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Melbourne Residential Market Update Future Estate investment products enable investors to cut out typical developer’s profit and access properties at near cost price. This eBook does not constitute an investment offer. Prospective investors are recommended to read IM or PDS for further information. No guarantee with regard to future investment performance is made or implied. Whilst every effort has been made to ensure accuracy, no reliance can be placed upon it by recipients.

Intelligent Property Investment

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE

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In this eBook, you will learn about the current conditions, drivers and outlook of the Melbourne residential market. Ben Anderson Managing Director and Founder

Would you like to learn about the current conditions and outlook for the Melbourne residential market?

Yes

No

Would you like to learn the real story, supported by reliable statistics, rather than the media hype?

Yes

No

Do you own property in Melbourne, or are you an investor considering your next property investment?

Yes

No

If you answered ‘Yes’ to any of the above, please read on.

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FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE


WHY MELBOURNE? Melbourne is Australia’s second largest city and was voted as the most liveable city in the world in 2011. Melbourne is highly ranked in key economic indicators such as GDP per capita, GDP growth, employment and average household income. As of June 2012, there are about 4.14 million people living in Melbourne, or some 77% of Victoria’s population. At the current population growth rate (1.5% or 62,000 p.a.), Melbourne is forecast to surpass Sydney to become Australia’s largest city in the next few decades. Melbourne boasts a diverse range of world-class entertainment centres, shopping, fine-dining, cultural events and sports venues. Melbourne remains the destination of choice for overseas property investors due to its long-term investment potential. Melbourne remains more affordable than Sydney. Melbourne’s economy is diverse and less industry dependent (i.e. resource sector for Perth and financial services sector for Sydney).

Residential property investment in the Melbourne market is a sound long-term investment strategy underpinned by a diverse and robust economy and sustained high population growth.

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE

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MARKET OVERVIEW The Melbourne market has been one of the best performing residential markets among Australian capital cities in recent years. After significant capital growth in 2009-2010, the market softened and has been generally more subdued. From peak to trough, the median house price of the Melbourne market declined by 8% before rebouncing by almost 4% in the last few months. Many lead indicators show that the bottom has been reached with a positive outlook for capital growth going forward.

The current drivers of the Melbourne residential markets include the following: Strong population growth - the highest of any Australian capital with 647,000 people moving to Melbourne over the past decade Desirable lifestyle, diverse industries and employment opportunities High investment return - Melbourne has performed strongly over the long term both in terms of capital gain and rental returns Low rental vacancy is supporting rental growth - rents grew at an average of over 8% p.a. in the 5 years to 2011 Continuing supply shortage - in stark contrast to the alarmist media commentary Strong market outlook, underpinned by robust fundamentals (such as low rental vacancy, continued demand growth and diminishing supply projections beyond 2013)

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FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE


HISTORICAL RETURNS ANNUAL ASSET RETURNS AND VOLATILITY OVER THE LAST 20 YEARS TIME FRAME

2008 - 2012

2002 - 2012

1992 - 2012

ASSET CLASSES

RETURN

VOLATILITY

RETURN

VOLATILITY

RETURN

VOLATILITY

Australian Shares

-7.30%

12.40%

2.40%

11.40%

2.30%

9.60%

Australian Listed Property

-6.20%

15.90%

4.30%

11.50%

3.90%

10.80%

Australian Residential Property

8.20%

4.50%

12.80%

4.90%

11.60%

4.80%

Melbourne Apartments

8.50%

7.00%

13.40%

7.20%

12.30%

7.50%

UBS Bond Composite Index

8.17%

2.40%

6.79%

2.80%

9.20%

4.20%

Australian Cash Management Trust

5.90%

0.20%

5.50%

0.30%

6.80%

1.00%

Consumer Price Index

3.10%

0.90%

2.9%

1.20%

2.70%

1.40%

Average Weekly Earnings

4.30%

1.00%

4.40%

3.40%

3.40%

1.50%

Source: RBA, ABS, UBS , Trading Economics

FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE

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POPULATION GROWTH Population and Number of Dwellings in Melbourne LGA 2006-2031 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0.0 2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

Total Population

Source: City of Melbourne

2030

Dwellings

Population growth is exceeding dwelling completions, and this is forecast to continue well into the future.

Annual Net Overseas Migration by Major States 1983 - 2011

Net Overseas Migration

80,000

60,000

40,000

20,000

0 Dec-83 Source: rpdata.com.au

Dec-87

Dec-91

Dec-95

NSW

Dec-99

VIC

Dec-03

Dec-07

QLD

SA

Dec-11

WA

Net overseas migration has been increasing, particularly since 2003.

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FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE


MELBOURNE METRO Metro & Inner Melbourne: Median House Prices 2005 - 2012 $1,000,000 $950,000 $850,000 $800,000

Median Price

$750,000 $700,000 $650,000 $600,000 $550,000 $500,000 $450,000 $400,000 $350,000

Metro Melb Houses

Source: M3Property, ABS

Jul 12

Mar 12

Dec 11

Jul 11

Mar 11

Dec 10

Jul 10

Mar 10

Dec 09

Jul 09

Mar 09

Dec 08

Jul 08

Mar 08

Dec 07

Jul 07

Mar 07

Dec 06

Jul 06

Mar 06

Dec 05

$300,000

Inner Houses

The inner city region of Melbourne has consistently outperformed outer suburbs in terms of capital growth. Metro & Inner Melbourne: Residental Vacancy Rates 2005 - 2012 3.5% 3.0%

Vacancy

2.5% 2.0% 1.5% 1.0% 0.5%

Source: M3Property, ABS

Metro Melb Houses

Jun 12

Mar 12

Sep 11

Dec 11

Jun 11

Mar 11

Sep 10

Dec 10

Jun 10

Mar 10

Dec 09

Sep 09

Jun 09

Mar 09

Dec 08

Jun 08

Sep 08

Mar 08

Sep 07

Dec 07

JUn 07

Mar 07

Sep 06

Dec 06

Jun 06

Mar 06

Dec 05

Sep 05

Jun 05

Mar 05

0%

Inner Houses

Rental vacancy rates are very low by comparison to historical levels, supporting rental income growth. FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE

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CAPITAL GROWTH House Price Index of Eight Australian Capital Cities 2002-2011 250

200

150

100

50

0 Mar-02

Aug-03=100

Feb-05

Aug-06

Jan-08

Jan-11

Melbourne

Sydney

Source: ABS

Jul-09

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

Australia

Melbourne house prices have grown consistently over the past decade, even during the post-GFC period. Melbourne Median House and Apartment Prices 2002 - 2012 $600,000 $550,000

Median Prices

$500,000 $450,000 $400,000 $350,000 $300,000 $250,000

Source: REIV

Jun '12

Dec '11

Jun '11

Dec '10

Jun '10

Dec '09

Jun '09

Dec '08

Jun '08

Dec '07

Jun '07

Dec '06

Jun '06

Dec '05

Jun '05

Dec '04

Jun '04

Dec '03

Jun '03

Dec '02

Jun '02

$200,000

House Units and Apartments

Median house and apartment prices in Melbourne have grown substantially over the past decade.

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FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE


RENTAL YIELD Melbourne Residential Vacancy Rates

Number of Vacancies

2007 - 2012 14,000

7%

12,000

6%

10,000

5%

8,000

4%

6,000

3%

4,000

2%

2,000

1% 0

0 Jul 2007

Jan 2008

Jul 2008

Jan 2009

Jul 2009

Jan 2010

Jul 2010

Jan 2011

Jul 2011

Number of Vacancies

Source: SQM Research

Jan 2012

Jun 2012

Vacancy Rate

In contrast to media hype, Melbourne vacancies have been remained low and relatively constant near the long term average of 3%. Melbourne Rental Growth 1996 - 2011 14%

Growth Per Annum

12% 10% 8% 6% 4% 2% 0 Adelaide Source: SQM Research, ABS

Perth

Brisbane

Canberra

Sydney

1996-2001

Darwin

Hobart

2001-2006

Melbourne

National

2006-2011

In comparison with the Sydney and Brisbane markets, the Melbourne rental market has averaged a higher annual growth rate of over 8% in the last five years. FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE

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NATIONAL SUPPLY SHORTAGE Australian Population Growth vs Growing Completions 1976 - 2010

Annual Apartment Completions

450,000 400,000 350,000 300,000 250,000 200,000 150,000 100.000 76 Source: ABS

78

80

82

84

86

88

90

92

94

96

98

00

Annual Dwelling Completions

02

04

06

08

10

Annual Population Gain

National population growth has accelerated and this has not been met by higher dwelling completions, creating an undersupply. Australian Housing Market Balance 1986 - 2015 400,000 360,000 320,000 280,000 240,000 200,000 160,000 120,000 80,000 40,000 0 -40,000 -80.000 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: ABS

House Surplus/Shortage

Completions

Underlying Demand

The national housing shortage is expected to reach over 600,000 houses by 2030.

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FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE


MELBOURNE SUPPLY SHORTAGE Melbourne Total Dwellings Approvals vs Highrise Approvals 2000 - 2012 7,000

Number of Dwelling Units

6,000 5,000 4,000 3,000 2,000 1,000

0

Total

Source: ABS

Highrise

Contrary to market commentary, the supply of new dwellings is expected to decline as dwelling approvals has declined substantially in 2012. Inner Melbourne Apartment Supply 2002-2014

5,000

Forecast

Annual Apartment Completions

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2002 Source: City of Melbourne

2003

2004

2005

Completed

2006

2007

2008

2009

Long-term Average

2010

2011

2012

Under Construction

2013

2014

Mooted

Contrary to media hype, the actual number of apartments under construction is decreasing from 2012 and expected to be below the long-run average by 2014. FUTURE ESTATE EBOOK SERIES: MELBOURNE RESIDENTIAL MARKET UPDATE

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MARKET OUTLOOK The market has been subdued over the last 12 months, with slight price declines across houses and units. The market appears to have bottomed - the peak-to-trough fall of 5.8% with 2.3% price increase over the last two months. We consider this primarily a ‘crisis of confidence’ as the fundamentals and outlook remain strong. Rents continue to grow (4.2% over the last 12 months) and vacancy rates remain relatively low at 3.5%. Forecast supply is expected to decline from 2013 to well below the long run average. The reality is in stark contrasts to media commentary which suggests a sustained oversupply. The Melbourne economy remains robust with the last reported (June 2012) year-on-year GDP growth rate at 2.3% and unemployment rate at 4.1%. Population growth remains very high and is forecast to continue, which means strong demand for new housing.

We all know property is a long-term investment. So, given the positive long-term outlook of the Melbourne market, the astute investor is recommended to look beyond the ‘market beat-ups’ and invest for the long-term.

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