capabilities will remain the key drivers for retailers’ success. The importance of evolving with the structural and cyclical changes of the retail environment will become increasingly evident, both negatively and positively, as successful retailers set themselves apart from those that do not evolve.
CYCLICAL V STRUCTURAL CHANGE
Retail is in the midst of a structural change that is transforming the sector. Online shopping at present accounts for only 9% of Australia’s total retail trade, but this is expected to increase to 12% by 2022, representing an 77% increase in annual volume from $24.4 billion to $43.1 billion. By contrast, traditional retail will grow at a much slower rate.
The closure of major incumbent bricks and mortar retailers has gained pace since 2014, with almost half of those being retailers of mid-range apparel (figure 4). In 2018, 22 major retailers either exited the Australian market or entered voluntary administration, up 38% on 2017. These exits, however, have occurred in conjunction with pure-play online retailers moving into physical stores, supporting the notion that an online-offline model will define the future success of retailers.
Lower growth of in-store turnover and increased demand for omnichannel retail has forced many groups to rationalise store networks, resulting in a two-tier retail market in which prime retail areas retain high quality tenants while secondary areas present greater vacancy risk. This trend will continue in 2019.
To combat losing trade to online retail, shopping centre owners continue to focus on capital improvements aimed at increasing foot traffic. Fresh food, dining and entertainment, community facilities and non-retail spaces such as parks and playgrounds can provide a unique retail experience that can’t be emulated online. As centres increasingly become ‘destinations’ attracting more visitors, overall retail densities will grow. A number of regional shopping centre developments incorporating these concepts are currently underway and scheduled to open in 2019, including Highpoint Shopping Centre, Melbourne; Toombul Shopping Centre, Brisbane and Roselands Shopping Centre, Sydney.
Retailers are investing in omnichannel strategies to drive sales and as operations evolve it will become less insightful to purely compare online and in-store retailing separately. It is estimated that by 2020, 34% of retail sales will be influenced by the web. Investment into supply chain efficiencies is important for retailers to facilitate fast delivery to customers as delivery time expectations become shorter.
SLOWING RESIDENTIAL SECTOR
TO IMPACT LARGE FORMAT SALES
Household goods retail sales grew at around 2% annually in 2017-18. Average annual growth for the preceding three years was 6.2% so the slowdown has been pronounced. The sum of dwelling transfers and completions is generally a good leading indicator of household goods sales (figure 5). This measure peaked in late 2017 and the subsequent decline accelerated in H2 2018; thus we expect weaker trading conditions within large format stores in 2019.
Figure 4: Insolvent retailers 2015 – 2018

Source: ABS, CBRE Research, February 2019
Figure 5: Annual change dwelling transfers & completions v. household goods retailing (6-month lag)

Source: ABS, CBRE Research, February 2019
The slowdown in household goods sales has been driven by furnishings and electrical goods. Offsetting this has been growth in hardware, building and garden supplies, driven by higher levels of renovation and extension activity. This type of activity tends to grow and slow in conjunction with dwelling prices; early signs indicate that this will continue to be the case in 2019 and more households will defer renovation plans.
NEIGHBOURHOOD SHOPPING CENTRE
SUPPLY PICKING UP
At the national level for the retail sector, we expect 2019 will see a similar amount of new supply as was delivered in 2018. The bulk of this supply will comprise neighbourhood centres and large format retail, as former Masters stores continue to be reimagined as Home Consortium lifestyle centres. This trend will continue in 2019 with a total of 312,000sqm of new large format retail space due for completion across Australia. Population growth, especially in east coast markets, is driving the need for neighbourhood shopping centres in urban growth areas and in 2019 there will be 250,000sqm of new neighbourhood space completed, some 50% higher than the amount delivered in 2018.
VALUE AND RENT GROWTH LIMITED
Retail rents across Australia this year are expected to be broadly flat or slightly lower as softer retail turnover growth impacts some retailers’ profitability and their ability to maintain existing operating costs. There is potential for larger rent declines in some markets and retail sub-sectors. Incentives in shopping centres have trended upwards over the past two years. Still, the number of major retailers becoming insolvent has been rising. We may reach a point where face rents decline rather than incentives increase.
Capital city CBD and regional shopping centre yields have reached the peak of the cycle, with no further compression likely in these markets. We expect some yield softening in the sub-regional space due to concerns around income risk in discount department stores and mini-majors. This has contributed to significant sub-regional asset divestment in H2 2018, including Vicinity’s $2 billion portfolio of centres and a large number of off-market opportunities. Large format retail likewise could experience yield softening due to weakness in the housing sector and heightened new supply.
It is expected that 2019 will remain a challenging year in the sub-regional space, as continued pressure on turnover for discount department stores and mini-majors forces a number of groups to exit or downsize to improve retail densities in centres. Centre owners will likely look to repurpose this space into service-based offerings such as gyms, child care, entertainment or residential development: ideas detailed in our 2018 report Sub-regional shopping centres: a case of middle child syndrome?
OUTLOOK
Retailers are investing in omnichannel strategies to drive sales with an estimated 34% of retail sales to be web-influenced by 2020. |
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Kate Bailey
Associate Director, Head of Logistics and Retail Research
Australia
[email protected]
Logistics Sector
Structural Change Driving Growth
Well located industrial areas with land availability constraints will see proposals for multistorey warehouses in 2019. Land prices have grown strongly for inner city locations over recent years, yet industrial demand will continue to grow as last-mile logistics becomes increasingly important for supply chain efficiencies.
Logistics Sector
Australia’s industrial and logistics economy continues to perform strongly, with a number of major infrastructure projects driving growth in the construction sector. The rise of e-commerce is creating structural change, resulting in continued demand and growth in the industrial and logistics sector.
INDUSTRIAL ECONOMY SOLID IN 2018
The industrial and logistics sector has performed well since 2016 with industrial GVA growing solidly before slowing to 0.3% in Q3 2018. Construction has underpinned recent strong performance (figure 6) and can be attributed to significant investment in infrastructure projects, many of which will remain in the construction phase over the next few years or longer, providing continued support to the industrial economy.
Similarly to the rest of the economy, headwinds are intensifying. The Ai Group’s performance indicators for construction and manufacturing have moved into ‘contraction’ territory. The slowdown in the housing sector will impact construction and manufacturing, but there will also be an impact on consumption. Typically when dwelling prices fall households lift their savings rate and reduce consumption. This could occur in 2019 and result in slower growth in the number of goods passing through supply chains.
Figure 6: Contribution to industrial industries Gross Value Add growth

Source: ABS, CBRE Research, February 2019
RENTS GROW AMID SOLID DEMAND
AND LIMITED SUPPLY
Australian super prime rents increased by 2.3% across 2018, primarily driven by growth in Melbourne, Sydney and Adelaide which saw strong demand coupled with limited new supply. Rents in 2019 are expected to grow across all regions. Average Australian super prime rent growth in 2019 is expected to reach 3.1% with Adelaide (5.4%) and Melbourne (4.1%) to have the strongest growth, driven by an extended period of limited new supply and continued growth from the food processing sector.
YIELDS AT RECORD LOWS WITH LIMITED FURTHER COMPRESSION EXPECTED
Yields compressed further in 2018, primarily driven by growth in land values. Super prime yields in Australia average 6.0%, a 23bps compression over 2018. This was largely driven by super prime markets in Sydney and Melbourne which experienced compression of 40bps and 25bps respectively. The Sydney market, which has seen the greatest increase in land values with average 1.6ha lots increasing by 48% over the past three years, saw super prime yields reach a record low of 4.85%. Prime and secondary yields have converged in this market again. We expect limited yield compression across all markets in 2019.
Transaction volumes in 2018 were slightly down in value but the deal count held steady. There remains strong demand for industrial assets. Transaction volumes could increase in 2019 as groups recycle and adjust their portfolios following a period of prolonged yield compression across most asset classes.




DWINDLING SERVICED LAND SUPPLY LEVELS DRIVING SOLID VALUE GROWTH
Strong land take up has seen supply in highly desirable industrial areas become progressively scarce. As supply chain efficiency becomes increasingly important, choosing a location that best suits occupiers’ requirements is the key to success. Half of total supply chain costs come from transport, while just 5% comes from occupancy costs, showing the importance of locating an industrial and logistics asset in an optimum location with good access to suppliers and customers. In many cases, particularly Melbourne and Sydney, this land is located in close proximity to the ports and the city centre. This land is also in demand for competing uses including residential and large format retail development. In 2018 strong demand coupled with dwindling supply saw significant land value growth in these markets, with 1.6ha lot land values in Australia increasing, on average, by 6.3%, driven by exceptionally strong growth in Melbourne (21.9%).
CBRE expects that well located industrial areas with land availability constraints, such as the Port of Melbourne and South Sydney, will see proposals for multistorey warehouses in 2019. Large scale multistorey development currently does not exist in Australia given the relatively cheap and plentiful availability of land, limiting the viability for developers to implement this type of asset.
Land values have now reached a level where multistorey developments will begin to become feasible and CBRE expects them to become a key part of Australia’s industrial and logistics landscape.
E-COMMERCE TO DRIVE NEW SPACE TAKEUP
CBRE has determined that growth in e-commerce will create the requirement of an additional 350,000sqm of new industrial and logistics space in Australia each year until 2022, with much of this space consisting of large distribution centres. Examples of this development in 2018 include the Moorebank distribution centre (42,000sqm) and the Australia Post facility in Chullora (21,700sqm), both in New South Wales.
We expect that over the next three years there will be increased demand for infill development to facilitate fast delivery. Much of this space will be comprised of smaller, secondary grade stock with minimal racking which is able to be filled and emptied several times a day. The main requirement of this space will be proximity to customer base, which will enable faster delivery times and thus cater for more-demanding customer expectations. According to a McKinsey & Company study conducted in 2016, one-quarter of customers surveyed stated they would pay an increased delivery cost to receive same-day delivery.
OUTLOOK
CBRE has determined that e-commerce will create demand of an additional 350,000sqm of new industrial and logistics space in Australia each year until 2022. |
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Kate Bailey
Associate Director, Head of Logistics and Retail Research
Australia
[email protected]
Hotels
Weaker Currency Will Lend Support
With the expectation of a lower Australian dollar in 2019, this will benefit hotel operators by attracting international visitors and dissuading Aussies from travelling abroad. The projected weaker AUD reflects a weaker economy, and that being the case we expect the level of corporate travel will decline in 2019.
Hotels
WEAKER CURRENCY WILL LEND SUPPORT
Hotels in 2019 will benefit from a weaker Australian currency, which will help entice international visitors and encourage locals to stay at home. But locals might stay at home a little more than hoteliers will want: household finances are under pressure and will dampen some Australians’ willingness to travel. A headwind inherent in our forecast of lower economic growth this year is that corporate travel plans may be subdued.
RevPAR GROWTH WAS POSITIVE IN 2018
Australian hotels on average recorded 1.2% RevPAR growth in 2018, a positive result but lower than the 2.8% recorded in 2017. Between states there was a degree of convergence in performance, with those outperforming in 2017 experiencing lower growth in 2018, while most weaker performing markets improved. The Gold Coast was the top performing market, underpinned by hosting the Commonwealth Games in April 2018.
The slightly weaker level of national growth recorded in 2018 was partly driven by a modest decline (~1%) in hotel nights occupied by international visitors; 2018 marked the first year since 2012 that hotel nights occupied by international visitors declined. The 2018 result bucked the trend of strong growth (7% p.a.) over the three preceding years. The impact was felt most in Cairns and Melbourne, with occupancy declining in both cities.
We don’t expect this decline in international visitors to persist in 2019. The Australian currency is ~10% weaker against the US dollar and ~5% against the Chinese yuan than this time last year. Given our economic forecasts, we expect bias towards further AUD depreciation in 2019. Over the past decade, any year with AUD/USD currency depreciation of 10% or more was typically followed by a year of (on average) 5% growth in hotel nights occupied by international visitors; thus we expect more international visitors in 2019. International visitor nights are forecast to grow by 6.2% p.a. over the next three years according to Tourism Research Australia.
Growth in visitors from China over the past decade has been phenomenal and China has displaced the U.K. as Australia’s most valuable market for leisure exports since 2013. China is also Australia’s largest market for education exports, and a lower AUD will strengthen Australia as a choice destination for university studies. There is a positive relationship between leisure tourism and education exports given that overseas’ students also travel domestically during their studies.
A weaker currency will provide the additional benefit to local hoteliers insomuch that a greater number of Australians will travel nationally rather than internationally. In the past ten years, hotel nights occupied by domestic tourists grew by 5% when the AUD fell 15% against the USD. While we expect this relationship will remain in 2019, the impact will be diluted due to household cost pressures.
COST PRESSURES LIMIT DOMESTIC TRAVEL
A weaker currency reflects a relatively weaker economy. Business travel is highly cyclical and reflects changes in business conditions. When business conditions deteriorate, business travel is an expenditure where companies reduce costs. Over the past decade, when economic growth deviated by more than 50 basis points compared to the previous year, it resulted in a significant change to hotel occupancy and the number of nights occupied by corporate travellers (figure 7). If our expectations of GDP falling from 3% in 2018 to 2.4% in 2019 prove correct, hotel nights occupied by corporate travellers is likely to fall.
Cost pressures are also impacting households, which are highly leveraged and watching balance sheets deteriorate with falling house prices, a lower stock market value and anaemic wage growth. The household savings rate has declined to a mere 1% at end-2018 compared to 8% three years ago, with the largest drop occurring over the past 12 months. These factors will likely dampen hotel demand by local tourists.
SOME MARKETS WILL BE AT GREATER RISK OF LOWER REVPAR GROWTH
New supply over the next few years will influence RevPAR growth over the medium-term outlook period. The Hobart hotel market will grow in size by 20% annually over the next three years (figure 8). Higher levels of international visitors in 2019 should benefit the Hobart market; nevertheless, on account of new supply we expect further declines in RevPAR this year.
Figure 7: Impact on hotel nights (driven by corporates) and hotel occupancy when GDP changes by more/less than 50 basis points

Source: ABS, TRA, CBRE Research
Adelaide and Melbourne are also expecting sizable increases in supply (as a proportion of existing stock) from 2019-21, meaning these markets risk recording lower RevPAR growth in 2019 as occupancy is expected to fall and operators feel pressure to reduce room rates.
In Sydney occupancy rates ended the year trending lower and growth in room rates stalled. Pipeline over coming years will likely have limited impact on overall hotel performance because most developments are high-end products and should be well absorbed by the market given there has been limited new supply of such product over the past decade.
Perth has experienced ongoing RevPAR decline since 2012 but the rate of decline moderated in Q4 to the extent it was almost stable. Any further falls will be moderate and we’re expecting stabilisation in 2019.
Queensland markets will experience the least supply growth over coming years which augurs well for RevPAR. Brisbane recorded a 7.2% increase in hotel rooms in 2018; the detrimental effect to RevPAR from this massive increase in supply was partly mitigated by growth in international visitor nights that eclipsed all other capital cities except Hobart. Brisbane’s new hotels will act as a further draw to the city, for tourists and investors.
INVESTOR SENTIMENT ENCOURAGING
Sales volumes of $1.7 billion in 2018 exceeded 2017’s result but still represents a quiet year for hotels compared to previous years. Investors from South East Asia, particularly from Singapore, were the most active in 2018, as Chinese buyers scaled back due to capital restrictions. Queensland saw a large surge in investments in 2018, 12 hotel transactions compared to 3 in 2017. But will the improved sales volume carry forward into 2019?
According to CBRE Hotels’ Global Investors Intentions Survey 2019 (APAC results), investors are aware of the risks to RevPAR growth, yet their confidence and sentiment remains intact for Australian hotel investments. An overwhelming majority of respondents selected Australia as the number one preferred market for 2019 (figure 9). Many stated their intent to invest either the same or more capital into hotel real estate in 2019, compared with 2018. Australia was chosen for its more secure market with high transparency and regulation. Australia also has strong tourism fundamentals, good linkages to Asia and stable economic fundamentals, making it the most preferred investment destination in the region.
Figure 8: Hotel Development Pipeline 2019-2021

Source: CBRE Research, February 2019
Figure 9: Countries targeted for investment in 2019

Source: CBRE Research, February 2019
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Danny Lee
Senior Research Manager, Head of Hotels,
Retirement and Aged Care Research
Australia
[email protected]
Residential Sector
Correction, But How Much?
APRA’s imposed limitations on investor lending are now having significant effects on the residential sector. There are also a number of known unknows that could profoundly impact the residential sector in 2019 such as the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the looming federal election, and any changes in Australia’s overseas migration intake and related policy.
Residential Sector
CORRECTION, BUT HOW MUCH?
While Australia’s largest residential markets, Sydney and Melbourne, are now firmly in a correction phase, the full extent of price adjustment remains uncertain, with several regulatory and political factors muddying the waters as we start 2019. The smaller capital cities didn’t see the same level of price elevation and should deliver better performance in the short term.
HOW LOW WILL PRICES GO?
In 2018 Australia’s largest residential markets, Sydney and Melbourne, moved from an unprecedented growth cycle into a period of correction. Most other capital cities have begun to follow suit, exceptions being Brisbane and Adelaide houses and Melbourne units, all of which are at historically high prices and have upward momentum.
Figure 10 illustrates dwelling price growth from end-2011 to the recent peak – 2017-18 for most markets but 2014 for Perth. Growth in Sydney and Melbourne was extraordinary; consequently, a price correction was inexorable. We forecast falls of 15-20% in Sydney and 12-17% in Melbourne, with prices bottoming in 2019-20.
A surprise to us has been the resilience of Melbourne unit prices, but we expect that to change in 2019 and ultimately unit prices will fall 10% from current levels.
In Brisbane, Perth and Adelaide price corrections will be most severe in unit markets on account of high levels of supply. For Brisbane and Perth we’re expecting that by 2021 prices will be lower than recorded in 2011.
House prices have proven more resilient in Brisbane and Adelaide and are still trending upwards. Queensland is receiving high levels of interstate migration and this will continue to support Brisbane house values.
A YEAR OF KNOWN UNKNOWNS
There are significant uncertainties this year that could profoundly impact the residential sector:
- the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and, more importantly, how banks and other lenders react to these findings in terms of lending policy and therefore credit availability
- the looming federal election, and with a change of government appearing possible, how proposed changes to negative gearing and capital gains tax concessions will impact
- any changes in Australia’s overseas migration intake and related policy
Credit availability
Credit availability has emerged as the biggest headwind impacting Australia’s residential markets. Banks are responding to preliminary findings in the Royal Commission and are imposing more stringent lending standards. The scale of price correction now underway in the Sydney and Melbourne markets has been largely driven by tightening credit availability and the impact on market confidence.
Figure 11 illustrates the impact of APRA macroprudential measures in 2014 and 2017 on residential investor lending. In response to these measures, investor lending as a proportion of total lending has decreased. Additionally, the interest rate spread for investor mortgages over owner-occupier mortgages has increased to historic levels. In December 2015 the lending rate for investor interest only loans was 9bps higher than owner-occupier principal and interest loans. Three years later the spread is 84bps.
Developers are also facing much higher hurdles in obtaining finance from traditional sources. The eventual impacts on site values may prove to be even more significant than headline price correction for built product.
Taxation changes
If the federal election in H1 2019 is won by the Australia Labor Party (currently in opposition), it could result in significant changes to negative gearing and capital gains tax discounts on investment property. Labor’s proposed policy changes will limit negative gearing to new rental dwellings and also halve the capital gains tax discount from 50% to 25%. Negative gearing on existing investments will be ‘grandfathered’, meaning that assets purchased before the new legislation is introduced won’t be affected by the new rules.
Introduction of this proposed legislation could create a significant distortion in the market whereby investors will favour new stock as investment assets at the expense of secondhand property. For residential units, in particular, there could be a structural shift where there exists a significant, perpetual margin between pre-sale prices and re-sale prices. It may reduce transaction volumes on secondary markets because investors will benefit from buying new stock and holding it for a longer period.
Figure 10: Residential price change

Source: REIA, CBRE Research, February 2019
The proposed changes to capital gains and negative gearing legislation are designed to encourage new supply. Given that new supply will be the exclusive domain for negative gearing, this may well encourage new supply and will benefit residential developers.
Overseas migration
Recent years have seen Australia’s net migration intake at record levels, topping 263,000 in 2016-17 before pulling back to 237,000 in 2017-18. A majority of the net intake settle in New South Wales (38% in 2017-18) and Victoria (36% in 2017-18).
Despite lower levels of immigration, media and political rhetoric is increasingly highlighting public discontent over Australia’s migrant intake. Unaffordable housing and transport congestion in Sydney and Melbourne are cited as key reasons why population growth needs to slow.
It is expected that the 2019-20 financial year migrant intake will be reduced from 190,000 to 160,000. If this occurs and proves permanent, 10,000 to 15,000 less new dwellings (predominantly inner-city units) would be required every year. Significant changes in immigration policy would likely be an added drag on markets already facing a period of price correction.
CONSTRUCTION ACTIVITY SLOWING
Nationally, quarterly dwelling commencements reached the second highest level on record in Q1 2018. The record was set in Q1 2016, whereafter the subsequent decline in commencements started to drag on economic growth six months later. The fall in dwelling commencements since Q1 2018 has been sharper than was observed in 2016; thus we expect the drag on economic growth will be larger this time around.
National dwelling completions in Q3 2018 were just shy of the record set in Q4 2016 – three quarters after the record level of commencements in Q1 2016. Using this as a guide, we expect that completions peaked in Q4 2018 and will trend down in 2019.
But some markets will prove more resilient than others. Dwelling approvals and commencement have been relatively robust in Queensland and ACT, suggesting that these residential markets will perform better in terms of maintaining construction activity in 2019. By contrast, the slowdown will be most acutely felt in Victoria and South Australia.
Figure 11: Residential investor finance (rolling annual, excluding refinancing)

Source: ABS, CBRE Research, February 2019
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Craig Godber
Associate Director, Head of Residential Research
Australia
[email protected]
Build to Rent
Market Gaining Traction
The pace of progression in this emerging sector is expected to pick up in 2019 as changing conditions in the residential market, particularly falling land values, improve potential returns for prospective build-to-rent developments. With over 3,000 units under construction and a handful of projects opening up this year, the question as to whether the general public embraces the concept will be closer to an answer.
Build to Rent
The nascent build-to-rent (BTR) sector will continue to progress in 2019 with developments breaking ground and an increasing number of investors actively seeking sites to develop in this emerging asset class. But the sector still has its challenges. Some existing tax policies aren’t overly favourable for BTR but may come under review if a change of federal government occurs in the first half of the year. Land prices remain elevated but our view is that in 2019 these will follow dwelling prices lower, improving the economics of BTR.
The pace of progression in the BTR sector is expected to pick up in 2019 as changing conditions in the residential market lower some of the financial hurdles currently facing BTR developments.
One of the main issues prospective BTR developers have been facing in achieving financially viable projects is the cost of land; however, due to falling dwelling prices in most capital cities – particularly those that have or will receive large amounts of apartment supply – the cost of land is set to decline. Whilst the underlying land values haven’t declined as quickly or as much as the residential stock that sits atop, it is only a matter of time before it does. From an apartment developer’s perspective, changes in land prices should generally reflect changes in the price of the end product. The limited decline in land values to date is principally due to a lack of transactions resetting the market.
Land values will adjust in due course thereby lowering a significant obstacle to BTR developments. If residential rents remain stable or grow amidst falling land prices, returns on prospective BTR developments will increase.
To date the majority of proposed BTR developments have been in Melbourne’s fringe markets or Sydney’s west as the cost of land is significantly cheaper than closer to the CBD. We expect this will remain the case over the medium-term outlook period as it is unlikely that land values in CBD locations will fall enough to entice developers to move into more central locations.
Despite the falling cost of land in the Sydney market we still expect that the majority of new projects will occur in markets such as Melbourne and Perth. The price of land in good locations in these cities remains significantly lower than that of Sydney; moreover, we’ve gauged more interest in these cities from prospective developers.
In all capital cities investors with sizeable landbanks won’t face the difficulty of sourcing viable, purchasable parcels to develop so are better positioned to build in more expensive locations. However, those without existing land holdings will continue to struggle to source economically viable residential lots, especially in expensive markets.
TAXATION REMAINS AN ISSUE
The implications of the current tax regime (as detailed in our 2018 report A Taxing Time for Build-To-Rent) are an ever-present issue for investors seeking viable returns on BTR investments; unfortunately, we don’t see this changing in the medium-term. It is possible, however, that a change of federal government may bring about new discussions with a view to clarifying the current position or offering assistance in the form of land release or tax concessions for developments that include a portion of key-worker accommodation.
Australia’s closest peer with regards to the maturity of the BTR sector is the United Kingdom, which overcame a number of similar hurdles that has enabled the sector to get off the ground. Ultimately the UK government backed the sector through measures such as amending planning rules to make construction easier, and also in forming a fully recoverable investment fund where the government shared risk or bridged finance. This was done in response to an identifiable need for new purpose-built rental housing, similar to the existing situation in Australia.
WILL PEOPLE WANT TO LIVE IN
BUILD-TO-RENT ACCOMMODATION?
With over 3,000 units under construction and a handful of projects opening up this year, the question as to whether the public embraces the concept will be closer to an answer. Regardless of taxation issues or financial hurdles that developers are facing, if the public doesn’t welcome the BTR model then ultimately the sector won’t thrive or possibly even survive. However, it is our view that this is unlikely to happen.
Of the limited number of projects that are accepting ‘pre-leases’, they have seen a steady stream of tenants signing up, indicating that on face-value people are keen to try this new concept of rental accommodation. The ease of the renting process (in selecting the building and then ascertaining availability, rather than vice versa), the quality of build, the high level of amenity provided within the development or in the surrounding locations is a strong drawcard for renters. If these features become more commonplace, people will increasingly shift their preference to purpose-built rental accommodation.
OUTLOOK
With over 3,000 units under construction and a handful of projects opening up this year, the question as to whether the general public embraces the concept will be closer to an answer. |
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Ben Martin-Henry
Associate Director, Head of Capital Markets,
Forecasting and BTR Research
Australia
[email protected]
Capital Markets
Reaching the Top
Transaction volumes this year will likely continue the downward trend since 2016, more attributable to the decline in owners willing to sell rather than a dearth of buyers. There remains strong buyer interest from local and offshore capital, and selected Australian office and industrial markets still offer some of the best prospects for rent growth within the APAC region. Global investors requiring an increase in APAC allocation in 2019 will still have Australia on their target list.
Capital Markets
After a thriving transaction environment over the past five years, 2019 is expected to see a reduction in the total number of sales, marking a continuation of the trend in declining transactions since 2016. Restrictive capital controls in China, tighter lending criteria and yields at historical lows in many markets will all contribute to a quieter year in terms of buyer activity.
But the decline won’t be catastrophic. The number of sales fell 14% and 10% in 2017 and 2018 respectively. We’re expecting further declines of 5-10%. On a transactions by value basis the falls were smaller because yield compression has seen values rise.
We attribute declines over the past two years to less owners willing to sell rather than a dearth of buyers. There remains strong buyer interest from local and offshore capital, and selected Australian office and industrial markets still offer some of the best prospects for rent growth within the APAC region. Global investors requiring an increase in APAC allocation in 2019 will still have Australia on their target list.
Transaction volumes will receive a boost from recent corporate activity such as Oxford Property Group’s acquisition of the Investa Office Fund portfolio, who will likely divest assets it deems non-core. Many REITs are still trading at a discount to NTA so there is the potential for further corporate activity that will be followed by the sale of selected assets.
Also contributing to transactions this year, many landlords will see 2019 as possibly the last chance to rebalance portfolios and divest from non-core assets at top dollar before yields in unison begin to trend upwards, a scenario we’re expecting in 2020-21. The flipside of this, however, is that pricing has already turned some investors away from some markets. The perception that we are approaching the very top of the current property cycle may lead investors to delay buying as they believe the market to be overheating.
RISK PREMIUMS TRENDING UPWARDS
We forecast a global economic slowdown over the next two years, but emphasis needs to be given to the word ‘slowdown’; it won’t be a shock as severe as the GFC. However, we do expect investors to be more cautious with investment decisions due to the economic uncertainty and, therefore, will want a larger spread to bonds for the risk taken on. Risk spreads on US high-yield corporate debt increased over H2 2018 and we regard this as a bellwether for global risk appetite.
Australian 10-year government bond yields fell over 2018 and we expect they will gravitate around the current level (2.3%) for the next few years with 2021 dropping to the lowest level recorded in over a decade at 2.1%. Offsetting this fall, however, will be a rise in risk premiums by 80-100bps.
MARKETS AND SECTORS DIFFER
Australian property markets are rarely synchronous. Whilst New South Wales and Victoria have been performing strongly in the last few years, Western Australia and Queensland were on the receiving end of a significant economic downturn and the property sector has not been immune. However, with both economies showing signs of life the property market has started to pick up and investors have been taking note.
All major office markets are expected to see yield compression in 2019 but it is Perth that will see the greatest movement as investors who may have been unable to acquire assets in other markets seek opportunities in the mining state.
Similarly, Brisbane is experiencing a resurgence in the economy that is translating into positive movement in the property sector. Investors recognise that Brisbane’s outlook has turned more favourable than in recent times and that it represents good value for money compared to Sydney and Melbourne.
This positive momentum isn’t limited to the office market as both the retail and industrial sectors in these cities are expected to see stronger investor demand as they rebound from sluggish years. Figure 12 shows the expected five-year total returns across sectors for the major markets. Ostensibly returns presented may seem low, but we expect that in five years’ time yields will have softened.
Figure 12 attempts to demonstrate that markets such as Sydney and Melbourne are approaching the very top of their respective cycles and any asset purchased now is not expected to perform as strongly as in recent years. Whilst news for the Sydney economy remains broadly positive, being a global gateway city it tends to be more adversely affected by global economic slowdowns. Moreover, rent growth tends to revert to long-term trends over time, and given that Sydney’s office rents have grown at an extraordinary rate over recent years, we expect some pullback when the demand/supply imbalance improves.
Figure 12: Five-year Annualised Total Return Forecasts

Source: CBRE Research, February 2019
Timing and location of any acquisition is crucial but so too is asset selection. Adelaide industrial, for example, is expected to be one of the standout performers over the next five years as significant investment is poured into the defence sector and this trickles down into the local industrial economy.
In recent times bricks and mortar retail has been under pressure due to reasons such as online retailing, increasing cost pressures and a decline in retail spending. However, this also represents significant opportunities for investors to acquire relatively inexpensive assets and reposition them. Neighbourhood shopping centres have been in hot demand and this is reflected in their pricing, and there have been limited buying opportunities. Conversely, sub-regional shopping centres haven’t performed as well but do represent value-add plays so we expect more of these to transact in the next few years as investors seek new opportunities for higher yielding assets and back themselves to improve assets.
DEBT MARKETS TIGHTENING
A potential headwind for property acquisitions in 2019 is the availability and cost of debt. The ‘Big Four’ banks in Australia have been under increasing pressure to tighten up their lending practices across all property sectors, not just residential. As such they have been going down a deleveraging path and reducing their balance sheet exposure to property and also increasing the cost of borrowing for commercial real estate.
Chart 13 illustrates the average best lending rate available and the average yield for commercial property in Sydney. The chart shows that property yields have been compressing for a number of years and so too has the cost of debt, but now that banks are increasing lending rates the spreads are converging, squeezing investor margins.
Investors looking for refinancing have some alternatives if banks turn them away, and we expect these options will become more prevalent in 2019. Local and offshore hedge funds and institutional capital (pension, insurance funds) keen to gain exposure to Australian property but have been unable to enter the market have been lending to developers and owners. Likewise, some investors who are reluctant to acquire assets at this late stage of the cycle have entered the lending market in order to gain property exposure. In previous cycles debt has ultimately resulted in creditors owning assets when borrowers default – this is no doubt a consideration and motivation of some opportunistic lenders at this point in the pricing cycle.
Opportunistic ‘alternative’ lending sources are typically costlier than banks; however, in general there is little (if any) difference in margins from institutional lenders and banks. We expect in 2019 that banks’ share of lending within commercial property sectors will gradually decline but this won’t increase lending rates in addition to any further increases imposed by banks.
Figure 13: Cost of Debt vs. Property Yields

Source: CBRE Research, February 2019
Contacts
Bradley Speers
Head of Research
Australia
[email protected]
Ben Martin-Henry
Associate Director, Head of Capital Markets,
Forecasting and BTR Research
Australia
[email protected]
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