Quarterly Property Report - Banner Asset Management · The Australian dollar fell by 10% in 2018 against the US dollar, hitting a two year low against the Greenback during the year,

Quarterly Property Report J A N U A R Y 2 0 1 9

Q U A R T E R L Y P R O P E R T Y R E P O R T | J A N U A R Y 2 0 1 9 2

Introduction Welcome to the second edition of Banner’s Quarterly Property Report. Australia’s property market has remained firmly in the spotlight over the last three months, with the residential market in particular continuing to dominate the headlines.

As asset prices continue to stage an orderly correction in most state capitals from highs set in 2017 after several years of strong gains, some commentators have speculated there may be more dramatic falls near term with significant consequences for the broader economy.

While some further weakness in residential asset values

could well be seen, the fundamental drivers of the market remain sound. A combination of regulatory and cyclical factors have combined to reset the residential market for more sustainable levels of growth, reducing the risk of a boom-bust scenario.

Outside of the residential market, growth in e-commerce underpins robust investor demand for industrial and logistics properties, and rising employment is driving tenant demand for offices.

Long term prospects for Australia’s property market are supported by population growth among the highest in the developed world,

a resilient economy and significant government-led infrastructure spending.

In our previous report, our Spotlight section discussed the rising opportunity for investors to participate in the commercial real estate debt market as banks have reduced the amount of capital they allocate to the sector.

In this edition, we explore the potential for commercial real estate debt to provide access to the positive long-term fundamentals of Australia’s property market with less exposure to downward corrections in asset prices, while achieving stable returns.


Economic update

Australia’s economy has achieved a 27-year uninterrupted expansion, the longest in the developed world. Gross domestic product is rising at an annual rate of 2.8%.

Annual consumer price inflation fell to 1.8% in 4Q from 1.9% in the previous period, slipping further below the Reserve Bank of Australia’s target band.

Official interest rates remain near record lows. The Reserve Bank of Australia has held the cash rate steady at 1.5% for more than two years. Many commentators are projecting that rates are likely to remain unchanged as far as 2020.

Australia’s population continued to grow by a strong 1.6% in the 2018 financial year. Official estimates predict New South Wales will remain the biggest state however Victoria is expected to experience the strongest growth.

The Australian dollar fell by 10% in 2018 against the US dollar, hitting a two year low against the Greenback during the year, as investment capital chased higher interest rates in the U.S.

Source: Australian Bureau of Statistics, Reserve Bank of Australia, Reuters

Australia’s economy continues to expand at a solid pace, buoyed by steady immigration-driven population growth. Australia’s average economic growth rate of 3.2% a year in real terms over the past 27 financial years is well above that of all major developed economies such as the US (2.5%), UK (2.1%), France (1.6%), Germany (1.4%) and Japan (0.9%).1

The latest data shows Australia’s economy grew by 2.8% in the third

1 Australian Trade and Investment Commission, 2017-18 GDP growth rate of 2.9% confirms the resilience of our economy. This research can be found at: https://www.austrade.gov.au/news/economic-analysis/2017-18-gdp-growth-rate-of-2-9-per-cent-confirms-the-resilience-of-our-economy+

2 Australian Bureau of Statistics, 5206.0 - Australian National Accounts: National Income, Expenditure and Product, Sep 20183 Reuters, Australia central bank rates seen at record lows until mid-2020: Reuters poll. This article can be found at https://www.reuters.com/article/us-australia-

economy-rates/australia-central-bank-rates-seen-at-record-lows-until-mid-2020-reuters-poll-idUSKBN1O90G9

quarter of 2018 2, helped by rising exports, household consumption and government spending. Growth has pulled back from the 3.4% peak hit in June, as softening house prices combined with sluggish wage growth to rein in discretionary household spending, tempering expectations of a near term rate hike.

The central bank is seen as likely to keep interest rates steady until mid-2020, according to a poll of economists

conducted by Reuters in December.3 At the same time, unemployment has continued its downward trajectory, hitting a six-year low in December of 5.0%, business conditions remain above trend, and wages growth is gradually picking up.


Despite headwinds from a slowing global growth, especially in Australia’s biggest trading partner China, the economy is expected to maintain its steady pace, helped by high levels of government infrastructure spending, population growth, and low interest rates.

A weaker Australian dollar is also helping to shield Australia’s economy from the impact of slowing global growth by boosting the value of the country’s goods and service exports. Sales of iron ore, coal and tourism have helped to deliver 11 consecutive months of trade surpluses.4 Economists forecast economic growth around 2.7% through 2019 and 2020, according to a Reuters poll.5

4 5368.0 – International Trade in Goods and Services, Australia, Nov 2018

5 Reuters, Australian economy to be slowed, not sunk, by headwinds: Reuters poll. This article can be found at: https://www.reuters.com/article/us-australia-economy-poll/australian-economy-to-be-slowed-not-sunk-by-headwinds-reuters-poll-idUSKCN1PF01E

27yearsU N I N T E R R U P T E D G R O W T H

U N E M P L O Y M E N T R A T E

5.0%I N D E C E M B E R 6 Y E A R L O W

3 Q G D P

+0.3%U P ( V S P R I O R Q U A R T E R )

+2.8% U P ( V S Y E A R A G O )

A U S T R A L I A G O V E R N M E N T I N F R A S T R U C T U R E S P E N D

$75BO V E R 1 0 Y E A R S

C O M P A N Y P R O F I T S 3 Q

14% A N N U A L G R O W T H

+1.9% O N P R I O R Q U A R T E R

Source: ABS, Australian government budget documents

Sources: CommSec, ABS, Deloitte

N E W S O U T H W A L E S

Australia’s most populous state is the second best performing economy, leading on retail spending and dwelling starts.

V I C T O R I A

The nation’s fastest growing state, buoyed by strong construction activity and the lowest jobless rate in a decade. Melbourne is projected to take over from Sydney as the nation’s most populous city around 2050.

Q U E E N S L A N D

Queensland’s economy is gaining pace as it recovers from a mining downturn, with higher coal prices and rising LNG exports reviving confidence in the resources sector. Retail spending is picking up as the lower Australian dollar attracts more overseas visitors and international students, and more people migrate from interstate.


A N N U A L G D P G R O W T H

Source: CommSec

2010-11 2.5%

2011-12 3.9%

2012-13 2.6%

2013-14 2.6%

2014-15 2.3%

2015-16 2.8%

2016-17 2.3%

2017-18 2.8%

T R E N D A N N U A L E C O N O M I C G R O W T H

A V E R A G E A N N U A L G R O W T H R A T E B E T W E E N 1 9 9 2 A N D 2 0 1 8

Source: CommSec Source: Australian Trade and Investment Commission

+4.5

%

+5.1%

+4.2

%

+4.7%

+6.7%

+6.9

%

+5.5

%

-5.6%

NSW

Vic

tori

a

Que

ensl

and

Sout

h A

ustr

alia

Wes

tern

Aus

tral

ia

Tasm

ania

ACT

Nor

ther

n Te

rrito

ry

New

Zea

land

Aus

tral

ia

Can

ada

USA

Net

herl

ands UK

Spai

n

Fran

ce

Switz

erla

nd

Ger

man

y

Japa

n

Ital

y

3.1%3.2%

2.5%

2.5%

2.1%

2.1%

2.1%

1.6%

1.6%

1.4%

0.9%

0.7%

A U S T R A L I A ’ S D E C L I N I N G J O B L E S S R A T E

Source: ABS

Une

mpl

oym

ent r

ate (

seas

onal

ly ad

just

ed)

6.3

6.3

6.2

5.7 5.

8

5.5

5.4

5.5 5.6

5.3

5.0

6.0

5.9

Jan-

2015

Feb-

2015

Mar

-201

5A

pr-2

015

May

-201

5Ju

n-20

15Ju

l-201

5A

ug-2

015

Sep-

2015

Oct

-201

5N

ov-2

015

Dec

-201

5Ja

n-20

16Fe

b-20

16M

ar-2

016

Apr

-201

6M

ay-2

016

Jun-

2016

Jul-2

016

Aug

-201

6Se

p-20

16O

ct-2

016

Nov

-201

6D

ec-2

016

Jan-

2017

Feb-

2017

Mar

-201

7A

pr-2

017

May

-201

7Ju

n-20

17Ju

l-201

7A

ug-2

017

Sep-

2017

Oct

-201

7N

ov-2

017

Dec

-201

7Ja

n-20

18Fe

b-20

18M

ar-2

018

Apr

-201

8M

ay-2

018

Jun-

2018

Jul-2

018

Aug

-201

8Se

p-20

18O

ct-2

018

Nov

-201

8D

ec-2

018


Dwelling prices have been undergoing an orderly correction in many markets since 2017 after several years of strong growth across major east coast cities.

The latest data from CoreLogic shows average national dwelling values fell by 4.8% in the year through December,

6 CoreLogic property market chart pack January 2019

the largest annual decline since 2008. While in the short term there has been acceleration in asset price falls, underlying metrics suggest the decline may not be long term.

The weakest performing cities were again Sydney and Melbourne, down 8.9%

and 7.0% respectively, after previously recording the strongest gains. Values have risen slightly in Brisbane, where housing prices remain more affordable.6 Within these capital city markets, prices are varied, with many suburbs still achieving rising dwelling values.

Residential

D E C E M B E R M A R K E T S N A P S H O T

Source: CoreLogic, SQM Research

M E L B O U R N E

-3.2% D W E L L I N G V A L U E S ( O N Q U A R T E R )

-7.0% D W E L L I N G V A L U E S ( O N Y E A R )

-7.2% F R O M N O V E M B E R 2 0 1 7 P E A K

2.2% V A C A N C Y

B R I S B A N E


+0.2% D W E L L I N G V A L U E S ( O N Y E A R )

-0.4% F R O M A P R I L 2 0 1 8 P E A K

3.2% V A C A N C Y

S Y D N E Y



-11% F R O M J U LY 2 0 1 7 P E A K

2.2% V A C A N C Y

N A T I O N A L


2.5% V A C A N C Y


Tightening creditAs discussed in our prior Quarterly Report, the decline has largely been driven by a tightening in the availability of credit as the Australian Prudential Regulation Authority (APRA) has implemented measures to reduce the risks in the mortgage market, causing a fall in lending to investors and making it harder for owner occupiers to obtain loans. Increasing supply, investor caution and a reduction in stamp duty incentives on presale stock are among the other issues that have impacted the market.

The Reserve Bank of Australia has noted in a recent commentary that lending to investor purchasers has declined in proportion to owner-occupier lending, with a reduction in interest only loans and tightening of serviceability requirements impacting the property market, particular high density stock (apartments or “condos“).

7 Australian Bureau of Statistics, 8731.0 – Building Approvals, Australia, Dec 20188 Australian Bureau of Statistics, 8752.0 – Building Activity, Australia, Sep 20189 Pendal, Australian Housing Review, November 2018

Supply adjustsAfter two years of booming construction, particularly in the east coast capital city apartment markets, the supply pipeline is now reducing, and this should help to moderate further price declines. Dwelling approvals fell by 8.4% in December from the previous month to their lowest level in five years and are down 23% over the year.

High density was the most impacted, with approvals for apartments falling by an even greater 19% in the month and 38% over the year7, indicating the amount of new supply coming into the market is set to revert to more normal levels after a period of unusually high construction activity.

The fall in approvals is already starting to show up at the construction phase with new residential building work

commenced falling by 5.7% in the September quarter from the June quarter8, and units falling 8.4%.

Annual building approvals have fallen below 200,000 from above 250,000 at their peak, which will be negative for growth beyond 2019, but approvals above 180,000 are still at reasonable levels on a long-term basis, according to Pendal. Based on average population over the past decade, 200,000 new approvals a year are needed, Pendal says in its Australian Housing Review.9

N E W D W E L L I N G S A P P R O V E D

Source: ABS

20,000

15,000

10,000

25,000

2012

2013

2014

2015

2016

2017

2018

2019


Stage set for more sustainable growthIn the wake of a recent Royal Commission into the financial services sector, credit availability is likely to remain tight. The RBA has highlighted one risk of tighter lending restrictions is that some investor buyers of off-the-plan apartments may be unable to obtain finance for completing their purchase. Whilst this is a possibility, the RBA has concluded that there is as yet not a lot of evidence that this has occurred.

The RBA has further noted that the measures introduced by APRA have improved the risk profile of new lending which is a positive for the future strength of buyers and the market more generally.

10 Trent Wiltshire, Domain Economist, Domain’s Property Price Forecasts

Domain Research has forecast that as banks and consumers adjust to the new lending standards, lending growth should resume throughout 2019, but at a more moderate pace.10

Reduction in supply and continued strong levels of migration, particularly to Sydney and Melbourne, should help to provide a soft landing for the market and see dwelling price growth resume at a more sustainable rate.

Domain has forecast that 2019 will be a year of greater stability, saying that while prices may fall further, the pace of those falls is likely to slow in the first half of the year before the market moves into another growth phase. Other commentators suggest greater volatility, with greater headwinds and a heightened decline.

Domain Research forecasts lending growth to resume through 2019


Investor demand for industrial and logistics space in Australia remains buoyant, underpinned by rising exports, strengthening business investment, growth in e-commerce, and a large public infrastructure spending program.

The Sydney and Melbourne markets are still outperforming, with gross take-up above historical benchmarks and robust rental growth, while the Brisbane market is rebounding, according to JLL.11

Investment in transportation projects has surged significantly over the last few years and is expected to continue apace. In its budget last year, the Australian Government outlined plans to spend more than $75 billion on transport infrastructure projects over the next decade, and the individual states also have big spending plans and many projects are already underway.

Australia’s ecommerce industry is accelerating from low levels compared to the U.S. and is expected to lead to greater integration of technology and automation into distribution and fulfillment centers.

Colliers International predicts the differing performance between capital cities will become more prominent with the east coast markets of Sydney, Melbourne and Brisbane seeing stronger capital appreciation than Perth and Adelaide.12

11 JLL Australia, Economic growth was subdued in September 2018 quarter12 Colliers International Industrial Research & Forecast Report, Second Half 2018

Industrial & Logistics

O N L I N E R E T A I L T R A D E A S A P E R C E N T A G E O F T O T A L A U S T R A L I A N R E T A I L T U R N O V E R

Source: ABS

M O N T HT O T A L O N L I N E T R A D E (% )

2 0 1 5

January 2.8

February 2.9

March 3.1

April 3.1

May 3.1

June 3.4

July 3.1

August 3.2

September 3.3

October 3.1

November 3.3

December 3

2 0 1 6

January 3

February 3.1

March 3.2

April 3.1

May 3.3

June 3.5

July 3.2

August 3.4

September 3.6

October 3.9

November 4.1

December 3.8

M O N T HT O T A L O N L I N E T R A D E (% )

2 0 1 7

January 3.6

February 3.6

March 3.7

April 3.4

May 3.9

June 4.1

July 4.3

August 4.6

September 4.4

October 4.7

November 5.5

December 4.8

2 0 1 8

January 4.7

February 5.1

March 5.1

April 5.4

May 5.6

June 5.7

July 5.5

August 5.6

September 5.6

October 5.9

November 6.6

Q U A R T E R L Y P R O P E R T Y R E P O R T | J A N U A R Y 2 0 1 9 1 0

G L O B A L Y I E L D S – I N D U S T R I A L & L O G I S T I C S By City 2Q 2018

C H I C A G O 5.1%

D A L L A S 5.9%

V A N C O U V E R 4.5% L O N D O N 4.3% F R A N K F U R T 4.7%

S I N G A P O R E 3.6%

M E L B O U R N E 6.2%

S Y D N E Y 5.3%

B R I S B A N E 6.5%A U C K L A N D 5.5%

H O N G K O N G 3.8%

T O K Y O 5.1%

S H A N G H A I 6.0%L A 5.8%

Source: Colliers


S Y D N E Y

The positive economic outlook for New South Wales and an unprecedented level of infrastructure investment are supporting growth in the Sydney industrial market. Combined with a lack of assets, this has caused yields to compress. With a limited amount of assets expected to hit the market over the next 12 months, Colliers expects yields to remain tight.

5.6% Average prime yield at September - down 48 bps over 12 months

$72.6BO V E R F O U R Y E A R S - R E C O R D S T A T E G O V E R N M E N T I N F R A S T R U C T U R E P R O G R A M

Source: Colliers

M E L B O U R N E

The market in Victoria’s capital is being buoyed by strong de-mand from local and offshore investors supported by major new infrastructure announce-ments such as the Melbourne Airport Rail Link. This has caused further yield com-pression for both prime and secondary grade assets. Lack of supply of built industrial product is making it necessary for investors to take a longer term investment horizon and buy land holdings.

5.79% Average prime yield - down 11 bps

6.33%Average secondary yield - down 12 bps

$50B S U B U R B A N U N D E R G R O U N D R A I L L I N K - A U S T R A L I A ’ S B I G G E S T E V E R T R A N S P O R T P R O J E C T

Source: Colliers

B R I S B A N E

Strong population growth and low unemployment is expected to drive consumption of goods and retail spending, increasing demand for logistics and industrial space.

6.13% to 6.57%Average prime yield in September - down 20 bps over 12 months\ / S Q M

A V E R A G E C O S T O F I N D U S T R I A L L A N D - U P 9. 2 % O V E R 1 2 M O N T H S

Source: Colliers

S H A R E O F I N D U S T R I A L S P A C E S U P P L Y P I P E L I N E 2 0 1 8 - 2 0 2 2

Source: Colliers

21%Victoria

4%Western Australia

1%Northern Territory

49%NSW

20%Queensland

4%South Australia


Robust jobs creation, population growth in major cities and significant spending on infrastructure continues to support occupier demand in Australia’s office market. An improvement in the economies of the mining states Queensland and Western Australia has also benefited absorption as the resources sector recovered.

All CBD office markets recorded positive effective rental growth in 2018, with Sydney leading the charge, according to CBRE. After 12 months of national CBD office stock contracting, the second half of 2018 saw the return of positive net supply growth. However, with absorption also beginning to increase over the second half, vacancy continued to decline.13

Leading indicators suggest strong employment growth is set to continue14, further supporting the office market. Meanwhile improved infrastructure, including the in-progress Sydney Metro rail project, the nation’s biggest transport project to date, and Melbourne’s in progress $50 billion underground suburban rail loop, which would set a new record, will increase the appeal of suburban markets to office occupiers.

13 CBRE Marketview Australia Office, Q4 2018. This is also the source of the following paragraph.14 Australian Bureau of Statistics, 6354.0 - Job Vacancies, Australia, Nov 2018

OfficeN A T I O N A L C B D S N A P S H O TSource: Collier, Savills

58C B D S A L E S I N 4 Q 2 0 1 8 W O R T H $ 5 . 2 B

8.7%N A T I O N A L C B D V A C A N C Y D E C 2 0 1 8

7.9%M I D 2 0 1 9 C B D V A C A N C Y ( C B R E F O R E C A S T )

5.3%N A T I O N A L C B D P R I M E Y I E L D 4 Q 2 0 1 8

123,000S Q M N A T I O N A L C B D N E T A B S O R P T I O N 2 H 2 0 1 8

74,000S Q M N A T I O N A L C B D N E T S U P P LY H 2 1 8


S Y D N E Y - S T A R P E R F O R M E R

Sydney’s CBD market is delivering the strongest rental growth of all CBD markets nationally. Although face rents continued to grow over the quarter, the pace of growth is slowing. By contrast, incentives continued to fall quite sharply, according to data from CBRE.

Yields also continued to compress in all precincts of the broader Sydney metro office market over

the six months through September. Demand from both institutional and private investors remains strong, with demand outstripping supply. Demand for metro office space has been supported by increasing pricing in the CBD, with a number of investors now priced out of the market and looking for more long-term upside outside of the CBD, according to Colliers.

16 bpsA V E R A G E M E T R O Y I E L D C O M P R E S S I O N - S I X M O N T H S T O S E P T E M B E R

15%2 0 1 8 C B D P R I M E N E T E F F E C T I V E R E N T A L G R O W T H

2.9%4 Q C B D P R I M E E F F E C T I V E R E N T A L G R O W T H - S L O W D O W N F R O M 4 . 5 % I N 2 Q

S Y D N E Y C B D

Source: CBRE

6.2%

4.8%

3.6%

3.6% 4.

9%

$705 $8

05 $925 $9

90

$980

5.21

%

4.93

%

4.75

%

4.62

%

4.66

%

December 2016 December 2017 December 2018 December 2019 f December 2020 f

Source: CBRE, Colliers Vacancy Prime net effective rent Prime Yield


7.4%P R I M E E F F E C T I V E C B D R E N T A L G R O W T H 2 0 1 8

3.1%F O R E C A S T C Y C L I C A L L O W F O R V A C A N C I E S E X P E C T E D B Y M I D -2 0 1 9 ( C B R E )

9.3%F O R E C A S T P E A K F O R V A C A N C I E S E X P E C T E D I N 2 0 2 2 ( C B R E )

M E L B O U R N E C B D

Source: CBRE

6.5%

4.5%

3.7%

6.0%

8.0%

$360 $4

15 $445

$455

$4405.

51%

5.03%

4.86

%

4.79

%

4.72

%


M E L B O U R N E - V A C A N C Y N E A R I N G C Y C L I C A L L O W S

Rents in Melbourne’s CBD continue to rise, although at a slower pace, reflecting increasing supply. The city has entered its largest supply cycle since the early 1990s with around 630,000 sqm of new stock coming to market over the five-year period from 2018 to 2022, according to CBRE research. Vacancy is expected to hit a cycle low in early 2019 before heading higher in the second half of the year as more supply comes to market.

In the metro market, vacancy rates in the city fringe, inner east and outer east are all well below long-term average levels, according to Colliers, with tenant demand continuing to rise on the city fringe. Current low metro vacancy rates suggest vacancy will rise only to long-term average levels through the next supply cycle (2020 to 2022), Colliers says.

Source: CBRE, Colliers Vacancy Prime net effective rent Prime Yield


$3.2BV A L U E O F T R A N S A C T I O N S I N 2 0 1 8 A C R O S S 3 6 D E A L S

$43BI N F R A S T R U C T U R E P R O J E C T S P L A N N E D

B R I S B A N E C B D

Source: CBRE

15.3% 16

.1%

13.9

%

13.2

%

12.4

%

$370

$365

$375

$390

$410

6.38

%

5.83

%

5.51

%

5.37

%

5.34

%


Source: CBRE, Colliers

B R I S B A N E - M O R E Y I E L D C O M P R E S S I O N F O R E C A S T

2018 marked the turn in the cycle for the Brisbane market, which had been weighed down by high vacancy rates and elevated incentives.

Demand for prime grade properties is rising as the state economy recovers from a slump in commodities and government spending on infrastructure projects boosts business confidence.

Vacancy Prime net effective rent Prime Yield


As we discussed in our previous Spotlight section, reduced lending to the commercial property sector by the banks has created an opportunity for non-bank investors to increasingly participate in this space. In this quarter’s spotlight, we explore the potential for Commercial Real Estate Debt investment to provide access to the positive long-term fundamentals of Australia’s property market with less exposure to late cycle volatility or market corrections.

After several years of strong gains in Australian property prices, the residential market is experiencing an orderly correction in some capital cities while yields continue to compress in large parts of the industrial & logistics and office sectors (“yield compression” means rising asset prices).

Long-term, the Australian property market is backed by strong fundamentals and the expectation is for residential prices to return to more sustainable levels of growth. However, investors are right to be selective about their point of entry to the market given current volatility.

While there is still growth to be achieved through select direct investments in Australian property, Commercial Real Estate Debt offers an attractive alternative way to access the underlying positive long-term market fundamentals while taking on less exposure to late cycle volatility or correcting asset prices.

Real estate debt is perceived as a defensive form of investment into the underlying asset of real estate for several reasons.

Typically, it is structured as a loan secured against a property via a first mortgage, offering stable income returns through agreed interest payments. These contractually agreed

payments insulate the lender from the volatility of fluctuating rents/prices.

A first mortgage enjoys the primary lien (charge) over the property and it has priority over all other claims on the property in the event of an ordinary sale or event of default.

Property assets are financed by a mix of debt and equity capital. In some instances the debt can be structured into senior and subordinated (“junior”) priorities, however Banner typically only provides senior debt investment opportunities. The debt investor’s capital is protected by an “equity buffer” or first loss position provided by the borrower’s “at risk” capital and profits that are positioned between the assessed asset value of the property and the debt. Should there be a decline in asset value, the lender is significantly more protected as the “first loss” position has to be eroded before there is a potential capital loss position to the lender.

Capital Provider

LVR1

Equity 20%

Second Mortage (Junior) Debt2

10%

First mortage (Senior) Debt3 70%

Notes

1 LVR’s are illustrative only2 Example only, if applicable3 Banner tipically only

provides First Mortage (Senior Secured) Debt

Ris

k &

Ret

urn

Equi

ty B

uffer

(c

ombi

ned

first

loss

pos

ition

)

The example provided represents the risk profile and return of each provider of capital and where they would sit

in a typical “capital stack”. The Loan to Value Ratio (“LVR”) represents the percentage that each party agrees to provide against the assessed underlying asset value (being a current valuation at the time the investment is made by an independent and licensed valuer) and the order of priority.

First mortgage senior debt is also backed by a suite of associated security documentation and well proven legal recourse in Australia. Commercial real estate loans usually include covenants that protect the lender in the event of capital value or income declines. These could include loan-to-value, debt service cover ratios, pre-sales cover ratios and the like depending on each transaction.

Importantly, commercial real estate debt investments in Australia are based on project specific metrics and are not trying to judge medium to long term real estate investment cycles and trends. Each investment will have its own unique characteristics and risk profile, which will vary between transactions and so an experienced manager in this space is paramount. Project specific metrics include current (not historical) valuation assessments, pre-sales at agreed (contracted) prices, and geographic and sector attributes.

Despite major residential markets softening as the property cycle changes, underlying real estate fundamentals remain sound.

Meanwhile, the pullback in lending by the major banks (discussed in detail in the previous Spotlight section) has boosted prices for commercial real estate debt, which is delivering attractive risk-adjusted returns.

Given the uncertainty surrounding property yields short term, commercial real estate debt is an attractive proposition for investors seeking protection from market volatility.

Spotlight on real estate debt as a defensive asset


Australia’s real estate market is supported by strong fundamental influences including steady population growth led by healthy immigration levels.

In real estate, one of the best long-term drivers of property returns is population growth, and Australia’s is among the fastest in the developed world.

Based on current trends, the population is projected to reach 30 million between 2029 and 2033,15 and all these people will need places to live and work.

15 Australian Bureau of Statistics, 3222.0 - Population Projections, Australia, 2017 (base) - 206616 ASFA, Superannuation Statistics, January 201917 Credit Suisse Research Institute, Global Wealth Report 201818 JLL, Global Real Estate Transparency Index 2018

They will also need transport, infrastructure and services, the creation of which boosts economic growth, and activity.

The market’s long-term prospects are further underpinned by the Australia’s resilient economy; its $2.8 trillion pool of superannuation savings16; a large working-age population; elevated infrastructure spending; and the second highest per capita wealth in the world behind Switzerland17.

In its Global Real Estate Transparency Index 2018, JLL ranked Australia behind

only the U.K. as the second most transparent market in the world18. This high level of transparency means the market is trusted by participants. Australia’s political system is stable. Laws and regulations are clear and consistently enforced, and sovereign risk is low.

This combination of population growth with transparency and stability provides a solid foundation for the market and will ensure it continues to have a place in the portfolio of domestic and international investors.

Outlook

P R O J E C T E D A V E R A G E A N N U A L P O P U L A T I O N G R O W T H ( 2 0 1 8 T O 2 0 2 2 )

Source: IMF/Colliers

0.40

%

0.00

%

0.50

%

0.60

%

0.60

% 0.70

% 0.80

% 0.90

%

1.00%

1.30%

1.60%

Japa

n

Ger

man

y

Chi

na

Fran

ce US

UK

Hon

g Kon

g

Sing

apor

e

Indi

a

Aus

tral

ia

Can

ada

$2.76 trillion S U P E R A N N U A T I O N A S S E T S

US$411,060 A U S T R A L I A ’ S M E D I A N W E A LT H P E R C A P I T A - 2 N D H I G H E S T G L O B A L LY B E H I N D S W I T Z E R L A N D

Source: ASFA, Credit Suisse


At Banner Asset Management, we provide an opportunity for investors to gain exposure to the real estate debt market through lending to established and proven developers for development projects, or for strategic acquisition of sites earmarked for development in the future. We also provide opportunities to invest in direct real estate through funds alongside other project partners.

We invest in developments with a proven use, evidenced either by presales or lease agreements, as well as strong fundamentals, including proximity to growth centres.

In the residential space, our focus is on medium density development (apartments and townhouses) in the bigger population centers of Sydney, Melbourne and South East Queensland, which provide greater liquidity and depth than other markets in Australia. This includes mixed-use residential projects that incorporate some uses such as office space or retail. We are looking to grow our investment in industrial, as growth in ecommerce drives demand for warehousing and logistics.

Our approach

D I S C L A I M E R

Investment in the Banner Wholesale Fixed Interest Income Fund ARSN160596770 is offered by Banner Asset Management Pty Ltd and is administered by Allied Funds Management Limited (AFSLicenceNo. 416441).None of the Asset Manager, the Responsible Entity, the Investment Committee Members or their associates or directors of any other person or entity guarantees the performance ors uccess of the Fund or any particular investment, the repayment of capital invested or any rate or return on investments in the Fund. We recommend that you consider your individual objectives, financial situation,needs and circumstances in managing any investment and that you consider consulting your financial advisor.

M E L B O U R N E

Level 21, 90 Collins Street, Melbourne VIC 3000 +61 3 9929 6400 [email protected]

S Y D N E Y

Suite 7.05, Level 7, 1 Margaret Street, Sydney NSW 2000 +61 2 9262 2422 [email protected]

Documents

Quarterly Property Report - Banner Asset Management · The Australian dollar fell by 10% in 2018 against the US dollar, hitting a two year low against the Greenback during the year,