

Chapter 1
Introduction
Introduction
Welcome to the Q1 2023 edition of Banner Asset Management’s Quarterly Property Report. Residential property prices fell by another 0.6 per cent in the first quarter but showed early signs of stabilising in March. Rents rose steeply as population growth– including renewed immigration– exacerbated the impact of a national housing shortage.

Industrial and logistics properties continued to outshine other commercial sectors as the shift to online shopping helped keep vacancy rates at historic allows. In the office sector, demand for quality space showed no sign of abating as companies sought to attract talent and maintain sustainable operations.
Like other countries, Australia is experiencing a slowdown in economic growth that may impact business and consumer decision-making in the months ahead.
This quarter’s Spotlight section provides an in-depth analysis of the demographic changes that are reshaping the nation’s property market. A surge in new immigrants following the reopening of Australia’s borders and its existing ageing population is driving demand for different kinds of housing to those that were previously popular.
We hope you find these insights useful.


Chapter 2
Economic Update
Overview
Australia’s economic growth has moderated with the latest official data showing gross domestic product (GDP)increased by 0.5% in the three months through December1, down from 0.7% in the previous quarter.
It was the fifth consecutive increase in GDP, though the second quarter in a row in which growth has slowed. Annual growth has also declined to 2.7%2 from the robust 5.9% recorded in September last year when the economy rebounded from the low base registered during COVID lockdowns.
The December quarter figure was below trend and broadly in line with population growth, which implies that GDP per capita was flat, according to the Reserve Bank of Australia.3
The biggest drivers of quarterly GDP numbers were final consumption and net trade4. However, consumption growth has slowed and the RBA has noted the bounce-back in spending following the pandemic has largely run its course. Higher interest rates, falling housing values and cost of living pressures are weighing on house hold budgets.5
Net trade contributed 1.1 percentage points to GDP, as exports increased 1.1% and imports fell 4.3%. Services exports, in particular, rose as tourists and international students returned to Australia following previous border closures.
GDP rose by 0.5%
in the December quarter.
GDP rose by 0.5%
in the December quarter.
The unemployment rate
remained low at 3.5% in December.
The unemployment rate
remained low at 3.5% in December.
The RBA lifted interest rates
twice in the March quarter to 3.60%.
The RBA lifted interest rates
twice in the March quarter to 3.60%.
Australia's population growth
accelerated to 1.6% in the year
to September 2022.
Australia's population growth
accelerated to 1.6% in the year
to September 2022.

Source:
- ABS (2023, March 1), “Economic activity increased 0.5 per cent in December quarter” [Press release]
- ibid
- RBA, (2023, March 7), “Minutes of the Monetary Policy Meeting of the Reserve Bank Board”,
- ABS, “Economic activity increased 0.5 per cent in December quarter” [Press release]
- RBA, (2023, March 7), “Minutes of the Monetary Policy Meeting of the Reserve Bank Board”,
Rate hikes continue
The RBA continued to raise official rates in the March quarter, announcing two 25 basis point increases that pushed the target cash rate to 3.6% after 10 consecutive hikes.6

It subsequently paused rate hikes in April after recent banking system problems resulted in a reassessment of the outlook for global interest rates, though it indicated this does not mean rate increases are over.
Inflation rose by 8.4% over the year to December7 and the RBA’s central forecast is for it to decline this year and next, to be around 3% in mid-2025.8
In a statement accompanying the central bank’s monetary policy decision in March, RBA Governor Philip Lowe reiterated that it is seeking to return inflation to its 2-3% target range while keeping the economy on an even keel. He also reinforced that “the path to achieving a soft landing remains a narrow one”.
Growth over the next couple of years is expected to remain below trend and the RBA forecast is for GDP growth of around1.5% in 2023 and 2024.9
Source:
The numbers
Annual GDP growth falls from COVID rebound
2.7% decrease of 3.2%
source: ABS
Quarterly GDP growth eases
0.5% slight decrease of 0.2%
source: ABS
Unemployment rate remains low
3.5% unemployment rate
Source: ABS
RBA Cash Rate Target
3.6% Cash Rate increases by 0.25%
source: RBA


Chapter 3
Residential
Performance
The March gain was driven by a tight rental market and renewed migration, with Sydney recording the biggest increase in prices over the month (1.4%).2
On an annual basis, national prices were 8% lower than the same period last year –though most housing prices remain higher than at the onset of COVID-19 in 2020.3
Listings are lower than the previous five-year average in every state capital city other than Hobart but auction clearance rates are rising back to average – if not above average in some cities.4
It is unclear if the gain in March will transpire into a longer-term trend of rising prices as the full impact of higher interest rates on household budgets has yet to take effect. Slowing economic growth may dent consumer confidence in the months ahead.

Hans Wibawa
Investment Analyst
National dwelling values fell by 0.6% overall in the first quarter but showed early signs of stabilising in March by recording the first monthly gain (0.6%) since April 2022, according to CoreLogic.1

Source:
Renting housing shortage continues to drive rent prices up
Fixed rate ‘cliff’
Higher interest rates are expected to take slightly longer than usual to impact all mortgage holders due to the number of borrowers who took out ultra-cheap fixed rate loans during COVID-19.
According to the RBA, the value of fixed rate loans increased substantially during the pandemic to peak at 40% of outstanding housing credit in 2022, or roughly twice their usual share.1
The central bank estimates that 880,000of these loans will be reset this year and another 450,000 loans in 2024.2 This ‘fixed rate cliff’ means borrowers will face large increases in repayments when their current loans expire, though the actual impact will vary depending on individual circumstances.

Unit rents soar highest
A shortage of rental housing combined with population growth and renewed immigration after COVID-19 continues to force rents higher in big capital cities, while rental growth in smaller capitals is slowing.
Unit rent is growing at a materially faster rate than other properties, according to CoreLogic, as more tenants seek out medium-to high-density dwellings instead of more expensive houses. A surge in international students and other migrants after Australia’s border reopening is adding to rental demand in inner city areas and university precincts.3
Both Sydney (5.3%) and Melbourne(4.3%) experienced a record quarterly rise in unit rents in the first three months of the year. The annual pace of rental growth for units in Sydney (18.1%) is now almost double the growth recorded for houses (9.4%).4


Source:
- RBA Bulletin (2023, March), “Fixed Rate Housing Loans: Monetary Policy Transmission and Financial Stability Risks”, Fixed-rate Housing Loans: Monetary Policy Transmission and Financial Stability Risks (rba.gov.au)
- ibid
- CoreLogic, Hedonic Home Value Index [Press Release]
- ibid
- CoreLogic, Hedonic Home Value Index [Press Release]
- ibid
Market snapshot
Source:
- Corelogic, SQM Research residential vacancy rates


Chapter 4
Industrial & Logistics
Tailwinds driving the industrial sector’s strong performance for the past few quarters are likely to persist throughout 2023
Key Insights
Tenant demand is strong, thanks to long-term structural shifts towards online retail and ecommerce. Additionally, while global supply chains are stabilising, businesses have learned their lessons on maintaining inventory levels as a safeguard against short-term volatility in supply lines.
Vacancy rates in industrial property remain at historical lows with the national average falling to 0.5% in the March quarter, from 0.6% at the end of 2022, according to Colliers.1
As in other sectors, high-quality industrial property is most in demand. According to JLL, tenants are seeking spaces with ESG credentials that are adapted for automated processes2 and this is encouraging investors with older buildings to consider redeveloping to meet the market.
Meanwhile, high construction costs and restricted material availability are curbing speculative developments. Pre-lease transactions accounted for 41% of all deals over the first quarter of 2023 and 66% of the 2023 pipeline is already pre-committed, CBRE’s data shows.3
The undersupply is pushing face rents higher and incentives lower in both prime and secondary grade markets. Colliers is now predicting 15% rent growth in 2023 after stronger-than-expected rent growth in the first quarter of the year.4
Source:
- Colliers (April, 2023), “Australian Industrial &Logistics Snapshot, Q1 2023”,
- JLL (2023, March 10), “Why knocking down warehouses is on the rise”,
- CBRE (2023, April 12), “Australian Industrial and Logistics National Figures Q1 2023”,
- Colliers , “Australian Industrial &Logistics Snapshot, Q1 2023”
Vacancy rates 1Q 2023
Source: Colliers
Super prime net face rental growth 1Q23
Source: CBRE
Market Overview
Melbourne
Strong demand, low vacancy rates, high rents and low incentives continue as features of Melbourne’s industrial leasing market. Many businesses have increased their on-shore inventories by 25% to 30%after feeling the effects of COVID lockdowns on their supply chains, and Melbourne warehouses have proved a popular choice among tenants looking for storage facilities, JLL notes.1 Net incentives are down across the city, with properties over 5,000 square metres recording a 10%-20% drop in incentives year-on-year in the first quarter. Face rents are up by 12%-24% depending on location, according to Cushman &Wakefield.2 Despite the strong leasing market, investor concerns about high interest rates and construction costs are tempering sales and speculative development activity, Cushman & Wakefield reports.3
Melbourne’s industrial leasing market is characterised by strong demand, low vacancy rates, high rents, and low incentives. Many businesses have increased their inventories, resulting in a popular choice of Melbourne warehouses. Investor concerns about high interest rates and construction costs are tempering sales and speculative development activity.

Sydney
Vacancy rates in Sydney were at a decade low of 0.2% in the second half of 2022, according to CBRE4. This has led to rents rising at their fastest pace on record in the first quarter of 2023 – up 10% over the quarter, and 33.5% for the year, according to Colliers.5 Investors continue to be attracted by the sector’s long-term prospects. Transaction volumes eased in the first quarter to $553 million from are cent peak in the same period last year, according to Cushman & Wakefield6, but this was still well above pre-COVID levels. Prime yields in Sydney averaged 4.6% in the March quarter, according to Colliers.7
Vacancy rates in Sydney dropped to a decade low of 0.2%, causing rents to rise at a record pace of 10% in Q1 2023. Despite this, investors are still attracted to the sector, with transaction volumes reaching $553 million in Q1 and prime yields averaging 4.6%

Brisbane
High tenant demand coupled with delays in development in Brisbane are leading to rent increases significantly above historical trends, according to Cushman& Wakefield8. Face rents increased by 18%in Brisbane’s south and 21% in its west, while other areas continued an upward trend in rent prices that began in 2021 after five years of rental stability.9 Investors are responding to the economic environment with transaction volumes slowing from the highs of the past two years. Around $80 million worth of industrial property changed hands in the first quarter, a little over half the $150 million in transactions recorded in the same period of 2022, Colliers reports.10 Prime yields softened by 0.25% to 5.4% across the market.11
Brisbane is experiencing rent increases above historical trends due to high tenant demand and delays in development. Transaction volumes have slowed, with $80 million worth of industrial property changing hands in the first quarter, and prime yields softening by 0.25% to 5.4% across the market.

Source:
- JLL, (2023, March 9), “Businesses zoom in on Melbourne Warehouses”,
- Cushman & Wakefield, (2023, April), “Marketbeat Melbourne Industrial Q1 2023”,
- ibid
- CBRE, “Australian Industrial and Logistics National Figures Q1 2023”
- Colliers (April, 2023), “Australian Industrial &Logistics Snapshot, Q1 2023”
- Cushman & Wakefield, (2023, April), “Marketbeats Sydney Q1 2023”,
- Colliers, “Australian Industrial &Logistics Snapshot, Q1 2023”
- Cushman & Wakefield, (2023, April), “Marketbeat Brisbane Industrial Q1 2023”,
- ibid
- Colliers (April, 2023), “Australian Industrial &Logistics Snapshot, Q1 2023”,
- ibid


Chapter 5
Office
Tenant demand for quality office space persists
The shift towards quality assets was highlighted by a CBRE Research report which analysed 220 tenant relocations in the two years prior to March. It found 66% of those tenants had moved to a building with a higher rent than their previous premises, while only 24% had opted for abuilding with a lower rent.1
Colliers reported a strong quarter of CBD activity with over 57,000 square metres of office space leased via 111 deals – almost triple the area leased in the same period last year. However, it also noted that economic uncertainty may lead to a more cautious approach by tenants in the months ahead.2
Prime gross effective rents rose in most capital cities over the March quarter, though Melbourne rents were an exception and remained flat, according to Cushman and Wakefield.3

Andrew Turner
Founder and CEO
A focus on quality assets continued to play out in the March quarter as factors such as ESG demand and the war for talent benefited prime office space over the secondary market.
Source:
Overview
Melbourne CBD
The flight to quality is more pronounced in Melbourne’s office market than other capital cities, with the vacancy rate for B-grade office sitting at 20.8% versus 12.4% for prime space.1
Overall demand for office space was in negative territory at net absorption of-15,654 square metres in February –but this total figure again disguised the disparity between higher quality property and secondary offices. Prime space net absorption was actually positive at 40,054 square metres in a strong indication of the trend in tenant preferences, while secondary space recorded negative net absorption of -55,708 square metres, according to Knight Frank.2
The outlook for new supply is relatively subdued as developments are likely to stall until precommitments are secured, according to Cushman and Wakefield.
Prime net effective rents are flat year-on-year at an average $410 per square metre and B-grade net effective rents are an average $355 per square metre.3
Sydney CBD
Leasing enquiries remained stable in the March quarter but the uncertain economic environment is encouraging tenants to delay decision-making, according to Cushman and Wakefield.4 It reports that prime gross effective rents rose 2.9% in the quarter to an average $960 per square metre versus an average $705 per square metre for B-grade space.
A flight to quality by location also remains evident with the take-up in the CBD’s core precinct continuing to outstrip other areas of the city, according to Savills.5
The total CBD vacancy rate in the quarter was 11.3%. In terms of supply, Cushman and Wakefield predicts it will be more subdued this year. No new major developments are expected to be completed in 2023 and most refurbishments will not be done until the second half of the year.6
Brisbane CBD
A lack of supply and rising inflation pushed up rents across all grades of office property in the first quarter and the upward pressure will continue due to the limited supply coming onto the market over the next three years, according to Cushman and Wakefield.7
Incentives remain between 35% and 45% but have the potential to fall as demand for office space heats up ahead of the Brisbane Olympics in 2032, says Colliers.8 It also argues that the flight to quality is driving renovations and new construction that are transforming Brisbane’s CBD from a once secondary market to a prime market.
Prime gross effective rents are sitting at an average $485 per square metre per annum versus $360 for B-grade gross effective rents.9
Vacancy rate for
Melbourne CBD
Vacancy rate for
Melbourne CBD
Vacancy rate
for Sydney CBD
Vacancy rate
for Sydney CBD
Vacancy rate for
Brisbane CBD
Vacancy rate for
Brisbane CBD
Source:
- Cushman and Wakefield (April 2023), “Marketbeat Sydney CBD, Office Q1 2023”,
- Savills Research (2023, March 23), “Australian Office Spotlight – March 2023”,
- Cushman and Wakefield, “Marketbeat Melbourne CBD, Office Q1 2023
- Cushman and Wakefield (April 2023, “Marketbeat Melbourne CBD, Office Q1 2023”,
- Knight Frank (March 2023), “Melbourne CBD Office with Southbank update”,
- Cushman and Wakefield, “Marketbeat Melbourne CBD, Office Q1 2023
- Cushman and Wakefield (April 2023), “Marketbeat Brisbane CBD, Office Q1 2023”,
- Colliers, “Australian CBD Office Snapshot, Q1 2023”
- Cushman and Wakefield, “Marketbeat Brisbane CBD, Office Q1 2023”


Chapter 6
Spotlight
Increase in population to drive a shift in national vacancy rates
As of late 2022, Australia’s population surpassed 26 million, with the annual population growth rate exceeding 1.6% for the first time in five years. Most of this growth can be attributed to the return of international immigration, which could signal a potential opportunity for well-informed investors.
Net overseas migration (the number of overseas immigrant arrivals less residents departing) has increased rapidly. In its 2022-23 State of the Nation’s Housing report, the National Housing Finance and Investment Corporation (NHFIC) revised its expectations for net overseas migration from 2021 to 2025 to 855,000 people. This compared to 587,000 in its previous forecast.1 Charter Keck Cramer notes that Sydney and Melbourne combined will take two-thirds of international immigrants over the next decade, with many new residents occupying apartments.2
International students account for a substantial proportion of overseas arrivals. These numbers could soon eclipse pre-pandemic arrival numbers, with student visa applications 40% higher in the second half of 2022 than during the same period in 2019.3
Higher immigration numbers are lifting demand for homes in an already tight market. The national vacancy rate remains at a tight 0.8%, emphasising the highly competitive rental market. Perth’s vacancy rate sits at a record low of 0.3%, raising concerns about the increased arrival numbers into Australia.4 A stronger buyer demand and higher interest rates on repayments are leading many landlords to sell their properties or vastly increase rent prices,5 which is driving vacancy rates lower.

Nicholas Lakin
Chief Lending Officer
An increase in immigration and changing preferences for housing are set to have a significant impact on residential property markets across Australia
Source:
- National Housing Finance & Investment Corporation (NHFIC), (2023, April 3), “State of the Nation’s Housing Report 2022-23”,
- Charter Keck Cramer, (2023, February), “State of the Market Apartments – Australian capital cities – H2 2022”,
- The Age, (2023, January 7), “Thaw in China relations drives uni demand, but triggers student room shortage”, Paul Sakkal,
- Domain Research, (2023, February 2), ”Vacancy rates: January 2023”,
- Domain (2023, April 6), ”Cost of renting in Australia soars to new highs as prices rise even further in 2023”,
Keeping up with increasing demand
According to NHFIC, there will be more than 1.8 million new households formed over the next decade. This will largely be influenced by a growing focus on ‘compact’ living, as those looking to live alone drive demand for smaller dwellings.
Though the predicted growth for family homes is not far behind, with 533. 3K new dwellings predicted by 2032, it is more likely that these homes will fall within medium-density middle-ring suburbs.1
The seven local government areas containing Melbourne’s greenfield suburbs accounted for 50% of Victoria’s total population growth over the last decade, reinforcing that Melbourne is expanding outwards rather than upwards.
Despite the population growth, building new infrastructure outwards can be up to four times more expensive than building in established middle ring suburbs due to a lack of existing amenities. Encouraging residents to live in established suburbs creates a more compact city and higher population density, offering better access to workplaces, services, and entertainment.
The Victorian Government’s metropolitan planning strategy, Plan Melbourne 2017-2050, includes an aspirational scenario for 70% of new homes to be constructed in established suburbs by 2051 to promote affordable and compact city living.6
Source:
Demand for rental accommodation
The influx of new immigrants and lower rates of home ownership among younger people has created high demand for rental accommodation, which is apparent in low vacancy rates and upward pressure on rents.
Further exacerbating housing shortages, building approvals for apartments, townhouses and semi-detached homes are at their lowest levels in over a decade.1 NHFIC is forecasting shortages of higher density homes for rent to persist over the medium-term, with a cumulative shortage of 106,300 dwellings of all types over the five years to 2027.
Building approval rates diminished by 21.7 per cent from August 2022 to January 2023. This is particularly evident in private attached homes, the demand for which is escalating due to mass immigration post-covid.2

Source:
New housing options
The ongoing housing supply-demand imbalance has sparked calls to increase the availability of build-to-rent (BTR) accommodation and purpose-built student accommodation (PBSA).
While the BTR sector remains in its infancy in Australia, the Property Council of Australia forecasts that institutionally backed BTR could comprise around 5% of the residential rental pool within a decade, while PBSA could help alleviate shortages of student accommodation, particularly among international students arriving in the country.1
BTR, PBSA and other institutionally managed residential property investments provide another avenue for investors seeking exposure to residential property, without the challenges of managing their own private rental properties and mortgage interest rates.
Low building approval rates, coupled with long waits for construction supplies and available tradesmen indicate that the situation will worsen before showing signs of improvement.
Recent warnings from Planning Minister Sonya Kilkenny detail that an additional one million homes will have to be constructed in Melbourne’s established suburbs by the year 2050. Melbourne’s 2021 census tells us that, to meet this target, one new home will have to be built for every two existing homes in the city.
The current situation calls for urgent action and proper planning to ensure the housing needs of the population are met in a timely and efficient manner.

Outlook
As elsewhere in the world, the outlook for property markets in Australia hinges to a large degree on the extent to which economic uncertainty will impact business and consumers in the months ahead.
The International Monetary Fund’s (IMF)latest World Economic Outlook forecasts the Australian economy will grow by 1.6% in 2023 and 1.7% in 2024, with inflation returning to the RBA’s target band sometime after 2024.1
This position reflects the IMF’s broader outlook for the global economy, which it expects to fall from 3.4% in 2022 to 2.8% this year, before stabilising at 3% from 2024. Advanced economies are forecast to bear the brunt of the slowdown.
In the residential space, the IMF ranked the level of risk in Australia’s housing market as the second highest in the developed world behind only Canada, based on a range of indicators.
“Housing markets and prices are likely to cool more and be more sensitive to policy rate hikes in economies in which house prices rose more during the pandemic,” the IMF noted.
“Economies with high levels of household debt and a large share of debt issued at floating rates are more exposed to higher mortgage payments, with a greater risk of experiencing a wave of defaults,” it added.
Local commentators have provided various counters to this argument, with CoreLogic arguing “there is room for cautious optimism” about the local property market as many people built strong savings buffers when rates were low, and unemployment remains at a historic low. CoreLogic outlines that housing market conditions are turning a corner and we may be at the end of the rate-tightening cycle.2
On the commercial property front, the industrial and logistics sector is likely to continue to shine with strong tenant demand continuing due to structural shifts towards online retail, and businesses reevaluating their supply chain strategies following disruptions over the past few years.
Shortages of property will persist through 2023 and into 2024 with most developments already pre-committed, according to CBRE.3 The resulting supply-demand imbalance will hold rents high and restrict growth of incentives.
There is a strong nationwide call for additional housing and several solutions in the pipeline, driven by government strategies such as the Victorian Government’s Plan Melbourne 2017-2050 and the Big Housing Build project. With inflation rates sitting at a significant high and more immigrants entering Australia, we are likely to see the situation worsen before it improves. The RBA forecasts inflation to decline this year, dropping to around 3% in mid-2025, aiding affordability.4
In the office sector, the flight to quality shows little signs of abating in 2023 as the trends which underpin it remain in place. The strong leasing activity of the first quarter may temper somewhat as softer economic conditions push more prospective tenants into a “wait-and-see approach,” according to Colliers.5
Other analysts have suggested the local market will inevitably be caught by the same headwinds impacting global office space, as low occupancy rates triggered by the working from home phenomenon and higher interest rates put downward pressure on asset values
Source:
- IMF (2023, April 11) “World Economic Outlook, April 2023: A Rocky Recovery”,
- CoreLogic (April 13, 2023), “Five reasons the IMF classifies Australian housing as relatively high risk”,
- CBRE, “Australian Industrial and Logistics National Figures Q1 2023”
- Reserve Bank of Australia (2023, February), ”Statement of Monetary Policy – February 2023: Overview”,
- Colliers, “Australian CBD Office Snapshot, Q1 2023”
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At Banner Asset Management we provide opportunities to invest in secured debt products and other property through funds alongside 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 population growth and the likelihood of resilient demand.
In the residential space, our focus is on medium density development (apartments and town-houses) in the bigger population centres of Sydney, Melbourne, and Southeast Queensland, which provide greater liquidity and depth than other markets in Australia. This includes mixed-use residential projects that incorporate uses such as office space or retail. We also invest in non-discretionary retail and the industrial sectors, as growth in e-commerce drives demand for warehousing and logistics.