1. Demographics is Destiny
Migration trends in Australia have had a profound impact on Australian property markets. While offshore migration is still well below the record levels experienced in 2008/09 (circa 300,000 migrants, versus 230,000 year to March 2017), the movement of people has changed dramatically. In 2008/09, 58 per cent of all offshore migrants settled in NSW and VIC. That figure is now up to 78 per cent. We believe this trend will continue, as infrastructure spending and jobs growth is heavily concentrated in these states. Residential markets continue to respond to the wave of people movements. The Sydney market in particular has been undersupplied for many years and supply is only just starting to catch up. Census data revealed that 19,000 more households were formed in Sydney than dwellings over the five years to 2016 - the only city to experience such huge undersupply. Concerns about oversupply in our markets ignore the long term impacts of population growth.
2. Economic indicators push the investment case for commercial property
Record low interest rates, below target inflation and anaemic income growth are a set of economic circumstances rarely seen in Australia. The RBA has not increased interest rates since November 2010, and we don’t expect an increase until sometime in 2019. While these indicators aren’t unique to Australia (most major economies are experiencing similar) our demographic buffer against these economic trends is what continues to set us apart. The case for property continues to grow despite the unusual economic circumstances, and property will continue to outperform other asset classes in terms of returns and growth potential.
3. Infrastructure spending continues to grow
Close to $100 billion of transport infrastructure projects are currently under construction across Australia. Almost half of these projects are in NSW – the true infrastructure powerhouse of Australia currently. And it doesn’t stop there. NSW will invest a staggering $70 billion over the next 4 years in transport infrastructure, while Victoria will invest $40 billion over the same time. A number of these projects, like the Sydney and Melbourne metro rail projects, will be true game changers for their cities, and open up more land for property development in the future.
4. Australia stands tall amongst the major global property markets
It can’t be underestimated just how unique Australia’s investment potential is when placed in a global context. Global property funds, as well as pension and sovereign wealth funds, have taken notice, and continue to allocate money to invest in Australian commercial property. While much has been made of China and the flow of funds to Australia, FIRB approvals have increased 223 per cent from Japanese real estate investors, and 79 per cent from German. Over 2018, we expect the cap rate compression cycle will continue, as demand for limited stock remains high.
5. Office supply dwindling in the major markets, turning points close in others
Sydney and Melbourne CBD and metro markets have below average vacancy rates, with these rates forecast to fall even further in 2018. While supply is on the horizon – circa 2019 for Melbourne CBD and North Sydney and 2020 for Sydney CBD – strong demand conditions being experienced now mean that rents are moving upwards. In the other states, demand conditions are improving – faster in Brisbane, more slowly in Perth and Adelaide – and low supply conditions in these markets will be a positive for landlords.
6. New entrants to eCommerce industry will increase demand for well-located industrial space
The transport and logistics sector has been dominating the demand for industrial property with strong growth projected as the demand for goods rises (on the back of consistent economic growth and robust projected population growth). Fuelling this trend is Australia’s growing eCommerce industry - currently making up around 40 per cent of the online retail market. Therefore, industrial properties that are located close to urban centres and end consumers are becoming an important option to consider when seeking to optimise the supply chain and distribution process. As new entrants are expected to enter the Australian market, the need to speedily deliver products to the end-consumer will become a major point of difference for business’ competitive advantage. There will become a greater need for facilities to be positioned close to highly populated areas to effectively achieve the last mile delivery.
7. Retail markets facing headwinds, population growth softening the blow
The arrival of Amazon in Australia has put the retail market on notice, and its impact will be closely watched throughout 2018. Despite the negative watch on some landlords and major retailers, the Australian retail sector does not mirror any other international market, and has a number of defences against the onslaught of online retailing. By and large, Australian centres are well run and maintained on a global benchmark, and the better landlords have positioned their assets to capture the long trend of growing food and services consumer sectors. Population growth in the major centres also continues to push retail turnover growth into positive territory.
8. Disruptors in Hotel industry will challenge the market
2017 was underscored by a pause in hotel transaction activity after the bull run experienced over the past five years, with transaction sales falling back toward the long-term average. Locational discrepancies across the country are widening as trading fundamentals fluctuate, though a lack of stock is still driving pricing. Growth has also shifted, bringing new stars to the fore. In particular, Cairns and Canberra were some of the strongest trading markets. Appetite for hotel development in Melbourne and Sydney is growing, against a backdrop of improving tourism demand and as consumers demand a greater focus on in-room design and technology. Disruptors are clearly evident, but the hotel sector has a proven track-record of resilience that should absorb this inventory over time.
9. Australia is leading the world in healthcare innovation
The ageing population globally is presenting economies with both significant challenges and opportunities. With circa $100bn in estimated investment required in Australian healthcare over the next 30 years alone, advances in medical technology, models of care and the physical buildings in which they are housed have positioned Australia as a global leader in healthcare provision - surpassing even Japan in eldercare models. As a result, investment in the Australian healthcare sector (local and global) has grown exponentially in the last few years and is on an accelerated trajectory in recognition of a relatively stable economic environment and political landscape coupled with the increasing demand.
10. Wagyu and Angus set to be a focus for rural investors
With nearly all commodity values in AUD remaining bullish to strong, the stand out sector in Australia is high value beef such as Wagyu and Angus. In particular, high value beef exports have been exceptionally strong. Numbers of cattle on feed in Australian feedlots has lifted strongly, with record levels reached in 2017 of just under 1.1 million head on feed at the end of the Q2 2017. Carcass weights continue to rise due to the record numbers of cattle fed and time spent on feed*. In April 2015, there were 7,720 registered Wagyu animals in Australia with estimated breeding values (EBVs). In April 2017, it was more than 80,000**. This dynamic demand base for high value livestock has created a strong run on properties displaying safe production systems, and first-rate genetic records, with herds close to feedlots and processors. The buyers are mainly domestic HNWI and North Asian Corporates seeking to increase market share.
* MLA. (2017). Australian Cattle, Industry Projections 2017 October update
** Goodwin, S. (2017). Wagyu’s explosive growth set to continue. Retrieved 21st November 2011 from http://www.wagyu.org.au/wagyus-explosive-growth-set-to-continue/