Macquarie Releases Real Estate Market Outlook 2007 - “The Real Estate Carnival – Game Of Skill”

19 June 2007

According to Macquarie’s annual Real Estate Market Outlook (the Outlook) released today, some market sectors conditions - particularly the office sector - are the strongest in almost 20 years.

A booming global economy, buoyant business conditions, a new breed of investor and an enormous amount of investment funds looking for an investment home have propelled non-residential real estate markets worldwide.  

Launching the Outlook, Head of Research for Macquarie Bank’s real estate business, Rod Cornish said, “Rapidly changing markets has made real estate investment much more tactical and even more a game of skill. An unprecedented combination of factors has created what is seemingly a real-estate carnival. On the residential front, east coast developers will not feel like it’s a carnival – that came earlier. While our view does not entertain a quick pick up, the east coast residential market is stabilising. Investors in all sectors should note, we are one year further along the cycle and growth opportunities are limited - as we highlight in the Outlook, there are global growth opportunities, although compared to 12 months ago, investors need to be more selective.”

Officially launched today by Macquarie Real Estate and now in its eighth year, this year’s Outlook, entitled “Real Estate Carnival - Game of Skill”, investigates the state of the global property market and in particular, the impact of the strongest global economy in 30 years on real estate markets.

In the global analysis, the Outlook looks at the strength of the global economy and how it continues to drive stronger real estate fundamentals, partly due to high levels of liquidity. Improving fundamentals have attracted increased attention from a range of different profile investors as income streams from real estate grow. Europe is revealing its economic might, Japan is finally building strength and the slowdown in the US economy is having a limited effect due to the sheer power of the world economy.

“The cycle is expected to run for at least the forecast period of 12 months. If the US economic outcome is stronger than anticipated, the real estate fundamentals could run even longer. If the current exceptional performance was simply due to the weight of money, it would be merely a bubble. But the global economy is in the midst of its strongest cycle in 30 years supporting those fundamentals,” said Mr Cornish.

“Savvy investors need to remain alert to signs like tight yields, over aggressive pricing of rental expectations, and diminished accountability for risk that will signal the change in the cycle. They will also need to continue to apply the fundamentals and be rigorous in assessment,” said Mr Cornish.

When the carnival calms down and liquidity slows, it will be the markets lacking competitive advantage which will suffer the most, such as secondary assets in less secure locations or those with less creditworthy tenants. With limited further yield compression to drive returns in this stage of the cycle, investors will need to be increasingly confident on rental expectations to achieve target returns.

Global Head of Macquarie Bank’s Real Estate business, Stephen Girdis said, “There are real estate investment opportunities around the world but only in growth markets where we expect rental growth to continue, including parts of Asia and markets where there is a positive gap between property-yield and long-term bond yields. Opportunities include the Sydney and Melbourne office sector, residential and office markets in Japan, the office sector in Europe and Asia and European logistics. With our global platform and partners around the world, Macquarie Real Estate can provide investors access to those opportunities,” he said.

“We’re seeing strong inflows from retirement savings, private equity and hedge funds transactions, the latter of which are reliant on cheap available debt. Local knowledge is always critical in property, and it is increasingly important for investors to be discerning.

In Australia, the divergence between east and west in the residential real estate sector/market is steadily narrowing.

“Sydney residential real estate is entering a stabilisation phase,” said Mr Cornish. “We expect to see the east coast moving to the next phase of a long cycle with the upper end of the market still outperforming as is the case in London and parts of the US. Factors pointing to a stabilisation phase in Sydney are mounting with the strongest migration in 5 years, and the east/west divide narrowing, although subdued confidence threatens a slower recovery particularly in outer ring areas. The forecast is for slower conditions in Perth with affordability a key factor. Moderate price rises are expected in Melbourne and Brisbane.”

The Outlook reports that globally the office cycle is the strongest in almost 20 years in some markets. “Melbourne has had the strongest three consecutive years of leasing demand in at least 35 years and Brisbane and Perth have experienced the lowest vacancy rates on record. We believe the strong leading indicators and demand drivers will outweigh the moderating drivers, leading to a longer cycle,” said Mr Cornish.

“As we’ve highlighted in past reports, there is a definite link between the global economy and international performance of the office market. Forecasts point to continued strong levels for the global economy albeit, with some moderation from recent highs. If in line with expectations, 2008 will mark the sixth year of above 4 per cent growth.

“By this stage of the office cycle, some of the leading indicators are typically starting to slide, particularly in Asia where the cycles are traditionally sharper and shorter. But that’s not happening as yet in many markets, despite the moderation in the US economy. Already, we have seen signs that this cycle is elongated.

“Development is the next phase. Indeed, supply in some commercial markets is one factor that could take the thrill out of the ride of some markets. Currently, with little supply in most markets, relative to this stage of previous cycles, the momentum should continue this year but there is capacity for supply to increase. At this stage of the cycle, it is even more important to have local insight and local partners,” said Mr Cornish.

As Australia’s most reliable non-residential property class, retail continues to provide solid returns with low volatility. “The outlook for retail property is solid as retail sales have turned the corner. We expect retail to experience another nine to 12 months of similar conditions,” said Mr Cornish. “There is limited potential for retail yields to firm significantly this year.”

“Infrastructure is still the key to the industrial sector,” said Mr Cornish. “Land values are rising and rents are increasing where there is new and improved infrastructure. Rental growth is partly due to developers passing on increased land values and construction costs to tenants by way of higher rents. While industrial values were flat last year in NSW, they will start to increase as the state’s economy improves back towards the Australian average.”

The Macquarie Real Estate Market Outlook report has been produced annually for the last eight years. In that time, it has predicted trends in the property market including the influence of the baby boomers, the move to community lifestyle property, the move to apartment living, the out-performance of industrial property located around new and emerging infrastructure, the surge in residential property in south-east Queensland and Perth, the softening of residential markets and the resurgence of office markets, and over the last three years the huge weight of money targeting domestic assets resulting in investors shifting their focus to global real estate.

The Outlook is available at www.macquarie.com.au/remo

For further information, please contact:

The Real Estate Market Outlook report is an annual publication produced by Macquarie Real Estate, a business of Macquarie Bank Limited (ABN 46 008 583 542), a company incorporated under the laws of Australia (“Macquarie”). 

Macquarie has made every reasonable effort to ensure that the information contained in the Outlook is accurate and reliable, however some facts and opinions may change without notice on the basis of changing market conditions and actual results may vary from any forecasts provided. Macquarie has not considered the personal objectives, financial situation or needs of readers, so readers should consider these matters and if necessary, seek professional advice before making any investment decision.