ANZ PROPERTY OUTLOOK

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1 ANZ PROPERTY OUTLOOK May 1 Australia and New Zealand Banking Group Limited A.B.N ANZ Property Outlook is produced semi-annually by Economics@ANZ. Contributors to this issue: Ian James (Editor) Senior Economist () 97 Ange Montalti Economist () Richard Foale Economist () 97 8 Frank Foley Economist () 97 Paul Braddick Senior Economist () 97 8 Economics on the Web To view this publication, or other research products published online by Economics@ANZ, go to and click on the Economics link under ANZ Spotlight. NZ economic research can be accessed online by selecting New Zealand from the ANZ Worldwide dropdown box before clicking on the Economics link. Inside Economic overview The economy weakened dramatically towards the end of. Much of this was due to distortions to economic activity caused by the introduction of the new indirect tax system. While significant downside risks remain, economic activity is expected to revive next financial year with the construction sector rebounding off its present lows. (Paul Braddick: page ) Residential property Lower interest rates and the extension of the First Home Owners Grant are helping to insulate any negative sentiment towards the housing market stemming from the economic slowdown. With activity at GST-induced historic lows, moderate recovery is expected in the June quarter, accelerating later this year, as buyers pullforward activity to take advantage of the extra $7, offered until the end of 1. Several states are well placed to experience renewed house prices growth. Some market segments will struggle as the extended government grant distorts first-home buyer decisions. Bottom-end rentals and outer-ring established markets are likely to be adversely affected. The inner-city residential markets of Melbourne and Sydney appear to be in fundamentally good shape, with rapid household formation rates matching the high levels of building seen in recent years. (Ange Montalti: page ) Commercial property The weakness in the economy from late and into the early months of 1 is having an adverse impact on commercial property markets in the short term. However sector specific factors are also important. Industrial property markets are being adversely affected by an underperforming manufacturing sector. Hotels are suffering from oversupply. Weakness in retail trade last year, and the distortions caused by the introduction of the GST, has adversely affected retail property developments. In contrast, office property markets are in their best condition for a decade and developers are dusting off plans for new projects. (Frank Foley & Richard Foale: page 8)

2 ANZ PROPERTY OUTLOOK ECONOMIC OVERVIEW Policy will support renewed economic upturn A.% contraction in real GDP in the December quarter brought to an end an unprecedented 7 quarters of continuous economic growth in Australia. After averaging.8% over the previous three financial years, annual GDP growth fell sharply to only.1% over calendar. However, the dramatic decline in growth in the second half of the year substantially overstates the extent of the slowdown in underlying economic activity. Much of the apparent weakening reflects an inter-temporal shift of residential building activity into the first months of in order to avoid the GST. In fact, annual GDP growth excluding dwelling investment and the impact of the Olympics remained relatively steady at ¾% throughout the year. Macroeconomic fundamentals remain healthy and the usual preconditions for recession in Australia (rising inflation, a widening current account deficit and rising interest rates) are notably absent. While we now believe official interest rates may have bottomed, both monetary and fiscal policy will remain accommodative and should support a cyclical recovery in building activity and the general economy over the remainder of 1. Nonetheless, significant risks to growth remain. Restricted cash flows in the household and small business sectors have resulted in a marked increase in personal bankruptcies and corporate insolvencies. Moreover, weakening global growth expectations and rising inventory levels have led to a sharp decline in both business and consumer sentiment. Perhaps of even more concern are the recent sharp falls in the ANZ job advertisement series, which foreshadow a further deterioration in labour market conditions, and raise questions over the sustainability of household spending growth in 1. However, employment, bankruptcies and insolvencies are lagging indicators of economic activity and the present weakness in these series may well reflect the economic downturn in the second half of. After detracting from growth last year, domestic cyclical factors will turn supportive in 1 and global growth is forecast to recover solidly in the second half of the year. Hence, despite residual risks, we believe that the worst of the slowdown is behind us. While growth in the first half of the year is being tempered by an inventory adjustment and subdued business confidence, activity should regain momentum through the course of 1- and provide a positive backdrop for property markets. The rebound in growth will be led by a renewed upturn in dwelling investment (boosted by lower mortgage rates and the extension to the first homebuyer s scheme) and a coincident recovery in non-residential building activity. Much of the weakness in employment experienced to date has been either directly or indirectly associated with the collapse in building activity. Consequently, a renewed upturn in building activity should also provide a positive impetus to the broader economy. The inflation outlook is subdued and we expect interest rates will remain at low levels through 1-. Hence, we are cautiously optimistic about the economic outlook and after slowing to only % in -1, GDP growth is forecast to strengthen to.% in 1-. Construction to rebound in 1- A % decline in construction activity in the second half of, was the major culprit behind the sharp turnaround in economic growth. The countercyclical spike in residential building activity in the first half of was always likely to result in an equivalent post-gst contraction. Coincident steep downturns in both non-residential building and engineering construction exacerbated the downturn in the sector and had substantial negative impacts on upstream suppliers and household spending. However, the surprisingly rapid post-gst decline in housing investment suggests the majority of the necessary adjustment was compressed into the second half of. Annualised dwelling approvals in the March quarter of only 11, remains substantially below underlying housing demand of around 17, and in contrast to recent cyclical housing downturns, excess supply estimates in 1 are relatively low. As a result, the downturn, while sharp, should be relatively short-lived. Approvals data suggest that activity is close to its nadir and we expect a cyclical upturn in housing will gain momentum in mid-1. Non-residential building and engineering construction are also forecast to recover in 1.

3 ANZ PROPERTY OUTLOOK RESIDENTIAL PROPERTY National Trends Residential building construction is experiencing a severe downturn. A large part of this weakness can be attributed to the natural correction to GST-pull forward, although some dwelling oversupply and the lagged effects of higher interest rates through, have also combined to propel falls in activity. Expenditure on new dwellings has fallen 7% since peaking in the June quarter while spending on renovations and extensions has also fallen sharply. Building approvals, after showing tentative signs of bottoming towards the end of, collapsed to an annualised rate of 11, in the March quarter (largely driven by the medium-density sector), well below that required to satisfy new household formation. $bn, 1997/98 prices Source: ABS Cat. No. 871.,. Building is bottoming New dwelling expenditure Alterations & Additions 1 1 Number, sa, Finance approvals for established dwellings Building approvals Finance approvals for construction Mortgage rate reductions in the first half of 1, the extension of the first-home buyer grant (lapsing end- 1) and progress in absorbing excess dwelling supply are establishing pre-conditions for recovery. Dwelling starts are projected to rise moderately from the June quarter, accelerating later this year and into as the first-home buyer grant pulls activity forward (an estimated net, additional dwellings). A temporary interruption to growth from around mid- can be expected as this pullforward corrects. Established market remains strong Contrary to historical patterns, turnover of the established market has held up relatively well over this period of significant building adjustment. High auction clearance rates, anecdotal evidence of continued prices strength and record new homes sales suggest positive sentiment has carried well into 1, despite the more pessimistic tenor surrounding the economy generally. Finance for established homes has also remained at near-record levels while building has slumped. Accommodating policy settings are insulating housing churn from the tougher economic climate with services related to the turnover of dwellings (e.g. real estate agents, conveyancing companies, mortgage originators and state government stamp duty collection) likely to experience continued growth. Inner cities not over-supplied? Strong inner-city building prompted some flag waving (including by us in the November issue of Property Outlook), warning of severe short-term oversupply. Recent hard data on inner-city unit prices for Melbourne (up 1% over Calendar ) and Sydney (up %) suggest demand has remained firm. Inner-city household formation rates for Melbourne and Sydney have been sufficient to absorb the medium-density and multi-storey activity seen in the past few years. While inner-city residents are more likely to be transient, the social, recreational and more recently, staple infrastructure which has developed within and around these locations, combined with changes in family and household structures suggest the lure of lifestyle will be ongoing. With inner city building levels now falling, the threat of oversupply and lower capital values has faded for the time being. 1 1 Number Households move to inner city Inner-Sydney Building Approvals* Annual change in no. of households Inner-Melbourne Number * rolling annual sum, June years Source: ABS Cat. No , 871., 1.1, 1., Unpublished ABS Small Area Statistics 1 1 Annual change in no. of households Growth in house prices moderates Building Approvals As expected, the direct GST impact on new home prices was significant, reflected in a 9.% jump in the September quarter. The impact on established housing was most probably felt in the period leading up to GST implementation. Higher mortgage rates

4 ANZ PROPERTY OUTLOOK through removed some of this momentum, with established house prices growth slipping from almost 1% in the year to June to.% through calendar. Lower interest rates will put renewed upward pressure on prices growth through 1, although scope will be limited in regions where affordability and rental yields are already very low. Construction proposals in outer-suburban rings and newly-built medium-density projects will be the biggest winners, while middle- and outer-ring established markets are expected to come under some pressure as demand shifts to these favoured sectors over the remainder of 1. Rentals are also likely to improve. Gross yields have fallen, quite sharply in some capitals, and GSTinduced cost rises have to-date been largely absorbed by landlords. Rent reviews should begin to reflect these changed market conditions over the course of 1; although rising vacancy rates suggest scope for ongoing higher rental growth may be limited. This is particularly the case in the bottom-end rental market, which will have to contend with existing and prospective tenants being encouraged by government assistance to seek owner-occupation. Fundamentals are being restored Underlying demand for dwellings has plateaued in recent years, well below mid-199s levels. An easing in business migration quotas in 1999-, while potentially lifting population growth, is unlikely to outweigh the dampening effects of a slower economy and higher unemployment. 1 Market will be in balance by June Number, Underlying Requirement 1 Completions Forecasts Source: ABS Cat. No. 87.,., ANZ Estimates and forecasts Months demand Shortage Surplus NSW VIC QLD 1 Months demand Shortage 1 Shortage - Surplus Surplus SA WA TAS 18, dwellings will be fully absorbed by June, bringing the market into overall balance. Looking after the baby-boomers The ageing of baby-boomers will be imposing a strong, but glacial influence, over housing demand patterns over the course of the coming decade. This pre-retirement cohort will consider housing options, which satisfy what are, for many, conflicting social and economic agendas. While lifestyle dwellings (inner-rings, coastal and country retreats) are an option for high income/high wealth segments, the bulk of the household sector at this life-stage will face more limited choices. Strength of local communities and the availability of social infrastructure will be valued highly Most over-s tend to stay put Million Change in number of people 1 years to: to to 9 to + % 1 1 Propensity to purchase dwelling by age group* * Recent home buyers in each age group as % of total households in each age group Sources: ABS Cat. No. 11.,. (* Series II projection - assumes net migration of 9, per annum) and 18.. * purchased in last three years. Identifying housing solutions that enable these factors to be protected or developed further is likely to offer new growth opportunities to a building industry which will have to contend with a stagnant first-home buyer market and a significantly less buoyant upgrader market. A key challenge for building marketers is the mobilisation of older segments which, traditionally, have been less inclined than younger people to change their housing arrangements. For the baby-boomers themselves, a major challenge will be maximising market values over a period when demographics will be changing housing demand dynamics. Dwelling starts forecasts: 99/: 17., /1: 11.7, 1/:11.1, /: 1.8, / : 17. Underlying demand is projected to average around 17, dwellings per annum over the next four years, comparable to the average over the past four years. With activity levels remaining subdued in the short-term, the estimated oversupply of around

5 ANZ PROPERTY OUTLOOK State Trends Migration patterns and demand/supply imbalances at the state level will bear significantly on the strength and durability of recovery over the next few years. Leading indicators are already hinting that recovery will not be uniform across state borders. Building approvals already showing divergence Index: Jan-9 = Victoria NSW Queensland Source: ABS Cat. No New South Wales Tasmania South Australia Western Australia The NSW housing market under-performed through the most recent national upswing but still experienced substantial falls through the second half of, with building approvals reaching their lowest level since the mid-198s. A post-olympics economic slump, the lagged effects of weaker population growth and a significant deterioration in housing affordability have reduced housing demand and driven a sharp reduction in house price growth (from a peak of 1% in the year to March to % through calendar ) Number, trend, ' NSW approvals hit record lows NSW houses NSW flats, units etc Source: ABS Cat. No. 871., Unpublished ABS Statistics, Market Facts REIA, 7 1 % Sydney rental yield Sydney vacancy rate New home sales and auction clearance rates data suggest this mild sentiment continued into 1, although the recent stimulatory effect of lower interest rates and the first home-buyer grant (worth.% and % of housing values) are beginning to reflect in home-buyer decisions. Approvals are currently trending at an annual rate of 1,, short of the, dwellings required to satisfy new demand. This should accelerate the takeup of excess dwelling stock (1,), estimated to fall to minimal levels by. Low rental yields and poor affordability also suggest there will be constraints on values, particularly with employment and incomes growth slowing. Several new high-density inner-city proposals have received approval recently, suggesting a healthy pipeline of activity. Given strong population draw into inner-sydney, current levels of activity can be sustained without severe imbalances, a condition that will be maintained by the limited availability of conversion sites. However, this scenario could be threatened if volume residential projects (e.g. Pyrmont) are developed too quickly. Dwelling starts forecasts: 99/:.9, /1:., 1/: 9.9, /:., /:.1 Victoria The Victorian market continues to outperform. While falls in activity have been significant through much of, approvals have clearly bottomed and had, by March 1, already risen 1% above the recent trough (8% above the late 199 trough!). A shortage of dwellings, a sustained improvement in net interstate migration and a solid economy, have been supporting housing demand and prices growth in recent years. Medium-density development has been particularly strong, in both inner-city localities and metropolitan areas, with unit approvals re-bounding from already high levels.... Activity re-bounds but values vulnerable Number, trend, ' Victorian houses Victorian flats, units etc.. Melbourne vacancy rate Source: ABS Cat. No. 871., Unpublished ABS Statistics, Market Facts, REIA 7 % Melbourne rental yield

6 ANZ PROPERTY OUTLOOK Net interstate migration has improved significantly since the mid-199s, from a net annual loss of around, people to a net gain of 9, in the year to September. However, with the Victorian economy expected to under-perform slightly in the next year, a reversal in migration has been projected. Underlying demand for dwellings is estimated to decline from around 7, dwellings in to, by -, but given pent-up demand, is not expected to interfere with a recovery in the market. Rising mortgage rates through put a check on prices growth but buyer sentiment has remained buoyant in 1. New home sales were up strongly, even ahead of a remarkable grant-induced jump in March, and auction clearance rates have been high on solid volumes. 1 1 annual % change Established house prices Melbourne Sydney Queensland The Queensland housing market is approaching the end of a prolonged period of adjustment, lasting well over a decade. Sustained improvement in activity and prices still depends on absorbing excess dwelling stock, improved economic performance and a return to long-term trend population growth. With building approvals trending at an annualised rate of, (1-year low) and an underlying requirement of just over,, dwelling oversupply, while significant, is being absorbed quickly. The Queensland economy is projected to grow solidly over the medium-term, sustaining real GDP growth above % by. This strength should be providing necessary inducement for restoring migration, (at Victoria s expense?). Against this background, underlying housing demand is projected to edge upwards to, by, accelerating the dwelling stock adjustment. 7 Rebound in migration critical to outlook Persons, Net interstate migration (rolling annual sum) 7 Ratio Ratio of median house prices to average household income - Brisbane Queensland NSW Source: ABS Cat. No. 1. But record low rental yields, low affordability and a notable rise in rental vacancy rates suggest market values are vulnerable to any deterioration in sentiment. While lower economic growth and rising unemployment pose risks, accommodating policy measures will limit further moderation in prices growth in 1-. Beyond this point, however, Melbourne home prices remain vulnerable, entering a phase, which, at best, will see current levels consolidate. Melbourne s inner-city market is in reasonable balance, with strong activity supported by high rates of household formation. The Docklands precinct offers considerable scope to expand lifestyle opportunities, but the pace at which this development proceeds could undermine the steady state which the inner-melbourne market is currently experiencing. Dwelling starts forecasts: 99/: 8., /1:.9, 1/: 7., /:., /: Victoria Source: ABS Cat. No. 11.,., HIA, ANZ calculations Vic Qld The prices boom experienced in both Sydney and Melbourne since the mid-199s has largely by-passed Brisbane, although some strength has been evident in recent quarters. Above average rental yields, good affordability and improved economic growth prospects for Queensland provide scope for a realignment of price levels among Eastern capitals over coming years. Dwelling starts forecasts: 99/:., /1:.8, 1/:.8, /: 8., /:. South Australia Continued sluggishness in population growth and a weak economy will constrain recovery in housing activity in South Australia. Building approvals fell sharply over the second half of, following a very rapid pre-gst acceleration. Detached housing approvals have taken the brunt of recent declines,

7 ANZ PROPERTY OUTLOOK 7 falling by more than % but despite these falls, approvals were running at a level comparable to the, dwellings required to satisfy new demand. A racheting down in activity levels to meet reductions in demand in the mid-199s has averted a chronic Queensland style oversupply problem, leaving demand/supply fundamentals in relative balance. Pre-GST activity boom eases market conditions Number, trend, ' SA houses. SA flats, units etc. -. Adelaide - vacancy rate. -9 (right, inverted) Source: ABS Cat. No. 871., 1., Market Facts, REIA % change % Adelaide established house prices (left) Annual growth in established house prices slowed sharply over the second half of, following solid growth through Rental vacancies are rising again, a trend which may be exacerbated by a grantinduced shift in housing demand out of rental markets and into owner-occupation. That said, housing affordability remains favourable, suggesting considerable scope for higher prices growth in the short-term (first-home buyer grants equate to % and 1% of median house values). Sustaining activity at higher levels (i.e. back to the early 199s levels) is going to require a significant turnaround in net interstate migration, supported by economic performances closer to the national average, neither of which at this stage is in prospect. Dwelling starts forecasts ( ): 99/: 9., /1:., 1/:., /:.8, /: 8. Western Australia Western Australia has experienced a typical dwelling cycle, although building approvals have continued to fall in the March quarter, showing no sign of recovery at this stage. Providing grounds for some optimism, however, new home sales have risen strongly since late, a trend which did continue in March 1 as interest rates fell and the effects of the first-home buyer grant started kicking in. 1 swing variable, expected to return to trend levels by, boosting annual underlying demand over this period to around 18,. With activity running at around 1, dwellings, and pent-up demand, conditions are ripe for a solid and sustained recovery. Reflecting these tight market conditions, house prices growth continued to trend upwards over calendar. Very good affordability and healthy rental yields suggest there is plenty of scope for this momentum to continue WA nearly set for solid rebound Number, trend, ' WA houses WA flats, units etc Source: ABS Cat. No. 871., 1., Market Facts, REIA % change % Perth established house prices (left) Perth vacancy rate (right, inverted) Dwelling starts forecasts: 99/:.9, /1: 1., 1/: 18., /: 1.1, /:. Tasmania Tasmania s population is shrinking, with a net annual loss of, to mainland states in the year to September. Relatively weak economic prospects suggest little scope for a turnaround, although temporary weakness in the Victorian economy may offer some respite. New housing demand can be expected to remain fairly subdued with annual underlying demand projected to decline to around 1, dwellings over the medium-term. Despite a substantial fall in approvals to date, they are still running only slightly below underlying requirements, suggesting there may be some resistance to recovery in the early stages. The rental market appears to be moving into better balance with vacancy rates continuing to fall, but this is more likely to reflect a withdrawal of stock from the market (discouraged landlords) than any rise in demand for rental properties. Dwelling starts forecasts: 99/: 1.77, /1: 1.1, 1/: 1., /: 1., /: Population growth is expected to improve over the medium-term, underpinned by solid economic performances. Interstate migration will be the key

8 ANZ PROPERTY OUTLOOK 8 COMMERCIAL PROPERTY CBD office markets Limited building and increased take up rates have lead to falling office vacancy rates. This is particularly true for premium space, where supply is tight producing vacancy rates below % - making this sector the key driver of a more favourable outlook for office property. With lower vacancy rates and a strong economy through most of last year, moderate growth in commencements in Sydney and Melbourne should be sustainable in the medium term. However, with the economy now in an economic downturn, growth in demand for office space is likely to fall in the short term, tempering the enthusiasm (and justification) for new office projects. Industrial markets Weak growth in manufacturing has curtailed construction of industrial property. Space in industrial premises under construction in Sydney declined by more than half between the December quarter 1999 and the December quarter, with construction of traditional industrial accommodation in Melbourne reportedly down by around two-thirds in the same period. This weakness has been exacerbated by the sharp downturn in the economy in the December quarter with leasing and precommitments reportedly falling by %, Australiawide, compared to the September quarter. 1 % oya Manufacturing out-paced by GDP Vacancies support moderate building activity % Perth Melb. Syd. Adelaide Real GDP Real Mfg output 1 Brisbane Hobart - Dec-91 Dec-9 Dec-9 Dec-9 Dec-9 Dec-9 Dec-97 Dec-98 Dec-99 Dec- Source: ABS Cat.No Source: ABS Cat. No. 87. The current weakness in the economy will lead service firms to emphasize cost reduction and containment. In the face of strong growth in rents, most corporations are likely to look keenly at office accommodation expenses to reduce costs, including relocating away from the expensive CBD and reducing workspace per employee. Although, the current economic slowdown is expected to temper new developments, the office property sector in general is in better shape now than it has been in earlier economic downturns. Moreover, the risk of oversupply developing is less. Property analysts (having learnt from 199) are warning of the dangers of over-exuberance due to recent positive trends in rents and vacancies, and developments tend to require pre-committed tenants before proceeding. We expect the office property market to remain poised for moderate expansion when economic activity strengthens next financial year. While cyclical influences are dominant in the near term, the industrial property market is being affected by manufacturing s declining share of economic activity and employment, and by changes in the type of premises required. Industrial premises now need to accommodate hi-tech equipment and provide a higher proportion of office space. Downsizing reduces employee numbers, influencing the size of premises required. Cost-effective locations are sought. Sites for factories/warehouses conveniently located to modern, efficient roads and good infrastructure, offering the scope to tailor-make premises, are favoured over older-style city-fringe locations. These changes in the character and location of industrial premises will underpin new construction, even as much existing industrial property languishes. For the time being, the deteriorating economic outlook suggests that demand for factories, and warehouse accommodation, is unlikely to pick up this year.

9 ANZ PROPERTY OUTLOOK 9 Retail markets Retail sector building activity slowed over with commencements and value of work done, down by 1% and 1%, respectively. This downturn followed a peak in activity the previous year. However, by historic norms, the level of activity remains relative high and well above the levels of the early 199 s.,,, 1, $ million Shop building activity slowing Real value of shopbuilding approved (moving avg.) Tourism accommodation markets The Olympic-inspired building boom of recent years has clearly come to an end. Building activity in the hotel, motel/guesthouse and serviced apartment sector slowed dramatically over and this looks certain to continue throughout the first half of 1 with building approvals, as at March 1, down by % since the end of 1999., 1,8 1, 1, 1, $ million Collapse in building activity Real value of hotels etc. approved (moving avg.) 1, 1, Real value of shop building work done (moving avg.) Source: ABS Cat No. 87., DX Nonetheless, the adverse impact of the current economic downturn on yields is also likely to keep building activity subdued. While ABS retail sales figures have shown surprising resilience in early 1, trading conditions remain tough. Retailer profit margins have been in decline for 18 months and this trend is likely to worsen following a build-up in inventories from the latter half of last year. Runningdown these excess stocks in a climate where consumer confidence is at its lowest levels since the early 199s will probably be dependant on some level of price discounting (and margin sacrificing). Particular areas of sales weakness have been amongst clothing, furniture and floor coverings and recreational goods retailers. By contrast, sales have been improving in the takeaway food, domestic hardware and selected services areas. In this economic climate and with margins squeezed, further retail property development is likely to be restrained. Building activity in 1, will be largely concentrated in bulky goods store developments near the newer growth suburbs (where there is a greater demand for household goods). In addition, the continuing success of new café and coffee retail outlets will encourage continued refurbishments in the more affluent inner city strip shopping areas. 8 Real value of hotels etc. building work done (moving avg.) Source: ABS Cat No. 87., DX The Olympics was always a certainty to deliver strong tourist demand for accommodation in. However, the benefits overwhelming flowed to NSW and Victoria whilst other markets (particularly Queensland) suffered falling patronage. Therefore, overall national visitor nights were only up by % on the previous year and occupancy rates remained around the average of the latter half of the 199s (about 8%). The Tourism Forecasting Council has predicted further growth for Australia s inbound tourism from the promotional impacts of the Sydney Olympics (and the weak $A). Visitor arrivals are forecast to increase by an average of 7.% over the next 1 years, but changing accommodation preferences and less time spent in Australia by international tourists, will result in visitor nights in hotels, motels and guest houses growing more slowly. If this rosy forecast for overseas arrivals is borne-out it will assist in reducing the current glut in tourist accommodation establishments relatively quickly. Economics@ANZ s optimistic economic outlook for 1- is also supportive of rising occupancy and room rates, however, it will require an extended period of rises to initiate the next building cycle. In the meantime, the sector remains oversupplied.

10 ANZ PROPERTY OUTLOOK 1 Melbourne In Melbourne's CBD office market, vacancies for premium space are reportedly below %. Given the lead times for any new space to come on to the market, rents are likely to be firm despite the sluggishness of the economy. Tight availability in the CBD area has likely assisted the strengthening of the suburban office market. Vacancy rates in Melbourne's inner city and southern regions have fallen. Strength of demand in these locations reflects a large proportion of tenants in business services. (The more industry-oriented northern suburbs have a much higher vacancy rate.) While any worsening of trading conditions in the industrial base would eventually flow through to the business services sector, the current strength of demand, low vacancy rate and the fact that most office buildings under construction in Melbourne's suburbs have pre-committed tenants, should provide some insulation from weaker economic activity. The value of factory commencements was strong last financial year assisted by The Age newspaper printing facility. However, Melbourne's industrial sector will be adversely affected by the current weakness in the manufacturing sector. Melbourne tourist accommodation establishments experienced very favourable conditions in. However, a large increase in the supply of rooms in late /early 1 will keep occupancy and room rates under pressure. Bulky goods centres are dominating retail sector building activity in Melbourne at present. Sydney The current economic slowdown has adversely affected demand for commercial property in Sydney. However, this is expected to be temporary with economic growth recovering next financial year. Sydney enjoys the lowest office vacancy rate amongst the capital city CBDs. Lease expiries and some fall out from the collapse of dot.com companies will have an influence on the structure and the take-up of office space. A substantial amount of Sydney s better quality space is due for lease renewal in the next year or two. Over the medium term, Sydney appears in the best position to cope with a substantial increase in supply without creating a supply/demand imbalance. Sydney office space take-up exceeding new stock,,, 1, 1,, -, -1, -1, -, sqm Additions to stock Net take-up of office space, 1 mths to Jan-9 Jan-9 Jan-9 Jan-9 Jan-9 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Source: Property Council of Australia In industrial property, the lack of new building has underpinned some rental growth. A limited supply of existing sites, demand from hi-tech companies and the rezoning of industrial sites have assisted rises. Currently activity in this sector is weakening in line with the slowing economy. After a frenetic hotel building boom in the lead-up to the Olympics, it will take some time to justify further construction activity. However, favourable economic conditions in 1- and growth in tourist numbers assisted by the weak $A, should enhance the profitability of the sector. New building and redevelopment of retail property is likely to slow. Further development is anticipated to be concentrated in new areas of population growth and further bulky store developments. Brisbane The Brisbane office market has been burdened with oversupply and commencements have declined in the past two fiscal years. However, take-up of office space in the past 1 months or so has been relatively strong, causing the vacancy rate to decline to 7.% at January this year from 9.1% in January. With take-up expected to remain strong, the increased supply from several CBD projects reaching completion this year is not expected to have an adverse effect on the vacancy rate as it will impact the premium end of the market where supply is very tight. However, there is the potential for new building to become excessive beyond the next year or two due to the availability of new sites. Brisbane's industrial market has been fairly stable in recent years. Currently, investor interest is primarily in premium quality stock. Locations like the Brisbane Airport Corporation and Brisbane Port are attracting investors due to their useful location and easy access. The weakening economy has begun to

11 ANZ PROPERTY OUTLOOK 11 take its toll however, as sales and enquiries appear to have slowed in the first quarter of this year. The Olympics coincided with (and thus spoiled) the traditional peak period for the North Queensland tourist industry, but this had little impact on the profitability of Brisbane hotels. Occupancy and room rates are expected to rise with few new developments proposed in the immediate future and continued growth in tourism numbers. In retail property, resilient retail sales in, despite the GST, has led to a large amount of construction activity planned for 1. Adelaide The office market in Adelaide remains oversupplied. However with net absorption strong (assisted by public sector take-up) average vacancy rates have fallen from around % to near 1%, although premium CBD space has less than a 1% vacancy rate. There are no major projects in the pipeline, and additional approved space is expected to proceed only if pre-commitments are secured. Adelaide s industrial property is being adversely affected by the weakness in the manufacturing sector. Construction of factory space has been slowing since late last year. At the same time, take-up of new space has weakened, while rents have been fairly stable. Building activity in Adelaide s retail property sector is likely to be underpinned this year by the construction of a number of bulky goods developments planned. The Adelaide hotel market performed well in the first half of but suffered during the Olympics and in the aftermath. With only slow growth expected in tourism and nights spent in tourist accommodation, it is doubtful that this market could support much of an increase in supply. Perth The downward trend in the CBD market s vacancy rate accelerated last financial year. This reflected the absorption of over, m in 1999/, the highest take-up in three years. While demand is expected to be weaker for most of this year due to the slower economy, downward pressure on the vacancy rate is expected to continue, with only a limited increase in stock in the near term. However, some ensuing developments such as the m Woodside project presents the risk of significant upward pressure on vacancy rates. Before economic conditions began to weigh on the industrial market, developers were reportedly paying premium prices for well-located sites. However, due to concerns about the slowing economy, new building this year is likely only on the basis of pre-committed tenancy. Looking to the medium term, the strength in the market in evidence earlier, is expected to return. The Perth retail property market appears healthy at present with good returns and a large number of new construction proposals having received approval. However, weak retail sales could impact on plans for further building activity. Growth in tourist accommodation building activity was stronger in Perth than anywhere else in Australia in with strong growth in serviced apartment establishments. As a result, they now comprise 1% of the Perth market (compared to 17% of the national market). Hobart A fall in total stock available and net absorption of some m has led to a fall in Hobart s CBD office vacancy rate. The fall in vacancies occurred at the premium end of the market. Despite the encouraging decline in vacancies, Hobart's rate remains higher than all other capital cities and it remains in oversupply. Demand in Hobart's primary industrial market has been good, reflecting a shortage of newer factories. However, secondary market industrial premises are languishing. Tasmanian retail sales figures were dismal in so significant increases in retail floor space, and thus building activity, appear unlikely in 1 Tasmanian tourist numbers recovered well in, which boosted hotel room rates in Hobart. However, the Tourism Forecasting Council is forecasting that visitor nights will only increase slowly over the next couple of years, which will be insufficient to prompt significant new hotel developments.

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