#1CAPITAL ATTRACTION: THE RISE OF AUSTRALIA AS AN INVESTMENT DESTINATION 8th September Stephen McNabb - Head of Research, Australia CBRE Prepared for: UNSW Real Estate Symposium 2015#2TODAY'S PRESENTATION Observations on capital flows to Australia CBRE What's attractive about Australia? Offshore investment into residential real estate Cross border capital flows outlook and implications 2 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#3OBSERVATIONS ON CAPITAL FLOWS TO AUSTRALIA CBRE#4A FEW BASICS - AUSTRALIA IS A CAPITAL IMPORTING COUNTRY Domestic Saving and Investment as % of GDP CBF 35% Mining investment boom 30% 25% 20% Domestic savings rise post "GFC" Domestic Savings Domestic Investment 15% 10% Foreign Capital Requirement % of GDP Qu: What happens when Australia requires less capital but demand for assets is strong? 9% 6% 3% 0% -3% -6% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: ABS, CBRE Research Y#5GLOBALISATION IN ACTION - RISING FOREIGN ASSET AND LIABILITY POSITION BUT NO PRESSURE ON THE OVERALL BALANCE 250% 200% 150% 100% 50% 0% -50% Foreign assets and liabilities as a proportion of GDP -100% -150% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 CBRE Foreign Assets Net position 5 Foreign liabilities Overall external position is fairly balanced relative to GDP so every dollar in equals a dollar out Source: ABS, CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#6GLOBALISATION - LOCAL ALLOCATIONS TO OFFSHORE HAVE RISEN 25% 20% 15% 10% 5% Offshore Allocation across all Managed Funds in Australia All asset classes Implication for Australia's property markets: Domestic investors looking to diversify offshore • AustSuper acquisition of share in Hawaiian shopping centre ($1.1b) Local investors with mandated hurdle rates are squeezed out of market 0% 1988 Source: ABS CBRE 1991 1994 1997 2000 2003 2006 2009 2012 2015 6 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#7Sales Volumes ($m) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 CBRE 2006 WHAT HAVE WE SEEN IN COMMERCIAL PROPERTY MARKETS? FOREIGN PURCHASE ACTIVITY HAS INCREASED The key question is whether this represented a shift in the net position or just more globalisation (rising cross border flows in both directions) Commercial Property Transaction Activity - by purchaser origin ■Foreign ■ Domestic 2007 2008 2009 7 2010 2011 2012 2013 2014 2015 YTD Source: CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#8FOREIGN INVESTORS HAVE BEEN NET ACQUIRERS OF COMMERCIAL PROPERTY SINCE 2007 Foreign Net Commercial Property Purchases - Cumulative position since 2005 AUD Billion 24 21 ■Retail ■ Industrial ■ Office 18 15 12 6 6 3 0 -3 2005 Source: CBRE Research CBRE 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 8 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#9THE COMPOSITION OF THE ORIGIN OF FOREIGN INVESTORS HAS CHANGED Origin of Foreign Purchaser 2008-2012 Origin of Foreign Purchaser 2013-2015 APAC 32% Americas 17% CBRE EMEA 21% EMEA 51% APAC 58% Americas 21% 9 Source: CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#10AND THERE IS NOW A VERY DIVERSIFIED MIX OF INVESTORS BY ORIGIN Origin of Foreign Investor 2007-2015 All others 18% Canada 3% United Kingdom 4% Germany 11% USA 14% Malaysia 6% Korea Singapore 21% 5% CBRE China 18% Investment into Australia over the last 7 years led by Singapore... Source: CBRE Research 10 China overtook Singapore as source of capital in 1H 2015 and moves further ahead... Investa portfolio ~$2.4bn = Total foreign purchases from 2007 to YTD-2015 ~21% of total (but 33% in 2015) CBRE | AUSTRALIAN COMMERCIAL PROPERTY#11WHAT'S ATTRACTIVE ABOUT AUSTRALIA? CBRE#12HIGHER ECONOMIC GROWTH, INTEREST RATES AND YIELD SUPPORTED CAPITAL FLOW TO AUSTRALIA Global Commercial Office Yields Regional Averages - 7.0% 6.0% 5.0% 4.0% ப 3.0% 2.0% 1.0% 0.0% Asia US Aust ■ Yield Source: CBRE Research CBRE ☐ Spread to bond Europe 12 • . Higher growth/rates and yield structure Lower risk: AAA-rated sovereign Banks/Financial system lower risk; capitalised and credit risk managed CBRE | AUSTRALIAN COMMERCIAL PROPERTY#13Spread between yield and bond WIDE SPREADS TO BOND DON'T, BY THEMSELVES, MEAN GOOD VALUE BUT THEY AT LEAST MEAN FAIR PRICING Property and equity looks fair value compared to bond rates Asset Yields to 10 year bond spread 10% Low inflation/lower growth High inflation/high growth 5% 0% -5% -10% -15% Low inflation/high growth 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Gross dividend yield (ASX) Sydney Prime office to Bond Assets priced off growth have seen yields widen relative to bonds i.e. more "return" has to be delivered from yield rather than growth. Hence, equities have corrected the most. Property/equities look fair on this basis CBRE 13 Source: RBA, CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#14Index: 100 RISING CONSUMPTION/INCOME PER CAPITA MADE AUSTRALIA ATTRACTIVE TO BUSINESS AS WELL Strong relative performance... 260 240 220 200 180 160 140 120 100 80 Consumption Per Capita Index India 2024: 595 China 2024: 450 Forecas + 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Australia •U.K. CBRE Canada China .U.S. India Germany Japan Source: CBRE Research; Oxford Economics 14 • • Australia's population growth of 1.7% over last decade - 0.6% Advanced world economies; 1.0% Asia-Pacific Consumption per capita average growth of 4% in last 10 years v 2-2.7% in US/Europe/UK • Over 40 foreign brands opened retail stores in Australia in 2014 (and 11in 2015 to date) CBRE | AUSTRALIAN COMMERCIAL PROPERTY#15CBRE 60% 50% 40% 30% 20% 10% 0% China MORE THAN JUST INVESTMENT CAPITAL – FOREIGN RETAIL BRAND PENETRATION IS GROWING - STILL SOME WAY TO GO ...retailers diversifying globally Foreign Retail Brand Penetration Singapore Hong Kong Japan Malaysia Korea Taiwan *Number of foreign retailers operating in a country as identified by CBRE divided by total foreign retailers in APAC region Source: CBRE Research, August 2015 15 Cambodia CBRE | AUSTRALIAN COMMERCIAL PROPERTY#16OFFSHORE INVESTORS CAN SOMETIMES HAVE MISPERCEPTIONS AS WELL "Australian industrial is underperforming because motor vehicle manufacturing is being shutdown" Myth?: Fails to see that Motor Vehicle manufacturing represents just 5% of manufacturing (itself only 7% of the economy) or that 85% of vehicles consumed are already imported "Housing bubble" Myth?: Rising levels of building activity, high price to income ratio, prices haven't fallen like they did in the US/Europe - in some cases these headlines miss the fundamentals of vacancy and rent. "Mining bust" Myth?: Term used loosely, without focus on the subtle difference between an "investment" boom and a "production" boom; often the regional concentration of this activity isn't well understood. CBRE 16 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#17OFFSHORE INVESTMENT INTO RESIDENTIAL REAL ESTATE CBRE#18RISING RESIDENTIAL VALUE RELATIVE TO COMMERCIAL APPEARS TO BE DRIVING DEVELOPMENT AND CHANGE OF USE IN SOME MARKETS Residential Prices versus Commercial Capital Value Sydney 170 150 130 110 90 10 70 50 2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 2013 2014 2014 2015 Sydney Residential Source: CBRE Research, ABS CBRE Sydney Office Sydney Industrial 18 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#19FOREIGN INVESTORS ARE PURSUING THESE DEVELOPMENT OPPORTUNITIES 140 120 100 Number of deals 4 % 800 60 40 Inner City Development Site Acquisitions (Sydney, Melbourne, Brisbane) year to April Comprising: • Sydney (37) - average site price $65m · · Melbourne (52) - average site price $20m Brisbane (26) average site price $20m 20 0 2012 2013 Local ■Foreign other CBRE 2014 2015 ■China 19 Source: Real Capital Analytics; CBRE CBRE | AUSTRALIAN COMMERCIAL PROPERTY#20FOREIGN INVESTMENT IN NEWLY BUILT DWELLINGS HAS RISEN ...the most significant market for foreign purchase activity is Melbourne FIRB Approvals as % of state all residential turnover % of offshore purchasers 20 18 16 14 12 10 8 6 4 2 0 NSW VIC QLD Source: CBRE Research; RP Data; City of Melbourne Council, 2014. CBRE 20 20 WA SA CBRE | AUSTRALIAN COMMERCIAL PROPERTY#21IMPACT OF FOREIGN INVESTORS? PRICING GAP BETWEEN NEWLY BUILT RESIDENTIAL AND “RE-SALE” MARKET 12 Pricing Differential between New and "Re-sale" Market - Melbourne Residential 4 Excerpt from recent CBRE Research Viewpoint, Aug 2015 "Foreign investment driving two tiered residential market" Annual value of FIRB approvals ($b.) 10 10 8 00 6 4 2 Differential new versus resale (RHS) FIRB value of residential for development (LHS) 0 2009 2010 2011 2012 CBRE Source: CBRE Research; RP Data City of Melbourne Council, 2014. 21 2013 2 0 2 -4 -6 -8 2014 Price differential (%) CBRE | AUSTRALIAN COMMERCIAL PROPERTY#22CROSS BORDER CAPITAL FLOWS OUTLOOK AND IMPLICATIONS CBRE#23INTENTION TO INVEST ACROSS BORDERS HAS RISEN - AUSTRALIA ATTRACTING A LARGE SHARE Cross-region investment intention by origin % of survey respondents 44% 40% 36% 38% 2015 2014 37% 38% 28% 14% 20% NORTH AMERICA Cross-region investment - preferred destination 31% WESTERN EUROPE 11% CENTRAL AND EASTERN EUROPE APAC EMEA AMERICAS GLOBAL SOUTH AMERICA Source: CBRE Global Investor Intentions Survey 2015, % of survey respondents CBRE 23 AFRICA AND MIDDLE 7% PACIFIC 27% ASIA CBRE | AUSTRALIAN COMMERCIAL PROPERTY#24WHERE IS THE CAPITAL ? FUNDING SOURCES FROM ASIA AND THE MIDDLE EAST ARE GROWING Excerpt from CBRE Research " In and Out – Middle East" August 2015 - FIGURE 3: GLOBALISATION OF INVESTMENT MARKET NORTH AMERICA 66 US$ BILLION Source: CBRE Research, Real Capital Analytics CBRE Cross-regional capital flows into global commercial real estate increased to $125 billion in 2014, up 39% year-on-year. The Middle East was the third largest source of capital in 2014, with $14 billion invested outside the region. ASIA 28 US$ BILLION MIDDLE EAST 14 US$ BILLION 24 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#25USD Billion CHINESE CAPITAL FLOWING INTO GLOBAL REAL ESTATE MARKETS HAS ALMOST TRIPLED SINCE 2012 In 1H 2015, Australia attracted over 25% of China's real estate investment dollar Chinese Capital into Global Real Estate 12 10 30% 25% 8 20% 15% 4 2 10% 5% 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 1H Chinese Capital to Rest of World % to Australia Chinese Capital to Australia CBRE 25 Source: CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#26CHINESE ONLY AT THE START OF INVESTMENT DIVERSIFICATION ...repeat of Japan looks less likely? 200 180 160 140 읍 120 100 80 Foreign Investment in Australia - Japan and China Major sectors Mining Manufacturing 50% of Japanese 60 investment into real 40 estate 20 0 Japanese investment halted after 1990 during the "lost decade" 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Major sectors Mining Real estate (almost 50%) CBRE China investment -Japan investment 26 Source: FIRB, ABS, CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#27CHINESE CAPITAL - BACKED BY PEOPLE (AND BI-LATERAL TRADE)! Volume of Migrants per annum 25,000 1 20,000 15,000 1 10,000 5,000 0 CBRE 32 Sources of Migrants - Australia ■Ave (1991-2000) ■Ave (2001-2010) ■2014 2 2 4 3 2 5 3 6 6 7 NZ UK Philippines China 27 4 India 1 Source: ABS, CBRE Research CBRE | AUSTRALIAN COMMERCIAL PROPERTY#28MORE CAPITAL EXPECTED TO BE ALLOCATED TO REAL ESTATE WHICH IS UNDERWEIGHT AMONGST APAC INVESTOR GROUPS APAC institutional investor AUM and allocation to real estate, as at end 2014 US$ billion 16 14 12 10 6 4 2 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Insurance ■AUM Pension % of allocation by APAC SWF Total % of allocation to Real Estate by developed markets Source: Preqin, OECD, SWF Institute, and Various Central Banks and Insurance Associations, ANREV - The increasing importance of Real Estate in Asian pension funds; CBRE - Insurance Paper CBRE 28 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#29FOREIGN INVESTMENT ADDS AN UNKNOWN TO TRADITIONAL ANALYSES OF "DOMESTIC REQUIRED RETURNS" 10% 9% Sydney CBD Required Return and Yield - Traditional analysis 8% Risk premium 7% 6% 5% 4% 3% Implied* growth 2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sydney CBD Prime required return Source: RBA, CBRE Research Sydney Prime Yield 10 year bond yield *"Implied" growth is derived from the difference between IRR and observed market yields CBRE 29 As foreign investors have a greater influence on the market; we may need to look beyond purely domestic fundamentals Implication: Creates a little less certainty about predicting the required return as need to factor in international expectation for return CBRE | AUSTRALIAN COMMERCIAL PROPERTY#30KEY POINTS IN CONCLUSION 1. Globalisation - Australia receiving a share of rising cross border activity 2. Relative performance of Australian economy and markets • more cyclical - Australia currently receiving an above weight share of investment interest 3. New capital sources are growing and diversifying • Australian funds also look offshore Implication for local investment returns CBRE 30 CBRE | AUSTRALIAN COMMERCIAL PROPERTY#31Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE. 8th September 2015 CBRE