Quarterly Australian Commercial Property Survey: December 2012

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1 Summary Report Embargoed until: 11.3am Wednesday February 13 Quarterly Australian Commercial Property Survey: December 12 NAB Commercial Property increased slightly to -17 points in Q4 12 but performance varied across individual property markets. CBD hotel index rose strongly, but retail and office indices hit new lows as economy slowed. Recovery expectations also postponed in all markets, with property professionals less optimistic about prospects for longer-term capital and income growth. WA identified as strongest market nationally, but NSW the most optimistic state by end- 14 with Victoria lagging. Debt and equity funding still a problem for developers and consumer confidence continues to be identified as the main challenge for property firms in the next year. Capital values fell in all sectors in Q4 12 except CBD hotels (1.7). Values fell most for retail (-1.4) and industrial (-1.2) property. Office slipped -.6. CBD hotels enjoy strongest outlook (3 by Q4 13 and 4 by Q4 14). Modest growth predicted for industrial (.3 and 1.2) and office (.1 and 1.2). Retail least optimistic with values to fall -.2 in next year and rise.8 by Q4 14. Rents also contracted in all markets in Q4 12 led by retail (-2.1) with rents down in all states. More subdued expectations in office market with rents to remain flat in next year and grow 1 by Q4 14. Rental expectations for industrial property also revised down with rents to grow.8 in next year and 1.7 by Q4 14. Retail participants slightly less pessimistic this quarter with average rents to fall -1. in next year and -.4 by Q4 14. With income returns falling further, rental incentives have become more important in all property markets. Office market supply currently neutral and expected to remain so in all states in next 1- years. Retail markets somewhat over-supplied but neutral conditions to emerge in 3- years. Industrial market balanced in all states except WA (modestly under-supplied), but set to tighten in next 3- years. CBD hotel market currently undersupplied but situation expected to rectify in 3- years. Vacancy rates rose in all markets in Q4 12 and are expected to improve only gradually in all markets over the next 2 years reflecting a subdued development pipeline and softer conditions in all property segments. Despite difficult market conditions, slightly more developers are planning to commence works in the near-term according to the survey. Consequently, more survey participants also plan to source funds in the next 6 months. Residential property remains the most favoured property type for new development. Debt and equity funding is still seen as a problem for property developers, but less so than in Q3 12. Funding seen as most difficult for Victorian developers. on bank pre-commitment requirements for new developments rose to 8 in Q4 12 after falling in the 2 preceding quarters. Queensland and Victoria are the most negative states with regards to average precommitment expectations to secure development funding. WA and NSW the most positive states. Consumer confidence still the main challenge for property firms but concerns over regulation/red-tape growing. 1 NAB Commercial Property 8 NAB Commercial Property Mar-1 Jun-1 Sep-1 Dec-1-6 Retail CP Office Industrial CBD Hotels CP Office Retail Industrial CBD Hotels NAB Commercial Property : December Quarter 12 Jun-1 Sep-1 Dec-1 Office Retail Industrial CBD Hotels CP For more information contact: Alan Oster, Chief Economist (3) Robert De Iure, Senior Property Economist (3) Dean Pearson, Head of Industry (3)

2 Commercial Property Market Overview Embargoed until 11.3am Wednesday February 13 Commercial Property rises slightly in Q4 12..solely on the back of CBD hotels 1 NAB Commercial Property 8 NAB Commercial Property Mar-1 Jun-1 Sep-1 Dec-1-6 Retail CP Office Industrial CBD Hotels CP Office Retail Industrial CBD Hotels Forward expectations soften and index lower in all states bar Victoria Mar-1 NAB Commercial Property Jun-1 Sep-1 Dec NAB Commercial Property by State Australia Victoria NSW Qld SA/NT WA NAB retail index slips to new low in Q4 12 and retail markets very weak in all states 3 NAB Retail Property 6 NAB Retail Property by State Mar-1 Jun-1 Sep-1 Dec-1 NAB Retail () NAB Retail () NAB Retail () Office index hits a new low in Q4 12 and forward expectations also soften Australia Victoria NSW Qld SA/NT WA WA the most resilient state for office in Q4 12 but NSW strongest by end-14 and Victoria weakest 8 NAB Office Property 1 NAB Office Property by State Mar-1 Jun-1 Sep-1 Dec-1 NAB Office () NAB Office () NAB Office () Australia Victoria NSW Qld SA/NT WA 2

3 Embargoed until 11.3am Wednesday February 13 Industrial index unchanged in Q4 12 but forward expectations pared back Mar-1 Jun-1 Sep-1 Dec-1 NAB Industrial Property NAB Industrial () NAB Industrial () NAB Industrial () CBD hotel index rises strongly in Q4 12 and remains the most optimistic sector going forward NAB CBD Hotels CBD Hotels () CBD Hotels () CBD Hotels () Average capital values fell for all property segments in Q4 12 bar CBD hotels; outlook weaker NSW seen as the best state for industrial property in Q4 12 with Victoria the weakest NAB Industrial Property by State Australia Victoria NSW Qld WA There is wide variance in opinion as to where each market is in the current cycle 1 1 Already Recovering Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 214 Q1 1 Q2 1 Q3 1 Q4 1 Recovery of Respondents 2 Office Market Retail Market Industrial Market Already Recovering Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 214 Q1 1 Q2 1 Q3 1 Q4 1 Already Recovering Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 214 Q1 1 Q2 1 Q3 1 Q4 1 Rental returns also negative in all markets in Q4 12 and outlook subdued in all markets Capital Value Gross Rental Mar-1 Jun-1 Sep-1 Dec-1 Mar-1 Jun-1 Sep-1 Dec-1 Office Retail Industrial CBD Hotels Leasing incentives more important in all markets. Office Retail Industrial Retail over-supplied; CBD hotel shortage persisting 1 Importance of Leasing Incentives (net balance) Supply Conditions Retail 8 Office 6 4 Industrial CBD Hotels Retail Office Industrial Quite Quite Somewhat Over Neutral Somewhat Under Over-Supplied Under-Supplied Supplied Supplied Current 12 months 3 years years 3

4 Embargoed until 11.3am Wednesday February 13 Vacancy rates creep up in all markets in Q4 12 More planning new developments in the short-term 9. Vacancy Rate of Responses Development Commencements Mar-1 Jun-1 Sep-1 Dec-1 In the next month 1 month to less than 6 months 6 months to less than 12 months 12 months to less than 18 months Longer time frame Office Retail Industrial but majority of developers still seeking to develop new projects in the residential space More developers looking to cash in on land-banked stock for new projects 6 Development Commencements by Sector ( of respondents) 8 Sources of Land Development ( of respondents) Sep-1 Dec-1 Residential (LHS) Industrial (RHS) Office (RHS) Retail (RHS) 4 Mar-1 Jun-1 Sep-1 Dec-1 Land-Banked Stock (LHS) New Acquisition Opportunities (RHS) Refurbishment of Existing Stock (RHS) Other (RHS) Debt and equity funding still a problem for property developers but less so than in Q3 12; Bank pre-commitment requirements rise in Q4 12 but expected to soften in next 3-6 months Net Balance 1 Ease of Acquiring Debt/Equity 6 Pre-Commitment Requirements Net Balance Mar-1 Jun Sep Dec Q1'1 Q2'1 Q3'1 Q4'1 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q3'1 Q4'1 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4' Debt Equity Percentage Required (LHS) Expected Trends: Next 6 Months Expected Trends: Next 12 Months Consumer confidence still the main challenge for property firms but regulation/red-tape also rising Survey respondents expect interest rates to continue falling in the next 12 months Critical Challenges over Next 12-months Consumer Confidence. Interest Rates Govt Regulations/Red Tape/Bureacracy/Incompetence Finance/Funding Staff (NFI) Availability of Stock/Stock Levels/Suitable Stock Cash Flow 3. Quality/Skilled Staff/ Recruiting Good Staff Interest Rates 3. Sales/Sales Rates percentage of respondents Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 4

5 Embargoed until 11.3am Wednesday February 13 Tables Survey Respondents : December 12 Capital Values () OFFICE Victoria NSW Queensland WA SA/NT* AUSTRALIA RETAIL Victoria NSW Queensland WA SA/NT* AUSTRALIA INDUSTRIAL Victoria NSW Queensland WA SA/NT* AUSTRALIA Gross Rents () OFFICE Victoria NSW Queensland WA SA/NT* AUSTRALIA RETAIL Victoria NSW Queensland WA SA/NT* AUSTRALIA INDUSTRIAL Victoria NSW Queensland WA SA/NT* AUSTRALIA Vacancy Rates () OFFICE Victoria NSW Queensland WA SA/NT* AUSTRALIA RETAIL Victoria NSW Queensland WA SA/NT* AUSTRALIA INDUSTRIAL Victoria NSW Queensland WA SA/NT* AUSTRALIA n/a n/a n/a n/a.3 * Limited sample size

6 Embargoed until 11.3am Wednesday February 13 About the Survey In April 1, NAB launched the inaugural NAB Quarterly Australian Commercial Property Survey with the aim of developing Australia s pre-eminent survey of market conditions in the Commercial Property market. The large external panel of respondents consisted of Real Estate Agents/Managers, Property Developers, Asset/Fund Managers and Owners/Investors. Given the large number of respondents who are also directly exposed to the residential market, NAB expanded the survey questionnaire to focus more extensively on the Australian Residential market. Around 27 panellists participated in the December 12 Survey. The breakdown of our Survey respondents - by location, property sector and business type - are shown below. Respondents by State Respondents by Property Sector Respondents by Business Type SA/NT Western Australia 12 ACT 3 Tasmania 1 Victoria 2 Hotels/ Entertainment Infrastructure 6 2 Other 6 Office Property 16 Retail Property 16 Fund Managers (Real Estate) Owners/Investors in 3 Real Property Valuers 6 Other 1 Real Estate Agents and Managers 39 Queensland 26 New South Wales 26 Residential Property 43 Industrial Property 16 Property Developers 17 Asset Managers/ Property Operators 13 6

7 Embargoed until 11.3am Wednesday February 13 Global Markets Research Group Economics Peter Jolly Global Head of Research Australia Economics Rob Henderson Chief Economist, Markets Spiros Papadopoulos Senior Economist David de Garis Senior Economist FX Strategy Ray Attrill Global Co-Head of FX Strategy Emma Lawson Senior Currency Strategist Interest Rate Strategy Skye Masters Head of Interest Rate Strategy Rodrigo Catril Interest Rate Strategist Credit Research Michael Bush Head of Credit Research Ken Hanton Senior Credit Analyst New Zealand Stephen Toplis Head of Research, NZ Craig Ebert Senior Economist Doug Steel Markets Economist Mike Jones Currency Strategist Kymberly Martin Strategist UK/Europe Nick Parsons Head of Research, UK/Europe, and Global Co-Head of FX Strategy Gavin Friend Markets Strategist Tom Vosa Head of Market Economics Simon Ballard Senior Credit Strategist Derek Allassani Research Production Manager Alan Oster Group Chief Economist Tom Taylor Head of Economics, International Rob Brooker Head of Australian Economics Alexandra Knight Economist Australia +(61 3) Michael Creed Economist Agribusiness +(61 3) Dean Pearson Head of Industry Analysis +(61 3) Robert De Iure Senior Economist Property +(61 3) Brien McDonald Economist Industry Analysis +(61 3) Gerard Burg Economist Industry Analysis +(61 3) John Sharma Economist Sovereign Risk +(61 3) James Glenn Economist Asia +(61 3) Tony Kelly Economist International +(61 3) Equities Peter Cashmore Senior Real Estate Equity Analyst Jenny Khamphet Senior Real Estate Equity Analyst Important Notice This document has been prepared by National Australia Bank Limited ABN AFSL ( NAB ). Any advice contained in this document has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this document, NAB recommends that you consider whether the advice is appropriate for your circumstances. NAB recommends that you obtain and consider the relevant Product Disclosure Statement or other disclosure document, before making any decision about a product including whether to acquire or to continue to hold it. Please click here to view our disclaimers and terms of use. 7