March Quarterly Review - Valuers Institute · 2016-03-05 · March Quarterly Review Marches On National Australia Bank Research | 1 March Quarter Performance At A Glance The AREIT

Australia > A-REIT Research 2 April 2014

March Quarterly Review Marches On

National Australia Bank Research | 1

March Quarter Performance At A Glance

The AREIT sector’s (S&P/AREIT 300) March 2014 quarter performance (3.0%) saw the sector outperform the broader market (S&P/ASX 200) (2.2%). The AREIT sector was 6th best performing sub-sector over the March quarter. On a monthly basis, February’s performance (4.2%) did the heavy lifting for the March quarter with January (0.47%) and March (-1.6%).

Outperformers in the March quarter included : Australand (ALZ) (9.6%), Charter Hall Group (CHC) (9.3%), Astro Japan Trust (AJA) (8.7%) and GPT Group (GPT) (7.7%). CapitaLand’s exit from ALZ and Stockland’s (SGP) 19.9% stake in ALZ announced in March saw Australand rank #1 performer over the March quarter although the stock was underperforming pre this announcement.

Underperformers in the March quarter included : CFS Retail Trust (CFX) (-2.8%), Ingenia Communities Group (INA) (-1.9%), Charter Hall Retail (CQR) (-0.3%) and Goodman Group (GMG) (0.0%). The AREIT sector ranked #4 globally for the March quarter.

The March quarter was also charactersied by elements we saw in the December quarter although the scale of the activities were materially less. We saw the CFX internalisation voted up with the WDC/WRT restructure still on foot. The DXS/CPPIB move on CPA got closed out but the M&A theme got rekindled with Stockland taking a 19.9% stake in Australand. Capital raisings were modest with ANI and CHC raising ($56.4m) and ($140m) respectively. IPO space saw 360 Capital Group raise $155m to part fund the listing of an office portfolio holding $239m of assets with a forecast FY15 DPU of 8.5%.

Portfolio Review Outcomes – A Few Changes

ALZ: From an overweight to an underweight - Given the price action, the earnings upgarde already factored in and Stockland

substantially in control of the process upside from here is limited. Despite SOTP valuations implying a higher bid can be justified Stockland is not compelled to pull out all stops..

WRT: From an underweight to overweight - At some point post deal vote in May index buying will provide price floor over the June

quarter. Operational update in the June quarter is not expected to see commnetary suggest any material improvement in re-leasing spreads.

CQR: From an overweight to underweight – Can’t see any “event” that will see upward movement on price action. Any new assets of

the size we saw with Rosebud Plaza is likely to be part funded with a capital raisng

DXS: From overweight to underweight - Whilst has announced several deals (Minters and Allens) the cost of doing office leasing

business in its key Premium/A-grade exposures faces upwards pressure. The earnings offset offered by the industrial portfolio does not look apparent.

The Godfather placed under the “Bunsen Burner” !!

We cover a number of issues from the sector to stock level through a question and answering section as Victor “ the nice guy” places the Cashy “ the Godfather” under the Bunsen Burner.

A-REIT Research: March Quarter Review 2 April 2014


The “Bunsen Burner” applied to the Godfather

Key Macro Issues/Themes VB: What do we have a reasonable level of confidence about? GF: Our economists see GDP rising by 3% in 2014. They see rising export volumes plus the outlook for residential property markets

and related construction spending as positive. We got another positive residential print yesterday with The RP Data-Rismark March Home value Index showing the March quarter recording dwelling values rising 2.3% over the March month to post a 3.5% capital gain over Q12014.The greyer areas sit around the bounce in consumer spending being tapered as unemployment rises but this would mean pockets of industries and in turn some state economies will be particularly hit rather than a broader effect. VB: Outlook for Australian 10yr bond rates? GF: NAB expect 10 yr bonds to broadly repeat the trading pattern we saw in Q1 2014 ie range trading from 4%-4.5% so more or less

supportive to the AREIT sector. VB: Do you believe bond rates will be a major issue in the next Quarter? GF: There looks to be nothing on the horizon that would suggest the 10yrs will break out above our forecast 4.5% and given they did

trade up to 4.4% in the March quarter the sector managed to still outperform the broader market. VB: How do you view the current pricing of the AREIT sector? GF: From a top down perspective and trading at a 169bps to the 10-year bond rate the sector may look on the expensive side but on

the other hand the 1% trading premium when we strip out GMG and WDC does not signal an over-bought sector. VB: What are the key sector issues to watch out for in the next quarter? GF: The batch of Q3 operational updates are not expected to surprise from what we saw at the December 2013 results. Retail

landlords are expected to comment on specialty re-leasing spreads in the context of better/worse or in line with December levels. Don’t expect any shifts in reported office occupancy with GPT having the work ahead on improving the 90% quoted at December 2013. Residential updates will be seen in the context of momentum into FY15 more than underwriting what is already booked for FY14 and for that reason the residential piece will be the focus given what is already priced in. Retail Sector VB: Have we seen re-leasing spreads bottom given the consecutive nine months of positive retail sales growth? GF: Retail landlords at the December 2013 results pointed to positive January retail sales levels. Nonetheless, there looks to be

sufficient evidence to suggest that tenants are working off the known ie rents have tracked ahead of sales for some time and the window for monetising that trend (ie lower rents) may be closed come the end of the year. So in a perverse way the pressure to push hard on rebasing rents from tenants against a backdrop of positive sales momentum may be the tenants being opportunistic as much as anything else. VB: Are retail vehicles better rewarded for being developers or acquirers? GF: No doubt development programs showcase IP and development management skills whether for a fee to co-owners or on behalf of

its own book. Whilst developments are part defensive capex but can be incrementally accretive the market seems to be more rewarding acquisition activity in the current environment. VB: If the market believes discretionary re-leasing spreads have at worst bottomed and may track sideways from here how can we

explain the divergent in performance in the March quarter between CFX and WRT? GF: Both have gone through or are about to go through an internalisation restructure process which partly decouples the entities from

fundamentals but even if we look through that the Melbourne Emporium plus the shakedown of the new internalised vehicle overhangs CFX. VB: So why are you overweight FDC and WRT and underweight SCA and CQR? GF: In its current form or else sweetened the WRT transaction will happen and although the vehicle carries higher gearing than WRT

Mk 1 it is coming to market at a time that sees some positive retail data momentum. FDC is expected to prove up its stated goal of mopping up the remaining syndicates which is earnings accretive. SCA has materially outperformed on justifiably positive results on several fronts but to repeat that again in the June quarter looks a stretch whilst CQR is an event driven stock and for now with the exception of the German exit we don’t expect any material activity in the June quarter. VB: What are your thoughts on the Westfield’s group demerger? GF: All eyes will be on the EM’s, so until then it’s hard to make an informed comment.

Office Sector VB: How do you view the sector? GF: The thesis for the turnaround in office markets ie positive net absorption needs to see WCE growth sufficient to shift the power

base from tenants which will need to floorspace availability levels to fall materially and in turn vacancy rates tightening. When we take that outcome and the levels of expiries in FY15/16 it will be a race for retention and we know how that ends. VB: What’s your view on the direction of cap rates? GF: Given NOI challenges I find it difficult in the absence of a material level of comparable transactions to justify valuations via just

further cap rate tightening being warranted.



VB: Why overweight IOF and underweight DXS? GF: IOF as the remaining standalone office play has shown a willingness to use its balance sheet to acquire accretively with a value-

add twist and whilst Dexus also adopted this strategy the gestation of the CPA portfolio plus some expected earnings drag from the industrial piece sees us favour IOF. Industrial VB: Development securement remains a shootout between competing groups so development margins have moved from being a

margin on cost game to a margin on funding costs play. Do you agree? GF: Economic rents are under downward pressure due to two factors. First, the cost of funding provides headroom to sharpen the

commencement rent/incentives package and secondly, the carrying costs of holding a landbank can exceed economic rent growth hence the motive to accept lower development rents in order to put a landbank to work. So to answer your question I agree with you. VB: You saw some re-valuations in some Industrial assets from TIX. Can we read something into that for other stocks? GF: When you look at the TIX results its Chullora asset ($20m) tightened in excess of 100bps with the balance of the revaluation gains

coming from NOI gains such as the removal of break clauses and major lease extensions. All up the cap rate tightening of 38bps was the lesser contributor to the $26m uplift. Therefore we would not draw a strong led from the TIX result on just a cap rate theme. Residential VB: Is Stockland’s potential move on Australand a signal that it is not convinced of material organic earnings growth from its existing

landbank and Australand adds immediate accretion in a market that has potentially over bought residential names? GF: The primary motive is to have inventory in the current market that removes planning delays, rezoning risks and potentially offers

realisation levels above budget. Given Stockland with a Masterplanned Communities portfolio has revenue pegged to land releases as opposed to forward sales that characterises Apartment projects we can see the rationale for the move which I put down to bolstering its short-term workbook and less a read that it is not convinced in the data it is seeing. VB: Do you believe the hype that Residential segment is the place to be in? GF: Whilst there has always been a healthy level of cynicism regarding the HIA data, the data from ABS and RPD data to name just

two reporting on various aspects of the market all paint a similar picture. Which leaves us with the question of the depth and longevity of the recovery more than stats that we are seeing. So I would answer that the hype for now is being backed up by data points. Funds Management VB: How can we reconcile the disparity in performance between Goodman Group and Charter Hall? Both have material funds

management businesses yet CHC has materially outperformed in the March quarter whereas Goodman Group underperformed. GF: Having seen CHC raise $140m of equity the expectation is it will have deals/partners in place to deploy the capital. Dealflow

across its various funds has always given CHC a high profile. GMG on the other hand with the exception of any revisit of the Brazil which would see a fund launched is more focused on working with its existing partners on development product/acquisitions hence its profile is lower. There may be an element of disappointment that the Brazil deal did not close. VB: Your view on the best way to value a funds management business. GF: The revenue streams whether asset management, development management need to be split out and capitalised at rates that

reflect the quantum and recurrent nature of each. Overlaying that is what multiple can be applied to embedded or future performance fees. The % of FUM approach is like the initial yield approach to valuing income producing property in that it can over/under value the earnings stream and makes for a dubious comparative valuation technique. VB: Could healthcare assets become a new and material property sector class in the listed sector? GF: We have seen childcare and storage REITs now both listed and healthcare is going through a splitting of Opcos and Propcos like

we have seen in childcare/storage so yes it has a place and in fact offers some quite defensive earnings plus growth characteristics. Capital Management VB: What is your view on the capital management aspects of the AREITs? GF: Announcements of sharper bank debt margins well in advance of scheduled expiry dates is an everyday event plus of course the

rebasing of hedges game with the Australand transaction arguably the last of what has been a common theme. Where are now in a phase of some AREITs being opportunistic in that they may sound out the MTN or USPP market and if the arbitrage to raise money and retire debt works from a tenor/price trade-off they will do it but they are not compelled. Last question VB: Your beloved Saints are 2-0, great start. Can they make the Eight? GF: They are sitting at 6

th but have the West Coast Eagles at Patterson Stadium, Adelaide Crows at Etihad Stadium the following week

followed by Essendon at Etihad. Cannot see us 6th after that but if we knocking on the door of the 8 I would be happy with that.



Recommended Portfolio Weightings - June Quarter.

Overweights

FDC – Although the stock underperformed in the March quarter we expect to see some material evidence of its syndicate roll-up in

the June quarter and potentially further activity in the DCM space although this latter element is less of a price driver.

GMG – The March underperformance reads as partly a case of expectation management in that the Brazil transaction was seen by

the market as moving to a closed deal and a fund launch synchronised at that point. The US piece has yet to hit its straps. As the

China market finds a new level there will need to be some repositioning although GMG is not saddled with an unproductive

landbank on balance sheet.

GPT – Although the outperformance in the March quarter was at odds with the reporting season results and outlook the withdrawal

from the CPA race with a consolation prize for its two wholesale funds got the stock rewarded. The buy-back added to the price

support and we expect that this in itself will provide support with the Q1 operational update not expected to show any marked

improvement in key operating metrics.

CHC – The $140m of working capital equity messages the Group is expected to be active co-investing and it is confident that the

deals and partners can be secured. The multiples on the CFX deal and potentially the WRT proposition add a level of support for

the vehicle.

MGR – We don’t expect any immediate news on the TIAA CREF transaction however the momentum from its Apartment business

coupled with the expected uptick in Masteplanned Communities sales are a positive. To that we can add IP metrics that are proving

defensive in the current operating environment.

IOF –– The remaining standalone office play and a vehicle that has shown its willingness to use its balance sheet to acquire

accretively with a value-add angle. The MS angle adds a layer of corporate appeal.

WRT – In the lead up to the EM being issued and the vote the following month there is a prospect of the offer being re-cut given to

have the transaction voted down is not a result that Westfield wants to contemplate. Some index buying assuming the deal gets up

adds a level of support but at the margin. Will be the markets preferred play as a bet on the retail sector recovering despite some

further negative re-leasing spreads.

Underweights

WDC – The securement of $22bn of standby funding was an expected announcement in the lead up to the vote to split with WRT.

Although the offshore operating metrics are appealing and although the stock outperformed in the March quarter the forthcoming

EM and any sweetners that would need to be funded by WDC is unlikely to see the stock repeat its March performance.

SGP – Will likely underperform until market gets clarity on how o=it approaches Australand from a funding standpoint and what the

end game will be. How it positions itself to have a minimum exposure to the Australand office portfolio yet remain in control of the

bid will be key. Stock may hold out for the Australand interim before it makes another move,

BWP – The March outperformance reads as the market expecting the strong results of the settled market rent reviews to be more

or less repeated for the batch of outstanding market rent reviews and in turn the NTA upside that is expected to follow. We view

both of these outcomes fully priced in.

CFX – Materially underperformed in the March quarter and with Melbourne Emporium due to open in the June quarter and

commentary around the development metrics plus the bedding down post the internalisation we don’t see the vehicle

outperforming.

ABP – Outperformed in the March quarter on the back of little transaction activity. Don’t expect that there will be sufficient

newsflow that will drive the stock higher.

CQR – Underperformed in the March quarter with stock price movement largely event driven. Earlier than forecast exit from the

German portfolio would be seen favourably although unlikely. A stable portfolio and relatively mature supermarket portfolio which

sees the stock trading on a yield of X% which provides a level of price support but operationally lacks a re-rate driver.

ALZ – The outperformance in the March quarter given both the earnings upgrade and pending corporate activity sees the stock

not expected to move higher from here on our view that an “over the top” bid is unlikely. Although SOTP valuations hypothetically

could support a bid above the current trading price Stockland given its stake is not expected to be pushed to offer an aggressive

bid.

DXS – Q3 operational update will have several positives including rating upgrade and some further new leasing including securing

Allens for its 480 Queen St Brisbane fund-through project yet cost of doing office leasing at best expected to mirror metrics

reported in the December 2013 results. Development profits locked in. The scale proposition that partly sold the CPA deal will

need to be proved up.

SCP – Strong March quarter result and expect the momentum on reducing underwritten specialty leasing income to continue over

2014. A lot of that already priced in.



March Quarter Performance

The AREIT sector’s (S&P/AREIT 300) March 2014 quarter performance (3.0%) saw the sector outperform the broader market

(S&P/ASX 200) (2.2%). The XPK ranked the 6th best performing sub-sector in the March quarter. The sector closed the March

quarter trading at a 11.8% weighted premium to NTA or a 1%% premiumif we adjust for the material premiums in WDC/GMG. As

at the March quarter close, the AREIT sector was trading at a 169bps premium to the 10-year bond rate which equates a trading

yield of 5.8%. On a monthly basis, February’s performance (4.2%) did the heavy lifting for the March quarter with January (0.47%)

and March (-1.6%).

Outperformers in the March quarter included : Australand (ALZ) (9.6%), Charter Hall Group (CHC) (9.3%) ,Astro Japan Trust (AJA)

(8.7%), and GPT Group (GPT) (7.7%). CapitaLand’s exit from ALZ and Stockland’s (SGP) 19.9% stake in ALZ announced in

March saw it rank #1 performer over the March quarter although the stock was underperforming pre this announcement.

Underperformers in the March quarter included : CFS Retail Trust (CFX) (-2.8%), Ingenia Communities Group (INA) (-1.9%),

Charter Hall Retail (CQR) (-0.3%) and Goodman Group (GMG) (0.0%). The AREIT sector ranked #4 globally for the March

quarter.

The AREIT sector’s February performance (4.2%) over the reporting season period saw residential names outperform with

Stockland (6.1%), Mirvac (5.5%) with the balance of notable outperformers including: SCA Property Group (9%),Charter Hall (8%),

BWP Trust (7%) and Westfield Retail Trust (6.1%).

We read the reporting season (February) return performance as the sector delivering 4.7% weighted average core profit growth

with growth reported on pcp for just about all consitutents as testament of defensive earnings against challenging operating

environmenst overlaid with the market forming the view that reported metrics in the key sectors such as discretionary retail this

reporting season signal a bottoming given the momentum say in retail sales and a strong January sales period. Furthermore the

tone and outlook backed up with several data points for the residential sector saw two of the three residential names outperform.

The March quarter saw some similar themes as we saw in the December quarter namely capital raisings with the Australian

Industrial REIT raising $56.4m and Australand’s major shareholder Capitaland selling its entire holding (39.1%) which saw

Stockland acquire a 19.9% stake in the entity. The corporate activity associated with both Westfield vehicles remains ongoing with

the EM report due in April. The IPO space saw 360 Capital Group raise $155m to part fund the listing of an office portfolio holding

$239m of assets with a forecast FY15 DPU of 8.5%.

Key Drivers in Q1 (Ranked)

#1 Reporting Season

The AREIT sector traded strongly over the month of February despite the tone of investment portfolios grinding through

challenging markets. Headline earnings in a large number of cases were underpinned by reduced finance costs. The weighted

average core EPU growth of 3.3% was skewed by both Westfield vehicles reporting 2% EPU growth on pcp. The weighted

average payout ratio of 83% versus 80.7% in the pcp saw weighted average DPU growth of 5.7% again skewed by both Westfield

vehicles delivering 6%.

#2 Corporate Activity

Although corporate activity is less than what we saw in the December quarter the Stockland/Australand play has refocused the

market on the residential sector although it s fair to say that the reduced scale of activity sees corporate activity in terms of relative

impact somewhat narrower than in the December quarter.

#3 Bond Yields

10 year bonds opened in January at 4.3% and peaked at 4.37% over the March quarter and bottomed at 3.98%. They closed the

quarter at 4.1%.

#4 Index Reweighting

S&P announced its March 2014 Quarterly Rebalance of the S&P/ASX Indices which resulted in several AREITs added to the

S&P/ASX 300 Index including: Australian Education Trusts (AEU),GDI property group (GDI), Hotel Property Investments (HPI),

Industria REIT (IDR) and National Storage (NSR). Inclusions into the All Ordinaries Index outside of those stocks that were

included into the S&P/ASX 300 included Galileo Japan Trust (GJT), 360 Capital Group(TPG) Generation Healthcare (GHC) and

Villa World Limited (VLW). CPA has been removed from the indices.

Credit Markets

Newsflow was relatively quiet in the March quarter with Investa Office Fund (IOF) issuing a US$200m USPP at 173bps above

USTs in 11,13 and15 year tranches whilst Stockland (SGP) issued US$125m into the USPP market for a 15 year tranche (Feb

2029). We expect, however, that ongoing discussions are being held between Dexus and CPA noteholders as Dexus looks to

rebase CPA’s capital structure and similarly WDC engaging with noteholders in regard to the exercise of ‘make whole’ provisions

now that it has secured $22bn of standby bank facilities leading up to the vote to split its Aust/NZ business to create Westfield

Corporation and Scentre Group.



At the close of the March quarter Dexus Group (DXS) announced that S&P has upgraded Dexus’s credit rating from BBB+ to A-.

S&P noted that the CPA acquisition “strengthens Dexus’s business profile due to the expanded size and scope of its Australian-

based office-asset portfolio, its solid asset quality, and its enhanced ability to offer its tenants a broader property portfolio” and that

the acquisition has been funded by a combination of debt and equity and is within Dexus’s articulated financial policy. S&P also

noted that Dexus’s partnership with CPPIB represents “ a credit positive to Dexus as it enables the introduction of third-party equity

and reduces the initial sizable capital outlay.”

Figure 1 plots the March quarter total return for the stocks in the XPK and the performance of offshore REIT indices. The XPK

ranked the #3 global index performer. WDC’s material underperformance (-8.4%) coupled with Stockland (-3.6%) set the tone for

the sector’s quarterly performance.

Figure 1: March Quarter Total Return - ASX 200 Property Trust and Global Comparatives

Source: Iress, Bloomberg *-denotes returns quoted in USD.

Figure 2 plots the XPK’s relative total return performance that saw it underperform the broader market and rank the second worst performing sector over the March quarter.

Figure 2: March Quarter Total Return - ASX 200 Sectors

Source: Iress

-25 -20 -15 -10 -5 0 5 10 15 20 25 30

XPKAIWDCWRTABPAEUAJAALZAPZARF

BWPCDICFXCHC

CMWCQRDXSFDCGDI

GMGGPTHPIIDRINAIOF

MGRNSRSCPSGPTIX

Hong Kong REIT*Sing REIT*

UK REIT*Japan REIT*

US REIT*

%

-2-10123456789

10(%)



The following chart (Figure 3) plots the performance of the wholesale unlisted property funds sector as at January 2014 which shows distribution income returns have been consistent at circa 5% with capital returns drawn primarily from revaluations and positive moves in NTA/NAV more recently edging up to see total returns track towards 10%. The total return performance of the unlisted wholesale since the GFC sees total returns more than clawback the underperformance booked between January 2009 and June 2010.

Figure 3: Returns for unlisted wholesale funds

It will be interesting to see if the uptick in gearing demand as at January 2014 is a consistent theme over the March 2014 quarter.

Fig 4 below plots the trends in debt for wholesale property funds since January 2008.

For the 12 months to March 2014, the average turnover ($7.5bn) was 22% above March 2013 levels whilst the number of transactions was 26.4% below March 2013 levels.

Figure 5: AREIT trading turnover pattern in the 12 months to March 2014

-20%

-15%

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20%

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Returns for unlisted wholesale property fundsannual returns on monthly periods to January 2014

Capital return

Distributed income return

Total return

Source: IPD

0%

5%

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Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Trends in debt for wholesale property fundsdebt/GAV ending January 2014

Source: IPD

600

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Dec-02 Mar-04 Jun-05 Sep-06 Dec-07 Mar-09 Jun-10 Sep-11 Dec-12 Mar-14

XP

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Turn

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December 2013 Reporting Season

Tone - The tone of the reporting season was one of investment portfolios grinding through challenging markets from that standpoint of

defending occupancy levels via proactive tenant retention strategies and minimising open market leasing deals that saw negative reversion. In essence it came down to which AREITs have an asset base, portfolio mix and management platform that can best collect rent, drive rent and minimise earnings risk without eroding future earnings growth

Notables: If we look at the notable core operating profit outliers TIX (+136%) was drawn substantially from a 111% ($9.3m to $4.4m)

fall in Finance Costs, INA (+14%) reduced it drawn debt levels from capital raising proceeds which saw it Finance Costs fall 81%, CQR

(+17%) via a reduction in margins, floating interest rates and swap rates resulted in a 41% fall in reported Finance Costs, CMW’s result

(59%) was a combination of increased funds management fees and full 12 months earnings from acquisitions and FDC (12%) saw

Finance Costs fall 86% ($22.8m). It looks as if the smaller cap names are now exploiting attractive credit spreads with the impact given

their equity base quite material.

Stocks that saw EPS growth in excess of Core Profit growth were vehicles that had buy-back programs in place including WDC

(109.6m), WRT (75m), DXS (73.7m) and GPT (73.8m).

As we have come to expect the reporting metrics on underlying profit/distributable earnings remain divergent although post the PCA

FFO paper more AREITs this reporting period have stated to have adopted the PCA definition yet some elements still remain

debateable within what vehicles report as FFO. Similarly, the re-cut to AFFO which has been adopted as a broad basis for determining

distributions has similarly been shown to be somewhat loosely defined.

One key characteristic of the reporting season was the backdrop of corporate activity which resulted in several AREITS (CPA, CFX,

WRT and WDC) delivering results that are somewhat historical and to various degrees less relevant for the purpose of the market

getting a read on the underlying business drivers. For CPA a last reporting season outing prior to the Dexus takeover.

Given the degree of “heads up” the market had in order to: activate a buy-back program (GPT), benchmark proposals against status

quo earnings (WRT, WDC and CFX), fulfil disclosure requirements that are considered material (ALZ) or provide comprehensive

market updates late in the period (SGP), there was a material level of guidance/results content in advance of the formal reporting

season.

Office Portfolios – With the exception of CPA, the office portfolios reported a softening in LFL NOI growth. In the case of IOF the 9%

in the pcp drawn largely by leasing at 10-20 Bond St was never going to be repeated. The pullback in GPT (3.9% versus 0.7%) was in

large part the contribution from three of its four Sydney CBD assets recording a total NOI fall of -2.3%. GPT’s GWOF reported NOI

growth of 1.1%. Occupancy levels were topical this reporting season in determining how the mix of retention levels, expiry levels and

downtimes worked into the reported occupancy. The most material pullback in occupancy relative to pcp was GPT (90.6% versus

95.8%) with the Freehill’s lease expiry (20,140m2) in December 2013 the major contributor with the MLC asset reporting 65.7%

occupancy (incl HoAs). We note that GPT’s September quarter update quoted its office portfolio occupancy including terms agreed of

95.4% which again underscores the timing of the quoted 90% occupancy as being less material in the context of the 2013 result. Each

of the office AREITs reported softer occupancy levels versus pcp.

The following table plots the stock specific and overall sector results for each of the office portfolios.

Group Core Operating Profit Core EPU DPU Payout

Dec-12 Dec-13 ∆ % Dec-12 Dec-13 ∆ % Dec-12 Dec-13 ∆ % Dec-12 Dec-13 ∆ %

ABP 42.40 46.00 8% 9.59 9.8 3% 8.25 8.25 - 86% 84% -2%

AJA 15.10 15.20 1% 25.90 22.6 -13% 7.50 10.00 33% 29% 44% 53%

ALZ 142.07 148.00 4% 24.60 25.6 4% 21.50 21.50 - 87% 84% -4%

BWP 37.40 42.90 15% 7.04 7.0 - 7.00 6.83 -2% 99% 97% -2%

CDI 22.91 23.87 4% 10.70 11.1 4% 8.60 9.20 7% 80% 83% 3%

CFX 192.30 194.90 1% 6.80 6.8 - 6.80 6.80 - 100% 100% -

CHC 33.70 38.10 13% 11.29 12.4 10% 9.80 11.00 12% 87% 89% 2%

CMW 45.92 73.21 59% 3.80 4.3 13% 3.60 3.80 6% 95% 88% -7%

CPA 103.30 103.80 0% 3.80 4.4 16% 3.20 3.50 9% 84% 80% -6%

CQR 43.80 51.10 17% 14.76 14.8 1% 13.30 13.65 3% 90% 92% 2%

DXS 182.20 189.80 4% 3.85 4.1 6% 2.89 3.07 6% 75% 75% 0%

FDC 106.18 118.81 12% 7.50 8.3 11% 6.60 7.50 14% 88% 90% 2%

GMG 265.70 296.00 11% 16.20 17.2 6% 9.70 10.35 7% 60% 60% 1%

GPT 456.40 471.80 3% 24.20 25.7 6% 19.30 20.40 6% 80% 79% -0%

INA 4.30 4.90 14% 0.80 0.7 -13% 0.50 0.50 - 63% 71% 14%

IOF 78.30 84.50 8% 12.80 13.8 8% 8.75 9.25 6% 68% 67% -2%

MGR 194.20 200.20 3% 5.70 5.7 - 4.20 4.40 5% 74% 77% 5%

SCP 0.00 39.50 0.00 6.1 na - 5.40 na 89%

SGP 255.00 267.20 5% 11.60 11.6 - 12.00 12.00 - 103% 103% -

TIX 4.16 9.81 136% 9.17 10.5 14% 9.00 9.30 3% 98% 89% -9%

WDC 1,474.00 1,438.00 -2% 65.00 66.5 2% 49.50 52.50 6% 76% 79% 4%

WRT 591.40 596.80 1% 19.37 19.9 2% 18.75 19.85 6% 97% 100% 3%

Weighted Average ( excl SCA) 4.7% 3.3% 5.7% 80.7% 83.0% 2.6%

Headline Numbers – The AREIT December 2013 reporting season saw AREITs report weighted average operating profit growth on

pcp of 4.7% if we exclude SCA Property Group (SCP)) from the data set given it reported only an operational update in the pcp post its

October 2012 listing and in any event the shortened timeframe warranted its exclusion from a comparative perspective. Core EPU was

up 3.3% on a weighted average basis on pcp whilst distributions supported by a higher weighted average payout this reporting period

of 83% versus 80.7% in the pcp were up 5.7% on pcp.



Retail Portfolios – Sales (MAT) results were mixed across the key categories although the consistent theme was non-discretionary

categories outperforming at both the major and specialty levels. The positive MAT sales results at a portfolio level were encouraging

although at levels particularly in the specialty segment that removes landlords negotiation leverage to the extent that we can expect

any material reversal in replacement/renewal re-leasing spreads in the more challenged non-discretionary spectrum of specialty sales.

The discretionary retail metrics this reporting season through the lens of specialty re-leasing spreads saw a further deterioration in most

of the key metrics (renewals/replacement) spreads. Whilst there were some one-off material deals that skewed the reported results

such as FDC which this period reported blended re-leasing spreads of -8.8% for its regional assets however one transaction in the food

precinct at Bankstown saw the underlying -4.5% move to -8.8%.

The following table plots the reported blended re-leasing spreads over the past four reporting periods which shows this reporting

season as a low point for WRT and CFX whilst GPT reported a modest (60bps) recovery but still at levels below historical averages.

Industrial Portfolios

The industrial portfolio results saw quite a divergence in portfolio metrics with occupancy levels ranging from 89.7% (SGP) to 99.5%

(MGR) and equally LFL ranged from MGR (5.2%) to DXS (0.6%). As we have seen with the MGR results, one or two material deals in

a portfolio valued at $460m can result in above trend LFL. With SGP operating at one of the lowest occupancy rates, shortest WALE

and lowest LFL this period the question is whether under the new management team can the portfolio track back near its peers. The

appeal of having relatively high yielding industrial assets in a portfolio has been somewhat diminished in the operating metrics reported

in some cases that has seen occupancy circa 95% yet LFL seldom not exceeding CPI.

By and large outside of development activity AREITs have not been active traders across the industrial market partly due to the

decretive nature of any transaction but also the value-add in trading within the industrial sector has at times been a marginal game.

Hence at points in the cycle where occupier trends particularly in the logistics space have given rise to increased asset or location

obsolescence, AREITs to some extent have been caught short in re positioning an asset for an alternative user or else face a sale

below book value.



The following table plots the key portfolio metrics for each of the key industrial portfolios

Residential

Arguably the sub-sector that has been priced to outperform with the reporting season metrics substantiating this view with the

challenge being AREITs getting product to market. Across the board lots settled this reporting period were above levels recorded in the

pcp and ranged from MGR (49%) to ALZ (3.6%). Mirvac recorded a 44.5% contribution from its NSW Masterplanned Communities

Division which has proved up the NSW housing recovery theme.

SGP’s quoted EBIT margin this reporting season (27.3%) compares to 19.1% in the pcp and converted to an operating profit of 8.9%

versus 7% in the pcp arising from the treatment of capitalised interest in COGs. Contracts on hand ($) were up between 50% (MGR)

and 70% (ALZ) compared to pcp.

Impaired and provision stock is expected to burn off faster than forecast which is expected to see operating profit margins normalise

ahead of expectations. The ALZ FY13 result and outlook highlights the issue of hitting the upper end of guidance yet the momentum

running into FY14 has been in part impacted by projects selling out and not sufficient new product being launched which saw the FY13

EPS growth of 4.1% converted to “modest” EBIT growth for FY14.

Both SGP and MGR upgraded FY14 guidance to the degree that both tightened guidance towards the upper end of the previous range

drawn in each case from improved visibility and some better than expected outcomes although in neither case sufficient to upgrade

beyond the band previously provided.

The following table plots the relative performance by lots sold, reported EBIT margins and contracts on hand.

Outlook

With Apartment earnings cemented for the next 12 months given the timing of settlements and the level of pre-sales, the key factor will

be the timing of releases in key Masterplanned projects such as SGP’s Willowdale (3,115 lots),Calleya (1,820 lots) and Marsden Park

(2,085 lots), ALZ’s East Baldivis (950 lots) and Sunbury (390 lots) plus Mirvac maintaining momentum at Googong (50%) (1,638 lots)

and Jane Brook (119 lots).

FHOB participation has been consistent at ~8% of all mortgages although a higher representation circa 11% is for new dwellings.

Product delivery remains the key challenge.

GMG DXS GPT

Dec-12 Jun-13 Dec-13 Dec-12 Jun-13 Dec-13 Dec-12 Jun-13 Dec-13

Cap Rate 8.00% 7.90% 7.90% 8.6% 8.6% 8.6% 8.4% 8.3% 8.3%

Occupancy 97.0% 96.0% 97.0% 91.7% 94.4% 95.9% 99.0% 98.2% 98.5%

WALE - by income 4.0 3.5 3.2 4.4 4.0 4.1 6.1 5.8 5.4

Over/(Under) Rented nd nd nd 4.8% 5.8% 4.8% nd nd nd

NOI Growth nd nd nd -1.6% 1.1% 1.1% 2.5% 2.7% 3.2%

MGR SGP ALZ


Cap Rate 8.0% 7.9% 7.8% 8.7% 8.8% 8.6% 8.6% 8.5% 8.4%

Occupancy 99.4% 99.4% 99.5% 93.3% 89.1% 89.7% 100.0% 98.6% 96.1%

WALE - by income 9.2 8.8 9.3 2.8 3.3 3.7 6.1 6.1 5.8

Over/(Under) Rented nd nd nd nd nd nd nd nd nd

NOI Growth 5.9% 5.9% 5.2% 6.4% 2.3% 0.6% 2.6% 2.9% 1.7%

MGR SGP ALZ


Lots settled 694.00 1809.00 1032.00 2085.00 4641.00 2253.00 1242.00 409.00 1287.00

Revenue 317.3 820.8 543.2 398.0 849.0 439.0 606.0 192.0 582.0

EBIT Margin (% ) 15.1 16.7 15.2 19.1 19.9 27.3 14.7 11.5 15.5

Contracts on Hand (#) nd nd nd 1721.0 1946.0 2872.0 690.0 1108.0 1148.0

Contracts on Hand ($) $1,019.0 $1,005.0 $1,523.8 nd nd nd $345.0 $558.0 $587.0



Guidance

The following table plots the guidance/commentary for each AREIT.

Agency Research

We have set out below some extracts from agency research published in the March quarter which we view as topical in the AREIT sector. For the March quarter we have selected Metropolitan office markets given GPT;s aspirations to increase its exposure to this sector and potentially launch a managed product seeded by metropolitan office assets. Suburban Office Markets Knight Frank has published research on the Sydney, Brisbane and Melbourne suburban office markets. Sydney

Following the deceleration in tenant demand that was evident during 2013, the suburban office market recorded a slight rise in the vacancy rate to 8.7% as at January compared with 8.4% a year earlier. Nevertheless, net absorption remained positive at 12,031m², equivalent to 0.4% of stock. Supporting the moderate growth has been some Government related leases and private demand from smaller tenants of sub 1,000m². Very limited supply levels continue to cushion the market in terms of vacancies. Gross supply of new developments over both 2014 and 2015 is forecast to average approximately 29,000m² per annum, or only 0.9% of stock. However on a net basis, supply is anticipated to be lower given the strong investor appetite for office assets with residential conversion potential. In the 12 months to January 2014, average suburban gross A-grade gross face rents were virtually unchanged, recording approximately 0.3% growth. However rising incentive levels saw an average fall of 3.2% in net effective rents. A-grade core market yields range on average from between 8.25% and 9.75%. Although this reflects some very modest firming of around 10bps, the suburban market continues to lag the yield compression being experienced in core markets. However modern assets with long term passive income or smaller assets with redevelopment potential are trading a substantial premium to this average

range. Melbourne

•Impacted by some tenant relocations to other office markets and tenant consolidations, Melbourne’s suburban office market vacancy rate increased to 7.5% as at January 2014 – its highest level since January 2010, and up from 6.1% in January 2013. Despite tenants still being relatively cautious, occupied space in the suburbs continued to increase over 2013. Whilst net absorption over 2013 totalled 15,607m2, this level was the lowest annual total recorded since 2004.

Development activity in the suburban market continues to improve with 38,646m² of gross office space added to the suburbs, the largest annual level of supply since 2009. Although new supply levels have increased, 2013 completions were still 30% below the historical average.

Despite the current soft leasing conditions, investment sales activity reached record levels over 2013 with transactions totalling $516 million; $100 million higher than the previous annual record of 2007.

ASX Code FY14E EPU FY14E DPU Commentary

ABP N/A 16.75

AJA N/A 20.00

BWP N/A 14.6

CDI 22.3 18.5

CFX 13.60 13.6

CHC N/A N/A Forecast FY14 OEPS growth of 7-9% with the distributiona payout expected to be between 85% and 95% of operating EPS.

CMW 8.40 7.50

FDC 16.7-17.0 N/A

CQR 29.5-30.0 N/A Guidance excludes non-core German portfolio. Payout ratio is expected to be between 90%-95% of operetaing earnings excluding German portfolio.

DXS 8.29 6.24 Expect office market conditions to improve with distribuitions 75% of FFO

GMG 34.30 20.6 Offshore markets key contributor to growth - greater than 50% of earnings. Postioned to deliver FY14 EPS of 34.3cps up 6% on FY13. 60% payout ratio

INA N/A N/A

IOF 26.30 18.50 Upgraded FY14 FFO post the Piccadilly transaction after its result announcement from 26.1cps

MGR 11.8-12.0 8.8-9.0 Narrowed FY14 EPS guidance to 11.8 - 12.0 cps following 92.2% of FY14 Development EBIT secured.

SCP 12.3 11.0

SGP N/A 24.00 On track to achieve upper end of guidance and tightened this to 5-6% EPS growth. Distribution to be maintained at 24.0cps.

TIX 20.5 18.60 Strong investment demand for industrial assets is forecast to continue which should see improved valuation metrics in the coming six months.

ASX Code FY14E EPU FY14E DPU GPT N/A N/A Targeting a total return of >9% and confident portfolio will deliver 3% EPS growth with FY14 distribuition expected to be 100% of AFFO

ALZ N/A 22.00 Expects modest earnings growth in FY14. Forecast FY14 DPU of 22.0cps. Earnings expected to be skewed to the 2H14.

WDC 68.60 52.50 Prior to restructure proposal FFO 68.6 and Distribution of 52.5cps assummimg comparable income growth of 2%-2.5%,US 4.0%-5.0% and UK 10.0%-11.0%.

WRT 20.4 20.4

Prior to the restructure proposal FY14 FFO of 20.4cps whilst under the merger proposal Scentre Group FFO is forecast to be

21.5cps (pro forma).

Cost of new debt ~5% expect gradual fall in gearing levels as valuations increase and assets recycled.Long term target is for funds

management to contribute 20% of earnings.

FY14 EPS lifted to be between 16.7 -17.0cps drawn from: debt savings,timing and yield of acquitions and corporate overhead reductions.Payout to be 95%-105% of AFFO

Strong DMF sales and increasing MHE earnings will contribute towards stronger 2H results. Condust strategic review of investment

in DMF and conclude sale of NZ Students.

FY14 distributable earnings increased from 12.2cps to 12.3cps and Distribution guidance increased from 10.8cpu to 11,0cpu.

Announced a 5% buy-back.

Forecast FY14 EPU (22.3cpu) and DPU (18.5cpu) guidance represents a 4% increase on FY13

Guidance of 13.6cpu if no further asset sales or 13.3cpu if $450m of assets sold in FY14.

A batch of market rent reviews still to be determined from the 1H. And maintaining previous DPU guidance of 14.6cpu. Is evaluating

other sources of debt funding to enhance diversity and duration.

Confident of postive FY14. Strong balance sheet primed for growth. Is targeting full-year distribution of 16.75cps representing

growth of 1.5% on pcp.

Will continue to focus on capital management initaives to optimise earnings and cashflow trough improved financing terms. Incl

lower amortisation.



Brisbane

There are currently four suburban office buildings (over 1,000m²) under construction, totalling 21,100m². This adds to the 12,542m² of space completed over the course of 2013. The suburban market is expected to remain largely pre-commitment led for the larger projects, with some smaller speculative construction in the office parks. The vacancy rates across the PCA tracked suburban markets indicate a stable market for Chermside which is unchanged at 6.7% vacancy as at January 2014. At the same time Upper Mount Gravatt/Macgregor has increased from 7.4% to 9.1% over the six month period. The analysis undertaken by Knight Frank over the Inner North Eastern region shows a marginal fall in the vacant space to 10.1% as at January 2014. Investment demand for Brisbane suburban assets has increased in line with the broader improvement in the investment market. While private investors are active in the smaller end of the market, there is also increased presence from syndicators and other institutional funds. Yields for prime suburban assets have firmed slightly over the past six months to range between 8.25% - 9.00% across the

market.

Colliers have also published research on the metropolitan office markets with the key points set out below

Historically, the Sydney Metro office market has been by far and away the Metros sales hotspot and 2013 was no exception. Almost $1.99bn of office stock was sold in Sydney metro markets in 2013, almost doubling the volume of sales in Melbourne which as the second largest volume of metro market sales at just under $1bn.All markets with the exception of Adelaide improved on their sales volumes from 2012.

Sales volumes in the Melbourne Metro market grew by 10% whilst the Brisbane market was relatively steady with sales only increasing by 3%, while Sydney had 51% sales volume growth off a very high base. Oe of the reasons for the metro sales volumes in Sydney sitting above 2013 was the November sale of 177 Pacific Hwy for $413.2m and will be the Leighton HQ. The purchaser was Suntec REIT with the building due for completion in 2016 and was sold on an equivalent yield of what is believed to be between 6.5% and 7.0%.

Most institutional purchases in the Melbourne metro market occurred in St.Kilda Rd/Southbank or inner fringe areas such as Richmond. In Perth,Brisbane and Sydney occupiers/developers were by far and away net sellers. Institutions were net buyers only in Brisbane and Adelaide. In Brisbane, some large purcahses in Hamilton and the Urban Renewal precinct by the likes of 360 Capital and GPT Group which seeded its metropolitan office fund with the $110m purchase of the Optus Centre Brisbane in November 2013 – resulted in institutions gaining more of a foothold in that market.

Average A Grade yields across the Sydney and Melbourne markets have compressed in the six months to March 2014 as both markets experienced near record demand for Metro office stock. Despite the institutional interest in the Brisbane Metro market, A grade yields remained flat overall at an average of 8.5%, although there was some yield compression in the Urban Renewal precinct and the Inner South.

The following chart plots a time series of average A Grade Metro Yields

For the Sydney Metro market the state governments move to reduce occupancy costs via decentralisation to locations outside the CBD will underpin demand for large contiguous space within certain Sydney metro markets. Key metro markets which have been identified are in Western and South Sydney which are set to benefit from this decision. From late 2014 onwards, Colliers expect a dramatic turnaround in vacancy in St.Kilda Rd. This is due to the number of buildings in both St.Kilda Rd and Queens Rd that are earmarked to be converted to residential developments. Colliers estimate that up to eight buildings in the precinct could be converted to residential use and some of these buildings already hold substantial vacancy, thereby having a dramatic effect on the vacancy rate as they are removed from office stock inventory.



The amount of available sublease stock in the Brisbane Metro office market `increased 12.2% to 50,600m2 as at February 2014.The mining and energy sector accounts for the majority of this stock at 40%, followed by Engineering and Technical Services (26%) and the State Government (20%). The elevl of tenant enquiry has not waned significantly, however those requirements in the market are expiry related rather than expansionary, with no one particular sector accounting for demand. •

Credit Markets Loan Syndicate Market

The chart below profiles the volume, theme, pricing and motives that impacted the Australian loan market From Q42012.

Activity over the March quarter has been focussed on refinancing. Volume for Q1 2014 of ~$11bn is broadly in line with pcp but materially lower than the Q4 2014 levels ($50bn). The volume in Q1 2014 reflects the “pull-through” evidenced by the volumes levels in Q4 2013.

A table of indicative Corporate Loan Pricing is set out below

MTN Market

There was ~A$1.5bn of issuance in the AUD MTN market in Q1 2014 down 48% on pcp. On the corporate side, the search for yield led to increased BBB issuance as shown below with new “sweet spot” being 7 years. Noteworthy was only one corporate deal being a FRN

Borrower/Sector Date Amount Term Margins (bps)

SEEK Limited Dec-13 A$750m 2+3+4yr 145+160+170

SCA Hygiene Dec-13 A$562.7m 3yr 350

Asciano (“BBB”) Dec-13 A$1,300m 3+5yr 145+175

EnergyAustralia Holdings

Limited (BBB-) Dec-13 A$460m 3+4+5yr 150+165+180

Alumina Ltd (BBB-) Dec-13 A$300m 2+4yr 145+170

Nufarm Ltd (BB) Dec-13 A$530m 3yr 200

Village Roadshow Ltd (BB) Nov-13 A$280m 4yr 250

Equivalent Rating 3 year (bp) 4 year (bp) 5 year (bp)

A- 110 125 140

BBB+ 120 135 150

BBB 130 145 160

BBB- 140 155 175

BB+ 150 170 190

Below BB+ 180+ 195+ 210+

Commitment Fee: 50% of the applicable margin on the undrawn commitment



in the March quarter. The table below shows the upweighting in BBB rated issuances in the March 2014 quarter which continues the increasing proportionate weighting of deals within the BBB band.

The table plots the issue margin for a range of corporate issuers in the March quarter of which the Citipower deal was the single floating note issue.

Issuance activity across the USPP sector saw a broadly equivalent level of UStransactions in the March 2014 quarter versus pcp whereas cross border activity below levels recorded in the pcp which we put down to currency movements by and large.

Macro Economics

Australia’s economy is expected to improve during the course of 2014, with GDP forecast to rise by 3% this year. Most of that growth will be contributed by rising export volumes for commodities, however we are also expecting to see better consumer spending and dwelling investment growth in coming quarters.

The big hurdle for the Australian economy over the next two years will be the decline in business investment, driven by the downturn in mining investment. While non-mining business investment will improve, it will not be strong enough to offset the falls in mining and energy investment, as new construction in the sector is completed, with only limited opportunities for fresh projects to commence. The easing of the mining boom is already posing some challenges for some States. For example, we have already started to see Queensland activity underperform the national average in recent quarters. Reflecting the downturn in investment spending, Queensland state final demand growth was weak in the December quarter of 2013, contracting by 0.4%, for growth of just 0.6% through 2013. Only WA has been softer, where activity has declined by 2.7% in the past year. NSW and Victoria are doing somewhat better, benefitting in part from the solid increase in housing activity, particularly in apartment construction.

≥AA-18%

≥AA-14%

≥AA-25% ≥AA-

17%

A band68% A band

70% A band38%

A band12%

BBB band13%

BBB band16%

BBB band37%

BBB band72%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 YTD

Issuer Rating Format Issue Amount Issue Date Maturity Date Tenor Issue Margin

PERTH AIRPORT PTY LTD Baa2 / BBB FIXED 5.5 $400m 25/03/2014 25/03/2021 7 yrs 165

LEASEPLAN AUSTRALIA LTD Baa2 / BBB+ FIXED 4.5 $175m 13/03/2014 12/03/2017 3 yrs 135

SGSP AUSTRALIA ASSETS Baa1 / BBB+ FIXED 5.5 $350m 12/03/2014 12/03/2021 7yrs 165

CITIPOWER I PTY BBB+ FLOATING $150m 27/02/2014 4/01/2019 5 yrs 145

FONTERRA COOPERATIVE GRO A1 / A+ FIXED 5.5 $175m 26/02/2014 26/02/2024 10 yrs 105

GE CAP AUSTRALIA FUNDING A1 / AA+ FIXED 5.25 $250m 24/01/2014 9/04/2020 7 yrs 97

0

1,000

2,000

3,000

4,000

5,000

6,000

Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14

Volume(US$MM)

US Cross Border



The outlook for residential property markets and related construction spending remains positive, while the tourism sector should also see solid gains in the year ahead, especially with some overall stabilization and recovery in the global economy lifting the demand for travel and also if the Australian dollar continues to trend lower. The NAB expects the AUD to be in the low 80s against the USD by end-2014, which will further support the tourism and export-focused industries. While we see the domestic economy accelerating over the coming year, the pace of growth will not be strong enough to prevent a rise in the unemployment rate. NAB expects the unemployment rate to rise to a peak of around 6½% in the December quarter of 2014, which would see the RBA cut the cash rate further if inflation is contained. For the global economy, NAB expects to see growth of 3.5% in 2014 after 3.0% in 2013, with better growth outcomes in the United States, Europe and Japan. Chinese growth is expected to slow in 2014, but still remain solid at 7.3%, which will underpin Australia’s export growth during the year.

Bond Yields

Given where the 10y bonds closed 2013 (4.2%) and our forecasts based on the expectation of one more cut to the cash rate overlaid

with rising unemployment that we expect will see 10y bonds trade in the 4.00%-4.5% range. We foresee that movements in bond

yields based on our forecasts will be predominantly neutral from a macro valuation standpoint.



Stock Performance Analysis

The following charts (Figure 6) plots the relative price return of the AREITs for the 3 months to March 2014 and we have set out commentary on each stock on the March quarter performance.

Figure 6: Stock Price performance for the 3 months to March 2014

ABP

Announced security purchase plan. Reported interim EPS growth of 2.5% on pcp and 8.3% underlying profit growth. Property ventures EBITDA ($12.1m) impacted by Lewisham realisation in HY13. Reduced AUM saw funds management EBITDA ($7.5m) down 22% on pcp. Targeting FY14 dps of 16.75cps (1.5% above pcp).

ALZ

Post FY13 results which had a modest earnings outlook CaptiaLand exited its remaining stake (395) which resulted in Stockland acquriacquiring9% stake in the entity at $3.78 per ALZ share. Subsequently ALZ reset $900m of hedges at a cost of $84m which resulted in FY14 EPS growth on pcp of between 7%-10% with its initial forecast FY14 dps of 22.0cps upgraded to 25.5cps (19% on pcp).

ANI

Raised $56.4m via an entitlement offer to part fund a $81.2m industrial portfolio acquisition which is forecast to be ~1% EPS accretive on a proforma basis. Pro-forma gearing post the transaction is 36.4% compared to the 25%-40% target range. Forecast distribution for the six months to 30 June 2014 is 8.18cpu.

ARF

Post Affinity and SHCT acquisitions during the 1hFY14 delivered distributable income growth per security of 7.6%. Gearing is forecast to sit at 32.4% post the stapling redemption offer. FY14 distribution guidance increased to 8.75cps. Has $22m of unallocated funds available for future investment.

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BWP (Not Covered)

Reported distributable profit up 14.7% on pcp, with dpu up 2.4% on pcp. Gearing sits at 19.8%. 2.8% LFL rental growth for the 12 months to December 2013. 17 market rent reviews remain unresolved.

CFX

Distributable income up 1.4% on pcp with LFL NPI up 1.7%. Comparable annual sales growth of 1.8% with the DFO portfolio up 10.2%. Specialty sales up 1.7%. Targeting specialty sales growth of 3% for 2014. Re-leasing spreads of -4.3% or -5.9% ex-DFO portfolio. Forecast DPU of 13.6cps for FY14 assuming no further asset sales. Internalisation approved which leverages vehicle to corporate services of ~8% of total revenue.

CHC (Not Covered)

Reported operating earnings of $38.1m up 13.1% on pcp which translated to 12.42cps (+10%) on pcp. Raised $140m of equity for working capital co-investment purposes. Has co-invested $99m across its managed funds during the period. Increased its earnings guidance with operating earnings per security up 7-9% post the expanded capital base and a distribution payout ratio of between 85%-95%.

CMW (Not Covered)

Reported 59% increase in operating profit $73.2m and operating EPS up 13% to 4.26cps. Payout ratio decreased from 96% to 88%.FY14 guidance maintained at 8.4cps (EPS) and 7.5cps (DPS) – 89% payout ratio. External AUM currently $1.2bn with 285% increase in funds management earnings to $3.2m.Gearing sits at 43% at December 2013.Look-through gearing of 44% including 50% interest in Northpoint Tower.

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CPA

Reported FFO up 0.5% on pcp or up 6% if we exclude the $5.7m performance fee. LFL NOI growth of 3.7%. The stock was de-listed on 10

th March post the full takeover by Dexus/CPPIB.

CQR

Reported operating earnings up 16.7% with EPS up 5.5% on pcp. SSNOI growth of 2.5% and specialty rent growth of 3.3% (blended). Occupancy of 98.2%. Refinanced $670m of debt facilities repaid or refinanced. Two non-core German assets booked A$20m (14%) devaluation – negligible equity remains in the German portfolio and sale program underway.

DXS

Closed out with CPPIB the takeover of CPA. Reported FFO up 4.2% on pcp ($189.9m) with FFO per security up 6.6% (4.08cps) and DPS up 6.2% (3.07cps). Forecast gearing post the CPA transaction of 34.6%. Office portfolio LFL growth of 3.8% and occupancy of 94.6%. Average incentive of 16.9% versus 12.2% as at June 2013. Industrial portfolio quoted LFL growth of 2.1% and 94.2% occupancy. $2.8bn development pipeline.

FDC

Reported underlying earnings up 11.95($118.8m) and EPS up 16.7% (8.3cps). Distribution up 13.6% (7.5cps). SSNOI growth of 2.2% and occupancy of 99.5%. Completed $28m of development projects at blended yield of 10.2%.Syndicate investment and management income declining as business is reduced. WACD of 5.24%.Syndicate rationalisation expected to continue.

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GMG (Not Covered)

Reported operating profit of $296m up 11% on pcp and operating EPS of 17.16cps up 6% on pcp. Distributions up 7% on pcp (10.35cps).Total AUM ($26bn) up 11% on FY13.Capital partnering approach to all markets with undrawn debt and equity of $5.2bn. Disposed of $746m of assets. Forecasting FY14 dps of 20.7cps ( up 7% on pcp).Quoted owned portfolio LFL NOI growth of 2.2% and occupancy of 96%. Development WIP of 2.6bn with forecast yield of 8.4%. Development commitments of $1.2bn with 69% pre-committed and 76% pre-sold to funds or third parties.

GPT

Reactivated buy-back and acquired 11.1m shares in the quarter. Reported FY13 ROI of $471.8m or ROI per share of 25.7cps up 6.1% on pcp which is slightly above previous guidance of 6%.Retail portfolio LFL growth of 2.5% with blended specialty leasing reversions of -5.2%.Office LFL growth of 0.7% with 90.7% occupancy. The Logistics portfolio reported LFL growth of 1.0% and occupancy of 96.2%.Still targeting $10bn FUM target against current $7.1bn.GWSCF acquires a 50% stake ($496m) interest in Northland SC on a core cap rate of 5.8%. targeting EPS growth of 3% for 2014.

GOZ

Reported interim distributable income ($42m) up 14.2% on pcp with EPU (9.9cps) up 5% on pcp. Interim distribution (9.4cps) up 4.4% on pcp. Headline portfolio occupancy of 98% with the office sub-portfolio recording WARR of 3.5% and a WACR of 8.2% whilst the industrial portfolio WARR of 2.8% and WACR of 8.2%. FY14 DPS guidance of 19.0cps.

IOF

Announced US$200m USPP at 173bps over UST. Reported interim net profit 9$56m) up 4% on pcp and FFO ($84.5m) up 8% on pcp. LFL income growth of 3% and quoted average leasing incentive of ~ 14%. NPI up 4.7%. Completed $31m of refurbishments. Announced the acquisition of a 50% stake in Piccadilly centre ($192.5m) that represents a 6.9% yield on cost. Post the debt funded transaction upgraded FY14 FFO to 26.3cpu (up 5% on pcp).

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MGR

Reported operating EPS of 5.5cps and tightened FY14 EPS guidance to 11.8-12.0 cps (8.3%-10.1% growth) post 92.2% of FY14 expected Development EBIT secured. Announced strategic alliance with TIAA-CREF. $100-$140m in provision releases for FY14 with $24.5m released in 1HFY14.On track to deliver gross margins of 18%-22%.MPT quoted LFL growth of 3.3%. IH Residential EBIT of $442m and settlement of 1032 lots .Record $1.5bn of residential exchanged pre-sales contracts with $670.2m secured in 1H14.

SCP (Not Covered)

Announced buy-back but as yet to be activated. Reported distributable earnings of $39.5m (6.1cpu). Distribution of 5.4cpu reflects a 88.5% payout ratio. Specialty vacancy levels has decreased to 11.1% from 19.2% in December 2012. 9.6% average MAT growth for Australian supermarkets trading more than 24 months and 14.9% for stores between12-24 months.FY14 distributable earnings guidance increased to 12.3cpu ( previously 12.2cpu) and distribution guidance increased to 11.0cpu (previously 10.8cpu).

SGP (Not Covered)

Reported a 4.8% increase in Underlying profit ($267m) and EPS flat (11.6cps).Distribution of 12.0cps equates to a 103% payout ratio. FFO ($269m) up 9% on pcp. IP reported 2.8% LFL growth. Quoted 3% and 3.1% growth respectively for retail specialty renewals and new leases. Industrial portfolio reported 89.7% occupancy and average rental growth of 0.6%. Office portfolio 91.3% occupied and average rental growth of -0.9%. Residential lot sales (2253) up 8.1% on pcp. Residential operating profit up 39.3% 9$39m) on pcp. Retirement operating profit up 41.7% ($17m). Acquired a 19.9% stake in Australand at $3.78 per share comprising a direct holding (15.7%) and indirect (4.2%).

TIX (Not Covered)

.Announced an on-market buy-back. Reported operating EPU of 10.4cpu up 14.1% on pcp with DPU up 3.3% with payout ratio of 89%. Upgraded FY14 guidance to 20.5cpu. Quoted 46% gearing as at December 2013. Portfolio occupancy of 98.7% with 5.2 yrs WALE. LFL NPI growth 0f 2.9%. Announced disposal of Campbellfield asset ($4.6m). Announced $26.8m (8%) increase on prior book value which translated to a 14.5% increase in NTA and gearing reduced to ~42%.

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01 Jan 14 13 Jan 14 25 Jan 14 06 Feb 14 18 Feb 14 02 Mar 14 14 Mar 14 26 Mar 14XPK SCP

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WDC (Not Covered)

Reported FY13 FFO per security of 66.5cps up 2.3% on pcp with dps up 3% to 51.0cps (77% payout ratio). Comparable NOI growth in Aust (+2.0%), US (+4.7%) and UK (+4.3%).Comparable specialty retail sales growth in Australia (+1.4%), US (+5.7%) and UK (+3.25%). $344m of property management and project income. Gearing of 35.8%.

WDC’s Aust/NZ business is proposed to merge with WRT to form Scentre Group.EM to be issued in late April 2014 with vote expected to be held in late may 2014. Proposal to split Aust/NZ business from WDC with WDC’s international business to be renamed Westfield Corporation. WDC security holders to receive 1,000 Westfield Corporation and 1,246 Scentre Group per 1,000 WDC securities. Sold three UK assets to Intu Properties for £597m.Announced $22bn of funding commitments for restructure proposal.

WRT

FFO ($596.8m) equivalent to 19.85cps up 2.5% on pcp and in line with forecasts.FY13 distribution (19.85cps) up 5.9% on pcp. Base case FY14 FFO of 20.4cps is 2.8% above pcp with 2014 DPS 100% of FFO (20.4cps). Under the merger proposal Scentre Group FFO is 21.5cps which is 5.2% above WRT’s 2014 forecast. Comparable NOI growth of 2% in Aust and 0.3% in NZ. Comparable retail sales growth of 1.7% in Aust and -0.7% in NZ. Comparable specialty sales growth of 3% in Aust and 0.6% in NZ for The December qtr. Average specialty rental growth of 1.7% split 1.8% (Aust) and 0.4% (NZ). Gearing of 22.4%.Blende re-leasing spreads of -6.5%.

Economic Releases and Outlook

Australian economic activity improved in the March quarter, resulting in the RBA moving off its easing bias and now projecting a lengthy period of a stable cash rate. The move to a neutral bias was also driven by a higher than expected Q4 CPI, where the underlying rate rose by 0.9% in the quarter and 2.6%yoy, up from 2.3% previously.

On the activity front, most notable in the first quarter has been the ongoing improvement in house prices and retail sales. House prices grew at an annual rate of 9.5% over the year to February, led by strong growth in Sydney (14%) and Melbourne (10%). Further, other housing indicators such as building approvals and housing finance point to a solid upturn in dwelling construction activity in 2014.

Data has also been solid for consumer spending. Retail sales rose a strong 1.2% in January, the ninth consecutive monthly retail sales increase. The improvement in consumption is helping to drive better GDP outcomes, with Q4 GDP coming in at 0.8%, with the other key contribution to GDP coming from net exports. In January the trade surplus improved further, to $1.43bn from $591m, after a stunning 3.7% rise in exports more than offsetting a 0.8% rise in imports. The gain in January exports was driven by non-rural commodities – mainly iron ore, coal and gold.

But despite the better performance in retailing and exports, unemployment continues to rise. The unemployment rate is now at 6.0%, and the weakness in business investment as mining investment slows means we are likely to see further upside in the unemployment rate this year. Despite an improvement in business conditions reported in the NAB Survey, capital expenditure plans for 2014-15 are currently soft, and NAB expects that the unemployment rate will head towards 6.5% by the end of this year.

The jobs market is placing some pressure on consumer confidence, which has fallen in five of the past six months. That decline suggests we will see some softer retail outcomes in coming months.

The lower AUD is also acting to support activity. The AUD has spent most of the past two months in a range of 0.8900 to 0.9100 USD, helping those AUD exposed sectors that were struggling with the currency above parity. Gains in the tourism sector have already been seen. NAB expects that the AUD will continue to drift lower during the year, and look for a level in the low 80s by the end of the year. 7 January – Trade deficit narrows further in November

The November trade deficit came in better than expected, narrowing to just -$118M (NAB -400M, Market -300M).

However October was revised from -529M to -358M, so the size of the monthly improvement in November was close

to expectations. Exports rose 0.3% and imports fell 0.5%. The low deficit continues the recent improvement in the

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trade position. After the very large deficits recorded in 2012, the trade position has improvement considerably in the

past year, supported by both a gain in export volumes and a decline in import volumes.

On the exports side in November, volumes of both iron ore and coal were lower in original terms, but prices were up.

In seasonally adjusted terms, iron ore values rose a strong $341m, but coal exports were down $202m. November

exports were also supported by small gains in rural exports and tourism. The fall in imports was largely driven by less

car imports, which pushed consumption goods down 2%. Intermediate goods were steady and capital goods rose

1%.

Looking ahead, the improvement in the trade position should continue. Export volumes are expected to rise around 8% in 2014, boosted by resource volumes, while import volumes will be flat reflecting the poor growth in domestic demand. That implies that net exports will add close to 2 percentage points to real GDP growth in 2014, accounting for the majority of Australia’s GDP this year, but in value terms the trade gains will be much less spectacular as we expect to see the terms of trade fall around 7% this year.

16 January - Employment falls by 22.6K in December, while the participation rate falls to 7-year low

The December labour market was worse than expected, with employment falling by 22.6K (well below NAB and Market forecast of+10K), while November was revised down to a +15.4K gain from +21.0K previously. Employment fell in every state in December except WA. But the unemployment rate remained unchanged at 5.8%, due to the participation rate falling to a seven year low of 64.6% from 64.8% in November.

Employment growth in the economy remains weak, reflecting the below trend growth in the economy and the ongoing softness in non-mining investment. Jobs growth was just 0.5% in 2013, which represents just 55K new jobs, all of which were in part-time employment (part time up 122K in 2013, full-time down 68K). With domestic demand growth forecast to remain weak in 2014, employment growth will remain soft, which will continue to put upward pressure on the unemployment rate.

The unemployment rate edged higher in December from 5.77% to 5.84%, but to one decimal place it was steady at 5.8%. If we see some stabilisation in the participation rate, then we will quickly see unemployment rise above 6%. The participation rate has fallen from 65.4% as recently as February 2013 to its current 64.6% rate, so some levelling out is due.

Today’s report will keep the RBA on an easing bias and reduces speculation that the RBA is preparing to raise rates. The pace of growth in the economy is soft, the investment outlook is weak, and the number of unemployed continues to rise, even if the unemployment rate (%) is being held down by lower participation. We maintain our view that the unemployment rate will rise over 6% in coming months, putting pressure on the RBA to cut again mid-year.

28 January - NAB Business Survey – December 2013

Business Conditions and Business Confidence are both now close to their long term averages pointing to an economy that showed further signs of stability at the end of last year.

Business Conditions jumped in December to more than a 2½ year high, and back into positive territory for the first time since August 2012. Conditions ended last year at their highest level since March 2011. In December, the NAB Business Conditions index rose to +4 from -3 in November. The recovery in activity was broad-based with only manufacturing declining in December.

Trading (from +2 to +12) and profitability (from -4 to +6) were especially higher, helping to reduce excess capacity, the non-farm business economy’s capacity utilisation rate increasing somewhat to 80.1%. The employment component index also rose from -8 to -4, though still soft and implying a still flat job market.

Business Confidence was steady at +6, having jumped in the lead up to the Federal election, consolidated since the election, though remaining higher than levels evident through the first half of 2013.

Forward orders did not reveal any further sign of a pick up at the end of the year, steady at a still languid -2 in December, though that is a little better than more worrying levels evident through most of last year.

Wage and price readings from the survey show some continuing labour and purchase cost pressures (the latter including from the fall in the AUD), these pressures still tracking final prices, pointing to continued margin pressure.

Better business conditions of late and a higher than expected Q4 CPI now make a near term cut in the cash rate unlikely. NAB has delayed the timing of another RBA move from May to November, another cut still expected to support still lower than expected domestic demand and economic growth.

30 January - Trade prices, December quarter: terms of trade steady for now

Not a market sensitive indicator but an important one for the economy depicting the evolution of commodity prices and the terms of trade and its expected decline over time. Export prices -0.5% (NAB +1.4%; mkt -0.2%), matched by import prices -0.6% (NAB +2.6%, mkt +2.0%) both somewhat shy of expectations and falling in tandem pointing to a virtually unchanged terms of trade in Q4. So no further drag on nominal incomes/ nominal GDP, for now anyway.

As for the granular detail, on the export side, larger falls in the price of gold, coal and grains were mostly offset by better ore prices and petroleum energy products export prices. (Some of that came through in import prices too.) As



for imports, the larger drags were for pharmaceutical products import prices, consumer electronics, and gold imports.

We expect the terms of trade to fall further over time, with around a 10% decline in prospect over the next two years; mostly recently have seen some evidence of that with iron ore eking out moderate declines of late; coal prices have held pretty well though, and despite the stronger USD. China and its demand still the key, while higher iron ore output from Australia is likely to weigh on the market over time.

We had figured on around a 1¼% decline in the terms of trade in Q4, so this outcome suggests that nominal GDP would do marginally.

6 February - Trade balance rockets back to surplus

The trade balance for December was +$468mn, after a revised surplus of $83mn in Nov (previously -$118m). These are the first trade surpluses recorded since December 2011.

Stronger exports did the trick, up by 3.7%, whereas we and the market looked for about a 2% rise. Imports up by 2% as expected.

Goods exports, mainly commodities, up by a massive 4.6%. Agricultural commodities rose by 17%, reflecting a 78% increase in grain exports, mainly wheat. But there was also a surge in iron ore export volumes and prices, quantities up by about 10% and prices up by around 7%. Hard coal, used in steel making was down 5% in volume but prices rose by 2%. Thermal coal, used for electricity, jumped by 31% in volume (sic) and 5% in price. Semi-soft coal volumes rose by 11% and prices rose by 5%.

Consumer imports were up by 3% and capital investment goods imports up by 4%.

Overall then, a strong result and AUD positive: two trade surpluses in a row and strong exports; domestic demand for consumer and investment equipment solid; and supportive of higher interest rates, for the time being.

17 February - Car sales fall in January

Motor vehicle sales fell 3.5% in January, a weak start to the year after the flat sales performance in 2013. The

January decline was due to falls in all 3 categories – passenger cars fell 2.1%, SUV’s down 4.6% and ‘other vehicles’

down 5.1%. Despite the lower AUD, car prices continued to fall in the second half of 2013 (according to the CPI

data), yet that provided little support to car purchases.

The ongoing softness in car sales in recent months suggests it will not contribute much to the growth in Household

consumption in Q4, when the Q4 GDP data are released on March 5. Although only a small portion of consumption

(around 2½%) the monthly data point to a flat quarterly outcome for car sales in Q4. The weak start to January

means that Q1 sales are already on the back foot, and any price rises will further harm sales in the current quarter

17 February - NAB Quarterly SME Business Survey – December quarter 2013

NAB’s Q4 SME Business Survey (a survey covering non-farm businesses 35 employees; >35 go into the main NAB quarterly survey) showed business confidence up for a 4th quarter, from 6 to 9 and just above the main survey (of larger businesses) where business confidence was +8.

Business Conditions also improved, from -7 to -1, also better than the main survey’s -3 reading. For small business, cash flows, trading, profitability and employment all improved, even tho’ trading and profitability still with negative readings. The SME employment index was -3 compared with the main survey’s -6.

While not market sensitive, it’s a very useful adjunct on this employment-generating sector of the economy and a positive. SMEs have been outperforming in a number of industries, especially services, though not so in retail that’s been struggling as an industry.

In short, small business seeing more of an improvement in business through the latter part of last year than the larger

end of town. While a lack of demand was still the most significant constraining factor on small business in Q4, that’s

eased a bit through last year.

18 February - RBA Board minutes re-state neutral bias, hopes for a sustained lower $A; consumer sentiment tested again after Toyota decision

This morning’s RBA Board minutes are little more than a re-statement of the Bank’s now know neutral monetary policy bias (if the economy broadly evolves as the RBA expects) and their hope that the lower $A observed in recent months, if sustained, would be expansionary for economic activity and assist in achieving balanced growth for the economy. They have of course removed their reference to the AUD as ‘uncomfortably high’. In essence then, there is nothing materially new. Both of these key views were laid out both in the Media Release issued on the day of this month’s Board meeting and the following Friday with the release of the 66 page quarterly Statement on Monetary Policy. The RBA has observed from the data flow that the accommodative stance of monetary policy has further found its mark in recent months through an improvement in business conditions, housing indicators and signs of firmer consumer spending, the first and the third of these growth spurs largely absent until relatively recently. The second,



dwelling investment, has developed more momentum across several fronts. Without wanting to be overly gloomy, some headwinds have appeared of late. Announcements from Toyota to cease car manufacturing in Australia and today’s announcement from Alcoa to close the Port Henry aluminium smelter and associated rolling/ recycling plants in Geelong (Vic) and Yennora (NSW) will test business and consumer confidence and conceivably spending/ activity.

Indeed, consumer confidence polled weekly by Roy Morgan has taken a hit this past week in the survey taken 15/16 Feb, down 3.5% to the lowest level since the end of last year, even though at a reading of 112, you could hardly say it’s low. And that level of confidence is not materially different from levels around the time of the Ford (23 May 13) and GM closures (12 Dec 13). For the AUD, clearly the RBA would see the lower $A if sustained as beneficial to an economy that is in the process of transitioning and increasingly relying on other avenues of growth aside from mining/ resources expansion to maintain and grow employment. To that extent, the RBA could hardly be over the moon that, since the Board meeting, when the AUD/USD was trading at 0.8750 it’s risen to over 0.90 in terms of their medium term growth transition aspirations. But they could hardly be too surprised that it’s since recovered some ground. The RBA removed its easing bias, also removing the reference to the AUD as uncomfortably high, factors that would be expected to add 1-2 cents to the $A, with some US$ softness also at play of late. Along with these support factors has been some paring of short positions in recent weeks when the AUD was at least one standard deviation below our fair value model. Even Chris Kent’s speech on the AUD from last Friday contained a chart of the real exchange rate showing that the real exchange rate in the March quarter is close to the RBA’s model of the equilibrium rate (fair value); see how the red and blue lines have met again His plot point of the equilibrium rate using the Bank’s June 2016 forecast of the terms of trade looks several per cent lower than its March quarter estimate. We could infer from that the RBA would certainly prefer to see a sub 90 cent AUD/USD as supportive of balanced growth over time, perhaps in the mid to lower 80s.NAB’s forecast is that the AUD/USD will be 0.84 by the end of this year.

19 February - Wage Price Index and Internet Vacancies on the upturn

The Wage Price Index rose by 0.7% in the Dec quarter, or 2.7%yoy. Market and NAB expectations were for a rise of 0.6%. The increase was 0.5% in the September quarter after 0.7% or 0.8% for the previous three quarters so it looks like the wages slowdown has bottomed.

Wages growth has become increasingly importance for monetary policy and today’s outcome is helpful in the sense that low wages growth has continued, putting ongoing downward pressure on the CPI, especially the non tradeables component.

26 February - Construction work done weak in Q4. Residential activity still soft

Construction work done fell 1.0% in Q4, weaker than our forecast of a flat outcome (market +0.2%). Engineering

work fell 0.5%, while residential building activity fell 1.7% and non-residential down 1.5%.

A soft outcome with surprisingly no growth coming from residential building in Q4. Residential activity had risen

slightly in Q2 and Q3 and a larger rise was expected in Q4 given the improvement in building approvals and other

housing indicators. Alterations and additions did rise 3.0% (worth $50m), but new residential building fell 2.5% (worth

-$262m). So a disappointing outcome that means residential activity will detract from Q4 GDP.

The softness in residential activity is one reason why the RBA will not raise interest rates to curb house price growth.

The RBA would have hoped to see some sustained improvement in dwelling investment by now, with low interest

rates and house price rises driving greater activity, yet the level of residential activity in Q4 was the weakest since

September 2012. It is now down 1% over the past year so not helping to offset the investment gap left by weaker

mining investment.

Meanwhile private engineering work done fell 1.6% in Q4, the fourth decline in the past 5 quarters, reflecting that the

investment boom peaked about a year ago. By state, construction activity fell in all states, but the weakest was WA,

down 4.3%.

The soft Q4 residential data puts some slight downside risk to our Q4 GDP forecast of 0.9%, but we will get a better picture of Q4 investment tomorrow with the release of the capital expenditure survey. The Capex release will give us more industry detail on Q4 expenditure, an update on investment spending plans for 2013-14 and also the first estimates of 2014-15 spending.



27 February - Capex report very soft. Capex falls 5.2% in Q4 and first estimate for 2014-15 is 17.4% lower than last year

Capital expenditure fell 5.2% in Q4 (NAB flat, market -1.3%), so much worse than expected. We had been looking for

a fall of 2% in business investment in next week’s national accounts, so this adds to the downside risk, especially the

8.6% fall in plant and equipment, while building and structures were down 3.5%. By industry, mining capex fell 5.5%

in Q4, manufacturing fell 7.0% and other industries fell 4.4%.

But the bigger news was the poor estimate for 2014-15 capex plans. The first estimate for the next financial year was

$124.8bn, a large 17.4% decline on the first estimate for 2013-14. Mining plans have plunged 25% to $74bn from

$99bn (1st estimate for 2013-14), manufacturing plans are down 20% to $6.3bn, while other industries have risen, but

only by 0.4% to $44.4bn. The fall in mining has clearly driven the fall in capex plans, and using 5-year average

realisation ratios, the capex plans for 2014-15 would point to a fall of around 10% in full year spending. That is

consistent with our business investment forecast of an 8% fall in investment in 2014-15.

The chart below shows the poor starting point for 2014-15, and highlights the clear downside risk to capex spending

if plans are not revised significantly higher through the coming year. For example, if capex only rises to $140bn in

2014-15, that would mean a fall of around 16% next year.

Meanwhile the 5th estimate for 2013-14 was $167.1bn, 0.8% higher than the 4

th estimate. Businesses get it about

right by this time of year, so the final year outcome is on track to be around $165-170bn, so a small increase on

2012-13.

In regard to Q4 GDP next week, our current forecast is 0.9%, but unless we get some positive surprises in

inventories or net exports early next week, some downward revision may be required.

28 February - Private Sector Credit- slow acceleration in progress

Private Sector Credit rose by 0.4%, a touch below the median of 0.5% (NAB 0.4%). Housing was up 0.6% with investor housing still strong, up 0.8%, as per last month. Other Personal (consumers) up by 0.1% and Business Credit up by 0.2%. The trend in credit has accelerated a little, after recording 0.3% rises in the latter half of 2013: December was up by 0.5% and then January up 0.4% today. Overall, credit growth is still very slow however, up by just 4.1% yoy. Policy makers at the RBA will take some comfort from the slight acceleration in credit growth, indicating the economy is responding to the earlier rate cuts, albeit still very subdued away from housing.

3 March Non-tradables inflation still stubbornly high, while Home Sales flat in past couple of months

The TD Securities inflation measure rose a modest 0.2% in February, after the 0.1% gain in January, for 2.7%yoy. After the strong rise recorded in Q4, the first couple of months in 2014 suggest little further headline growth so far in Q1. In February there were price rises in fruit and veg, furniture, and petrol, while holiday travel and accommodation prices fell. The trimmed mean rose 0.3% in February after a flat outcome in January, with the annual pace rising to 3.0% from 2.7%. This series does not have a perfect relationship to the quarterly ABS CPI on a quarter-to-quarter basis, but the TD series is pointing to further upside risk for annual underlying CPI growth. The TD series is showing stubborn growth in non-tradables at 3.2%yoy, while tradables are trending higher at 2.1%yoy – we expect similar trends to be evident in the next Q1 CPI release. NAB’s current forecast for Q1 underlying inflation is 0.7%, which would see the annual pace rise from 2.6% to 2.8%.



Meanwhile HIA new home sales rose 0.5% in January, after the 0.4% fall in December, so home sales have essentially steadied in the past two months. But we have seen an upward trend in this series since 2012 that should continue through 2014, as interest rates remain low and more building approvals translate into greater dwelling activity and dwelling sales. In January, home sales rose in VIC and QLD but were lower in the other states. For the RBA, these two sets of data confirm recent trends. Underlying inflation pressures are trending higher due to still-stubborn non-tradables growth, while the upturn in new dwelling activity is happening at a much slower pace than desired.

3 March - AiG PMI Manufacturing still below 50 with hints of recovery as house prices level out

Two partial releases this morning, the AiG Manufacturing index that is showing signs of stabilising (almost) at 48.6 while dwelling prices were flat in February, consolidating some hefty gains through last year and January. The AiG PMI Manufacturing index did actually get back to above 50 last Sep and Oct, but then receded but only back into the high 40s, averaging 47.6 in the three months to February. While not quite pointing to manufacturing recovery, this index at a clinical level has been in a less bad space than some of the negative unsettling news over the wires in recent months, culminating in car plant closures. “Contraction eases” was how the AiG reported their release this morning. On a more encouraging note, both the AiG production and new orders components were back in recovery mode in February at 51.5 and 50.0, the first time since Sep/Oct. It seems that the pick-up evident in dwelling construction may be feeding through into related downstream manufacturing industries is one likely recent growth spur. In any case, it seems to be domestically-based, with the exports component plumbing a new shocking low of 25.8. By industry, the survey reported that the food and beverages sub-sector has now being expanding since March 2013. The petroleum, coal, chemicals and rubber products sub-sector index indicated growth for a second month while non-metallic minerals and wood and paper products expanded in February, in line with rising construction activity. In contrast, the large metal products and machinery and equipment manufacturing sub-sectors continued to contract in February. Overall, it still points to continuing contraction in manufacturing activity through the opening part of 2014, but with some sign that the rate of slowing has eased off.

3 March - Inventories flat for Q4 GDP, while profits growth solid after inventory adjustments. NAB Q4 GDP forecast remains at 0.7%.

Non-farm Inventories were in line with our expectations, falling 0.5% in Q4, for a zero contribution to Q4 GDP.

Looking at the quarterly change, there were notable falls in wholesale, retail and mining stocks, partially offset by a

rise in manufacturing stocks.

Inventories are usually one of the more volatile components of the GDP release, so the flat outcome means that no

revision to our GDP forecast of 0.7% is required. Tomorrow we get net exports and public spending for Q4 to

complete the partial indicators released prior to Wednesday’s National Accounts.

For the income side of GDP, headline company profits rose only 1.7% in Q4 (NAB +4.5%, market +2.0%).

However, this release does not adjust for inventory valuations, which were $2.9bn in Q3 and only $220m in Q4. After

valuation adjustments, the National Accounts gain in Q4 would be around 6%, so more in line with our quarterly

forecast and helping to support the growth in the income measure of GDP. Profits have risen for four consecutive

quarters, with the gain in Q4 largely contributed by mining and wholesaling. In contrast, small business profits

continue to be weak, down 0.9% in Q4, the third consecutive decline.

Meanwhile wages growth grew 1.1% in Q4, after 0.5% in Q3, for the strongest quarterly gain since December 2011.

The weak growth in early 2013 means that the annual pace is only 2.8%yoy, but that will trend higher in coming

quarters.

3 March - ANZ Job Ads pop higher in February after several months of flatness; signs of improvement

ANZ Job Ads pops higher by 5.1% (classifieds lagging internet ads) materially improving the annual rate of decline from -8.9% to January to -4.8% to February. Ads had been trending sideways for 4-5 months but signs of growth are now appearing again. This data presents mild upside risk for the labour market over coming months after having disappointed in January with employment growth now flat in y/y terms playing catch up to the softer leading indicators of employment through much of last year. Today’s news runs against the grain of recent news wire headline stories of corporate layoffs and is more positive

than the AiG PMI employment index released this this am at 47.4.



We’ll see how the other two PMIs run through this week (the AiG PSI Services index, Wednesday) and Friday’s PCI Construction Index say on the employment front; they were both running at sub 50 levels in January. There is also next week’s NAB Business Survey employment index for February being released next week, that index having turned to a net positive counter-intuitively in January and heralding signs of improved labour demand.

4 March - Net exports and government spending both supporting economy in Q4

Today’s pre-national accounts quarterly partials show net exports contributing 0.6% points to GDP growth, almost

right on the NAB and the market’s +0.7% points growth expectation.Only a very slight disappointment.

Also released was the government spending figures for Q4 which also slot right in to tomorrow’s GDP. They

revealed aggregate government spending growth in real terms of 1.1%, more than enough to offset the slight shortfall

in the net exports actual compared to the forecast. (NAB had figured on virtually no growth in government spending

behind our 0.7% GDP forecast.)

Within the detail of the government spending, pretty much all of the growth was in public sector investment which in

underlying terms rose 4.5% while government consumption (mostly wage payments) was little changed at +0.3%.

So in net terms, nothing in these two reports to fundamentally alter our 0.7% forecast for tomorrow’s GDP.

As for the balance of payments report, the current account balance came in at $A-10.1bn (NAB -9.8bn; market -

10.1bn) that is running at 2.6% of GDP, down from $A-12.5bn (3.2% of GDP) in Q3, thanks to a return to slight

surplus in the goods and services balance that offset some deterioration in the primary income balance (the net

income balance as it used to be known in my day). This diminishing current account deficit is expected to unfold

further this year thanks to a soft domestic economy and further export volume growth, especially from iron ore.

Along with the contribution from net exports, the improvement in the trade balance in Q4 was also assisted by an ever so slight improvement in the terms of trade, up 0.6%, with export prices (+0.8% in AUD terms) ever so slightly outpacing import price rises (+0.2%). As I wrote in yesterday afternoon’s note on the RBA commodity price index, the terms of trade is on track so far this quarter to give back some ground thanks to some pull-back in the bulk commodity prices so far this year.

11 March - NAB Business Survey – February 2014

Is the recent recovery short lived? One or two steps forward, now a step back.

The NAB Business Conditions index disappointingly back-pedalled sharply in February to a reading of 0 from +5,

reversing around half the post-election gains.

On a more positive note, Business Confidence also softened but at a reading of +7 (after +9 in January) still remains

marginally above trend and did not slide.

Within the Business Conditions index, the Trading and Employment components fell markedly during the month

(Trading from +8 to +4, and Employment from 0 to -6), with the latter pointing to very weak labour market conditions;

nearly all of the post-election gains have been reversed.

Manufacturing conditions deteriorated sharply, as did “bellwether” wholesaling conditions. Near-term outlook weaker

with forward indicators softening.

Inflation pressures well contained due to limited upstream pressures. Final product prices growth eases back to 0.3%

from 0.6%, while labour costs growth slips back to where it was in December at 0.6%, down from 1.0% in

January. Retail prices growth also eased, from 0.5% to 0.3%.

Economic growth forecasts unchanged. NAB still expects a final RBA rate cut in late 2014, with unemployment still

expected to rise to 6½% by late 2014 and stay “higher for longer”.

13 March - SEEK Job Ads down 0.9% in Feb; trend though still supportive of moderate employment growth in coming months

As a last minute look into this morning’s labour force report for February and the outlook for employment over the

next few months, the SEEK Job Ads index just published this morning gave up a little ground in February, after

having risen in all bar one month since last September, limiting the downside on employment for the next quarter or

so. In fact, it’s pointing to some positive annual employment growth, though at a rate that would still not be sufficient

to arrest some incremental rise in the unemployment rate this year.

The trend in the SEEK series has been more encouraging over recent months, as indeed the NAB employment index

had been to January, before it disappointingly gave up some ground in February as we reported on Tuesday. The

ANZ Job Ads series made up some ground in February and is pointing to some near term stabilisation in labour



demand.

Mapping today’s and these monthly release on to the monthly ABS report is more problematic. At the margin,

today’s result is only a slight negative, but only at the margin.

Our call for no change in the level of employment is somewhat more bearish than the market’s +15K. Remember

that it’s the unemployment rate that is more telling as representing signal rather than just noise, but even that can be

skewed by the likes of the discouraged worker effect where job seekers stop looking for work and thus miss the

Statistician’s statistical definition of unemployment.

NAB’s forecast of a 6.1% unemployment rate figures on no change in the participation rate; the movement in the

participation rate is just as crucial in that regard. An unexpected rise in the participation rate would be encouraging.

17 March - Car sales little changed in February

Motor vehicle sales rose a small 0.1% in February, after the 4.0% fall in January, continuing the weak start to the

year after the soft sales performance in 2013. The February rise was due to a 0.8% rise in passenger vehicles,

whereas SUV’s fell 0.3% and ‘other vehicles’ fell 1.0%. The Q4 CPI reported that car prices fell in the second half of

2013, but that has done little for car sales which are down 3.5%yoy in this monthly series.

Although quarterly household consumption growth continues to improve in the National Accounts (Q4 consumption

growth was 0.8% after 0.7% in Q3), there is little support coming from car sales. Car purchases were flat in Q4 GDP

(and down 0.3%yoy). The weak start to 2014 means that Q1 is likely to repeat that weak trend, with growth in

consumption largely driven by food, clothing and footwear, housing costs and recreation services. For car sales, the

risk remains of price rises due to the lower AUD that will further harm car sales in coming months.

19 March - Internet job vacancies ease in February, but still point to better employment growth ahead

Internet job vacancies fell 3.3% in February in seasonally adjusted terms (the number reported on Bloomberg is the

trend growth of 0.2%) with annual growth improving slightly to -1.0%. This leading indicator is pointing to fairly solid

growth in employment of around 1.5%yoy, whereas actual growth in the ABS data is running at 0.6%yoy. Along with

the NAB Employment Index and ANZ job ads, it suggests better employment growth ahead, though NAB’s view is

that employment growth will not be strong enough to stop the unemployment rate rising towards 6.5% by end-year.

In February, seven of the eight occupational groups showed falls (only rise was in Technicians and Trade Workers), while the 5 mainland states all saw monthly declines. Over the past year, both NSW and VIC have showed solid rises of 4.0% and 5.7% respectively, Tasmania is up 4.3%, while the other states have seen declines, the biggest in WA of -16.8%.

26 March RBA watching housing market closely for speculative surge

The RBA’s semi-annual Financial Stability Review reported that Australian banks continued to perform strongly in

2013, with asset performance improving and bad and doubtful debts falling. The four major banks are also well

placed to meet the higher capital requirements that will be required from 2016.

However the RBA did have some interesting comments to make in relation to the housing market. With business

credit growth soft, the RBA warned banks not to unduly increase their risk appetite or relax their lending standards for

dwelling finance. The RBA is not surprised that low interest rates have caused rising housing prices and greater

household borrowing, but it is keeping a close watch on speculative activity in the housing market. It has already

seen evidence that “some lenders are using less conservative serviceability assessments when determining the

amount they will lend to selected borrowers”. The RBA again stressed that investors and owner-occupiers must

understand that rising house prices (and low interest rates) will not continue indefinitely.

On housing market conditions, the RBA said that Australia is a ‘long way’ from housing oversupply, but localised

overbuilding and high-rise construction in Sydney and Melbourne “warrant some monitoring”. The RBA noted that

non-resident investors and self-managed superannuation funds were providing some additional demand for housing,

but on balance the “pick-up in investor activity in the housing market does not appear to pose near-term risks to

financial stability.”

Otherwise households are in good shape and continue to pay down debt faster than required. Non-performing loans

remain low, as can be seen in the charts below. There has also been an improvement in indicators of distress in the

business sector, which is consistent with the better business conditions readings seen in the NAB Business

Survey in recent months.

Overall, the Stability Review is much as expected. The banking system is in good shape, and lending to housing is

being closely watched for any signs of an upsurge in speculative housing activity. The RBA does not appear to be

overly concerned about a property price bubble so nothing here to move them away from their neutral bias.



26 March Stevens optimistic that the ‘handover’ from mining-led growth to broader private demand growth is beginning

RBA Governor Stevens’ speech in Hong Kong repeated the main sentiments expressed in recent RBA commentaries. He is optimistic that the Australian economy will continue to improve, strengthening in late 2014 and pick up further in 2015. While resource investment spending will be easing, exports and other parts of private demand will take up most of the slack. He sees promising signs that household consumption will build on recent gains, while we all know about the positive signs happening in the housing market. Asset prices will be closely watched and he repeated the warning in today’s Financial Stability Review that property investors “need to take care with the amount of leverage they take on”. Stevens also suggested that there are some early promising signs of improvement in employment hiring decisions, though the unemployment rate will rise “a bit further yet”. There was not too much on the currency, with the Governor saying that the AUD remains a risk to the outlook as it is “a source of significant uncertainty.” But overall, Stevens does not sound like he believes he will have to cut the cash rate again – this is obviously the case as otherwise the RBA would not have moved from an easing bias to a neutral bias in February. He expects to see growth improving and the unemployment rate to peak soon. But this is where the NAB view differs. NAB expects that declining mining investment and only soft growth in non-mining investment will see the unemployment rate rise to 6.5%, giving the option to the RBA to cut rates again before year end.

31 March - Upside risk to Q1 underlying CPI, while Home Sales rebound in February

The TD Securities inflation measure rose a modest 0.2% in March, for 2.7%yoy, the gains unchanged from February. Meanwhile the TD measure of the trimmed mean was up just 0.1% for 2.7%yoy, down from 3.0% in February. However on a quarterly basis the trimmed mean is pointing to growth of 0.8% in Q1, which suggests some upside risk to NAB’s 0.7% forecast. For the headline, the NAB is expecting a 0.9% gain in Q1 with many seasonal increases expected to show up. In the TD series in the past couple of months we have seen the price rises in fruit and veg, fuel and holiday travel and accommodation which reaffirms our expectation of a higher headline number. Tradables and non-tradables growth was low in March, up 0.3% and 0.2% respectively, with the quarterly rates growing by 1.0% for tradables and 0.6% for non-tradables. However the larger CPI basket in the ABS release is expected to see a non-tradable outcome closer to 1.0% in Q1. The Q1 CPI is released on April 23.

31 March - RBA credit growth still in check in February

Completing our trifecta of local data today, RBA credit grew 0.4% in February (NAB 0.3%; consensus

0.4%; last 0.4%). That puts the annual growth of RBA credit at 4.3% to February, up from 4.1% to

January, reflecting the overall acceleration over the past one to two quarters, thanks primarily to the pick-

up in the dwelling sector.

Contained within the February report were some mixed messages on the major sectors, suggesting

somewhat surprisingly a lower rate of housing credit growth, still anaemic other personal credit growth

but hints of business credit growth.



Housing credit grew 0.5%/5.8% y/y after two months of growing monthly by 0.6%; both owner-occupied

(0.4%/4.9% after 0.5%/4.8%) and investor housing growth (0.6%/7.6), down from two months of 0.8%)

were both lower, a suggestion that while housing activity and prices have been supporting new finance

approvals, loan amortisation remains in vogue.

As for the remainder, it was a mixed bag with “other personal” down 0.2%/0.7% in the month and the first

monthly fall since October. There was more life in business credit that rose 0.4%/2.4%, monthly growth

in line with its average for the past three months. Business credit growth softened through much of 2013

to finish last year at 1.7% y/y, but has since stabilised and has grown by a modest 2.4% over the year to

February.

Where we might not have been surprised had we seen that leverage was increasing is in housing and

today’s report does not add to that story but has cooled if anything. It’s true that while looking through the

month to month data that housing credit growth has picked up over the past two quarters, February

growth was at the lower end of the range of monthly growth seen since October. So there’s no overt

signs of re-leveraging in today’s report in the housing sector where activity and prices have been stronger

over recent months. If anything, it plays into the view that leverage is still very much contained and less

alarm for the RBA from still rising house prices, to February anyway.

Nothing much for the monetary hawks here and nothing to alarm the RBA Board at tomorrow’s meeting

that would dislodge them from yet again agreeing to leave the cash rates steady at 2.5%.

Property Related Data Releases

7 January – Retail sales again solid, while private housing approvals surge 6% in November

Retail sales rose 0.7% in November (NAB 0.2%, market 0.4%), the fourth straight solid monthly outcome. It is further

evidence that the improvement in consumer confidence is translating into better spending, and will make RBA more

comfortable that policy is working.

The gains in November were mainly in clothing & footwear, and cafes, restaurants & take away food. Food and

department stores fell.

Low interest rates and rising asset markets have finally seen some sustained improvement in retail spending, and

more in line with the improvement in consumer sentiment seen during 2013. The past four months have seen retail

sales grow 2.7%

Also today, building approvals fell 1.5% in October as we expected (Market at -1.0%), weighed down by a 9.7% fall

in private apartments, but private sector houses rose a strong 6.0%. The gains in housing were NSW, WA and VIC, and it is an encouraging sign after housing approvals had been very patchy for the previous five months. Most of the approvals growth had been coming from private apartments, and it was not surprising to see these fall back in November after the very strong levels in September and October. Taking out the volatility, approvals are trending higher at 2.4% a month, so consistent with other housing indicators showing improvement. With no rate rises in next few quarters, this series will continue to improve and should help to support improved dwelling investment growth through 2014.

For the RBA, the better retail and private housing approval data add to the case to keep rates on hold in February. Although we still have employment data and the Q4 CPI released over the next fortnight, there is little pressure on



the RBA to move again soon.

13 January - Housing indicators still solid, employment indicators still weak

Housing finance approval values rose 1.7% in November, the 10th increase in the past 11 months. Owner occupied

values rose 1.9% and investor approvals rose 1.5%.

In trend terms, housing finance approvals are rising by 2% per month, so consistent with other housing indicators

showing increasing strength in the housing market. Low interest rates and rising house prices have clearly increased

buyers’ interest in the market.

The number of owner-occupied approvals rose 1.1% (NAB and markets forecast +1.0%). Approvals to purchase

established dwellings rose 1.4%, while finance for construction rose 2.3%, and both of these two components are

trending higher. In contrast, approvals to purchase new dwellings remain volatile, and fell 4.3% in November after

+3.7% in October. The lack of first-home buyer activity was again evident in November, with first-home buyers

representing just 12.3% of owner-occupied approvals, a new low since the series began in July 1991.

With no interest rate rises on the horizon, housing finance approvals will continue to rise in 2014. The housing

outlook is one key factor keeping the RBA on hold and argues against a near term cut.

But also released today were ANZ job ads, which fell again. Job ads fell 0.7% in Dec, and have fallen in every month except one for the past 2½ years. It points to poor employment growth ahead, and a rising unemployment rate. This Thursday’s labour force release is expected to show the unemployment rate steady at 5.8% on the back of a 10K gain in jobs, but the NAB expects to see the unemployment rate push through 6% in coming months, which we believe would force the RBA to cut again.

22 January - Consumer confidence falls again in January

The Westpac-Melbourne Institute Consumer Sentiment index fell by 1.7% in January, after the 4.8% fall in

December. It’s the third fall in the past 4 months. The level of the index is still around 2% above the long-term

average, but we have seen a clear pullback in confidence in the past four months, after the solid gains that were

seen in Q3 ahead of the Federal Election.

All components of the Survey were lower in January, with a bigger fall in the expectations component (-2.0%). The

uncertain outlook for the economy and the deteriorating labour market have probably been the dominant thoughts for

consumers in the past month. It certainly appears that the strength of the housing market has had little impact on

confidence readings.

But despite the poor outcomes for confidence in recent months, we have seen very good monthly retail sales growth

from August until November, again highlighting that the month-to-month relationship between the consumer

confidence series and consumer spending is not great. The longer term trends show that consumer confidence has

been improving since 2011, but household consumption growth has slowed, while monthly retail sales have been

volatile, but relatively consistent at an annual pace between 1-4%.

Overall, if the pullback in confidence continues (and if it was to be accompanied by falls in business confidence) it would further sound the alarm bells for the RBA that the recovery is losing traction.

30 January - New home sales dip, but further improvement expected in 2014

HIA new home sales fell 0.4% in December, after the 7.5% rise in December. Unit sales fell 6.6%, easing back after the very strong growth in the previous three months (September unit sales were up 20% and November up 30%), while detached house sales rose 0.9% in December, adding further to the 3.6% gain in November. Within the housing component, there was a big 13% fall in Victoria, but all other states recorded a rise, the largest in SA.

House sales are a much bigger component than units in this series, and the recovery in housing sales through 2013 has driven the upward trend. Total sales have been above 7,000 in the past two months, to their highest level since mid-2011. The series is trending higher and fits in with other housing indicators showing better activity. If the rise in building approvals in recent months translates into better dwelling investment, this series should make some further solid gains in 2014.



3 February - Building approvals ease back in Q4, while job ads point to better employment growth ahead

Building approvals fell 2.9% in December (NAB +3%, Market at -0.5%), a weaker-than-expected outcome due to private housing which was down 3.4% in the month. Private apartments were down 1.2%. The fall in housing comes after the 7.2% surge in November, with declines in December driven by NSW, VIC and QLD.

Total approvals have seen small falls for 3 consecutive months in Q4 after the 17% rise in Sep, but are nevertheless holding onto a monthly pace of above 16,000. That 16K level is level is well up on the 13K level a year ago, with most of the growth coming from apartments in the past year.

The upward trend in approvals points to better dwelling construction activity in the year ahead, consistent with the growth in house prices seen earlier this morning and also recent housing finance approvals data.

Also this morning, we saw another fall for ANZ jobs ads, down 0.3% in January, after -0.8% in December and continuing the negatives seen for most of the past 3 years. However the declines are getting smaller, and the relationship to the ABS employment series suggests there should be better growth ahead. The ANZ series points to employment growth of around 1%yoy in 6 months’ time, up from 0.5%yoy now.

3 February - House prices continue with gusto into the new year

House prices have continued with gusto into the new year. While this is a seasonally low period for sales, what has transacted has continued to be at higher selling prices, up another 0.2% (+10.2% y/y) this past weekend (the first weekend of February), and that’s on top of the just reported 1.2% monthly rise through January, taking the annual rate to now virtually a double digit rate. Melbourne was the strongest in the month (+3.2%/11.9%); Sydney prices while not as strong in the month (0.8%/13.4%) have still had a strong past 12 months. Broad-based rises across the capital cities with all having positive y/y growth bar Hobart and even there prices have been steady (-0.2%). In short, the re-sale and broader housing upturn is becoming entrenched with low rates working. We saw the likes of this on Friday with an acceleration in housing credit, especially for investor housing. Expect more of the same in a month when the January RBA credit data are released. This report can only

add to the on hold view.

5 February - NAB Online Retail Survey – December 2013

The NAB Online Retail Sales Index increased modestly in December – to a seasonally adjusted 240 points (from 237 points in November). In seasonally adjusted three month moving average terms online sales expanded 1.58% (from a 1.65% increase in November). The recent growth comes after the relatively flat August to October period, and is more on par with the growth seen in July. Sales growth for traditional bricks & mortar retail has improved in recent months, maintaining momentum of about +0.6%, in November (seasonally adjusted, 3 month moving average basis).



The improved growth trend for online retail sales reflects almost uniform improvement in conditions at the category level. The online index grew +12.6%yoy, an acceleration on the November result (+11.2%). Particular strength was observed in Electronic Games and Toys category (+32%), a likely beneficiary of new games console releases and subscriptions. Groceries and Liquor (+24%) was also stronger, though Media (+21%) experienced slower growth. Personal & Recreational Goods (-1%YoY) was the only category to experience a contraction, albeit an improvement on the November result. In the year to December 2013, Australians spent $14 7 billion on online retail. This level is equivalent to 6.5% of spending with traditional bricks & mortar retailers (excluding cafés, restaurants and takeaway food to create a like-for-like comparison) in the year to November. 11 February - Investment demand for housing remains solid

Housing finance approval values rose 0.2% in December, due to a strong 2.9% rise in investment loans, while

owner-occupied approvals fell 1.5%. The upward trend continues – finance approvals have risen strongly in the past

year, with only one monthly decline in the past 12 months. Investors continue to be the bigger driver of the growth in

the housing market – investor approvals are up 41%yoy (compared to 19% for owner-occupiers), and the monthly

RBA housing credit data also show a faster pace of lending for investment housing.

The number of owner-occupied loans fell 1.9% in December (NAB -2.5%, Market +0.7%), due to large falls in both

finance for new dwellings (-1.9%) and established dwellings (-2.2%). New dwellings have fallen in 7 of the past 9

months, reflecting the weak first home buyer activity. In December, first-home owners represented just 12.7% of

owner-occupied approvals, a small increase from the 12.3% ratio in November which was the all-time low for the

series.

Meanwhile the ABS quarterly house price data confirmed the growth we saw in the monthly RP data. The national

index rose 3.4% in Q4 (and 9.3%yoy), with the strongest rises in Sydney (4.7%qoq/13.8%yoy) and Perth

(3.3%/8.7%). All capital cities saw gains in Q4.

Overall, the housing data continue to show solid gains, in both prices and activity. With no interest rate rises on the horizon, these gains will continue through 2014

12 February - Another fall for Consumer Confidence in February

The Westpac-Melbourne Institute Consumer Sentiment index fell by 3.0% in February, the fourth fall in the past five

months. The negative news on the employment front, the high CPI and the RBA removing its easing bias seems to

have offset any positive effect of rising house prices in the latest Survey.

The level of the confidence index is now at 100.2, its lowest since May last year, and indeed it is now below its long

term average of 101.5. In February, consumers became more pessimistic about the economy 1 and 5 years ahead,

while the third consecutive fall was seen in the question “is it a good time to buy a household item?’. That probably

reflects the rising cost of household items due to the lower AUD.

The falls in consumer confidence over the past 5 months are somewhat surprising, as the recent retail sales data would suggest confidence levels would be improving, rather than retreating. But while the relationship between confidence and consumer spending is not great, after all the gains in confidence through 2013, the recent slide is one that the RBA (and the new Federal Government) will want to see stop very soon



26 February - NAB Commercial Property Survey: conditions on the mend

Conditions improved on average across the commercial property sector in the December quarter of 2013. The overall index improved to -7 from -13 in the September quarter, although the overall reading remained in negative territory (the indexes are based on averages of capital values and rents.

The best performing and only sector to register a positive outcome was CBD Hotels, although the index number slipped from 39 to 14. Office was -11 from -28; Retail was -11 from -15; and Industrial was -4, unchanged from the September quarter.

Over the coming two years, respondents expect strong pick-ups in conditions across all sectors, the Industrial sector having the most optimistic expectations, the index for Q4 2015 at 58. Next was CBD Hotels at 43; then Retail at 40; Office at 30; and the overall index at 40.

Commercial property has been a drag on the economy for several quarters so the improving trends evident in this survey are good news for the outlook for the sector and the economy. With a lift in business investment being one of the keys to a better economy ahead, the improvement in conditions and optimism about the future are good news.

3 March - House prices stabilise in February After some very sturdy rises through last year and into January, house prices in most of the capital cities cooled

somewhat in February, with the exception of Sydney that rose by a further 0.8%.Melbourne (-0.2% after +3.2%),

Brisbane (-2.0% after +0.7%), Perth (-0.2% after -1.1%), Adelaide (-0.2% after 0.0%) and Canberra (-0.8% after 0.8%) all gave up some ground in February, but from very high levels. Darwin prices rose 0.7% while Hobart prices rose 1.4%, prices in these two cities tend to be more whippy month to month. It’s too early to say whether this is the start of some stability in major capital city prices or just some consolidation for a month or two that we’ve already seen in this up-cycle. In any case, there are several headwinds that will at the minimum slow the trend in rising house prices. First is the high level of prices themselves that will run into some demand headwinds while higher prices can also encourage more properties to come on to the market. From a more fundamental demand-supply balance viewpoint, there is a material rise in the stock of apartments in some of the capital cities (e.g. Melbourne) that will act as a brake on apartment prices. Slower growth in wage and thus household income would also over time act as something of a headwind. If this slowing in dwelling re-sale prices lingers, that will help to cool concerns that low rates are leading to house prices being overdone.



5 March - Online retail sales index shows somewhat slower growth in January

National Australia Bank’s (NAB) latest Online Retail Sales Index shows Australians spent $14.9 billion online in the

year to January 2014, up $1.9 billion or 11.3% on the previous year. That’s down from 12.9% growth to

December. Online sales slowed marginally to 1.3% in January, down from 1.6%, but the overall improvement in

recent months means online sales are far outstripping traditional retail in terms of growth.

Strong year on year growth was experienced in Groceries and Liquor (+27%), Electronic Games and Toys (+22%)

and Media (+18%), though Media has lost pace in recent months. Daily Deals and Personal and Recreational Goods

experienced the weakest growth.

A substantial gap also now exists between growth in domestic and international online retail sales. International

online sales have virtually stalled in recent months, with seasonally adjusted three month moving average growth just

0.3%. This slowdown is likely tied to the lower AUD. By comparison, domestic retailers continue to control the largest

share of online sales, which has edged marginally higher to around 74% of the market.

Commenting on the findings, NAB Chief Economist Alan Oster said that despite a recent pick-up in the traditional

retail growth, it was still outpaced by the improvement in online retail.

“With the improvement over recent months, online sales have returned to growth rates far exceeding traditional retail

sales,” he said.

“In the year to January, the main contributors to the growth in online retail sales have been Department and Variety

Stores, Media and Groceries & Liquor – which together accounted for 74.4% of the total increase in sales.

Online sales were equivalent to around 6.5% of traditional retail spending, up from 5.8% for the same time last year.

NAB’s forecast for ABS retail sales in January – being released tomorrow - is growth of 0.3%, down from 0.5% in December.

12 March - Consumer spending resilience being tested by brittle sentiment

Consumer sentiment down another 0.7%, to an index reading of 99.5, a little and not materially below its long term

average of 101.6 since the series began in 1974.

The further decline in sentiment, having now pulled back in every month bar one since last October plays to the

somewhat “skittish” consumer point that RBA Governor Stevens made recently. That’s not hard to see why given the

flow of unsettling corporate layoff news before and after Christmas/ New Year, not to mention recently the Qantas

news and the hangover from the 6% print on the unemployment rate last month.

The “family finances, year ahead” question was down 2.3% as was the “economy, one year ahead” (--4.0%) is where

there has been somewhat more apprehension. The RBA shifting its monetary policy bias from a soft easing bias to a

neutral one and market talk in recent weeks of the possibility of a rate hike as the next RBA move might also have

damped sentiment.

Both the current conditions and expectations components both down and by similar amounts, though relatively

modest declines given the news. At least home owners would be feeling the warm wealth glow from rising house

prices and that’s some offset. The gap between sentiment and spending is narrowing and seemingly somewhat

counter-intuitively from some increase in spending from a resilient consumer in the face of sentiment-destabilising

news, including in January if retail trade is any guide.

Though clinically at OK levels, consumer sentiment has taken a hit over the past six months but consumer spending



if anything has been more resilience.

But right now the downshift in sentiment is again weighing on the outlook for spending. It’s hard to see consumer

spending being anything like a new saviour for economic growth until this outlook becomes clearer. It would be a

bold prediction to expect the household savings ratio will fall much if at all, with consumer spending to grow more in

line with disposable incomes.

NAB sees consumer spending still making a reasonable contribution to economic growth, growing in real terms in the “2s”, and in a disjointed macro story where net exports are also making a similar to even greater contribution to growth, along with some contribution from dwelling investment this year.

12 March - A pullback in housing finance, but outlook still good

Housing finance approval values fell 0.4% in January, after the 0.3% decline in December. However the consecutive

falls in the headline total are not a major concern. The January fall was due to investor approvals (down 3.3% in

January after growth of 18% in the previous four months) while in December it was owner-occupied approvals that

took a breather, falling 2.1% in December but rising 1.5% in January (and now up 11% in the past 5 months).

Encouragingly, the growth in owner-occupied came mostly from finance for the construction of dwellings, which rose

7.1%, the sixth consecutive gain. So a good sign for future dwelling investment.

Meanwhile the number of owner-occupied loans was flat in January (NAB -2%, market +0.5%). The first home buyers

ratio of owner-occupied approvals rose to 13.2% in January from 12.7%, another good sign for future dwelling

activity.

So despite the small fall in the past two months, which may translate to softer housing credit growth in the near-term,

we would expect that housing finance approvals will re-accelerate in coming months. With no interest rate rises on

the horizon, housing data will continue to show solid gains through 2014, in both prices and activity.



31 March - New Home Sales HIA new home sales rose 4.6% in February, after a flat couple of months, with house sales up 6.9% while units fell 6.8%. Detached home sales are the much larger component in this series, and in February we saw big increases in QLD (+17.5%), WA and VIC (both +9%). The recent strong growth in residential building approvals suggests that dwelling activity and sales should continue to rise solidly through 2014, as low interest rates and rising prices continue to drive interest in housing.

Interest Rate Outlook

Weather impacted US data and geopolitical risks has kept longer dated bond yields near the lower end of expected trading ranges for most of Q1-14. Into Q2-14 the bias is for US yields to drift higher with the US 10y bond trading back near 3.0% as US economic data continues to show signs of improvement while the Fed remains on its path of tapering. For now 3.0% will remain a key support level for UST10s but into H2-14 we see this being broken. While the Australian bond market will take its lead from US Treasuries, Australia is no longer seen as the Beta trade for stronger global growth. While the interest rate sensitive sectors are showing signs of strength the underlying economy remains soft and the RBA is likely to be on hold for an extended period. This should see good support for AU bond yields on any sell-off. The AU 10y bond is currently trading around 4.10% and we see it in a range of 4.00% to 4.40% into mid year

.

Figure 9: NAB Forecasts

31-Mar

Sep1212SepSepp-12

Jun-14 Sep-14 Dec-14 Mar-15

RBA Cash Rate 2.50 2.50 2.50 2.25 2.25

AUD/USD 0.9252 0.87 0.85 0.84 0.83

ACGB 10s 4.09 4.2 4.3 4.2 4.5

3 year swap rate 3.19 3.3 3.5 3.2 3.6

10 year swap rate 4.41 4.5 4.7 4.6 4.8



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