Index

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EXPERT OBSERVER
The Wespac Leading Index has posted a solid rebound from last month’s below trend.
Despite this, the Leading Index growth rate has still slowed materially since the start of the year, from +1.31% in February to +0.55% in July.
Over the course of the last six months the Leading Index has only dipped below zero on the one occasion which was last month. That is sending a more positive signal around the growth outlook than we are expecting at Westpac. We are expecting growth over the remainder of 2018 and into 2019 to hold slightly below trend particularly in light of an uncertain outlook for the consumer. Falling property prices; amid a slowdown in jobs growth; fading jobs confidence and high household debt are likely to create headwinds for growth.
Three components account for the bulk of the slowdown in the Leading Index growth rate over the last six months: a turnaround in the Westpac-MI Unemployment Expectations Index (–0.35ppts); reduced support from commodity price gains (–0.28ppts); and a narrowing yield spread that mainly reflects rising short term interest rates (–0.27ppts).
These drags have been partially offset by some lift in aggregate monthly hours worked (+0.22ppts); and dwelling approvals (+0.08ppts) although the momentum in both of these components remains patchy month to month. While the remaining components have seen little change since February, US industrial production has continued to provide steady support.
The Reserve Bank Board next meets on September 4. Earlier in the month the Bank released its latest Statement on Monetary Policy which provided an update of its forecasts. Of most interest was a downward revision to the Bank’s inflation forecast for 2018 from 2.25% to 1.75%. If correct that would mark five consecutive calendar years when headline inflation has printed below the bottom of the Bank’s 2–3% target band.
The Reserve Bank still expects inflation to lift to 2.25% by 2020 and anticipates that the next move in the cash rate will be up. An obvious headwind to the Bank’s plan to move inflation back into the target zone is the impact that five years of underperformance in inflation will have on households’ and firms’ expectations.
The reason why the Bank is reluctant to lower its 2–3% target range is because such a move may have a further dampening impact on inflationary expectations.
Westpac is sceptical that the Bank will be successful in lifting inflation particularly under the weight of low inflationary expectations.
In fact, yesterday Westpac extended its forecasts to now expect the bank to remain on hold in 2020. This complements its existing forecast which has the bank on hold in 2018 and 2019.
Bill Evans is the Chief Economist for Westpac.
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Falling property prices to create headwinds for growth: Bill Evans

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EXPERT OBSERVER
The NAB Commercial Property Index rose 4 points to +21 in Q1 and sits comfortably above its long-run average (+3).
By segment, CBD Hotels continues to out-perform, aided by international tourism and favourable global economic conditions. Industrial property rose again, supported by transport &amp; logistics firms, warehousing, fulfilment and distribution centres. The Office market also bounced back with healthy demand in key eastern states and supported by strong business conditions and employment growth. Retail fell deeper into negative territory as challenging retail trade conditions continued to bite.
Click here <a href="https://www.propertyobserver.com.au/images/2018/4/18/index.jpg" target="_blank">to enlarge.</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/4/18/index.jpg" alt="">
While confidence around Industrial and Office property has lifted, Retail confidence was down heavily and negative for the first time since mid-2013. This is consistent with NAB’s Business Surveys which also show an under- performing retail sector along with our own forecasts for subdued household spending in 2018 and 2019. Confidence was also a little lower in the CBD Hotels sector, but still highest overall.
By state, sentiment rose strongly in WA (but was still negative overall). Sentiment was also higher in NSW and SA/NT, but fell in QLD and was unchanged in VIC.
Property experts in all states are more confident about the overall commercial property market in next 1-2 years (bar QLD), with NSW and VIC the most upbeat and WA least confident (but also the biggest improver).
Expectations for capital growth in Office markets in the next 1-2 years have improved in all states bar QLD. The outlook for Industrial property is also stronger, but expectations for Retail capital growth were scaled back with negative or slow growth anticipated in all states. Overall, expectations for capital growth are still strongest for CBD Hotel property.
Click here <a href="https://www.propertyobserver.com.au/images/2018/4/18/hotel-future.jpg" target="_blank">to enlarge.</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/4/18/hotel-future.jpg" alt="">
Overall Office vacancy rose to 9.0% in Q1 with a small rise in NSW. But NSW along with VIC are still the tightest markets for Office space (and set to remain so over outlook period). Office vacancy fell in WA, SA/NT and QLD and is expected to keep tightening in next 1-2 years (but remain relatively high), with over-supply to remain a key issue in these states.
Rental growth is expected to be fastest for Industrial and Office commercial property in the next 1-2 years, with VIC and NSW out-performing. Property experts also see rents recovering in WA, especially in Office. The outlook for rents in the Retail sector however remains very weak with negative growth expected in all states bar NSW (flat).
For the first time, Retail property experts were asked to assess the strategy acquisitions of A-REIT and ‘Other’ investors for next 12 months. Most (over 1 in 2) think they will focus on acquisitions and holding assets. But 1 in 5 also said ‘Other’ investors will likely divest, significantly more than in A-REITS where just 1 in 10 think they will divest.
Retail acquisition strategies are expected to be driven by concerns over the economy and consumer confidence, opportunities to acquire traditionally tightly held assets, concerns over online retail and entry of new players (like Amazon), all time high cap rates and concerns over changing consumer spending patterns. Most experts operating in the Retail property segment also think these changes will impact landlords negatively, especially large neighbourhood, sub-regional and regional areas.
Fewer property developers are looking to use land-banked stock for their new projects and an increasing number are also seeking new acquisitions, pointing to a period of stock rebuild. A higher than usual number of developers are also looking to refurbish existing property, suggesting more developers are also seeing this as a cost effective solution for their development needs.
Accessing funds (both debt and equity) needed for their property business is still a major challenge but less so than in Q4. But survey participants expect their debt funding and equity conditions to worsen again over the next 6-12 months.
Alan Oster is group chief economist, National Australia Bank, and can be contacted <a href="https://business.nab.com.au/author/alan-oster/">here</a>.
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jrobinson-rf4aSBido9

National CBD hotels continue to out-perform as NAB's commercial property index rises

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Housing market sentiment improved in the third quarter of 2017, as more property professionals surveyed by NAB reported positive rental growth during the quarter and house prices continued to rise in most states. 
The NAB Residential Property Index rose 6 points to +20 in Q3, with sentiment (based on current prices and rents) improving in all states except NSW (which edged down). Sentiment rose sharply in Victoria (up 27 to +63) and in Queensland (up 4 to +16). 
“The NAB Residential Property Survey shows an improvement in market sentiment across most states last quarter, but we continue to see market conditions that vary across different locations,” NAB chief economist Alan Oster said.
“The momentum is clearly with Victoria, while NSW is experiencing something of a slowdown.”  
About 300 property professionals participated in the Q3 2017 survey. 
<a href="https://www.propertyobserver.com.au/images/2017/10/13/NABQ3.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/10/13/NABQ3.png" alt="">
Confidence (based on forward expectations for prices and rents) was up in all states, led by Victoria, with WA rising the most. 
In NSW, despite the weakening price growth, higher confidence is being supported by expectations for higher rents.
<a href="https://www.propertyobserver.com.au/images/2017/10/13/NABINDEX.png" target="_blank">Click to enlarge</a> 
<img src="https://www.urban.com.au/images/2017/10/13/NABINDEX.png" alt="">
First home buyers were among the key buyers in both new and established housing markets, accounting for over 36% of all sales in new housing markets and around 29% in established markets. 
Meanwhile, the market share of foreign buyers in new property markets fell to a five-year low of 9.5%, potentially due to lending restrictions on foreign buyers. Low foreign buying activity in new property markets was led by Victoria, where the share of sales to foreign buyers fell to 14.4% (20.8% in Q2). 
For the first time, tight credit was identified as the biggest constraint on new developments in all states, while access to credit was the biggest barrier for buyers of established property. Price levels were the biggest concern in both Victoria and NSW. In WA and SA/NT, property experts said that employment security was the biggest barrier to buying an established home. 
NAB Group Economics has revised its national house price forecasts, predicting an increase of 3.4% in 2018 (previously 4.3%) and easing to 2.5% in 2019. Unit prices are forecast to rise 0.5% in 2018 (-0.3% previously), with a modest fall expected in 2019. 
“More moderate market conditions reflect a combination of factors which vary across markets, including deteriorating affordability, rising supply of apartments, tighter credit conditions and rising interest rates in the second half of 2018,” said Oster. 
“But still relatively low mortgage rates, a favourable housing supply-demand balance and strong population growth population growth should continue to provide support for prices going forward.” 
“By capital city, house price growth is forecast to be moderate outside of Perth - where prices are flattening out - consistent with good business conditions and better employment growth.” 
“Melbourne and Hobart are currently experiencing solid growth in prices; Sydney is cooling and we expect Brisbane and Adelaide will cool. Finally, we expect 2018 to mark the beginning of a gradual turnaround for Perth.” 
 
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jonathanchancellor-7SQnKwU6yx

Sentiment rises despite tightening credit among property experts in Q3: NAB

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Commercial property sector returns and capital growth eased in the year to June from the previous year, recent figures from the Property Council/IPD Australian All Property Index, released by MSCI, show.
Leading index provider and analytics firm MSCI Inc. recorded an annual 11.9% total return for Australian property to June 2017,  a step down from 13.4% in June 2016. 
While the number indicates that the commercial property market is still strong, it has stabilised in recent quarters, according to a media release.
The index covers 1396 assets across all the sectors of office towers, shopping centres, industrial property, healthcare and hotels.
That the market had cooled off slightly, was evident from the drop in both income return (down from 5.6% to 5.0%) and capital growth (6.6% to 5.6%) between June 2016 to June 2017. 
However, office markets outperformed, driven by strong capital growth in Sydney (10.9%) and Melbourne (5.8%).  Perth continued to soften, with negative annual capital growth of -2.7%, but Brisbane showed positive growth of 1.9% in the office sector. 
MSCI also noted that “strong market movements in Sydney office rents have not translated into higher income returns for investors as capital growth has continued to outpace income growth”. 
Valuations are however clearly reflecting changing rental assumptions, it added. 
Summing it up, Mitchell McCallum, vice-president for MSCI, said the results show that “markets have stabilised in recent quarters, although we continue to see strong growth, especially in the non-core sectors, with Healthcare showing a record annual total return of 25.1%”.
“The limited scale that the non-core sectors currently offer in Australia has contributed to the interest we are now seeing in the build-to-rent sector as a viable option,” said McCallum. 
MSCI’s global property database illustrates that this is not a new idea, as it is a substantial sector in other global markets, making up 50% of MSCI’s national database in the Netherlands, 23% in the US and 6% in the UK, to highlight a few. The lower yields have generally been offset by a strong capital growth profile. Over 14 years the residential sector has recorded a 7% total return on average across global markets, added McCallum.
Other highlights from the index:
<ul>
<li>Super and major Regional Shopping Centres were the only retail sub-sector with a higher return than for June 2016, with some of the largest shopping centres changing hands over the past year. </li>
<li>The Hotels and Healthcare segments were still performing very strongly, showing total returns of 22.8% and 25.1% respectively. </li>
<li>As tightening cap rates and lack of stock have fueled demand for other none core property options, build-to-rent has seen a major surge in Australia. </li>
</ul>
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