Brisbane, with more than 2.3 million residents, is a popular tourist destination, serving as a gateway to the state of Queensland, particularly to the Gold Coast and the Sunshine Coast. Queensland has the largest area of agricultural land of any Australian state and the highest proportion of land area dedicated to agriculture. Some 30,500 businesses carry out agricultural activity in Queensland, and agricultural industries contribute more than $10 billion to the state’s economy each year. Over the past two decades, Queensland’s economic growth has generally exceeded the national average.

Economy

Queensland’s economic conditions continued to improve over the second half of 2017. State final demand has now increased for five consecutive quarters, resulting in annual growth of 2.6% over 2017. In line with increasing economic activity, labour market conditions have also materially improved. Employment growth of 4.4% over 2017 was the strongest in the country. Queensland’s population growth surpassed the national average at 1.7% in the year to September 2017, compared with the national growth of 1.6%. The improvement has come from both interstate and overseas migration. The outlook for the Queensland economy looks increasingly positive. With the incumbent government re-elected, work can begin on mooted infrastructure works, which will be a further boost to growth. Queensland’s economy is forecast to grow 3.6% in 2018 and 3.4% in 2019.

26_BRISBANE PROPERTY INVESTMENT BY ASSET TYPE IN 2017

27_Initial Yields & IRRs – brisbane

Office Market

The state government continues to influence the Brisbane CBD office market. Following the consolidation of Queensland Health over 2017, total vacancy in the Brisbane CBD office market increased from 15.3% to 16.2%. Whilst the Brisbane CBD vacancy is currently high, vacancy rates appear to have reached a peak. Not only is stock under construction limited over the next three years but there has also been an increase in major tenant enquiries, which likely lead to lower vacancy rates. After five years of limited rental growth in the Brisbane CBD office market, prime office net face rents grew 10% over 2017. An environment of strengthening demand, coupled with a limited supply pipeline, is likely to result in further rental growth over the next three years. With a notable yield spread still evident between Brisbane CBD and Sydney and Melbourne CBDs, Brisbane CBD is proving to be an attractive alternative for investors. Investment activity by asset type for Brisbane can be found in Exhibit 26. The 1Q 2018 Situs RERC/UPA survey results reveal that the average unlevered yield for prime Brisbane CBD assets is 5.25% with an average IRR of 6.75% (see Exhibit 27 for initial yields and IRRs by property type).

With a notable yield spread still evident,Brisbane CBD is proving to be anattractive alternative for investors.

Whilst the Brisbane Fringe office market has grown significantly over the last decade, in the six months to December 2017, 15,000 square metres of stock was withdrawn from Brisbane’s Fringe markets for conversion to retail, residential and student accommodation. Over 2017, total vacancy in the Brisbane Fringe office market increased to 14.1% from 13.0% a year prior. Looking forward with limited uncommitted new supply, vacancy is projected to trend down over the next two years. Over 2017, leasing activity was lower than the preceding 12-month period, largely as a result of tenants being attracted back to the CBD. With leasing conditions subdued, rental growth for the Brisbane Fringe office market has been constrained for the past three years. Despite soft tenant demand, Brisbane’s Fringe market recorded its highest ever year of sales transactions in 2017. Yields continued to tighten as demand for core quality assets remained strong, with investors identifying more affordable options in Brisbane’s Fringe market. Over 2017, Brisbane Fringe office transaction levels totalled $1.3 billion, more than double the $600 million transacted in 2016. Responses from the 1Q 2018 Situs RERC/UPA survey reveal that the average unlevered yield for prime Brisbane non-CBD office assets is 6.5% with an average IRR of 7.75%.

Investment activity over 2017 in the Brisbane industrial market reached its highest annual level since the record highs set in 2007.

Industrial Market

Increasing population growth and the recovering state economy has also boosted the Brisbane industrial market. Industrial leasing activity in the Brisbane market reached its highest level in 2017 since 2012, led by the transport sector. State infrastructure developments such as the Cross River Rail and Queen’s Wharf redevelopment, are expected to further support industrial works in the region over the coming years. The development of the second runway at the Brisbane airport is scheduled for completion in 2020; this will boost freight through the Trade Coast precinct. Despite increased occupier activity, a competitive pre-lease market has restricted rental growth over 2017; however, the strengthening state economy is expected to facilitate higher rents from 2019. Investment activity over 2017 in the Brisbane industrial market reached $970 million, its highest annual level since the record highs set in 2007. AREITs were the most prominent purchaser in the Brisbane industrial sector over 2017, highlighted by Charter Hall’s sale and lease-back transaction of Coca-Cola’s manufacturing plant in Richland for $156 million. With institutional investor appetite persisting for prime Brisbane industrial properties, further sale and lease-back transactions are likely to be brought to the market as owner-occupiers capitalise on investor demand. According to the 1Q 2018 Situs RERC/UPA survey results, the average unlevered yield for prime Brisbane industrial assets is 6.0% with an average IRR of 7.0%.

Retail Market

Although there is a degree of optimism, consumers remain wary of the Queensland economy’s performance, particularly with the low wage growth, elevated household debt and relatively high unemployment. In the second half of 2017, Queensland retail turnover slowed, remaining below the national average. Over 2017, Queensland retail sales increased 1.1%, down from the 3.3% increase recorded in 2016. Queensland retail turnover growth outperformed only Western Australia (-0.4%) and the Northern Territory (-1.8%). Reflecting the subdued retail conditions, tenant demand remains mixed across Queensland with leasing agreements taking longer to finalise. Despite the soft retail conditions, international retailers continue to expand in Queensland with H&M, Mecca Maxima, Costco and Uniqlo all opening new stores in the state. Queensland accounted for 30% of retail transactions across Australia in 2017 with $3.1 billion sales recorded, boosted by the 50% stake in the Indooroopilly shopping centre sold for $802.5 million. Indooroopilly was the first super-regional shopping centre sale with management rights in more than a decade. The 1Q 2018 Situs RERC/UPA survey results reveal that the average unlevered yield for Brisbane Super & Major Regional Shopping Centre assets is 4.75% with an average IRR of 7.75%. Sales of large-format retail centres in Queensland totalled $140 million, accounting for 4.5% of all Queensland retail transactions in 2017. Responses from the 1Q 2018 Situs RERC/UPA survey reveal that the average unlevered yield for prime Brisbane large-format retail assets is 7.25% with an average IRR of 8.0%.