Residential Commentary - Perth Apartment Market March 2016 Executive Summary The Greater Perth apartment market has attracted considerable interest from local and offshore developers. Projects under construction together with a strong pipeline of projects at marketing stage and with development approval should see a spike in apartment projects reaching completion over the next two to three years. Around 2,190 apartments were completed in 2015, a 60% increase over 2014. A further 4,300 apartments are under construction, most of which will complete by 2017. However, soft market conditions have led to the supply of rental accommodation and apartments on the market outpacing demand. Vacancy rates across Greater Perth have increased to 6.0% and sales volumes for units are down by 18.5% for the 12 months to December 2015 (Source: REIA, CoreLogic RP Data). The softening demand environment has seen a correction in median unit prices, which have declined by 3.8% between 4Q14 and 4Q15 in Greater Perth. The Perth CBD has witnessed a larger decline with median sales prices now $440,000; or 8.3% below 12 months earlier (Source: CoreLogic RP Data). Median rents for units have also suffered, declining by 9% over the 12 months to December 2015 for Inner Perth. Gross rental yields have also declined to 4.7% for Greater Perth and 5.5% for Perth CBD at 5.5% (Source: REIA; CoreLogic RP Data). Key Market Indicators (Greater Perth) Apartment approvals 12 months to: Supply: Completions (2015) Under construction Plans approved Proposed Sales volumes* 12 months to: % change Y-Y Dec 15 4,483 1.1% Dec-15 2,190 4,326 10,808 2,427 60.1% Dec 15 5,617-18.5% Median unit price 4Q15 $425,000-3.8% Median rental value (Inner Perth) 4Q15 $410-8.9% Gross rental yield 4Q15 4.7% -25 bps Source: JLL Research, CoreLogic RP Data, REIA, ABS *Refers to existing purchases, as opposed to off-the-plan purchases Perth Apartment Market Commentary - March 2016 1
Economic Overview The Western Australia economy is struggling with the transition away from mining related investment. Headline figures suggest that the WA economy is still growing. Gross State Product grew by an estimated 2.6% in 2015 (DAE), boosted by strong volume growth in resource sector exports as projects move into the production and export phase. Volume growth has helped offset the impact of weaker commodity prices. However, the domestic economy is revealing significant weakness. State Final Demand (SFD) declined by 3.4% y-y in 2015, following a 2.4% y-y decline in 2014. SFD has now declined for 12 consecutive quarters. The consumer sector remains subdued although the retail sector has shown early signs of improvement, growing by 2.6% over the 12 months to December 2015. The food sector recorded stronger growth than the overall market; take-away food retailing grew by a high 10.1%. Conversely cafes and restaurants recorded a small decline, suggesting a shift in dining habits to more affordable options. Western Australia s population growth has slowed significantly. No longer is WA attracting a net gain of interstate migration, a feature of the resources boom. Net overseas migration has also declined to 14,100 residents in the year to June 2015, compared with 56,800 three years earlier. Population grew by just 1.3% over the 12 months to June 2015, below the national average of 1.4%. The RBA cash rate has remained stable at 2.00% following the last 25bps cut in April 2015 and the futures market is pricing in a high probability of a further 25bps cut by mid-2016. Despite this, JLL believes that interest rates are at an unsustainably low level and that interest rates will start to move upwards in the medium term. In July the Australian Prudential Regulation Authority (APRA) announced an increase in the capital backing required by banks and other deposit-taking institutions to support residential mortgage exposures. This led to the major banks increasing their mortgage interest rates by up to 20bps in October. The unemployment rate has fluctuated over recent months but has generally been on an upward trend over the past 12 months. In December 2015, the WA unemployment rate was 6.3% compared with 5.9% 12 months ago. Despite rising unemployment, the total number of people employed has shown moderate growth over the past 12 months (1.0%). The outlook for WA remains very much tied to commodity prices, which have suffered further falls recently. GSP is expected to grow at low to moderate levels over the next two years due to continued volume growth in exports. However, the domestic economy is expected to continue to struggle. Supply Major apartment completions across the Perth metropolitan area (Greater Perth) totaled 2,190 in 2015, well up on 2014 completions of 1,370. Only projects with 30 or more apartments were included in the analysis. Looking forward, the next four years could see a sharp increase in apartment development with over 15,000 units in the pipeline that could be delivered before the end of 2019. Most of these projects will require in the order of 75% precommitments prior to commencement of the project. However, there is already more than 4,000 apartments under construction that are expected to reach completion before December 2017. Building approvals provide a good forward indicator of shortterm supply of new dwellings. Building approvals for apartments have increased significantly over the last 18 months. In the year to December 2015, 4,483 apartments were approved in Greater Perth, slightly below the 4,949 apartments approved in 2014 but well above the long-term average of 2,400. Apartments accounted for 19% of all dwelling approvals in 2015, well up on 2009 when apartments accounted for just 4% of dwelling approvals. Figure 1: Apartment Approvals, Greater Perth Apartment approvals 6,000 5,000 4,000 3,000 2,000 1,000 Demand 0 0% Apartments (LHS) % of Total Dwellings Approved (RHS) 12 month rolling average, private sector building approvals Source: ABS, JLL Research Demand for apartments has been impacted by the decline in population growth, with key drivers of rental accommodation such as interstate and overseas migration well below the market peaks seen during the resources boom. This has led to a significant increase in the vacancy rate for Greater Perth dwellings (both houses and units), which has risen over the last three years from below 2.0% throughout 2012 to 6.0% as at December 2015. 25% 20% 15% 10% 5% Percentage of apartments Perth Apartment Market Commentary- March 2016 2
Weaker demand is also reflected in the sales volumes for apartments, which have declined from a peak in the current cycle of 2,234 apartment sales across Greater Perth in the 1Q13 to 1,258 sales in 4Q15. Sales include a mix of new apartments and re-sales of existing apartments. Figure 2: Quarterly Sales Volumes, Greater Perth Figure 3: Median Unit Sale Price, Perth Median Rent - All Units ($ per week) Median Sale Price, Quarterly ($) 550,000 500,000 450,000 2,500 400,000 Quarterly Unit Sales, Greater Perth 2,000 1,500 1,000 500 Pricing 0 Median unit sale prices across Perth have declined over the last two years. The median unit price in the Perth CBD 1 in 4Q15 was $440,000, an 8.3% decline over a 12 month period. The decline in median unit sale price has been less pronounced across Greater Perth, declining by 3.8% over the last 12 months to $425,000 in 4Q15. The gap between unit prices in the Perth CBD and Greater Perth has reduced, which is likely a reflection of the recent strong growth in the supply of CBD apartments (with supply outstripping demand) as well as the increase in smaller apartments in the CBD. Much of the investor demand for apartments is in the sub $450,000 price range, which typically means a single bedroom unit. Analysis of projects in the Perth CBD has highlighted that studio and single bedroom apartments account for 30-40% of total apartments, with two bedroom apartments being the most popular (~55-60%) and three bedroom / penthouses accounting for less than 10%. 350,000 300,000 Rental Rates Median weekly rents have continued to decline with supply outstripping demand. The high number of new investor units that have hit the market is creating increased competition, leading to a tenants market, with tenants negotiating lower weekly rents or moving to cheaper accommodation. The median weekly rent for a unit in Inner Perth has declined by 8.9% over the 12 months to December 2015 to $410 per week. Over the last 2 ½ years, median weekly rents have fallen from $520 per week in Jun-13 to $410 per week, a decline of 21.1%. All regions of Perth have experienced declines in rents over the last two years. Rents are marginally higher than they were five years ago (Dec-15). Figure 4: Median Weekly Rents All Units 550 500 450 400 350 300 250 Perth Suburb Greater Perth 200 Perth Inner Perth Middle Perth Outer Source: REIA, JLL Research 1 Data for the suburb of Perth is used as a proxy for Perth CBD. Source: CoreLogic RP Data Perth Apartment Market Commentary- March 2016 3
Gross Rental Yields Gross rental returns on residential units across Greater Perth have contracted, due to median rents declining at a faster rate than sales prices. It is noted that rents, sale prices and yields have all declined in the past two years. As at December 2015, the median gross rental yield for units in the Perth CBD was 5.5% compared with 4.7% for Greater Perth. Units in the Perth CBD have consistently provided higher gross returns than units in suburban locations, with the average difference over the past five years being in the order of 100 basis points. Figure 5: Gross Rental Yield All Units Median Rental Yield - All Units (%) 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Site Sales Perth Suburb Greater Perth Demand for development sites in the Perth CBD and near city locations remains strong but has begun to ease. Recent sales in prime CBD locations have been around $8,500-$9,000 per square metre of site area. Locations such as East Perth and Northbridge have transacted at between $4,000 and $5,000 per square metre of site area. Developer interest is coming from local developers as well as off-shore developers, often partnering with locals. The Perth CBD and Perth CBD fringe continue to be the most popular locations for development sites. Access to the CBD and views over the Swan River, ocean or the city are popular. Local developers in particular are showing increased interest in boutique locations for small apartment projects aimed at the owner-occupier market, including empty nesters downsizing from family homes (e.g. suburbs such as Claremont, Scarborough and South Perth). Outlook The strong supply pipeline is expected to see current levels of apartment construction maintained at least over the next two to three years. This is despite concerns of rising vacancy rates together with recent corrections in pricing and weekly rents. Already, there are over 4,300 apartments under construction. Furthermore, solid pre-commitments of some projects currently at marketing stage are expected to see new projects commencing construction in the first half of 2016. With relatively strong growth in apartment supply over the next two to three years coupled with slowing population growth, it is expected that heightened vacancy levels will remain in the short to medium term. Fears of an over-supply are lessened to a degree by the fact that most projects require a very high proportion of pre-sales (around 75%) before construction can commence. Nevertheless, there is expected to be continued pressure on pricing, rent levels and vacancy rates, with population growth from interstate and overseas migration (key rental markets for apartments) well down on its peak of 3-4 years ago. The low interest rate environment continues to attract purchasers while urban renewal projects in prime locations such as Elizabeth Quay, Kings Square, Riverside and Shoreline are keeping developer and purchaser interest in apartment projects relatively high. It should be noted that while apartments are now accounting for a higher proportion of the residential market (around 19% in 2015) this is still a relatively low market share compared to larger cities such as Sydney and Melbourne. We expect to see a greater shift towards boutique apartment projects aimed at the owner-occupier market, particularly from Perth s local developers. This trend is already noticeable in recent development site activity. Sales Summary: 36 St Georges Terrace, Perth A 2,600sqm site at 36 St Georges terrace in the Perth CBD sold for AUD23.75 million in October 2015. This landmark site includes the heritage listed St Andrews Church, and has development approval for 280 residential apartments in a 35 storey building together with ground floor commercial / retail uses. The sale reflects a sales rate of $9,135 per square metre of site area. The site is considered to be a premium CBD location, providing extensive views over the Supreme Court Gardens, Stirling Gardens, the Government House precinct and beyond to the Swan River. The purchaser is GP Hotel WA Pty Ltd. Perth Apartment Market Commentary- March 2016 4
For further information, please contact David Snoswell Director Strategic Research Tel: +61 8 8233 8843 david.snoswell@ap.jll.com Carol Hodgson Director Strategic Research Tel: +61 7 3231 1445 carol.hodgson@ap.jll.com JLL Perth Level 29 152-159 St Georges Terrace Perth WA 6000 Australia +61 8 9322 5111 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 Perth Apartment Market Commentary- March 2016 5