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CBRE GROUP

CBRE Group, Inc. is the world’s largest commercial real estate services and investment firm, with 2017 revenues of $14.2 billion and more than 80,000 employees (excluding affiliate offices). CBRE has been included in the Fortune 500 since 2008, ranking #207 in 2018. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

INVESTMENT SERVICES

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers with $105 billion in assets under management.

Built up over more than 40 years, our unparalleled platform is focused on real assets, giving our institutional clients access to real estate and infrastructure in the Americas, Europe and Asia Pacific. Our clients benefit from a complete range of investment solutions including equity and debt, direct and indirect, and listed and unlisted strategies.

Trammell Crow Company, founded in Dallas, Texas in 1948, is one of the nation’s oldest and most prolific developers of, and investors in, commercial real estate.The CBRE Global Investors and Trammell Crow Company platforms make up the Real Estate Investments division of CBRE Group.

The Real Estate Investments division is led by
Danny Queenan, Global CEO, Real Estate Investments.

BLOGS

Regularly released content on the state of the real estate and infrastructure industry are produced by our subject matter experts and shared on their blogs. A selection of them can be found below.

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ASIA PACIFIC WATCH

Australian residential prices have undergone a massive rise in recent decades. They have been supported by: strong demographic drivers (especially international migrants of household-formation age); a strong cultural bias to own rather than rent; a tax code which is favorable to individual investors (who can “negatively gear” and thus reduce their taxable income); enthusiastic banks and other lenders; an accommodative Central Bank which has interest rates at record low levels; and supply which has been comparatively muted due to strict planning controls among other factors. But incomes have not been growing at anywhere near the same pace, and by some metrics, Australian cities have among the least affordable residential prices and rents in the world. By the middle of 2017, residential prices peaked in Sydney and Melbourne, but average prices have fallen by around 10-15% since then (CoreLogic April 2019). A Royal Commission investigation into unethical lending practices, regulatory tightening on residential purchases by foreign buyers and potential for future tax code restrictions on top of the sheer unaffordability of stock for many aspiring home buyers, have all dampened the market. Although it may emerge in the future, Australia has nothing like the multifamily residential rental market of the U.S. or Japan, and institutional investor participation is mainly found in niche sectors (like retirement or student accommodation). Of interest here is whether the current correction in residential pricing has other negative impacts to the economy such as retail spending.

CORRECTION CURRENTLY UNDERWAY

Australia has enjoyed 27 years of consecutive positive GDP growth and a 15 year average, annual (unlevered) total return for All (commercial) property of over 10% (MSCI 2019). It has also seen an attractive 300% real price uplift of its housing market overall since 1975 (Deutsche Bank, 2018). But since 2014, some “commodity-driven” cities, saw residential prices slide (Perth is down 18% from peak) and since mid 2017 even the larger, more economically-diversified cities like Sydney and Melbourne have fallen. The depth and duration of this decline makes it the worst housing correction since 1965 (BIS Oxford Economics).

MAY 2019

21,205.81

0.8%

Nikkei 225

29,051.36

1.5%

Hang Seng

3,090.76

5.1%

Shanghai Composite

110.68

1.0%

Yen/Dollar

Data points through end of April 2019. Change represents month-over-month change.

RESIDENTIAL PRICE INDEXES BY MAJOR METRO

Source: Australian Bureau of Statistics as of April 2019. Data Indexed to the start of 2012.
“Weighted 8” refers to the weighted average of the four major cities shown, plus Adelaide, Canberra, Hobart and Darwin.

PRINCIPAL CONTRIBUTOR:
 
Shane Taylor
CAN AFFORDABILITY BE ENHANCED?

Real annual wage growth in Australia has been in the low single digits ever since the GFC and thus unable to keep up with residential price growth (nor with residential rental growth for that matter). The Annual Demographia (2019) survey of 309 metropolitan housing markets in 8 countries found that Sydney and Melbourne ranked after only Hong Kong and Vancouver for the highest median price to median income ratio. Demographia deemed all 5 Australian metros in the study to be “severely unaffordable” compared to 13 of the 55 metros in the U.S. and 2 of the 6 in Canada. The recent price falls are slightly improving affordability yet they need to fall much further as the price to income ratio is dramatically higher than in the early 1990s.

INTERNATIONAL HOUSE PRICE TO INCOME RATIOS: SELECTED COUNTRIES
Note: 1992* to 1987 whichever year had the earliest data
Source: 15th Annual Demographia International Housing Affordability Survey: 2019, page 8.
HOUSEHOLD DEBT LEVELS ALARMINGLY HIGH

The average Australian household is highly leveraged; largely due to residential mortgage commitments. For several years we have tracked household debt burdens across the major APAC markets and have been concluding that Australia has the highest household debt to GDP ratio in the region and among the highest in the world. When household debt is expressed as a ratio to disposable income, Australia ranks 4th worst of the OECD countries at 216% and is deteriorating (from 193% in 2014). This is above the ratio of Canada (181%) and well above the U.S. (108%), Japan (105%) or Germany (93%). Furthermore a sizable volume of Australian mortgages are floating rate rather than fixed, which exposes borrowers to the potential of even higher repayment burdens.

HOUSEHOLD DEBT AS A % OF DISPOSABLE INCOME
Source: OECD as of April 2019
RETAIL SALES GROWTH DECELERATES

Stretched household budgets have pressured the retail sector. Our underweight call to retail has been maintained for several years across virtually all APAC markets in our investment universe. This is mainly due to the structural challenges posed by ecommerce and to traditional formats of retail being slow to adapt: trends to which Australian retail have not been immune. But cyclical challenges are being presented in this environment of weak consumer/retailer confidence and where household “wealth effects” are being eroded given these residential price falls. Although an annual contraction in retail sales is not in our/Oxford Economics base case forecasts, the national-level annual retail sales growth of 3.7% (20 year LTA) will likely see a deceleration to just 2.3% p.a. in the coming five year period (2019-2023).

RETAIL SALES GROWTH:
NATIONALLY AND BY MAJOR METRO
Source: Oxford Economics as of April 2019
WILL HOMEOWNERS TRY TO DEFEND THEIR HOME VALUES?

Is expenditure on DIY/home improvement (landscaping, furnishings, renovations etc) contracting in this environment of declining house prices? It seems that thus far, this specific segment of retail has been holding up well. Spending in this segment actually rose by over 3% nationally in 2018. Somewhat ironically, this segment shows signs of holding up better than retail in general and that’s also despite new construction starts falling. This retail segment would thus appear to retain its defensive characteristics just as many homeowners appear to be defending their homes’ values through fixing up and improving their own and/or their investment housing. Far from forecasting contraction, Oxford expects growth in the coming 5 year period of 3.4% p.a. only modestly below the 15 year historical average of 4.3% p.a.

SALES OF HOUSEHOLD FURNISHINGS/EQUIPMENT AND OTHER HOUSING RELATED EXPENDITURES
Source: Oxford Economics as of April 2019. Note: includes household appliances, textiles, utensils, glassware, floorcoverings, gardening tools and supplies etc. in USD at purchasing power parity.
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This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy and Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

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