December, 2016
Australian Commercial Real Estate Market Focus
The following represents a monthly snapshot of how we see the commercial property
markets across the country along with the near term outlook. For a more detailed
commentary, please visit our website thinktank.net.au for our Quarterly Market Update.
The W-MI Consumer Sentiment Index fell slightly by 1.1 points in November but still
remained over the 100 level of optimism at 101.3. The AiG-PMI for November however
was up strongly by 3.3 points to 54.2 moving further into expansion territory above 50.
The D&B Quarterly Expectations Index for the 1st quarter of 2017 released earlier in
November rose 6.7 points to 23.7 and was greeted by D&B Economist Stephen
Koukoulas saying, “The economy is ending 2016 and moving into 2017 on a positive
note”. The W-MI Leading Index also points to steady growth despite falling slightly from
0.63% to 0.43%. Westpac lifted its expected GDP growth for 2017 from 3.0% to 3.3%.
As expected by most commentators the RBA Board left rates unchanged in its final
meeting of the year at the record low of 1.50%. Steady unemployment figures of 5.6%
along with a slightly better quarterly CPI for September, allowed the RBA to issue a mostly
unchanged Statement on Monetary Policy (SoMP) in November. As a result it is mainly
international events that are once again driving domestic interest rate moves here in
Australia. The surprise result of the US Presidential election appears to be generating an
equally surprising lift in financial sentiment with upgraded predictions of GDP growth for
the US and strong expectations of an increase in US interest rates at the December
meeting of the Federal Reserve Board. Our News and Views segment overleaf focusses
on interest rates and what has already happened to longer term rates and what is
expected to happen to short-term rates in the months ahead.
Property markets continue to reflect the same ‘two speed’ economy that Australia is
currently experiencing and this applies to both commercial and residential markets across
the country. The most recent CoreLogic measures of capital and income returns show
housing moderating nationally but with continued strong annualised growth for houses in
Sydney and Melbourne with some falls in unit prices. Quarterly IPD figures for commercial
sectors also show a reduction in total returns nationally to 12.2% from 12.6% in June.
Sydney and Melbourne returns continue to rise with net effective rents growing as lease
incentives fall and cap rates remain firm. The concern is that rising long-term interest rates
will see cap rates start to expand and the impact that will have on weaker markets.
We have made no changes to our ratings and trends this month which leaves 11 out of 16
in Melbourne and Sydney as Strong or Good and Improving. By contrast, we rate none of
the markets in the other three capitals that we cover as better than Fair or Weak and only
one of 24 has an Improving trend. Six of the markets are both Weak and Deteriorating
and three of those are located in Perth. Melbourne and Sydney are out in front on virtually
all measures and it is hard to see any early change even with stronger growth nationally.
SYDNEY
ADELAIDE
MELBOURNE
BRISBANE (SEQ)
PERTH
RESIDENTIAL
Strong
Stable
Strong
Stable
Fair
Stable
Fair
Stable
Weak
Deteriorating
COMMERCIAL
Strong
Improving
Good
Stable
Weak
Deteriorating
Weak
Deteriorating
Weak
Deteriorating
RETAIL
Fair
Improving
Fair
Improving
Weak
Stable
Fair
Stable
Fair
Stable
Good
Improving
Good
Improving
Weak
Deteriorating
Fair
Improving
Weak
Deteriorating
INDUSTRIAL
Sources: ABS, ACCI, AiG, ABS, ANZ Research, ATO, CBA, CBRE, Colliers International, CoreLogic RP Data, HTW, IMF, IPD, JLL,
Knight Frank, Melbourne Institute, OECD, PCA, RBA, Savills Research, Westpac Economics
© 2016 ~ Thinktank Property Finance ® ~ AFSL 333 163
December, 2016
News and Views

While short-term rates were kept on hold at the December Board meeting of the RBA, expectations of an
increase next year are now clearly evident in futures pricing shown in Charts 1 and 2 on the opposite page.
From having priced in a rate decrease for much of the past year this has now changed to monetary policy
remaining unchanged for most of 2017 and an increase by the end of the year. As is often the case, much of
the pressure to act will come from offshore despite only moderate growth domestically and employment figures
that feature high levels of part-time jobs growth and a falling participation rate while inflation remains well below
the RBA’s own target band. The following come from recent articles in the AFR and our own observations.

The RBA is being urged by the Organisation for Economic Co-operation and Development (OECD) to
prepare the nation for official interest rate increases in 2017 to avoid a housing market blowout. With the US
Federal Reserve widely anticipated to hike next month and again next year, the OECD suggests the Reserve
Bank will be able to respond by tightening policy without fear of driving up the Australian dollar. "Monetary
policy tightening is expected to commence towards the end of 2017 and this is appropriate given likely
monetary policy developments elsewhere," the OECD said in its latest global economic outlook.

"The new governor seems very relaxed with cash rates at 1.5 per cent, especially as house prices have reaccelerated in some areas," said NAB economist Ivan Colhoun. Indeed, a number of speeches by top RBA
officials over the past weeks indicate the central bank is reluctant to ease any further. Dr Lowe was widely seen
as ruling out another cut when he cautioned against a further rise in household debt in a speech in midNovember. And a week later assistant governor Chris Kent said the improved outlook for commodity prices
would provide some support to nominal demand growth. Economists expect the economy grew just 0.2 per
cent over the quarter, down from 0.5 per cent in the previous quarter, taking annual growth to 2.5 per cent, or
well below the RBA's latest forecasts of around 3 per cent. A number of economists including NAB and Morgan
Stanley are even predicting the first quarterly contraction in five years.

But most economists say the RBA will look through any slowdown, seeing it as more of a one-off quarterly
result, coming after strong growth in the first half of 2016 and as the recent surge in key commodity prices
works its way into the national accounts. While acknowledging soft inflation, HSBC chief economist Paul
Bloxham said that the rebound in commodities prices and the election of Donald Trump had considerably
changed Australia's economic narrative. "The election of Donald Trump and the expectation of faster US
growth and inflation means that more Fed rate hikes are now expected, which has strengthened the US dollar,
conversely weakening the Australian dollar," he said. Commodity prices including iron ore and oil have
rebounded strongly, and as shown in Chart 3, yields on long-term US government bonds have jumped a full
percentage point from the level back in June.

The correlation between the shape of the graph of US 10 year treasuries and AUD 10 year swap rates is
clear as is the recent weakening of the AUD/USD exchange rate mentioned above. The markets have given
the Fed a strong signal to raise interest rates from the current 0.25-0.50 target range at the December 13-14
meeting. However, there is considerable uncertainty about the pace of any rate increases from there. Market
economists are tipping between one and four increases in 2017 and bond markets have since almost fully
priced in a December rate rise. The more critical question facing analysts is how quickly the Fed will tighten
monetary policy in 2017 and for Australia, how quickly will the RBA follow that tightening. Particularly for
Australian property investors what impact will that have on commercial capitalisation rates?
© 2016 ~ Thinktank Property Finance ® ~ AFSL 333 163
December, 2016
Charts 1 & 2: Overnight Indexed Swap (OIS) Rates & Cash Rates
Chart 3: AUD & USD Interest Rates and AUD/USD Exchange Rates
3.50%
$0.77
3.25%
$0.76
3.00%
$0.75
2.75%
$0.74
2.50%
$0.73
2.25%
$0.72
2.00%
1.75%
$0.71
1.50%
$0.70
1.25%
3M BBSW
31-Mar
2.01%
30-Jun
2.13%
30-Sep
2.19%
30-Dec
2.12%
31-Mar
2.29%
28-Jun
1.94%
30-Sep
1.79%
$0.69
2-Dec
1.81%
AUD 10 Year Swap
2.72%
3.27%
2.83%
2.97%
2.59%
2.09%
2.03%
2.89%
USD 10 year Treas
1.95%
2.32%
2.05%
2.30%
1.83%
1.44%
1.55%
2.44%
AUD/USD
0.7650
0.7680
0.6990
0.7295
0.7670
0.7340
0.7655
0.7415
Sources: Bloomberg, RBA , Westpac Economic Research, CBA Research, AFR
© 2016 ~ Thinktank Property Finance ® ~ AFSL 333 163
December, 2016
For additional information, please contact:
Publications & Market Update
Credit & Operations
Per Amundsen
Company Secretary
T: (02) 8669 5515 M: 0417 064 252
Email: [email protected]
Sales & Distribution
Peter Kearns
General Manager
T: (02) 8669 5501 M: 0434 609 238
Email: [email protected]
Funding & Strategy
Jonathan Street
Chief Executive Officer
T: (02) 8669 5505 M: 0438 319 432
Email: [email protected]
Peter Vala
Head of Sales & Distribution
T: (02) 8669 5512 M: 0468 989 555
Email: [email protected]
Business Relationships and Loan Inquiries
Adam Hutcheson
Senior Relationship Manager- NSW / QLD
T: (02) 8669 5509 M: 0434 609 239
Email: [email protected]
Tony Zaccari
Senior Relationship Manager - VIC
T: (03) 9097 1781 M: 0403 758 514
Email: [email protected]
Paul Burns
Relationship Manager – NSW / ACT / WA
T: (02) 8669 5510 M: 0434 609 241
Email: [email protected]
Joel Harrison
Relationship Manager – VIC
T: (03) 9097 1781 M: 0410 861 540
Email: [email protected]
Ranei Alam
Relationship Manager – NSW / SA
T: (02) 8669 5502 M: 0434 609 240
Email: [email protected]
Kathryn Mackay
Partnership Manager
T: (02) 8669 5513 M: 0414 673 481
Email: [email protected]
Thinktank Property Finance is the leading independent lender specialising in commercial property in Australia.
Thinktank offers a wide range of tailored first mortgage product options including:





Finance for the purchase, equity release and refinance of commercial and residential property
Loan to Valuation Ratios (LVR) up to 75%
Set and forget loan terms up to 30 years with no ongoing fees or annual reviews
Self-Managed Superannuation Fund (SMSF) loans up to 75% LVR, and
Loan options ranging from fully verified to self certification of income.
Important Note
This report does not constitute or form a part of, and should not be construed as an offer to sell or solicitation of an offer to buy investments or
any fund and does not constitute any form of commitment, recommendation or advice on the part of Think Tank Group Pty Ltd (“Thinktank”).
www.thinktank.net.au
© 2016 ~ Thinktank Property Finance ® ~ AFSL 333 163