Residential Commentary Brisbane Apartment Market

Residential Commentary Brisbane Apartment Market July 2016 Executive Summary Approximately 15,200 apartments are under construction and are expected to complete over 2016-2021 within Inner Brisbane. The highest concentration of development remains within the Inner North and Inner South precincts, making up 41% and 33% respectively of total stock under construction or being marketed. The median apartment price was stable over the 12-months to March 2016. This is slightly below the 5-year annual average growth rate of 1.0% p.a.* Interstate purchasers continue to dominate the market accounting for 46% of off-the-plan sales of projects currently under construction or being actively marketed. Interest from foreign purchasers has increased 4pps q-q, whilst domestic purchasers decreased 4pps q-q. Brisbane apartment gross rental yield has remained relatively stable over the past 12 months, softening by only 6 basis points (bps) to 5.01%. This is above Sydney (3.88%) and Melbourne (4.04%). *Refers to the existing market, as opposed to off-the-plan purchases. Brisbane Apartment Market: Key Indicators Apartment approvals (Inner Brisbane) Supply (2016-2021): (Inner Brisbane) Under construction Currently Marketed Plans approved Plans submitted Proposed Sales volumes units* (Inner-Brisbane) Median unit price* Median rental value* 1-Bedroom 2-Bedroom 3-Bedroom Gross rental yield* 12-months to Apr-16 2Q16 12-months to 1Q16 % change y-y 11,249 +49% 15,162 8,008 17,153 7,562 1,362 4,776-11.8% 1Q16 $405,000 0.0% 1Q16 $375 $485 $650 +1.4% -1.0% 0.0% 1Q16 5.01% +0.06pps Source: JLL Research, CoreLogic RP Data, Queensland Rental Tenancy Authority Brisbane Apartment Market Commentary - July 2016 1

Economic Overview The impact of reduced spending on major infrastructure projects has flowed through to the domestic economy. Queensland has been hard hit by this slowdown and in 1Q16 State Final Demand (SFD), a measure of momentum in the domestic economy, contracted by 1.8% over 1Q15. The ongoing weakness in the Queensland economy is affecting the consumer sector. Retail turnover grew by 2.5% y-y in April 2016, below the national average growth of 4.1% y-y. Labour market statistics have been especially volatile since the end of 2015, but unemployment remains higher than the national average. Queensland unemployment was recorded at 6.4% in May 2016, compared to 5.7% nationally. However, the number of people employed has increased by 1.5% over the past 12-months and remains at record levels. Queensland s population growth has slowed considerably over the last few years. Over the 12-months to December 2015 the population grew by 1.3%, below the national average of 1.4%. Although interstate migration has increased 49% y-y, the number of interstate migrants is only 62% of the 10-year average. On the back of lower inflation figures, the RBA cut the cash rate 25 basis points to 1.75% in May 2016. This was the first cut since April 2015, and many economic commentators are suggesting a second rate cut is likely during 2016. This should support a lower AUD which has helped to sustain Queensland s export levels, mitigating the impact of commodity price falls and increasing competitiveness of service exports. A steady recovery in Queensland economy is expected over the next 12-18 months. The lower AUD will support growth in international export volumes and services export industries such as education and tourism. SFD is expected to grow by 1.8% and 2.0% in 2016 and 2017 respectively (DAE). Maintained growth in the housing investment and construction sectors, coupled with a pickup in domestic and international tourism are expected to underpin this growth. However, ongoing low commodity prices and lower investment in the mining sector will continue to be a burden for the state economy. Supply Apartment building approvals within the inner-city have continued to record strong growth over the 12-months to March 2016 1. In total, 10,314 apartment dwellings were approved over this period, with Newstead-Bowen Hills (26%) and Brisbane City (18%) accounting for the largest portion of these approvals. Currently 15,200 apartments are under construction and expected to complete during 2016-2020 in Inner Brisbane. An additional 8,000 are currently being actively marketed for completion over the same period. Many lending institutions have imposed higher pre-sales rates for developers and lower LVR s for purchasers to help curb their exposure to the inner-city apartment market and some lenders have shut off lending to this sector completely. Given lending institution s reduced appetite for exposure to the inner city apartment sector, it is highly unlikely that all projects being marketed will proceed past the pre-sales stage. Figure 1: Inner City Supply Pipeline by Status 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - no. of units 2016 2017 2018 2019 2020 2021 Completed Currently Marketing Plans Submitted Under Construction Plans Approved Proposed Source: JLL Research The highest concentration of development remains within the Inner North and Inner South precincts, accounting for 41% and 33% respectively of total stock under construction or being marketed. A number of projects completed during 2Q16, including: - Stage 1 of Aria Property Group s Eden Lane project in Woolloongabba (56 units). - Metro Property Group s Canterbury Towers (195 units), the third stage of their Central Village development in Fortitude Valley. - 1Oak, the 91 unit project located in Newstead and developed by Cavcorp. As investor sales becomes increasingly difficult to secure, developers have begun to target the owner occupier market. Examples of owner-occupier projects that commenced marketing during 2Q16 include: - Barca, a boutique waterfront development located in Bulimba, will provide 24 residential apartments across two (2) x four (4) storey buildings and 7 luxury townhomes. This project is a joint venture between APH Property, Alexander Property Group and the Anthony Moreton Group. - Sunland s Shea Residences will comprise 14 luxury duplexes (24 dwellings) with views of Mt. Coo-tha and the Brisbane CBD from its hilltop location in St Lucia The inner-city (0-5km) vacancy rate for all dwellings remained elevated in 1Q16 at 3.3%. This is above the market equilibrium of 3%, and has potential to increase, given the upcoming project completions. Demand Apartment sales have become increasingly difficult to secure during 2016 largely due to stricter lending criteria (especially for foreign buyers) and increased competition between projects. Volatile economic conditions and negative market commentary have also contributed to the decrease in demand. The value proposition and superior yield advantage Brisbane has to offer are a key driver for interstate and foreign investors. 1 Australian Bureau of Statistics Brisbane Apartment Market Commentary July 2016 2

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Incentives have become a mainstay in the Brisbane market as developers find it increasingly difficult to reach the required presales rates. Examples include furniture packages, rental guarantees and developers paying stamp duty on purchases. Interstate purchasers remain the dominant off-the-plan purchasers, accounting for 46% of sales of projects currently under construction or being actively marketed. Interest from foreign purchasers has remained robust increasing 4pps q-q, whilst domestic purchasers decreased 4pps q-q. Figure 2: Off-The-Plan Buyer Profile 2 Affordability remains a driver for the Brisbane market. The median unit price in Sydney and Melbourne was 65% and 19% above the median Brisbane unit price as at 1Q16. Price growth is expected to be stagnant in the short-term given current market conditions and subdued population growth. Capital values may see some downward pressure in areas where large pockets of supply are expected to complete. Resale values of well designed, priced and constructed apartments are expected to command a premium. In contrast, resale values on smaller sized apartments with lesser amenity may struggle to hold their current levels. Brisbane Metro Subway System 35% 46% 19% Interstate Local Foreign Source: JLL Research The Queensland State Government has recently introduced a 3% tariff on foreign buyers of residential property, effective from 1 October 2016. The surcharge will apply to residential purchases where foreign ownership equates to 50% of the transaction. This rate is below that of surcharge rates that the New South Wales (4%) and Victorian (7%) governments are to introduce. It is unclear as yet what effect this will have on demand for apartments from foreign buyers. Approximately 65% (up 3pps q-q) of the 23,200 apartments currently under construction or being marketed have been sold off the plan. Pricing The median apartment price for Greater Brisbane has remained stable over the 12-months to March 2016. This is below the 5-year annual average growth rate of 1.0% per annum 3. Figure 3: Median Unit Price Growth (Annual) 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% % growth p.a. Brisbane Sydney Melbourne Source: JLL Research, Corelogic RP Data The planned $1.54 billion Brisbane Metro Subway System will extend from Woolloongabba to Herston via the CBD. The proposed 7 km route will leverage off existing public transport infrastructure and include new underground tunnels. Major beneficiaries of the proposed transport link are expected to be residents of Woolloongabba and South Brisbane. Approximately 3,400 units are currently under construction within these two suburbs, with a further 1,900 being actively marketed. Although completion of the project is not expected until 2022, it is likely that projects along this transport corridor will experience increased demand from buyers and tenants. Rental Rates One bedroom apartments were the only configuration to record rental growth during 1Q16 (+1.4% q-q) 4. Two bedroom rental rates declined by 1.0% q-q, while three bedroom rental rates remained unchanged at $650/week. The lack of rental growth largely reflects increased levels of supply within the rental market. Rental growth is expected to remain relatively subdued or even negative over the coming year as the market absorbs new stock and population growth remains below the national average. Flight to quality will be a theme over the coming 12-18 months as renters choose to upgrade to newer, higher quality stock. Well-constructed and located projects with superior amenity and 2 Based on a sample of projects (>50 units) within Inner Brisbane (Source: JLL Research) 3 Refers to price growth in the existing apartment market not the new offthe-plan market (Source: Corelogic RP Data) 4 Queensland Residential Tenancies Authority. Brisbane Apartment Market Commentary July 2016 3

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 design will be preferred. Reflecting this, vacancy in the secondary market is likely to become an increasing concern. Shea Residences, St Lucia Shea Residences by Sunland will comprise 28 luxury paired residences of 3-bedroom configurations. The 6,298m² site, situated within the affluent suburb of St Lucia was purchased for AUD11.125 million from a local private vendor in early 2015. Its hillside location provides views of Mount Coo-tha and the Brisbane CBD. Development approval was awarded by the Brisbane City Council in February 2016, and initial site works have begun. Shea Residences is an example of a shifting dynamic in the inner-city as the investor market becomes increasingly competitive, and owner occupier market strengthens. Gross Rental Yields Brisbane apartment gross rental yields softened 6 basis points (bps) in the year to 1Q16, to 5.01%; on-par with the 5-year average. The higher rental returns in Brisbane continue to provide an advantage over the Melbourne (4.04%) and Sydney (3.88%) markets. However elevated vacancy within Inner- Brisbane is a concern for investors. Figure 4: National Gross Rental Yields 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% Brisbane Sydney Melbourne Source: JLL Research, Corelogic RP Data Site Sales Demand for development sites has been subdued during the first half of 2016 following record transaction levels in 2015. A number of sites purchased 6-12 months earlier have been offered back to the market, as proposed projects have been unable to proceed. This has been largely due to limited access to finance, and escalating marketing and construction costs. The site sales market is currently undergoing a transition whereby purchasers will no longer pay a premium to gain exposure to the Brisbane inner-city high-density residential market. Vendors may need to lower expectations in order to successfully achieve a sale as a result. Local developers have begun shifting their attention to smaller development sites with potential to build owner occupier targeted product. Opportunities within the englobo land and townhouse markets have remained strong in the middle and outer suburbs. Additionally, sites with good future prospects and attractive holding income (circa 5% equivalent yield) have been targeted by developers and private equity groups looking longer-term towards the next cycle. Foreign capital has not been as active in the Brisbane residential market, when compared to Sydney and Melbourne. Although a few major foreign developers have gained direct exposure to the Brisbane market (e.g. R&F, Banyan Tree, Aspial, Wee Hur and Shayher Group), a number of foreign investors have instead preferred to participate as silent investors or enter joint venture (JV) partnerships with existing local developers (e.g. Illumina JV with Property Solutions and Chiway). Outlook As construction costs rise and financial conditions tighten it is anticipated that the supply pipeline will start to self-regulate. As it becomes increasingly difficult to deliver a feasible project within inner Brisbane, a number of projects with development approval will be forced to postpone or abandon development plans until the next cycle. Although this self-regulation will be seen as a positive to the market, the current large quantum of supply will have short-term effects. As Brisbane absorbs the upcoming supply, vacancy rates are expected to rise and rents may come under downward pressure. This is especially likely to occur in locations where there is a high concentration of high-rise development. The flight to quality will be a theme in the rental market, and purchasers of quality off-the-plan apartments will be rewarded with stronger rental rates and tenant demand. Demand for smaller sized units with lower quality finishes and the secondary market for apartments are expected to suffer as a result. The value proposition of Brisbane apartments will continue to drive investor demand in the short-run. However, tightening lending conditions (especially for foreign buyers) may impact the longer term prospects. The owner occupier market remains an opportunity within inner-brisbane, however this market does not have the same depth as the investor market. Capital growth is expected to be subdued and potentially negative in some areas in the short to medium term as the Brisbane market absorbs the upcoming supply. High-quality development sites with strong holding income and future potential will still trade at a premium, though it is likely that transaction activity for vacant sites will be subdued. Brisbane Apartment Market Commentary July 2016 4

For further information, please contact Map of Brisbane Inner City Apartment Market Carol Hodgson Director Strategic Research Tel: +61 7 3231 1445 carol.hodgson@ap.jll.com John Watts Analyst Strategic Research Tel: +61 7 3231 1324 john.watts@ap.jll.com JLL Brisbane Level 33, 345 Queen Street Brisbane QLD 4000 Australia +61 7 3231 1311 This document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from Jones Lang LaSalle. This document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. Jones Lang LaSalle accepts no liability for damages suffered by any party resulting from their use of this document. www.jll.com.au Brisbane Apartment Market Commentary - July 2016 5