September market update

residential Property MARKET OVERVIEW AND OUTLOOK

publication 8 / 2013

SEPTEMBER 2013

Residential Market Update

The National Residential Property market grew at a slower pace of 0.5% in August, recording a 4.0% quarterly change.

The Australian Residential Property Market recorded a growth of 4.0% over the quarter ending in August 2013. Even as the monthly growth slowed to a more sustainable 0.5%, as recorded by RP Data, the annual growth of 5.3% was some indication of the current momentum. Property sales numbers are up substantially on an annual basis, by just less than 30%, as the difference from the previous peak property median value in 2010 narrowed to just 0.9% last month.

Sydney and Canberra are two cities that have already posted records, up 4.0% and 1.2%, respectively, from their previous record values.

The historic low cash rate of 2.5% has evidently been driving the current market statistics. Auction clearance rates are being reported at all-time record levels for the major capital cities Sydney and Melbourne, which have posted clearances of more than 80% consistently. This is despite these markets having relatively high median values compared to the rest of Australia, and posting current annual growth rates of 7.0% and 4.3% respectively. Nevertheless, with the cash rate low and the markets still emerging from the decline in recent years, the affordability

index reported last month by HIA and Commonwealth Bank showed a 4.4% increase over the previous quarter.

There was a slightly different picture presented by some other market statistics.

The New Home Sales figure recorded by the Housing Industry Association showed a 4.7% fall last month. This was the first decline since January, which was again the only decline recorded since last September. New Dwelling Approvals continued to present a rising trend, while the Housing Finance Commitments’ value measured by the ABS rose again by 1.1% over the past month. The Westpac Melbourne Institute Consumer Sentiment Index rose strongly over August too, posting a 4.7% rise to 110.6 points. This was evidently due to the improved affordability and positive expectations of growth in this sector over the coming years.

The Australian unemployment rate rose by 0.1% to 5.8% recently, with the participation rate unchanged. Inflation is currently at 2.4%.

The Australian dollar’s value against the USD rose by 4.8% over the past month, after news of a delayed cut to the US QE program.

Dwelling trend year on year 10%

9.4%

Dwelling Trend YoY (%)

8% 7.0%

6%

4.3% 3.8%

4%

2.8%

2.7%

2% 0.5% -1.1%

0

-2%

Perth ( WA )

Sydney ( NSW )

Melbourne ( VIC )

Canberra ( ACT )

Source: RP DATA

2

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

Darwin ( NT )

Brisbane ( QLD )

Adelaide ( SA )

Hobart ( TAS )

Key statistics SEPTEMBER 2013

ECONOMIC GROWTH WORLDWIDE 2012 US, EUROPE & JAPAN 2012 AUSTRALIAN 2012 AUSTRALIAN 2ND quarter 2013

2.8% 0.5% 3.1% 0.6%

0.93 USD

GDP growth

4.8% in september*

AUD BUYS

2012-2013

Consumer Sentiment Index Westpac - Melbourne institute

110.6

4.7% in september

Australian Employment

RBA STATS

72.8

0.2%

65.1%

in SEP

-0.9%

0.5% monthly

annual CHANGE IN total property sales

total dwelling commitments (M)

$ 24,180

29.0%

4.0%

housing finance

quarterly

Australia wide snapshot

in Q2

Difference from Peak Dwelling Value

1.1 %

Dwelling Values

New Home Sales

Median House Price $ 515,000 Median Unit Price

PARTICIPATION

5.3%

HIA-COMMBANK HOUSING AFFORDABILITY INDEX

0.25% 0.4%

0.1%

annual

CASH RATE 2.5% INFLATION 2.4%

UNEMPLOYMENT 5.8%

4.7%

$ 442,000

New Dwelling Approvals

10.8%

Weekly House Rent $ 478 Annual Change 3.2% Rental Yield 4.1% Weekly Unit Rent $ 443 Annual Change 2.3% Rental Yield 4.8% Source: ABS, RP DATA, HIA, RBA, Westpac - Melbourne Institute, REIA * Current at 12:00 pm 30 September 2013

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

3

Residential Market Update

Future estate capital city rating summary STATE

CAPITAL CITY

FUTURE ESTATE SCORE

OVERVIEW

NSW

SYDNEY

VIC

MELBOURNE

Melbourne’s score surpassed Sydney’s in the last month, buoyed by a strong Auction clearance rate. This allowed seller asking prices to subsequently show an increase. Melbourne continues to grow strongly.

QLD

BRISBANE

Brisbane’s score remained flat over the month. Brisbane properties were still showing a high number of days on market and the discount rate was also high.

WA

PERTH

SA

ADELAIDE

Adelaide’s score increased by a large percentage over August. Even as the days on market statistic was high, vacancy rates were low, the asking price index rose and auction clearance rates moved positively.

ACT

CANBERRA

Canberra’s score fell marginally last month. ACT’s discount rates and days on market statistics are low, but Canberra is seeing relatively high rental vacancy and a flat asking price change.

NT

DARWIN

Darwin continued to show relatively sound market statistics. The Auction Clearance rates were high and the vacancy very low. The state days on market figure, however, continued to be above national average.

TAS

HOBART

Hobart’s investment rating improved for the first time in several months. Its asking price change was positive, while vacancy rates were stabilising. Discount rates and property days on market were still high.

Sydney’s score declined slightly last month, mainly due to the SQM research asking price index falling. Clearances were high, but the median values were the highest in Australia, which impacts affordability measures.

Perth’s property score improved after the asking price index rose to 2.9%. The market discount and rental vacancy rates were also relatively low.

* Score is out of 5 as indicated by out of 5: Higher score indicates a stronger property market with positive outlook, whereas a lower score indicates a softer market with lower growth prospects.

4

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

Source: Future Estate Research

Property Market Performance While the capital city property markets are currently experiencing a heightened level of activity, it is important to note that several of these property markets have not matched the rises experienced by other asset classes over the long-term past. As RP Data representative Cameron Kusher described, Sydney home values have not grown in the past decade by enough to even match inflation. Despite the 8 Australian Capital cities having grown an aggregate 9.2% on an annualised basis since the start of 2013, only Sydney and Canberra’s median prices have passed their previous peaks. The markets for Hobart and Brisbane, for example, are currently 11.5% and 9.4% below their previous record dwelling values, and have only grown by 2.8% and 2.0% in the past year, respectively.

There are differing perspectives about the housing market’s direction of growth. Given the rebound of this asset class since the beginning of 2013, with total year on year return currently at 10% and close to 7% growth since 2013 began, there has been speculation about the expansion approaching levels that may be cause for concern. One factor that has been brought into spotlight is the disposable income growth statistic tracked by UBS, which is currently at 3.3% and much lower than during the previous periods of high dwelling value growth.

Moreover, with the low cost of credit, there are fears of instability in the market potentially caused by a credit boom and loose lending standards by the mainstream Australian banks.

These revelations, however, are in contrast to the evidence pointing towards the market currently experiencing legitimate growth through the fundamental market forces. Over the past month, experts at several financial institutions have dismissed claims of an unstable “bubble” forming in this market.

RBA’s Assistant governor Malcolm Edey was quoted as calling the fears of a housing bubble “unrealistically alarmist”, while the ANZ’s Australian chief Phil Chronician called the claims “overstated”. Citibank’s economists Brennan and Williamson pointed to the current increase in prices not being caused by out-of-control debt, but by wealthy buyers

exploiting the unique current conditions of this asset class re-emerging from recent decline.

In fact, while the cash rate has been reduced, thus improving affordability, the credit growth rates indicate that this has not resulted in an increase in overall debt. RBA statistics indicate that housing credit growth has only been 4.2% from its previous historic lows last year. The debt to income rate is also below previous peaks and there is anecdotal evidence that debt repayments have not reduced since the reduction of the borrowing rate. Moreover, the value of total finance commitments as tracked by the ABS has risen by just 1.1% over the past year, while housing turnover remains low compared to the last decade, according to the RBA. Lending standards in Australia are also under scrutiny by the IMF, ensuring consistently stringent practices.

While property prices have recorded consistent gains over recent months, the growth has come with little increase in household debt.

The housing market growth does not seem likely to be due to speculation or rising credit with potential to cause turmoil. It can be rather attributed to increased affordability, rising demand from the increased population and decreased supply from credit-constrained property developers. Australian capital city dwelling values grew by 0.5% over August.

auction clearance rates Auction clearance rates continued to surpass previous peaks in the capital cities of Sydney and Melbourne in August. Clearances were recorded at up to 86.3% for Sydney and 80.1% for Melbourne by APM in September.

Monthly averages, according to the REIV and REINSW were a robust 75% from approximately 1300 and 3000 auctions in Sydney and Melbourne, respectively.

Capital Cities The capital cities showed a lower growth in August compared to the previous month.

The outstanding performers were the units in Adelaide, which saw almost 6% growth in the month, followed only by the all dwelling growth statistic of 1.5% for Brisbane. The steepest fall was posted by Darwin’s units, contracting by 4.1% over August. The highest year on year returns according to RP Data were for Perth’s detached housing at 14.7%, closely followed by Sydney’s at 12.2%.

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

5

Residential Market Update

APM recorded a weekly Auction Clearance Rate of 86.3% in Sydney for the week ending 22nd September 2013.

This was once again one of the highest all-time recorded clearance rates for this capital city.

Property auction clearance rates: AUGUST August Property Auction Clearance Rates 2013 80%

75%

75%

79%

79%

70%

2981

3000

2500

60% 2000

50%

1500

40% 30%

1303

1000

20% 500

10% 0

0

Month Average

Last August Weekend

Source: Real Estate Institute of Victoria; Real Estate Institute of NSW.

Total August Auctions Sydney

Melbourne

Source: Real Estate institute of Victoria; Real Estate institute of NSW

Property auction clearance rates: week ending 22nd SEPTEMBER Auction Clearance Rates 90% 80%

86.3% 80.1%

81.4% 75.9%

78%

79%

70% 60% 50% 40% 30% 20% 10% 0

Australian Property Monitors

RP Data

REIV/REINSW* Sydney

6

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

Melbourne

quarterly capital city house and unit price trend 8%

House Price Trend Over Quarter (%)

6.9%

7% 6%

Unit Price Trend Over Quarter (%)

5.7%

5% 4.3%

4.5% 4.0%

4%

3.9% 3.2%

3.0%

3% 2.2%

2% 0.8%

1%

0.5%

3.0%

1.9%

0.2%

0

-0.4%

-2.6%

-1% -2% -3%

Sydney ( NSW )

Melbourne ( VIC )

Darwin ( NT )

Canberra ( ACT )

Perth ( WA )

Brisbane ( QLD )

Adelaide ( SA )

Hobart ( TAS )

Source: RP DATA

capital city house and unit gross rental yields Gross Rental Yields 8% 7% 6.1%

6.3%

6%

5.3%

5.4%

5.1% 4.7%

5%

4.4%

4.7%

5.0% 4.4%

4.9% 4.3% 4.3%

4.3%

4.1%

4%

3.6%

3% 2% 1% 0 Darwin ( NT )

Source: RP DATA

Hobart ( TAS )

Brisbane ( QLD )

Adelaide ( SA )

Perth ( WA )

Canberra ( ACT )

Sydney ( NSW )

House Gross Rental Yield (%)

Melbourne ( VIC ) Units Gross Rental Yield (%)

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

7

Residential Market Update

Capital City House and Unit Median Prices State

Capital City

Median House Price ($)

Median Unit Price ($)

Dwelling Trend YTD* (%)

New South Wales

Sydney

$ 666,900

$ 513,750

7.4%

Victoria

Melbourne

$ 548,000

$ 440,000

4.6%

Queensland

Brisbane

$ 459,000

$ 350,000

1.9%

South Australia

Adelaide

$ 394,000

$ 330,000

-0.1%

Western Australia

Perth

$ 510,000

$ 420,000

5.9%

Tasmania

Hobart

$ 300,000

$ 247,500

2.8%

Northern Territory

Darwin

$ 516,500

$ 450,000

2.3%

Australian Capital Territory

Canberra

$ 545,000

$ 412,500

5.6%

Source: RP DATA * Year to Date

Key Investment Themes Theme Key growth opportunities

Summary

§§ Sustainable above-

Future Estate View

§§ Capital cities re-emerging

market capital growth

§§ §§ §§ §§

Key value opportunities

§§ Significant discount to

Defensive yield

§§ Sustainable rental

comparable properties, market analyst valuation

income, above market yield

8

along with larger regional centres Darwin boom continues Sydney offers resilient performance in inner city and outer suburbs Melbourne market accelerating Population growth and dwelling undersupply are longterm drivers

Comments

§§ Generally larger centres and capitals currently experiencing growth, with population inflow and slow dwelling completions §§ Housing affordability is currently high, with cash rate low and expected to drop further and unemployment higher than expectated

§§ Distressed opportunities

§§ Value more at the suburb

reducing due to market improvement §§ Adelaide and Hobart hardest hit of capitals in 2012, recovery emerging with high affordability

level than city level and more particularly at the asset level §§ Distressed value without capital and income growth potential questionable – i.e. lifestyle / coastal

§§ Darwin, Brisbane and Perth

§§ Yield compression possible

have very high yields due to property undersupply §§ Regional centres (top 20 population) offer highest sustainable yield (i.e. Mackay)

/ likely in 2013 as housing recovery gains momentum, but subject only to growth in construction investment §§ Rental growth unlikely to exceed capital growth in the longer term

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

Key Cyclical Themes Cyclical Outlook

Summary

Future Estate View

Comments

Global economy and policy

§§ US Federal Reserve has plans

§§ Indirect impact on residential §§ Global negative impacts on

to curtail QE policy §§ Chinese growth is estimated to be 7.5% for 2013 §§ US economy is growing at an estimated 2.5% p.a. §§ US budget and debt ceiling

property market via local property markets are consumer confidence, access easing, given favourable to credit and changes to exchange rate and local cash price growth areas rate changes §§ No negative impacts §§ Weaker AUD is leading currently, due to current to international investor RBA policies interest

Domestic growth and policy

§§ ABS recently released an

§§ Lowered cash rate and above-expectation GDP growth improved affordability is statistic for Q2 of the 2013 assisting in housing market calendar year growth §§ Local economy being sustained §§ Unemployment, at 5.7% and by lower AUD; poised to grow if a lower participation rate is rates further decline, which is having a mixed impact likely if US QE policy is relieved

§§ Likely slight increase in unemployment, which combined with inflation rate on the lower end of the RBA preferred range may lead to further interest rate cuts later into 2013 to another record low

§§ REIA reporting 28.5% (26% in §§ Lower interest rates have §§ Increasing house prices Housing QLD) of household income is translated to strong auction likely to be off-set by lower affordability spent on mortgage payments, clearance rates of over 80% interest rates lowest in decade in the major capital cities, §§ Historic low interest rates §§ The median house price/ areas with high employment and new home buyer grants income ratio is about 4.5, which §§ Affordable inner city suburbs stimulating owner occupier is low compared to Asia & are experiencing growth property demand; investors Europe noticing high growth areas Population growth

§§ Population growth was

§§ Population growth expected §§ Impact on housing demand / recorded at 1.8% over the to rise in 2013, driven mainly supply imbalance substantial year in 2012 by overseas skilled migration – housing shortage too from §§ 394,200 persons annual §§ Migration to Australia reduced construction activity increase in period ending concentrated in capital cities and investment December 2012 of NSW, VIC and WA, which §§ QLD and WA major interstate §§ WA recorded highest has resulted in home value beneficiaries, while VIC growth: 3.5% growth grows through international §§ Population recently reached 23M migration

§§ Below-trend dwelling Dwelling development continues construction §§ 38th consecutive month of declining construction activity, as reported by HIA

Consumer confidence

§§ Consumer confidence

Household savings / demand for credit

§§ Household savings ratio

emerging, with stronger market fundamentals §§ Investor confidence substantially improved from lows in 2012 remains elevated at ~10% of income – back to 1908’s levels §§ Demand for housing credit still comparatively low

§§ House approvals have

§§ 25,000 fewer homes built

seen a decline as of late, with construction and completions remaining poor §§ New Home Sales are increasing

in 2013 compared to a decade ago §§ Construction has fallen since 2010 given credit crunch – rental growth and yield has been high as a result

§§ Over 50% of investors

§§ RP Data is reporting 250

expect house prices to rise in 2013 as compared to 8% who expect a fall

§§ With confidence emerging, it is anticipated that demand for housing credit will emerge, especially given substantial buffer to mortgage repayments after recent savings

suburbs around Australia tipped to double property values in 10 years §§ HIA reports hotspots are emerging

§§ Demand for housing credit is still increasing, albeit it at very low levels §§ Investor credit demand is leading owner-occupier demand

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

9

Residential Market Update

Future Estate capital city rating

PERTH State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

BRISBANE

DARWIN State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

33% 103 6.1% 2.9% 1.6% 3.75

Future Estate Capital City Rating

70% 140 5.1% 4.7% 0.9% 3.15

Future Estate Capital City Rating

3.94

3.49

State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

34% 152 8.5% 0.6% 2.1% 3.0

Future Estate Capital City Rating

2.85

SYDNEY

DARWIN

State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

NT

63% 108 6.5% 0.8% 1.8% 4.25

Future Estate Capital City Rating

QLD

3.61

WA

BRISBANE

SA

CANBERRA

NSW SYDNEY

PERTH

ACT ADELAIDE

CANBERRA

VIC

MELBOURNE

State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

45% 87 5.1% 0.6% 2.1% 3.3

Future Estate Capital City Rating

3.38

TAS HOBART

ADELAIDE State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

MELBOURNE 45% 158 7.7% 1.2% 1.5% 2.85

Future Estate Capital City Rating

3.11

State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

HOBART 61.5% 113 7.4% 2.6% 2.7% 4.35

Future Estate Capital City Rating

3.79

* The State Property Market Score, which is out of 5, takes into account several factors, including demographic factors that indicate Future Growth, Quarterly House and Unit Median Price Growth Rates, Annual Dwelling Growth Rates and the Median Mortgage Payments as a proportion of the Median Household Income.

10

FUTURE ESTATE RESIDENTIAL PROPERTY MARKET UPDATE SEPTEMBER 2013

State Auction Clearance Rate State Days on Market (days) State Discount Rate Asking Price Index Change City Vacancy Rate State Property Market Score*

33% 194 10.6% 0.7% 1.9% 3.0

Future Estate Capital City Rating

2.70 Sources: Australian Property Monitors, Domain.com.au and SQM Research.

Future Estate’s Research Team has developed an extensive quantitative modelling process to critically assess the Australian Residential Property Market.

For the Capital City Rating, our team records, benchmarks, assigns weights to and scores various key property market lead indicators and descriptive statistics.

Our Services Include: §§ Buyers’ agency §§ Research – suburb reports and due-diligence markets §§ Personalised advice and investment strategy §§ Panel of “Endorsed Projects”- over $1bn portfolio of “investment grade” projects nationally §§ Contact us to arrange a complimentary consultation to discuss your needs

Please contact our team at Future Estate for more information on our methodology and/or our range of other property investment advisory services.

1300 future (388 873) info@futureestate.com.au www.futureestate.com.au @futureestate future.estate future estate

Copyright © Future Estate Group Pty Ltd 2013

This document contains general information and does not contain personal advice or financial product advice. This information has been prepared without taking account of your objectives, financial situation or needs. Accordingly, before acting on this information and making financial decisions, you should consider whether this information is appropriate for you and are recommended to seek independent financial, investment, tax and/or legal advice having regard to your own objectives, financial situation and needs. This information may contain material provided to Future Estate Group Pty Ltd by third parties. While such material is published with necessary permission, Future Estate Group Pty Ltd and its related entities accept no responsibility for the accuracy or completeness of this information, nor endorses it. To the maximum extent permitted by law, Future Estate Group Pty and its related entities disclaim all liability for any loss, costs or damage which arises in connection with the use or reliance on the information and material contained in this document. Any forward looking statements and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. Furthermore, past performance is not a true indicator of future performance. Any past performance information this document has been given for illustrative purposesUPDATE only and should not be relied upon as an indication of future performance.

FUTUREin ESTATE RESIDENTIAL PROPERTY MARKET SEPTEMBER 2013

12