JUNE 2015

PROPERTY OF PITCHER PARTNERS

© Pitcher Partners 2015

Inside Cover: Story Bridge, Brisbane

Front Cover: Roma Mitchell Commonwealth Law Courts Building Adelaide

CONTENTS5 WELCOME

6 COMMERCIAL SNAPSHOT

9 RESIDENTIAL SNAPSHOT

10 ADELAIDE

11 BRISBANE – MEDICAL PROPERTY

12 MELBOURNE – LEGISLATIVE FRAMEWORK

AND MANAGING THE UNINTENDED IMPACTS

13 NEWCASTLE

14 PERTH – INCREASED PROFIT

OPPORTUNITIES FOR SAVVY INVESTORS

15 SYDNEY

4 PROPERTY OF PITCHER PARTNERS / DECEMBER 2014

5PROPERTY OF PITCHER PARTNERS / JUNE 2015

WELCOME

By Andrew Beitz, Pitcher Partners, Adelaide

At Pitcher Partners we have a passion for the property industry. We are attuned to the needs of all contributors in this complex and exciting sector – owners, developers, investors, builders, valuers, agents and of course debt/equity participants. We have a well-established and proven track record in contributing to our clients’ success based on our extensive knowledge and our intimate approach to servicing our clients.

This issue of Property of Pitcher Partners focuses on how each state is fairing in the property market.

Firstly, we look at the residential and commercial snapshots with JLL looking at the office, industrial, hotels and residential sectors across Australia.

I take a look at the Adelaide property market reflecting on the current economic conditions as well as what the future may bring.

Cole Wilkinson of Pitcher Partners Brisbane takes us through the medical property scene where over the past decade there has been a move from off premise medical suites to on or attached premise medical suites.

Melbourne Pitcher Partners’ Nicholas Lee takes a look at the legislative framework and managing the unintended impacts with particular reference to Plan Melbourne and Zoning Reform.

Ross Cooper of Knight Frank Newcastle provides a great overview of the property market in Newcastle looking at the commercial, residential and aged care sectors.

Across in Perth, Emma Everett of Momentum Wealth discusses recent changes in town planning regulations and the increase in development opportunities that this has led to.

Finally Grant Parish of Pitcher Partners Sydney takes us through the New South Wales property market and how the property supply shortage has provided opportunities for developers.

We welcome your feedback – if you have any suggestions on articles you would like us to cover in future editions please send them through to info@pitcher-sa.com.au.

6 PROPERTY OF PITCHER PARTNERS / JUNE 2015

Office

Transaction volume reached an all-time high in 2014 in the Australian office CBD sector reaching $17.1 billion. The strongest activity was recorded in Sydney and Melbourne, with yields moving below 6% in these two particular markets.

Offshore investment accounted for a staggering 40.6% of all office CBD transactions by volume, while capital values across the nation rose by 7.4%.

Overall, the last six months of 2014 identified four key trends in the Australian office market. The second half of 2014 saw positive net absorption of 36,000sqm across the CBD markets, which was the first time there has been positive net absorption over a six-month period since 2012.

The Sydney office vacancy rate remains stable at 9.5% against the national average of 12.5% at the end of 2014, due to rising vacancy in Perth and Brisbane. This year we expect the national average to remain at its current levels, as although demand is likely to pick up there is a fairly large supply pipeline across the country.

Already in the first quarter of 2015 positive net absorption has continued with 85,400sqm taken up, making this the third successive quarter of positive net absorption. As a result the national CBD office market vacancy rate tightened by 0.4 percentage points to 12.1%.

Sydney and Melbourne led the way in positive net absorption in the first quarter recording 34,999sqm and 52,000sqm respectively. The Sydney vacancy rate tightened to 9.0% while Melbourne’s vacancy rate is at 9.6%.

A contrast has emerged in office leasing markets with Sydney and Melbourne recording positive net absorption for 12 and nine months respectively now up to the end of quarter one 2015. Conversely, a further contraction in tenant demand was recorded in the resource dependent market of Perth. Its mining neighbour Brisbane, however, recorded its first quarter of positive net absorption for some time. The good news is that there are signs of organic growth across parts of corporate Australia and CBD office market net absorption is forecast to be 155,000sqm in 2015.

With regards to yield compression in the office markets, the national average fell to 6.9% in the last quarter of 2014. Nevertheless, there is scope for further yield compression in 2015. The spread between property yields and the real risk-free rate is wider than historical benchmarks, while the low cost of debt will allow investors to use tactical leverage to meet equity IRR hurdles.

One of the big drivers of the yield compression in the office, retail and industrial sector is the fall of bond rates. The real inflation bond rates in Australia fell by 50 base points in the fourth quarter of last year, which has partly contributed to a rise in capital values.

With regards to CBD office rents, there was a 3% face rise across the nation throughout 2014 but that combined with yield compression saw prime office capital values in Sydney and Melbourne rise by approximately 12% in 2014.

In the case of Perth and Brisbane, the story was rather different, as both those markets are weaker. In Perth we estimate that average capital values fell by 5% and in Brisbane, average capital values were unchanged over the quarter.

Industrial

After a record-breaking transaction turnover in 2014 of $5.1 billion, the industrial property sector has started 2015 on a more subdued note. This is not unexpected as the first quarter of any calendar year in Australia is traditionally the quietest for real estate deals though the volume of industrial transactions reached a reasonable $541 million.

In fact, we believe that the Australian industrial property sector is building toward a recovery in occupier demand where rental growth is expected to accelerate in the second half of 2016 and beyond due to the limited market opportunities.

The favourable economic conditions in Australia appeal greatly to industrial investors due to record low interest rates at 2.25%, very low rates of inflation 1.50% and the willingness of banks to lend.

It is because of these factors that we believe

industrial sales transaction volumes will reach record levels in the 2015 calendar year, which is further enhanced by eager investors keen to acquire prime industrial assets.

The first quarter of 2015 saw gross take-up of industrial space across the nation of 263,700sqm, which is in line with the first quarter of 2014. New supply remains steady overall with approximately 282,000sqm completed in quarter one and the full year is expected to see between 1.2 and 1.3 million square metres of total supply, which will equate to somewhere between 12.5% and 25% below the total supply of 2014.

Rents were largely flat in all markets on average, continuing the trend noted in the second half of 2014 and yield tightening was less broad in quarter one with limited transactional evidence to draw from due to lower transaction volume. Prime and secondary yields have tightened by 50-100 basis points in the last 12 months.

The outlook for the industrial occupier looks very bright for the remainder of the year, particularly in the eastern seaboard markets, due to a strong residential development cycle underway, combined with an upturn in the retail sector.

Australia’s strong population growth and housing investment cycle is clearly supporting a higher level of consumption spending and with no elections across the country until mid-2016 at the earliest, this further comforts consumers that there won’t be major legislative change upon their investment and spending strategies.

Owners of logistics property are also benefiting from new sources of demand including online and international retailers, as well as ongoing consolidation from the major third party logistics operators.

There was also yield compression in the industrial sector with the national average sitting at just over 7% in the last quarter to 2014.

Capital values in the industrial sector across the country rose by an estimated 8% in 2014.

COMMERCIAL SNAPSHOT

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Hotels

Australian transactional volumes rose an astonishing 86% to total US$2.2 billion – a new record high for hotel sales in Australia in 2014.

The sale of the Sheraton on the Park at $463 million was the biggest deal completed and a new record for a single asset hotel sale in Australasia. In Australia, the average price per key in 2014 was US$292,000, up 24%, in comparison to the rest of Asia where it was US$201,000 per key, down 34%, year-on-year.

Chinese were the biggest international buyers of Australian hotels last year accounting for 27% of all transactions (by dollar volume). This is sharp increase from the 3% of deals that they were involved in 2013.

Equally fascinating is that Australian domestic investment reached 43% in 2014, up from 24% in 2013, revealing that market conditions are appealing to both domestic and foreign investors. These conditions have flowed into 2015 as evidenced by the notable sales of the Hilton Sydney ($442 million) and The Westin Sydney ($445 million), amongst others

Buyer activity is expected to remain high for the balance of 2015 due to strong trading conditions and outlook in most markets, the transparency in the Australian investment market, a low dollar and record low interest rates.

These factors have a positive knock-on effect to tourism – both domestic and foreign. A lower Australian dollar encourages overseas visitors to the country, and deters locals from travelling overseas and looking within their own borders for their next holiday experience.

Recent research from the Australian Bureau of Statistics reveals that international visitor arrivals to Australia totalled 4.5 million as at year-to-date (YTD) September 2014 representing an increase of 8.6% year-on-year. The strongest growth was recorded in visitation from Thailand, Indonesia, Hong Kong, Germany and Mainland China, with Mainland China being the largest source market, accounting for 15.8% of all international visitor nights over the period.

The primary purpose of a visit to Australia is for holiday/pleasure with this segment accounting for just under one-third of total visitor nights in the period. Growth in this segment has been strongest for the purposes of convention and visiting friends and relatives (VFR), which increased by 18.6% and 14.1% respectively.

In the early parts of 2015, Sydney and Melbourne markets demostrated the most activity due to high profile international sporting events, combined with the Chinese New Year activities and the Australian summer being the peak time of travel.

As of YTD March 2015, hotel occupancy levels in Sydney have declined by 1.0% to 88.8% when compared to the same period in 2014. The Average Daily Rate (ADR) has improved considerably by 7.5% to $256 resulting in RevPAR growth of 6.4% to $228. Sydney’s accommodation market has continued to trade at strong levels which has been boosted by improving corporate demand, as well as strong leisure, cruise and VFR business.

As at YTD March 2015, occupancy levels in Melbourne increased 1.2% year on year to 88.3%. ADR improved by 8.6% to $222 resulting in RevPAR growth of 10.0% to $196. RevPAR gains were boosted by strong take-up during periods of high demand notably the Australian Open, Cricket World Cup and the Australian Grand Prix, as well as improving conference and corporate demand.

*Note all currencies AUD unless otherwise noted.

Contacts

Office

Andrew Ballantyne National Director – Strategic Research (Office) andrew.ballantyne@ap.jll.com

Industrial

Nicholas Crothers Director – Strategic Research (Industrial) nicholas.crothers@ap.jll.com

Residential

Rupa Ganguli Director – Strategic Research (Residential) rupa.ganguli@ap.jll.com

Hotels and Hospitality Group

Jude Bolger Senior Vice President – Strategic Advisory jude.bolger@ap.jll.com

Image: Acting on behalf of the National Pension Service of Korea, advised by J.P. Morgan Asset Management, JLL sold the HSBC Tower (8 Canada Square) to Qatari based QIA.

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Image: Sydney Harbour Bridge

9PROPERTY OF PITCHER PARTNERS / JUNE 2015

By Rupa Ganguli Associate Director – Strategic Research (Residential), JLL

The Australian residential market is experiencing positive growth in most states of the country. Sydney is leading the way with higher growth than the rest of the nation and this can be largely attributed to many years of underperforming. Matching the slow growth of the New South Wales (NSW) economy, Sydney dwelling prices rose by 18-19% across the detached and attached housing market segments between 2006 and 2011, below the 24%-25% growth in the weighted average price index across the eight capital cities. In real terms, dwelling prices actually fell during this period. Since December 2011, however, Sydney prices are up 34%-37% above the 20-21% across the eight capital cities, and the pace of activity seems to be accelerating. In real terms, dwelling price growth in Sydney has also been comparatively strong over the past three years (2012-2014).

The Sydney housing market has also been under supplied, with demand exceeding supply over the past seven years, and we estimate an annual average shortfall of over 8,000 dwellings, without taking into account vacancy in existing housing stock. It is expected that the recent pent-up demand has been exacerbated by a low rental vacancy in existing housing stock across the city during this period, averaging at 1.6%.

As a further stimulus to demand, home mortgage rates are at multi-decade lows at 2.25%. Buyers in the Sydney housing market are interest rate sensitive because Sydney is still the most expensive residential market in Australia, and therefore home mortgages tend to be large.

Housing price growth is set to continue in 2015, albeit in more moderate terms, as rising demand from prospective home-owners and investors, including many offshore investors, collide with a long-term under-supply of accommodation to drive up dwelling prices.

Housing supply, particularly in Melbourne’s inner suburbs, has increased significantly in recent years increasing the risk of oversupply in certain market segments and micro locations, albeit the supply pipeline is moderating going forward. This is expected to result in more moderate price growth in the short term than witnessed over the past three years, especially in the apartment segment of the market.

According to Melbourne City Council, there are over 7,400 apartments to be built over 2015-2017 in the CBD and CBD Fringe locations such as Southbank and North Melbourne. This implies that future price growth within the Melbourne residential market is likely to be driven by locational factors, with proximity to public transport (particularly in respect of inner city schemes) being a key demand driver.

Brisbane has lagged behind other capital city markets in the current residential cycle in terms of construction activity and price growth, but recent activity suggests that the Brisbane market is strengthening quickly, which is reflected in the substantial increase in the off-the-plan apartment sales. In nominal terms, housing price growth moved into positive territory from 2012 onwards, but has been well below the 2010 peak.

The apartment supply pipeline is expected to expand in Inner Brisbane over the medium term. An estimated 17,800 apartments are due to complete in 2015-2018, with the majority of this supply located in the Inner North and Inner South. We estimate that almost 60% of this supply has already been pre-committed through sales off-the-plan.

In 2014, there were more than 8,700 new residential apartment development planning approvals, making up over 40% of all new private sector dwelling approvals in Greater Brisbane, well above the five year annual average of 31%.

Within Inner Brisbane, we expect off-the-plan sales volumes to be more subdued in the short term, particularly to investor buyers. Given the stronger supply pipeline, we expect a rise in rental vacancy, softer rental growth and a reduction in rental yields.

*Note all currencies AUD unless otherwise noted.

Contacts

Residential

Rupa Ganguli Associate Director – Strategic Research (Residential) rupa.ganguli@ap.jll.com

Photo: Liberty Place, Sydney

RESIDENTIAL SNAPSHOT

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ADELAIDE By Andrew Beitz Principal, Pitcher Partners Adelaide

The current economic outlook in South Australia does not appear to be overly buoyant in comparison with other states in Australia. Commsec recently revealed that South Australia currently holds seventh spot on the economic performance rankings and has only improved its position on retail trade, equipment investment, and construction work. In addition, the state is still ranked eighth on dwelling starts leaving it 0.3% below the decade average with December 2014 quarter starts only 0.1% higher than a year earlier.

In regards to population growth and business investment, South Australia is third ranked compared with the rest of Australia, but conversely holds seventh position on economic growth, retail trade, and housing finance.

South Australia’s jobless rate increased to 7.1% in April up from to 6.4% in March 2015, with the national average being around 6.1%. This high unemployment rate has been attributed to the high cost of doing business in South Australia again fuelling the ongoing debate for tax reform.

All these economic indicators are contributing to lower business and consumer confidence which is stifling growth for not only the Property sector but all sectors within the state. The decline in the Manufacturing, as well as the failed expansion of Olympic Dam, and more recently Oil and Gas giant Santos posting a $935 million loss and over 200 jobs cut in Adelaide, South Australia is struggling to gain momentum and see any consistent economic growth.

Residential

The South Australian housing market is currently experiencing a very severe downturn, with a significant number of local building companies closing their doors over the last 18 months, as well as some large interstate companies scaling back their operations in South Australia or leaving the state altogether. Housing Industry Association chief economist Harley Dale said, “We could be in for a 10 to 15% fall in new home building activity that could take us back to some of the lowest levels we’ve seen in the last 15 years… we are building record numbers of homes in Australia at the moment… but it is quite a divergent profile for South Australia”.

The current Weatherill government has however taken steps to counteract this

downturn and stimulate the industry and state economy by engaging the private sector to redevelop housing trust stock in inner-city areas. This program should lead to 4,500 housing trust homes being made available for redevelopment over the next five years.

Commercial

The Property Council of Australia’s latest biannual Office Market Report, released in February 2015, showed that the Adelaide CBD vacancy rates dropped slightly from 13.8% to 13.5% in the six months to January 2015.

The CBD was not the only area posting a decrease in vacancy rates with decreases in the Adelaide fringe market from 9.9% to 8.3% over the same period.

The Property Council’s Office Market Report did however highlight that about 16% of older office space along three major city fringe roads were vacant as of January 2015, up 7% over the past two years.

The future

Apart from all the doom and gloom there are some positive signs for the future of the state with several new commercial projects being announced. The Sofitel is set to open a new five-star hotel in the CBD with construction to start on the $140 million building in 2017, which will be completed in late 2018.

It was also recently announced that Property developer Lang Walker has also committed to undertake a $600m project to upgrade the centre of Adelaide, including the development of a new Festival Plaza, office complex and an expanded retail precinct. It is the first time in 40 years that this part of the city has been redeveloped with the total project costing in excess of $1 billion. This development will aim to complement the redevelopment of the Adelaide Casino as well as the redeveloped Adelaide Oval, hopefully creating a positive economic impact for the state.

SA executive director of the Property Council Daniel Gannon said, ‘“The property industry welcomes a concerted focus on increasing South Australia’s attractiveness as an economic destination – particularly when it involves tourism, which is one of our state’s great economic drivers. What we need to do right now is bulldoze barriers to investment, not build them – and that means implementing widespread tax reform to ensure South Australia’s job floodgates stay open”.

Left: Adelaide CBD

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By Cole Wilkinson Partner, Pitcher Partners, Brisbane

and Brett Headrick Partner, Pitcher Partners, Brisbane

Over the last decade we have seen the movement of off-premise medical suites to on-or attached premise medical suites.

Locations such as the Wesley Medical Centre, Stanford Jackson, St Andrew’s Place, Mater Medical Centre and Greenslopes have become more and more popular. On the downside, demand for historically traditional locations such as Wickham Terrace have either remained flat or, in some cases, had softening in demand.

The most recent hospital-attached medical centre developed was St Andrew’s Medical Centre, primarily aimed at the Surgical Specialists. These rooms are located within the hospital grounds, were developed by Uniting Healthcare and sold off the plan in or around 2008 for approximately $7,500/m2. Properties at St Andrew’s Medical Centre now sell for $8,500 – $9,500/m2.

As a comparison, St Andrews Place, located across the road from the hospital and connected by an enclosed footbridge are currently transacting between $6,000 – $7,000/m2.

Private developers have taken the opportunity to fill the demand with properties being developed nearby, and endorsed by the hospital – albeit not connected. To this end 490 consulting suites at St Andrews, located on the next block to the hospital, markets rooms from approximately $5,500/m2. The asking price also increases as you progress to the upper floors of the building.

Nearby at Brisbane Private Hospital we understand the redevelopment of the car park may be back on the agenda. Some years ago, before private equity acquired Healthscope, Brisbane Private Hospital had plans for redevelopment of the car park, including medical suites and wards where the car park is located on Wickham Terrace. With Healthscope’s recent listing, we understand long term plans mean this development is again being considered, perhaps the injection Wickham Terrace requires. The makeup and opportunities in this development are yet to be announced.

Further West from the City in Auchenflower, the Wesley Medical Centre, a property integrated into the Wesley Hospital, continues to dominate medical suite property prices in Brisbane. In around 2012 the asking price for medical suites in the Wesley Medical Centre was approximately $8,500 – $9,500/m2. In today’s market this has increased to $11,000 to $12,000/m2.

To the South of Brisbane City, Mater and Greenslopes are both popular locations. The Mater retains the ownership of most private suites with leasing costs currently at approximately $100,000 p.a. for 100m2.

As mentioned above, the medical suites not located within a hospital precinct have become less popular. In comparison to the above comments, rooms at Watkins Medical Centre are currently for sale for approximately $4,600/m2.

Generally these types of properties are tightly held and purchasing opportunities only present themselves every now and then, and often at a size not suitable to individual practices. Having a good handle on value is also difficult, with reliable information difficult to come by. Issues such as size, location within the building, floor level and proximity to the hospital all have an impact on price and need to be considered if you are looking at purchasing a property.

Photo: Brisbane, CBD

BRISBANE MEDICAL PROPERTY

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MELBOURNE LEGISLATIVE FRAMEWORK AND MANAGING THE UNINTENDED IMPACTS

By Nicholas Lee Senior Manager, Pitcher Partners, Melbourne

Greater Melbourne is experiencing significant growth. With the backdrop of significant expected population growth and in the absence of any major unexpected changes in employment levels, wages growth or access to finance, this growth is expected to continue, providing significant opportunity for property developers and investors, but potentially causing headaches for landowners.

Two critical pieces of the legislative framework that are driving trends in development are Plan Melbourne and the recent zoning reforms that have taken place in Victoria.

Plan Melbourne

Plan Melbourne is the Victorian Government’s metropolitan planning strategy, mapping out the government’s blueprint for the way the region will develop over the coming years to 2051, along with some of the landmark infrastructure and transport projects flagged for the region.

Tasked with the delivery of Plan Melbourne is the Department of Transport, Planning and Local Infrastructure along with the Metropolitan Planning Authority (‘MPA’) who will implement the actions and projects that make up the longer term plan.

According to Plan Melbourne, the metropolitan area’s population is forecast to grow from 4.3 million to approximately 7.7 million people by 2051, representing growth of approximately 80% based on the 2013 population.

SUNSHINE

EASTWERRIBEE

LA TROBE

PORT OFHASTINGS

AVALONAIRPORT

MONASH

DANDENONG SOUTH

POSSIBLEFUTURESOUTH–EASTAIRPORT

PORT OFMELBOURNE

MELBOURNEAIRPORT

WESTERN INTERSTATEFREIGHT TERMINAL

BEVERIDGE INTERSTATEFREIGHT TERMINAL

EXPANDEDCENTRAL CITY

PARKVILLE

PORT OFGEELONG

Port Phillip Bay

Western Port

DELIVERING AN INTEGRATED ECONOMIC TRIANGLE BY 2050SOURCE: MAP 2 FROM PLAN MELBOURNE DEPARTMENT OF TRANSPORT PLANNING AND LOCAL INFRASTRUCTURE, 2014 © The State of Victoria. Department of Transport, Planning and Local Infrastructure, 2014.

The State of Victoria does not warrant the accuracy or completeness in this publication and any person using or relying upon such information does so on the basis that the State of Victoria shall bear no responsibility or liability whatsoever for any errors, faults defects or omissions in the information.

0 10 20

Kilometres

Metropolitan region Metropolitan urban boundaryUrban areaRoad networkRail networkExpanded central cityNational employment clusterTransport gateway – existingTransport gateway – futureKey industrial precinctsIntegrated economic triangleKey transport connection – roadOther major road connectionKey transport connection – railFreight airportSeaport

MAP 2 – DELIVERING AN INTEGRATEDECONOMIC TRIANGLE BY 2050SOURCE: DEPARTMENT OF TRANSPORT, PLANNING AND LOCAL INFRASTRUCTURE, 2014

0 10 20

Kilometres

Metropolitan region Metropolitan urban boundaryUrban areaRoad networkRail networkExpanded central cityNational employment clusterTransport gateway – existingTransport gateway – futureKey industrial precinctsIntegrated economic triangleKey transport connection – roadOther major road connectionKey transport connection – railFreight airportSeaport

DELIVERING AN INTEGRATED ECONOMIC TRIANGLE BY 2050SOURCE: MAP 2 FROM PLAN MELBOURNEDEPARTMENT OF TRANSPORT PLANNING AND LOCAL INFRASTRUCTURE, 2014

Diagram 1 – Delivering an integrated economic triangle by 2050

13PROPERTY OF PITCHER PARTNERS / JUNE 2015

Plan Melbourne assumes there will be 1,570,000 net additions in dwellings by 2051, distributed as follows:

• 39% (610,000) in growth areas;• 41% (650,000) in established suburbs; and• 20% (310,000) in the central city and surrounds.

This shows a clear preference for higher density development in defined locations and corridors in areas near pre-existing services and infrastructure, and an emphasis on continual development of a central city area. This complements another feature of Plan Melbourne, being a permanent metropolitan boundary to replace the existing urban growth boundary. The net increase in dwellings is expected to consist predominately of apartments (26%) and townhouses and units (36%).

Plan Melbourne also discusses a ‘State of Cities’ concept, whereby Victoria’s regional cities, leveraging on their existing strengths, are expected to share the anticipated population growth.

Unsurprisingly, given the recent change in Government and the reprioritisation of some of the infrastructure priorities in the state, the Government has recently announced a review of Plan Melbourne, with completion expected in the second half of 2015. Given the strategic importance of this document, it will be critical for those in the property industry to understand any change in the overall strategy.

Zoning reform

On 1 July 2014, reformed residential zones came into full effect across Victoria. The reforms have been in development for several years and aim to streamline the zoning process for residential, commercial and industrial zones as well as better align these with the Government’s strategy. The reformed commercial and industrial zones came in to effect in 2013.

Under the reforms, the three pre-existing residential zones have been replaced with the following:

• Residential Growth Zone; • General Residential Zone ; and• Neighbourhood Residential Zone.

The residential Growth Zone aligns with the stated objectives of Plan Melbourne and aims to encourage development near pre-existing services and infrastructure, such as areas near train stations and town centres. It also appears to encourage medium density housing such as apartments, townhouses etc.

Managing the impact

Given the above, unsurprisingly the demand for land and developments is starting to increase in not only traditional higher density development locations such as the inner suburbs and CBD, but also areas around

pre-existing infrastructure and greenfields sites on the fringe of greater Melbourne.

A side effect of this demand is significant increases in site values and changes to the way the various legislation is applied to these properties, impacting the associated land taxes and rates. This puts pressure on holders of sites during or prior to development, as in practice this redevelopment takes a number of years to complete.

Pitcher Partners have been working with a number of landholders possessing both greenfields and inner urban sites to help manage this impost. In a recent example, Pitcher Partners worked with a client in a greenfields area to defend their land tax exemption at VCAT to achieve savings on what could have otherwise been assessable in excess of $500,000 upfront and $150,000 per annum thereafter.

Residents and developers alike will be watching the review of Plan Melbourne with interest to ensure that the vision allows for the continued growth of Victoria’s population while continuing to cement Melbourne as the most liveable city in the world.

NEWCASTLE By Ross Cooper Managing Director, Knight Frank Newcastle

The first quarter of 2015 saw the Reserve Bank of Australia (RBA) reduce the official cash rate by 25 basis points (bps) to 2.25%, in February 2015. This led to a 30bps reduction in the variable mortgage rate to 5.65% which has further fuelled the residential property market in the Lower Hunter. The residential market has seen strong growth in units, apartments and free-standing housing. Developers have renewed confidence backed by strong “off the plan” sales.

From searches undertaken on the EAC Redsquare property database, a recorded 186 house sales across the Merewether and Merewether Heights suburbs recorded an average sale price of $998,000 and a median house price of $845,000 over the previous twelve months. Charlestown in Lake Macquarie recorded 225 house sales over the previous twelve months with an average price of $494,000 and a median price of $466,000. Apartment sales have also picked up over the last twelve months with 35 sales recorded over

$1,000,000 and a maximum price of $2.75 million in Newcastle.

The NSW Property Council has released their 2015 office market update indicating A Grade office vacancies of 2.7%. There is limited new A Grade office accommodation coming out of the ground so far in 2015. The only new A Grade office building currently under construction in Newcastle is 168 Parry Street offering approximately 4,500sqm of office accommodation over five levels. The building is fully leased with occupation proposed from December 2015.

Two A Grade office buildings in the Honeysuckle precinct have sold since mid 2014 on capitalisation rates of circa 7.9%. The buildings each had 10 year WALE’s to Government tenants and set new records in the Newcastle market. However there has been limited growth in face rents in A Grade office over the last five years averaging circa $320/sqm at present with incentives in the Newcastle market of approximately 10%.

The industrial market has seen increased vacancies and vacancy periods since early 2014. The industrial market in the Hunter is still heavily dependent on the mining industry, which is currently experiencing a significant downturn. As such, unemployment in the Hunter has hit a 20 year high with more than 17,000 people now looking for work. The unemployment level has increased from 5.8% in 2011 to 12.8% in March 2015. In Newcastle and Lake Macquarie the unemployment rate increased from 4.9% to 8.1% over the same period, being less pronounced than the Upper Hunter Region.

The aged care sector and over 55’s units have seen a resurgence over the last 12 months. The sector was decimated following the GFC however developers are now re-entering this space and recording strong pre sales of new and “off the plan” projects. We anticipate this will be a growth area over the next few years with an increasing aging population, low interest rates and further pressure being applied by an understocked residential market.

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PERTH INCREASED PROFIT OPPORTUNITIES FOR SAVVY INVESTORS

By Emma Everett Manager Strategic Alliances, Momentum Wealth

Recent changes to Western Australia’s town planning regulations have resulted in a significant increase in development opportunities in selected locations in the Perth metropolitan area. These changes, which have occurred at both a state and local government level, have typically included rezoning specific suburbs to meet WA’s future population demand and combat urban sprawl. At the same time, the Residential Design Codes (commonly referred to as ’R Codes’) were updated by the WA Planning Commission in 2011, which significantly changed the development potential of some properties within their current zoning status.

For example, many sites previously only suitable for villa and townhouse style developments can now be developed into small groups of apartments. Typically, these apartment groups contain 5-40 units and are limited to two to three storeys. This increased lot yield has had a significant impact on profitability and also meets the growing market demand for low-maintenance, affordable properties in quality locations. This strategy is particularly successful in locations where lifestyle amenities (such as café strips and natural attractions including the coast and the river) are of a high standard and where the cost of houses on larger blocks is prohibitively expensive.

Choosing the right target buyer for the end product is critical for the success of a development project. Some product types, including many apartments under $500,000 that are marketed as ‘investments’, have a high amount of excess supply on the market. Subsequently, these are aggressively marketed to interstate and overseas investors to achieve project sales. Other market sectors, including boutique apartments, have less supply and provide more profitable opportunities.

Another issue for investors to consider is the resale process and market demand for the finished properties. It’s important to remember that apartment living in Perth is not as established as other locations and so investors should take care with the location of their development site. Some locations are becoming oversupplied with apartments, which poses risks at the presale, settlement and post-construction sales stages. Property developers should closely monitor both existing supply (established properties) and upcoming supply (development/building approvals and off-the-plan sales underway) to allow them to focus on locations which offer the best return with the lowest risk.

Case study – Carine Rise

When Momentum Wealth managing director Damian Collins heard about the Landcorp land release at Carine Rise, he identified an opportunity to take advantage of changing planning regulations and also meet a growing market demand for apartment living in the Carine area. “Some Carine residents nearing retirement are finding their properties to be too much upkeep – but this doesn’t mean they want to move to a city apartment.” says Mr Collins. “They want to remain in the area, close to their family and all the lifestyle amenities they love. It made sense to us to explore the opportunity to develop a product for this ‘empty-nester’ market.”

The result was a development of 16 apartments and three townhouses across three lots, designed with premium finishes and features, which appeal to ageing occupants. With a price range of low $500,000’s to $1 million plus, the project achieved 12 presales in the first six weeks and has now proceeded to construction.

This project was developed by a syndicate of 13 investors. “Buying as a syndicate allowed the investors to pool their capital to access this high-return investment opportunity,” said Mr Collins. “Most investors could not access this scale of project on their own, so this was a great outcome for everyone.” In this rapidly evolving market, it is crucial for property owners to work with experts who understand this style of development. These development projects require vigorous due diligence and a proactive town planning approach to ensure that the best outcome is achieved.

Below: Carine Rise, Perth

15PROPERTY OF PITCHER PARTNERS / JUNE 2015

SYDNEYBy Grant Parish Client Director, Pitcher Partners, Sydney

The New South Wales property market has performed relatively strongly for the last twelve months on the back of some basic economic fundamentals. NSW has suffered for years at the lack of infrastructure development and limited land releases which, along with strong population growth, have led to a large shortage in supply of housing. The flow on effect of the supply shortage leading to strong demand across all property sectors and locations apart from regions affected by the downturn in the mining sector.

Many of these aspects of the economy are being corrected through:

• purposeful infrastructure projects (that have commenced or are being planned and budgeted for by state and federal governments); and

• market forces which have increased the supply of land, especially within the Sydney basin.

The supply issues in NSW have provided positive outcomes for developers through significant structural property fundamental movements, with average block sizes decreasing yet prices increasing. The 2015 Urban Development Institute of Australia – State Of The Land Report shows that median block sizes in Sydney have reduced from 520m2 at an average price of $269,000 in 2009 to median block sizes in 2014 being 450m2 at an average price of $339,750.

Similarly infill developments appear to be flourishing with ABS figures showing that from 2012/13 to 2013/14 apartment approvals are up in NSW by 37% (from 21,812 to 29,875) while at the same time dwelling unit completions have jumped 15% (from 32,628 to 37,360).

There has been much reported about the impact of foreign buyers in the property market. The latest statistics released by NAB Group Economics in the NAB Residential Property Survey Q1 2015 show a steady increase in foreign buyers in NSW over the last few years and a large jump in foreign buyers during the last quarter making up approximately 21% of the new property market in NSW up from 14.9% in the previous quarter.

Despite hype around first home buyers being priced out of the market, a recent NAB survey suggests first home buyers continue to account for approximately 25% of the NSW market.

So what does the future hold for the NSW property market? Whilst we don’t have a crystal ball, the economic indicators point to continued strength due to the supply issues albeit weakening as the market rebalances itself. The slower growth in the NSW property market going forward may be highly affected by various economic factors such as housing affordability, interest rate movements and employment security.

Adelaide Andrew Beitz Telephone +61 8 8179 2848 andrew.beitz@pitcher-sa.com.au

Melbourne John Brazzale Telephone +61 3 8610 5110 john.brazzale@pitcher.com.au

Brisbane Ross Walker Telephone +61 7 3222 8444 rwalker@pitcherpartners.com.au

Sydney Carl Millington Telephone +61 2 9228 2200 cmillington@pitcher-nsw.com.au

Newcastle Greg Farrow Telephone +61 2 4911 2000 greg.farrow@pitcher.com.au

The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals and agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. © Pitcher Partners 2015 PrintPost Approved PP381827/ 0043

Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Perth Leon Mok Telephone +61 8 9322 2022 mokl@pitcher-wa.com.au