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South EastProperty Breakfast

Leaders in Property Intelligence.

charterkc.com.au

Research

Our Property MarketsCurrent issues & future trends

PREPARED BYGLENN LAMPARDDIRECTOR VALUATIONS - STRATEGIC RESEARCH


TheEconomy.

UnderlyingFundamentals.

TheMarkets. Summary.

Context The DriversPopulation

Residential &Commercial

Markets

…there are always risks

Current issues & future trendsAgenda


The economyKey economic indicators

Source: Reserve Bank of Australia (November 2018)


The economyEconomic composition

Source: Reserve Bank of Australia (November 2018)


The economyEmployment – Melb & Syd outperforming

43.7

75.6

37.4

54.2

65.6

83.3

7.1

28.6

3.5

0

20

40

60

80

100

15 16 17

Annu

al J

obs

Gro

wth

('00

0)

Sydney Melbourne Brisbane In last 5 years:

236,000 new jobs added in Melbourne 229,00 new jobs added in Sydney 57,500 new jobs added in Brisbane

In 2017 Australia's new jobs went to:

Melbourne: 53%Sydney: 24%Brisbane: 2%

Source: ABS


TheEconomy.




CommercialMarkets


The opportunitiesAgenda


% of Total Population in Two Largest Cities(Australia = Sydney @4.8 M; Melbourne @4.5M)

Cities – Australia is uniqueEconomic activity & investment is concentrated in Melb & Syd

Source: ABS & various National agencies

4% 5%

12%

20%23%

27% 28%

35%

0

5

10

15

20

25

30

35

40

China India USA Germany France UK Canada Australia

% N

atio

nal P

opul

atio

n


Underlying fundamentalsPopulation Australia…below peak but high by historical

Source: Charter Keck Cramer, ABS


Underlying fundamentalsPopulation Australia…demographic change, not just size


MELBOURNE

SYDNEY


Underlying fundamentalsPopulation South East…demographics

KINGSTONGREATER

DANDENONG

CASEY CARDINIA

FRANKSTON

MORNINGTON PENINSULA


Underlying fundamentalsPopulation South East…demographics

KINGSTONGREATER

DANDENONG

CASEY CARDINIA

FRANKSTON

MORNINGTON PENINSULA

SOUTH EAST986,010(22% of metro)

Aust. 61.0%England 4.0%India 4.0%Sri Lanka 2.1%New Zealand 1.9%(China 1.5%)


Underlying fundamentals


Population – Melbourne & Victoria

Victoria (y/e Mar-18 : 137,400) Australia (y/e Mar-18 : 380,700)

, ABS


Underlying fundamentals


Population – Melbourne’s South East

As a % of Greater Melb

(*includes Monash)

20.2%

30.5%

19.9%

, ABS


Net Interstate Migration (NIM)VIC attracting people from each State



Net Interstate Migration (NIM)VIC attracting preferred age groups…QLD to follow


20-29 year old 30-39 year old


Underlying fundamentalsOur drivers…

PEOPLE


TheEconomy.





Markets




0

5,000

10,000

15,000

20,000

25,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 2019f 2020f

The apartment marketMelbourne completions

Source: Charter Keck Cramer


The development marketGreenfields

Source: National Land Survey Program


The office marketA National context since the GFC

Source: Property Council of Australia (OMR)

perthadelaide

sydney

brisbane

canberra

melbourne0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

SydneyCBD Melbourne

CBD

Canberra BrisbaneCBD

Perth CBD AdelaideCBD

Net additions

Net absorption


The office marketMelbourne by region

Source: Property Council of Australia (OMR) & Charter Keck Cramer

melbourne

65%12%

6%

10%4% 3%

Central Melb

City Fringe

Inner East

Outer East

South East

North & West

8.6m sq. m


The industrial marketThe logistics… …& other “e-tailers”


The industrial marketThe logistics…

Source: The Australian & Goodman

Bob Black, Group Chief Operating Officer for Australia Post said, “Australians spent $21.3 billion online last year, driving parcel volumes up, and this love affair with online shopping isn’t slowing down. Our $200 million investment – which includes automated processing technology and improved parcel scanning and tracking – is demonstration of our commitment to Queensland jobs and to remaining Australia’s preferred and most trusted delivery provider, and will ensure we’re well-equipped to manage future volume growth.

• 48,677 sqm purpose built warehouse with a further 20,000 sqm in covered awnings• 1,600 sqm of office space


0

50

100

150

200

250

300

350

400

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Average annual consumption Pre GFC Average Post GFC average Recent Average

The industrial marketAverage annual consumption of industrial land (hectares)

Source: Department of Environment, Land, Water and Planning 2017 (UDP)

“Industrial land consumption levels have increased to levels approaching Pre-GFC…”


The industrial market…land

31%

20%10%0.6%

37%

2%

Western Region Northern Region

Eastern Region Inner South East Region

Southern Region Inner Metro Region

By region

26,017hectares



Melbourne metropolitan industrially zoned land

26%

14%

17%4%2%

0%10%

5%

9%

13% 0%

Western SSIP Western Region - Remainder

Northern SSIP Northern Region - Remainder

Eastern Region Inner South East Region

Southern SSIP Officer/Pakenham SSIP

Hastings SSIP Southern Region Remainder

Inner Metro Region

Vacant industrial land (hectares)

6,669hectares


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Western SSIP Northern SSIP Southern SSIP Hastings SSIP Officer/PakenhamSSIP

Zoned Vacant Land Proposed Future Industrial

“Of the 6,669 of vacant industrial land, two thirds are

located within SSIPs…”


Share of workplaces by industry category 2015/16

9% 12% 8% 12% 9% 13% 10% 6% 8% 10% 10%

12%21%

13%20%

9%

19%17%

18%23% 16% 16%

9%

10%

6%

10%

8%

6%10%

39%33%

14% 13%10%

13%

12%

11%

10%

18% 16%

9% 10%

11% 12%24%

16%

22%

19%

26%

15% 21%

18% 15%

24% 22%

16% 6%

6%

7%

4%

4% 3%

3% 1%

3% 5%

20% 22%33%

21%33%

23% 23%7% 10%

22% 22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Manufacturing

Transport & W'housing

Wholesaling

Construction

Bus. & Prof. Services

Population Services

Other

Economic structure of SSIPs

Source: Worksafe Victoria (Department of Environment, Land, Water and Planning 2017 UDP)Based on the number of workplaces identified in industrial zones by Worksafe Victoria (unpublished data)

2% 9% 113

0%%9%

19

0%%

8%

66%

1%%

10%

1818

9%%

26%

1515

%%

4%

44%

1%33%

223


The retail marketRetail trade…just eat it

Source: SCCA Research (October 2018 release)



Source: ABS (November 2018 release, seasonally adjusted)

38%

18%9%

6%

16%

13%

Victorian RetailTurnover

September 2018

$7.02b

Food retailingHousehold goodsClothing, footwear & personalDept storesOther retailingCafes, restaurants & t/a


The retail marketFood based at the expense of Department stores

Source: ABS (Cat 8501.0) & SCCA Research

Dandenong Indian food & culture tours



aders in Propert Intelligence


The retail marketFood, and the experience…


TheEconomy.





Markets




Commercial.Capital markets.

Risks.

No doubt market iscooling

Solid populationgrowth remainsMedium density

Townhouses

Income growthwith Melb & Syd

focus on CBD officeRetail challenges

Industrial hot

Domestic &foreign capitalHow low can

yields go?New core asset

classes?

Immigration policyHousehold debtPlanning policy

Trump

Current issues & future trendsSummary

Residential.


DisclaimerThis report is provided for reference only and should not be relied on in isolation. It is incumbent on the Recipient to make their own enquiries, examinations and investigations, and rely on their own verified information. Charter do not warrant the appropriateness of the information for your purpose.

Whilst every care has been taken in the preparation of this report, the Recipient acknowledges that Charter give no warranty as to the accuracy or completeness of any information contained in this report or which may be provided in association with it, in writing or provided orally, or whether provided on or before the date of this report or in the future by Charter. The Recipient acknowledges that the contents of this report is based on information available as at the date of preparation.

Any statements as to future affairs are speculative and rely on assumptions and events in the future (some or all of which may not be satisfied or may not occur). All images are for illustrative purposes only and remain the property of the copyright holder.

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Disclaimer

Leaders in Property Intelligence. 11/15/2018 41

INVESTING IN VICTORIASue McMillanVictorian Government, Department of Economic Development, Jobs, Transport and Resources

As a member of the investment and economic projects team at Invest Victoria, and with a thorough understanding of Local, State and Federal Government, Sue works to build strong, productive relationships with businesses throughout metropolitan Melbourne, other government departments and agencies and the local government sector.

Sue presented a high-level summary of investment opportunities and activities in the South East, the state and Australia. She discussed the trends and factors that are impacting investment businesses and the potential impact on the property industry.

Our focus

Our sectors

Our office locations

ContactInvest Victoria

Victorian Government Business and

Trade Office - Dandenong


Key tax policies Corporate

tax rate cuts

No refunds of franking credits

Minimum tax on trust distributions

Remove negative gearing

Reduce CGT discount

Liberal policy Labor policy

Other measures –business as usual


Key tax policiesCorporate tax rate cuts

LiberalKey tax policies

* ‘Base rate entity passive income’ includes most dividends, interest income (with some exceptions for certain lenders), rental income, and net capital gains.

2017-18 2018-19Default rate 30% 30%

Reduced rate 27.5% 27.5%

Criteria for reduced ratePassive income <= 80% of assessable income <= 80% of assessable income

Aggregated turnover < $25m < $50m


Key tax policiesCorporate tax rate cuts


• Currently legislated tax cut to 25% where turnover < $50m

• Broader-based cuts to eventually apply to all companies blocked

• Rate of 25% originally scheduled to apply from 1 July 2026 but date brought forward to 1 July 2021

Income year Aggregated turnover

Previous rates Current rates

2017/18 $25m 27.5% 27.5%

2018/19 $50m 27.5% 27.5%

2019/20 $50m 27.5% 27.5%

2020/21 $50m 27.5% 26%

2021/22 $50m 27.5% 25%

2022/23 $50m 27.5% 25%

2023/24 $50m 27.5% 25%

2024/25 $50m 27% 25%

2025/26 $50m 26% 25%

2026/27 $50m 25% 25%


Key tax policiesExample – corporate tax rate cuts


• Propco holds 10 rental properties

• Its only income is rental income

• Its aggregated turnover is $20m for the 2018-19 year

• Rent (exclusive use of property) is passive income

Rental income

Propco Pty Ltd


Key tax policies

• How does Australia’s corporate tax rate compare to that of other countries?

– France, Germany, Japan and the US have higher rates

– Although the US is reducing its rate

• Headline rate of tax does not equal effective rate of tax

• How will it affect the government’s ability to get the budget back to surplus?

Corporate tax rate cutsLiberal

Key tax policies


Key tax policiesPotential wastage of franking credits


Franking credits can be lost where company becomes eligible for reduced franking rate

Franking at 30% Franking at 27.5%

Company

Profit 1,000,000 1,000,000

Tax payable @ 30% (300,000) (300,000)

Net cash available to pay dividend 700,000 700,000

Individual shareholder

Fully franked dividend 700,000 700,000

Gross-up 300,000 265,517

Taxable income 1,000,000 965,517

Tax payable @ 47% (470,000) (453,793)

Add: franking credit 300,000 265,517

Net tax payable (170,000) (188,276)

Total tax payable 470,000 488,276

Effective tax rate 47% 48.83%


Key tax policiesProperty changes

LaborKey tax policies

Negative gearing

• To be limited to new housing

• Losses to be quarantined and can be offset against income and capital gains in subsequent years

• Application date after next election

• Investments made before that date unaffected

CGT discount

• CGT discount for assets to be halved to 25%

• Exceptions – super funds or small business assets

• Application date after next election

• Investments made before that date unaffected


Key tax policiesExample – Negative gearing


Consider a salary and wage earner with a rental property

Year 1 Year 2 Year 3

Rental property

Rent 20,000 20,000 22,000

Depreciation (5,000) (4,800) (4,800)

Interest (10,000) (10,000) (10,000)

Other expenses (7,000) (8,000) (6,000)

Net income / loss (2,000) (2,800) 1,200

Other income

Salary 60,000 70,000 75,000

Taxable income – current 58,000 67,200 76,200

Taxable income – proposed 60,000 70,000 75,000


Key tax policiesExample – CGT discount


Current position Proposed position

Consideration $1,000,000 $1,000,000

Less: cost base ($300,000) ($300,000)

Capital gain $700,000 $700,000

Less: CGT discount ($350,000) ($175,000)

Net capital gain $350,000 $525,000

Tax payable @ 47% $164,500 $246,750

Effective tax rate 23.5% 35.25%

• Australian resident individual holds property for at least 12 months

• Property is held on capital, not revenue account

• Property is disposed of for $1m

• Assume cost base of $300,000


Key tax policiesProperty changes


What will these changes mean for the property market?

Some sectors of property market already softening

Existing investments are grandfathered – will there be a short-term increase in investment?


Key tax policiesMinimum tax on trust distributions


• Minimum 30% tax on discretionary trust distributions to individuals over age of 18

• Intention to prevent use of trusts to split income to individuals to access lower marginal tax rates

• Exclusions – special disability trusts, testamentary trusts, deceased estates, fixed trusts, public unit trusts, farm trusts, charities

• From 1 July 2019

30% tax even though may be in lower tax threshold

TRUST

Corporate beneficiary


Key tax policiesRefunds of franking credits


• Removal of refundable franking credits


• Individuals and SMSFs

• Will not apply to tax exempt charities, NFPs with DGR status

• Will not apply to pensioners and allowance recipients and SMSFs with at least one age pensioner or allowance recipient prior to 28 March 2019


Key tax policiesExample – refunds of franking credits


Current –full refund

Proposed –no refund

Profit 100 100

Tax payable (30) (30)

Net profit after tax

70 70

Current –full refund

Proposed –no refund

Fully franked dividend

70 70

Gross up –franking credits

30 30

Taxable income 100 100

Tax payable @ 15%

(15) (15)

Franking credits 30 30

Cash refund 15 0

SMSF – not in pension phaseCompany


• ATO has issued draft guidance on property and construction industry tax issues

• Paper covers

• Pitcher Partners has lodged submission highlighting significant concerns

– Capital vs revenue

– Characterisation of property development agreements

– Developer margins between related parties

– Land banking SPVs

ATO paperProperty and construction industry tax issues


Other developments

Stamp duty and partnerships

Foreign purchaser additional duty

GST and withholding

• Danvest v Commr of State Revenue [2017] VSC 125

• Interest in partnership holding Victorian land not dutiable property

• Duties Act amended from 14 June 2018

• May be able to claim overpaid duty 5 years from initial assessment

• Foreign purchaser additional duty is 7% in Victoria

• Australian-incorporated company is a foreign purchaser if > 50% owned by foreigners (even if unrelated)

• Purchasers required to withhold GST

• Purchases of new residential premises or potential residential land (‘PRL’)


• Exemption if purchaser GST registered, entitled to ITC, and supply of PRL

Indirect taxes


Important information

This presentation (‘Presentation’) has been produced by Pitcher Partners and has been prepared for informational and discussion purposes only. The information provided in this document is of a general nature and has been prepared without taking into account your objectives, circumstances, financial situation or particular needs. This Presentation does not constitute personal advice.

This Presentation has been prepared by us in the ordinary course of our profession. In providing this Presentation, we are not purporting to act as solicitors or provide legal advice. Appropriate advice should be sought prior to acting on anything contained in this Presentation or implementing any transaction or arrangement that may be referred to in this Presentation.

Information contained within this Presentation is based on the relevant law and its interpretations by relevant authorities as it stands at the time the information is provided. Any changes or modifications to the law and/or its interpretation after this time could affect the information we have provided.

This Presentation, or any part thereof, must not be distributed, copied, used, or relied on by any person, without our prior written consent.

To the maximum extent permitted by law, Pitcher Partners will not be liable for any loss, damage, liability or claim whatsoever suffered or incurred by an person arising directly or indirectly out of the use or reliance on the information contained within this Presentation.

Pitcher Partners is an independent member of Baker Tilly International.

Pitcher Partners is an association of independent firms.

Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any license or right to use any trademark displayed without the written permission of the owner.

Liability limited by a scheme approved under Professional Standards Legislation.

Pitcher Partners

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