RE5006

A STUDY OF MELBOURNE OFFICE

SPACE MARKET

A0166497L BUDI SUSANTO/ A0166424E CAROLINE POERNOMO/A0177414A CAO MENG

A0151637E HUANG, CHING-WEN / A0166503J LI LIANG / A0166489J NADIA AYU R. LESTARI
4/17/2018 1
CONTENT
1. GLOBAL & REGIONAL OUTLOOK

2. AUSTRALIAN ENVIRONMENT

3. REAL ESTATE MARKET ANALYSIS

4. ASSET ALLOCATION- SAA

5. TACTICAL ASSET ALLOCATION- TAA

6. CONCLUSION

4/17/2018 2
 GLOBAL & REGIONAL OUTLOOK

4/17/2018 3
GLOBAL REAL ESTATE INVESTMENT
• “Brighter Prospects, Optimistic Markets, Challenges Ahead”
• Global output is estimated to have grown by 3.7% in 2017 and forecasted to grow
by 3.9% in 2018 and 2019
• Australia is forecasted to have a growth rate of only 2.2% in 2018 and 2019
• Australian economy has not had a technical recession since July 1991
• While concerns around geopolitics are at unprecedented levels in recent times,
confidence in the ongoing flows of capital into real estate remain high
• Global cross border investment into real estate is holding up given the chase for
yield and real estate position as a safe haven, and there will continue to be a flight
to quality by the majority of institutional investors

4/17/2018 4
REGIONAL OUTLOOK
• ASEAN is one of Australia’s top three trading partners, representing around 15 per
cent of Australia’s total trade. Trade between Australia and ASEAN countries
amounted to AUD$93.2 billion in 2016
• Between 2012 and 2020, the ASEAN middle-class will more than double, from 190
million to 400 million people. The cities of Southeast Asia are booming, with more
than 90 million people expected to move to urban areas by 2030.
• Australia has much to offer this dynamic region and now is the time for Australian
businesses to focus on our nearest neighbours and contribute to the once-in-a
generation opportunity the ASEAN region offers.

4/17/2018 5
 AUSTRALIAN ENVIRONMENT

4/17/2018 6
 MELBOURNE ECONOMIC ENVIRONMENT ANALYSIS
➢ City of Melbourne economic output is $156.2 billion. ➢ The top 5 contributors to the City of Melbourne economy are
Financial and Insurance services, Health Care and Social Assistance,
Professional, Scientific and Technical services, Information, Media
and Telecommunications and Rental, Hiring and Real Estate services.
Melbourne
CBD

Great
Melbourne
Docklands GDP Southbank
322.74
billion

Melbourne’s
inner-city
suburbs

4/17/2018 7
AUSTRALIAN INSTITUTIONAL ENVIRONMENT
• Federal government:
Federal Parliament
Broad national powers to administer laws such as defencing,
The federal or national Parliament, in Canberra, Australian Capital Territory (ACT) immigration, foreign affairs, trade, postal services and
taxation.

• The State/ Territory parliament:

State/Territory Parliaments
Residual powers under the Australia Constitution. Usually
Six state parliaments and two self-governing territory parliaments covers issues like local governments, education and schools,
(Northern Territory and ACT)
health, some aspects of the environment, and emergency
services operation (police, fire and ambulance).

Local Councils • Local governments:

Local governments mainly regulate or manage services and
Over 560 local councils (also called shires or municipalities)
activities, and adapted to the needs of the community such
as parking, building inspections, childcare, and town
4/17/2018 planning. 8
LEGAL ENVIRONMENT ANALYSIS
• Land use: Foreign investors need to gain the approval from FIRB
before they purchase or lease land in Australia.
• Water use: The right to access water in Australia is a statutory
right governed by different legislative schemes in each state and
territory.
• Environmental protection: Australia has a robust legislative
framework for environmental protection mainly under the state
and territory level.
• Local planning: State and territory governments and local
governments primarily control the development.
• Supply chain regulation: The federal government has created
some laws to protect and manage the supply of productions
along supply chains.
• Research and development and intellectual property protection:
the federal government enforce some financial incentive schemes
4/17/2018 to attract more investments. 9
FINANCE ENVIRONMENT ANALYSIS
Interest Rate Funding source

4/17/2018 10
TAX ENVIRONMENT ANALYSIS
➢ Maximum duty rate of 5.5% for any asset transaction.
➢ Surcharge applied to foreign purchases of residential
property 7%
➢ Foreign persons
• People other than Australian citizens and certain types
of “permanent residents”
• Foreign owned corporation (50% or more)
• Foreign incorporated company
• Foreign Trust (foreigner owns 50% or more of trust)
➢ Residential property
• Apartments and houses
• Vacant residential land
• Land intended to be used as residential property
• Land which the intention of use changes to residential
property
• Excludes commercial residential property
4/17/2018 11
 REAL ESTATE MARKET ANALYSIS

4/17/2018 12
 MELBOURNE
CBD
• Area: 6.2 sq km

• Precincts: 7 Precincts, including newly addition

Docklands

• Bounded by City Circle Tram

• Population +- 41.500

4/17/2018 13
DEMAND & VACANCY
• Melbourne’s absorption is largely a result
of strong economic fundamentals in
Victoria.
• The stronger growth in white collar
employment for Victoria suggesting
continued strength in demand for
Melbourne’s offices.
• Net absorption in Melbourne CBD was a
national stand out

4/17/2018 14
SUPPLY
• 2017 lowest levels of net stock
addition to the CBD since June
2014.
• Currently Melbourne enters a new
phase of development activity and
future supply levels will remain
lower
• Contrary to the strong demand,
supply is expected to remained
constrained with tighter vacancy
rates at play

4/17/2018 15
RENTAL RATES
• Strong rental gains over 2017
show no signs of slowing down over
2018 and 2019
• Net effective rents for Premium, A
and B Grade assets all saw
double-digit growth at 11.7%,
10.% and 11.6% respectively
• The flurry of leasing activity and
continued strength in white-collar
employment will further push rental
growth in the CBD

4/17/2018 16
RENTAL GROWTH

4/17/2018 17
RISK PREMIUM
Factor Range (bps)
Sovereign Risk 0 50
Currency Risk 150 200
Inflation Risk 150 180
Market Fundamental Risk 50 100
Liquidity Risk 0 30
Credit Risk 0 20
Transparency Risk 0 20
Total 350 600

Above risk-free rate, being 10 year government bond yield which is 2.74%
Assumed Liquidity, Credit and Transparency risk is low since Australia has stable
environment for investors
4/17/2018 18
RISK-RETURN PERFORMANCE
Historical and concurrent return performance
RISK-RETURN PERFORMANCE
Historical and concurrent return performance
RISK-RETURN PERFORMANCE
Historical TRs, SD, CV and Forecasts
 ASSET ALLOCATION- SAA

4/17/2018 22
 ASSET ALLOC. PROPOSED

Adopted MPT Simulation of Derived initial

models Portfolio that portfolio
comprises
• One Factor SAA • Singapore • Enhance return and
• 3 Factor AHP SAA • Sydney minimize risk
( Long Time Horizon) • Melbourne • Proximity
• Tactical Asset • Transparency
Allocation for Short • Market data
term horizon availability

4/17/2018 23
 ONE FACTOR SAA
First Deriving GDP Per Capita for each country to measure its economic growth into
USD
CITIES GDP PER CAPITA CONV USD CONVERSION
SYDNEY 80,000.00 1.2980 61,633.28
MELBOURNE 65,400.00 1.2980 50,385.21
SINGAPORE 79,697.00 1.3162 60,550.83
172,569.32

Growth Factor- Inflation rate is applied

% CHANGE OVER THE YEAR HISTORICAL FORECAST
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024-2027
SYDNEY 3.8% 3.6% 4.6% 3.3% 3.0% 2.8% 2.8% 2.5% 2.5% 2.5% 2.5%
MELBOURNE 1.3% 3.3% 4.3% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8%
SINGAPORE 3.6% 1.9% 2.0% 2.5% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6%

4/17/2018 24
ONE FACTOR SAA
Deriving Forecast of 2024
CITIES USD CONVERSION 2017 FORECAST 2024 ONE FACTOR SAA
SYDNEY 61,633.28 73,979.5426 35.66%
MELBOURNE 50,385.21 60,922.2409 29.36%
SINGAPORE 60,550.83 72,574.9026 34.98%
207,476.6861 100.00%

To find better accuracy towards portfolio allocation,

3 factor SAA is further developed

One factor SAA result is used for a benchmark on

proposed final allocation

4/17/2018 25
3 FACTOR SAA
Create a better accuracy, 3 factors are With a linguistic Scale of
used :
1 Equally preferred
2 Equally to moderately preferred
3 Moderately preferred
Transparency Economic
Index Growth 4 Moderately to strongly preferred
Factor
5 Strongly preferred
6 Strongly to very strongly preferred
Vacancy
Index 7 Very strongly preferred
8 Very to extremely strongly preferred
9 Extremely preferred
4/17/2018 26
3 FACTOR SAA
Transparency Index

Further replicated:
Economic Growth Factor
Vacancy Index
4/17/2018 Ranking among the 3 factors 27
 3 FACTOR SAA
Rank the 3 Factors according to priority:
1. Economic Growth Factor
2. Market Vacancy
3. Market Transparency
Re- applied methodology on each row of averages towards the priority ranking preference

4/17/2018 28
 TACTICAL ASSET ALLOCATION- TAA

4/17/2018 29
 TACTICAL ASSET ALLOCATION (TAA)
Forecast Total Return, SD & Correlation for the Cities
Formulate TAA Bands to AHP-Based SAA Total return (US$)
Date SYD MEL SG
2018 25.60% 12.00% 15.00%

AHP-Based Strategic 2019 12.00% 10.00% 5.00%

Asset Allocation 2020 15.00% 8.00% 7.00%

(SAA) TAA Bands formulated 2021 18.00% 13.00% 10.00%
2022 10.00% 22.00% 15.00%
Average (2018-2022) 16.12% 13.00% 10.40%
as the Benchmark around the SAA & Market
Portfolio Fundamentals Exante Var-Cov (2018-2022)
Market Lower Upper SYD MEL SG
SYD 0.37% -0.09% 0.08%
Sydney SY 59.6% 50% 70%
MEL -0.09% 0.29% 0.14%
Melbourne MEL 17.8% 10% 25% SG 0.08% 0.14% 0.21%
Singapore SI 22.6% 15% 30%
Exante Standard Deviation (2018-2022)
SYD MEL SG
Total 100.0%
6.11% 5.39% 4.56%

Exante Weighted Var-Cov (2018-2022)

SYD MEL SG
SYD 0.11275% -0.01230% 0.00942%
MEL -0.01230% 0.01670% 0.00706%
SG 0.00942% 0.00706% 0.00917%
4/17/2018 30
Portfolio Expected Return Portfolio Standard Deviation

Sum of Sharpe
Sydney Melbourne Singapore Asset Wts Maximising
# Exante Portfolio TR Min. Portfolio SD SYD MEL SG
Ans.
1 13.81% 3.76% 55.0% 10.0% 35.0% 100.0% 2.94
2 13.94% 3.72% 55.0% 15.0% 30.0% 100.0% 3.01
3 14.07% 3.71% 55.0% 20.0% 25.0% 100.0% 3.05
4 14.13% 3.72% 55.0% 22.5% 22.5% 100.0% 3.06
5 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07
6 13.95% 3.85% 57.5% 10.0% 32.5% 100.0% 2.91
7 14.08% 3.82% 57.5% 15.0% 27.5% 100.0% 2.97
8 14.21% 3.82% 57.5% 20.0% 22.5% 100.0% 3.01
9 14.27% 3.83% 57.5% 22.5% 20.0% 100.0% 3.01
10 14.34% 3.85% 57.5% 25.0% 17.5% 100.0% 3.01
11 14.09% 3.95% 60.0% 10.0% 30.0% 100.0% 2.87
12 14.16% 3.93% 60.0% 12.5% 27.5% 100.0% 2.90
13 14.22% 3.92% 60.0% 15.0% 25.0% 100.0% 2.93
14 14.29% 3.92% 60.0% 17.5% 22.5% 100.0% 2.94
15 14.35% 3.93% 60.0% 20.0% 20.0% 100.0% 2.96
16 14.42% 3.94% 60.0% 22.5% 17.5% 100.0% 2.96
17 14.48% 3.97% 60.0% 25.0% 15.0% 100.0% 2.96
18 14.24% 4.05% 62.5% 10.0% 27.5% 100.0% 2.83
19 14.37% 4.04% 62.5% 15.0% 22.5% 100.0% 2.88
20 14.43% 4.04% 62.5% 17.5% 20.0% 100.0% 2.90
21 14.50% 4.05% 62.5% 20.0% 17.5% 100.0% 2.90
22 14.56% 4.06% 62.5% 22.5% 15.0% 100.0% 2.91
23 14.38% 4.17% 65.0% 10.0% 25.0% 100.0% 2.79
24 14.44% 4.16% 65.0% 12.5% 22.5% 100.0% 2.82
25 14.51% 4.15% 65.0% 15.0% 20.0% 100.0% 2.83
26 14.57% 4.16% 65.0% 17.5% 17.5% 100.0% 2.85
27 14.64% 4.17% 65.0% 20.0% 15.0% 100.0% 2.85
28 14.52% 4.28% 67.5% 10.0% 22.5% 100.0% 2.75
29 14.59% 4.28% 67.5% 12.5% 20.0% 100.0% 2.77
30 14.65% 4.28% 67.5% 15.0% 17.5% 100.0% 2.78
31 14.72% 4.29% 67.5% 17.5% 15.0% 100.0% 2.79
32 14.66% 4.40% 70.0% 10.0% 20.0% 100.0% 2.71
33 14.79% 4.41% 70.0% 15.0% 15.0% 100.0% 2.74
4/17/2018 31
 Remove the ‘non-efficient frontier’ Allocation sets

Sum of Sharpe
Sydney Melbourne Singapore Asset Wts Maximising
# Exante Portfolio TR Min. Portfolio SD SYD MEL SG
Ans.

1 13.81% 3.76% 55.0% 10.0% 35.0% 100.0% 2.94

2 13.94% 3.72% 55.0% 15.0% 30.0% 100.0% 3.01
3 13.95% 3.85% 57.5% 10.0% 32.5% 100.0% 2.91
4 14.07% 3.71% 55.0% 20.0% 25.0% 100.0% 3.05
5 14.08% 3.82% 57.5% 15.0% 27.5% 100.0% 2.97
6 14.09% 3.95% 60.0% 10.0% 30.0% 100.0% 2.87
7 14.13% 3.72% 55.0% 22.5% 22.5% 100.0% 3.06
8 14.16% 3.93% 60.0% 12.5% 27.5% 100.0% 2.90
9 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07
10 14.21% 3.82% 57.5% 20.0% 22.5% 100.0% 3.01
11 14.22% 3.92% 60.0% 15.0% 25.0% 100.0% 2.93
12 14.24% 4.05% 62.5% 10.0% 27.5% 100.0% 2.83
13 14.27% 3.83% 57.5% 22.5% 20.0% 100.0% 3.01
14 14.29% 3.92% 60.0% 17.5% 22.5% 100.0% 2.94
15 14.34% 3.85% 57.5% 25.0% 17.5% 100.0% 3.01
16 14.35% 3.93% 60.0% 20.0% 20.0% 100.0% 2.96
17 14.37% 4.04% 62.5% 15.0% 22.5% 100.0% 2.88
18 14.38% 4.17% 65.0% 10.0% 25.0% 100.0% 2.79
19 14.42% 3.94% 60.0% 22.5% 17.5% 100.0% 2.96
20 14.43% 4.04% 62.5% 17.5% 20.0% 100.0% 2.90
21 14.44% 4.16% 65.0% 12.5% 22.5% 100.0% 2.82
22 14.48% 3.97% 60.0% 25.0% 15.0% 100.0% 2.96
23 14.50% 4.05% 62.5% 20.0% 17.5% 100.0% 2.90
24 14.51% 4.15% 65.0% 15.0% 20.0% 100.0% 2.83
25 14.52% 4.28% 67.5% 10.0% 22.5% 100.0% 2.75
26 14.56% 4.06% 62.5% 22.5% 15.0% 100.0% 2.91
27 14.57% 4.16% 65.0% 17.5% 17.5% 100.0% 2.85
28 14.59% 4.28% 67.5% 12.5% 20.0% 100.0% 2.77
29 14.64% 4.17% 65.0% 20.0% 15.0% 100.0% 2.85
30 14.65% 4.28% 67.5% 15.0% 17.5% 100.0% 2.78
31 14.66% 4.40% 70.0% 10.0% 20.0% 100.0% 2.71
32 14.72%4/17/2018 4.29% 67.5% 17.5% 15.0% 100.0% 2.79 32
33 14.79% 4.41% 70.0% 15.0% 15.0% 100.0% 2.74
 TACTICAL ASSET ALLOCATION (TAA)
Generate the first draft ‘Efficient Frontier’
Sum of Sharpe
Sydney Melbourne Singapore Asset Wts Maximising
# Exante Portfolio TR Min. Portfolio SD SYD MEL SG
Ans.

1 13.81% 3.76% 55.0% 10.0% 35.0% 100.0% 2.94

2 13.94% 3.72% 55.0% 15.0% 30.0% 100.0% 3.01
4 14.07% 3.71% 55.0% 20.0% 25.0% 100.0% 3.05
7 14.13% 3.72% 55.0% 22.5% 22.5% 100.0% 3.06
9 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07
13 14.27% 3.83% 57.5% 22.5% 20.0% 100.0% 3.01
15 14.34% 3.85% 57.5% 25.0% 17.5% 100.0% 3.01
19 14.42% 3.94% 60.0% 22.5% 17.5% 100.0% 2.96
22 14.48% 3.97% 60.0% 25.0% 15.0% 100.0% 2.96
26 14.56% 4.06% 62.5% 22.5% 15.0% 100.0% 2.91
29 14.64% 4.17% 65.0% 20.0% 15.0% 100.0% 2.85
32 14.72% 4.29% 67.5% 17.5% 15.0% 100.0% 2.79
33 14.79% 4.41% 70.0% 15.0% 15.0% 100.0% 2.74

4/17/2018 33
 TACTICAL ASSET ALLOCATION (TAA)
Fine-tune the ‘Efficient Frontier’ by adding more allocation combinations

Sum of Sharpe
Sydney Melbourne Singapore Asset Wts Maximising
# Exante Portfolio TR Min. Portfolio SD SYD MEL SG
Ans. 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07

1 13.81% 3.76% 55.0% 10.0% 35.0% 100.0% 2.94

2 13.94% 3.72% 55.0% 15.0% 30.0% 100.0% 3.01
3 14.07% 3.71% 55.0% 20.0% 25.0% 100.0% 3.05
4 14.13% 3.72% 55.0% 22.5% 22.5% 100.0% 3.06
5 14.18% 3.73% 55.0% 24.5% 20.5% 100.0% 3.07
6 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07
7 14.22% 3.76% 55.5% 25.0% 19.5% 100.0% 3.06
8 14.25% 3.78% 56.0% 25.0% 19.0% 100.0% 3.05
9 14.31% 3.82% 57.0% 25.0% 18.0% 100.0% 3.03
10 14.34% 3.85% 57.5% 25.0% 17.5% 100.0% 3.01
11 14.37% 3.87% 58.0% 25.0% 17.0% 100.0% 3.00
12 14.42% 3.92% 59.0% 25.0% 16.0% 100.0% 2.98
13 14.48% 3.97% 60.0% 25.0% 15.0% 100.0% 2.96
14 14.56% 4.06% 62.5% 22.5% 15.0% 100.0% 2.91
15 14.64% 4.17% 65.0% 20.0% 15.0% 100.0% 2.85
16 14.72% 4.29% 67.5% 17.5% 15.0% 100.0% 2.79
17 14.79% 4.41% 70.0% 15.0% 15.0% 100.0% 2.74

4/17/2018 34
 TACTICAL ASSET ALLOCATION (TAA)
Finalize the ‘Efficient Frontier’ and Find the TAA set with highest Sharp Ratio

Sum of Sharpe
Sydney Melbourne Singapore Asset Wts Maximising
# Exante Portfolio TR Min. Portfolio SD SYD MEL SG
Ans. 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07

1 13.81% 3.76% 55.0% 10.0% 35.0% 100.0% 2.94

2 13.94% 3.72% 55.0% 15.0% 30.0% 100.0% 3.01
3 14.07% 3.71% 55.0% 20.0% 25.0% 100.0% 3.05
4 14.13% 3.72% 55.0% 22.5% 22.5% 100.0% 3.06
5 14.18% 3.73% 55.0% 24.5% 20.5% 100.0% 3.07
6 14.20% 3.73% 55.0% 25.0% 20.0% 100.0% 3.07
7 14.22% 3.76% 55.5% 25.0% 19.5% 100.0% 3.06
8 14.25% 3.78% 56.0% 25.0% 19.0% 100.0% 3.05
9 14.31% 3.82% 57.0% 25.0% 18.0% 100.0% 3.03
10 14.34% 3.85% 57.5% 25.0% 17.5% 100.0% 3.01
11 14.37% 3.87% 58.0% 25.0% 17.0% 100.0% 3.00
12 14.42% 3.92% 59.0% 25.0% 16.0% 100.0% 2.98
13 14.48% 3.97% 60.0% 25.0% 15.0% 100.0% 2.96
14 14.56% 4.06% 62.5% 22.5% 15.0% 100.0% 2.91
15 14.64% 4.17% 65.0% 20.0% 15.0% 100.0% 2.85
16 14.72% 4.29% 67.5% 17.5% 15.0% 100.0% 2.79
17 14.79% 4.41% 70.0% 15.0% 15.0% 100.0% 2.74

4/17/2018 35
 TACTICAL ASSET ALLOCATION (TAA)
Final TAA Recommendation is as follows

Proposed
Position at
AHP-Based Strategic Tactical Asset
Asset Allocation Allocation (TAA) Proposed TAA for Asia Markets TAA Allocation
(SAA) for 2018 2018 TAA Bands formulated
based on SYD 55.0%
Markowitz
as the Benchmark Optimiser, with respect to the around the SAA & Market MEL 25.0%
Portfolio Tactical bands SAA Fundamentals SG 20.0%
Market Lower Upper Total 100.0%
Sydney SY 59.6% 55.0% Slight Underweight 55% 70% Sharpe Ratio 3.07
Melbourne MEL 17.8% 25.0% Overweight 10% 25%
Singapore SI 22.6% 20.0% Slight Underweight 15% 30%
TAA Portfolio TR 14.2%
Portfolio SD 3.7%
Total 100.0% 100.0%

4/17/2018 36
 CONCLUSION

4/17/2018 37
CONCLUSION
• Growth in Victoria’s employment and co-working industry have push resulted in strong demand
for office sector. Strong demand combined with limited supply until 2019, vacancy rate
forecasted to fall. The flurry of leasing activity and continued strength in white-collar
employment will further push rental growth in the CBD, predominantly in the prime grade
market.
• Melbourne's CBD office yield and capital value has been growing in the last 15 years. Its
average total returns is around 15% and the SD is around 13.33%. The market recovers
rapidly from GFC and peaks in the recent 3 years due to continually FDI. The return expectation
is stable since the tighten supply will continue in the near future and the inflation rate is
expected to stay low.

4/17/2018 38
 CONCLUSION SG
20%
• Prudent Investment strategy on Portfolio Management
SYD
• Considering a Long time Horizon vs. Short term
MEL 55%
• Capture short term opportunistic returns and Max. CV Appreciation
25%
• Capital is short supplied in Asia & historically has higher yield

SAA Asia Markets TAA Allocation Sydney Melbourne Singapore

City SYD 55.0%
Total Weighted
MEL 25.0%
SYDNEY 59.6% SG 20.0%
Total 100.0%
MELBOURNE 17.8% Sharpe Ratio 3.07
TAA Portfolio TR 14.2%
SINGAPORE 22.6%
Portfolio SD 3.7%
4/17/2018 39
 THANK YOU !!!
Q&A

4/17/2018 40