Australia Real Estate Report - Q2 2013

Q2 2013
www.businessmonitor.com
AUSTRALIA
REAL ESTATE REPORT
INCLUDES 5-YEAR FORECASTS TO 2017
ISSN 2040-7580
Published by:Business Monitor International
Australia Real Estate Report Q2
2013
INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMIs Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: February 2013
Business Monitor International 2013 Business Monitor International

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Australia Real Estate Report Q2 2013
CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................... 9
Political ................................................................................................................................................. 10
Economic ............................................................................................................................................... 11
Business Environment .............................................................................................................................. 12
Industry Forecast .............................................................................................................. 14

Table: Forecast Rents - AUD/ Square Metre/ Month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table: Forecast Net Yield, 2010-2017 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Construction And Infrastructure Forecast Scenario ........................................................................................ 17
Table: Australia Construction And Infrastructure Industry Data, 2011 - 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table: Australia Construction And Infrastructure Long Term Forecast, 2017 - 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Construction And Infrastructure Forecast Scenario ...................................................................................... 20
Dampening Growth Potential ................................................................................................................... 25
Macroeconomic Forecasts ............................................................................................... 28

Economic Analysis ................................................................................................................................... 28
Signs Of Overheating Weigh On Infrastructure Investments ........................................................................... 29
Weakness In Other Sectors Further Weighing Down Economy ........................................................................ 30
Austerity Measures To Be Reversed ........................................................................................................... 31
Table: Australia - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Industry Risk Reward Ratings .......................................................................................... 34

Asia Real Estate Risk/Reward Ratings ......................................................................................................... 34
Table: Asia Pacific Real Estate Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Business Environment Outlook ................................................................................................................... 35
Table: BMI Business And Operation Risk Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Table: BMI Legal Framework Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Table: Labour Force Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Table: Asia, Annual FDI Inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Table: Trade And Investment Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Table: Top Export Destinations, 2002-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Market Overview ............................................................................................................... 47

Market Overview ..................................................................................................................................... 47
Office .................................................................................................................................................... 51
Table: Historic Rents - 2011-2012 (AUD per m2/month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Table: Net Yield, 2011-H212 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Business Monitor International Page 4

Table: Terms of Rental Contract/ Leases - H212 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Retail .................................................................................................................................................... 53
Table: Net Yield, 2011-H212 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Industrial ............................................................................................................................................... 55
Table: Net Yield, 2011-H212 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Competitive Landscape .................................................................................................... 57
Company Profile ................................................................................................................ 62

Bovis Lend Lease ..................................................................................................................................... 62
Brookfield Multiplex ................................................................................................................................ 65
Mirvac ................................................................................................................................................... 67
Stockland Group ..................................................................................................................................... 69
Leighton Holdings ................................................................................................................................... 71
Demographic Forecast ..................................................................................................... 77

Table: Australia's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Table: Australia's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Table: Australia's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Table: Australia's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Methodology ...................................................................................................................... 81
How We Generate Our Industry Forecasts ................................................................................................... 81
Construction Industry ............................................................................................................................. 82
Bank Lending ........................................................................................................................................ 83
Real Estate/Construction Business Environment Rating ................................................................................. 83
Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Sources ................................................................................................................................................ 86

BMI Industry View

The Australia Real Estate report examines the commercial office, retail, industrial and construction
segments in the context of a sector with muted growth prospects in the medium term. With a focus on the
principal cities of Melbourne, Sydney, Brisbane and Perth, the report covers the rental market performance
in terms of rates and yields over the past 24 months and examines how best to maximise returns in the
commercial real estate market, while minimising investment risk and exploring the impact of the country's
resources boom.
Australian commercial real estate continues to be fairly balanced because, structurally, the industry
functions in a way that restricts overdevelopment. It operates in an economy that, despite weak consumer
sentiment and structural changes, is performing reasonably well. The economy and sector are underpinned
by resources and demand from China, a reducing threat of interest rate rises, low unemployment and a
strong infrastructure sector. We caution, however, that our short-term outlook for the economy is bearish,
and the country will be negatively affected by the slowdown in Chinese economic growth.
Having consulted our in-country sources in December 2012, with our most recently collected data covering
full-year performance, we can confirm that rents in some regions experienced strong growth. However, it
seems our view for a slowdown in Australia's economic growth has already started to play out and affect the
sector, although the office market seems to be resisting this trend for the time being.
Key Points
The painful undoing of Australia's built-up imbalances is fast approaching as the demand for mineral
exports, domestic housing market and foreign credit sources all show signs of exhaustion. We expect the
mining slowdown that started in 2012 to persist into 2013, notwithstanding a temporary Q412 bounce.
Moreover, declining profitability will likely continue to plague the manufacturing and services sectors,
adversely impacting the employment outlook. We do not expect expansionary fiscal and monetary
policies to avert a recession, but believe that these policies will remain in place until 2015 as the country
experiences slow growth in the midst of structural change.
In spite of macroeconomic pressures weighing on the sector over the past 24 months, the office market
has aligned itself with a gentle growth trajectory across all the cities according to our newly collected
data covering H212, with rates in Sydney in particular benefitting.
Despite a pick-up in metal prices and improving global economy, we maintain our view the
improvements in the mining sector will be insufficient fuel for economic growth in 2013. Related
investment in this industry continues to be weighed down by high costs. Moreover, we believe that the
recovery in the Chinese economy is not permanent, given that much of the structural imbalances remain
at hand.
We believe that the housing market remains precarious, as affordability of home continue to edge to new
lows. Given our poor outlook for the Australian job market in 2013, in which we forecast unemployment

to reach 6.0% by the end of the year, we believe that demand for housing will decline. The overextended
household balance sheets further augur the growth in housing-related credit growth. In our opinion, the
Australian banking sector is the sector most leveraged on the housing market and we expect that declines
in house prices will adversely impact the industry.

SWOT
SWOT Analysis
Australia Real Estate/Construction SWOT
Strengths
This sector in Australia is technically sophisticated and globally competitive.

Structurally, the industry self-regulates the amount of new development and therefore
avoids huge over-supply in downturns.

The industry has seen a significant reduction in the number and cost of industrial
disputes in recent years.

There is a great amount of land capacity and the expertise to manage very large
projects.

Australia has recently committed to a major drive to improve public infrastructure.
Weaknesses
Profit margins in the industry have remained lower than for most other sectors of the
economy, even though revenue increased significantly.

The industry has been facing an increasingly severe skills shortage.
Opportunities
An increasing amount of the work being won by Australian construction businesses is
for offshore projects in Asia and the Gulf region.

The public sector is moving to increase its expenditure on capital works projects as a
deliberate strategy to blunt at least some of the effects of the global economic
slowdown.

The resources sector remains strong.
Threats
Weakening investor sentiment could result in a subdued market.

Political
SWOT Analysis
Strengths
Australia is a mature democracy with a broadly stable party system.

Economic stability over recent years supports the current political system and radical
groups are unlikely to gain substantial support.
Weaknesses
As one of the region's largest and most stable states, the country attracts many
refugees and economic migrants. The issue is a key source of domestic tension and
has been hotly debated in parliament in recent times as the capsizing of a boat led to
the death of a number of refugees. The issue continues to be debated in the federal
parliament with no sign of political parties co-operating to find an alternative that
would ensure the safe passage and fair processing of the refugees, while reducing the
possibility of people smuggling.

The fragility of the state governments' finances compared to the large infrastructure
projects that they need to undertake has led to questions with regards to the
compatibility of the federal-state system with the country's current development
needs.
Opportunities
Australia has historically enjoyed close military ties with the US. However, with the
rise of regional economic powers such as China, it will need to balance competing
military and economic ties.
Threats
Australia's early support for the US 'War on Terror', among other things, has made
Australians abroad a target for Islamic extremists.

Australia's close alliance with the US, particularly under John Howard, has left a
lingering feeling among some Asian governments that it is America's 'deputy sheriff'
in the region.

Economic
SWOT Analysis
Strengths
A free-market economy supported by a highly educated workforce.

Blessed with rich natural resources, Australia's economic activity will be augmented
by commodity exports and the high investment inflows into the mining sector.
Weaknesses
The persistent current account deficit increases vulnerability to capital flows and, by
extension, currency volatility.

The export basket is highly concentrated in commodities, with the consequence that
the economy and currency remain vulnerable to fluctuations in world prices for
metals, coal and agricultural goods.
Opportunities
The rapid expansion of Asian economies in recent years offers new opportunities for
diversifying trading ties from core European markets.

A low level of government debt has provided a certain amount of flexibility in fiscal
policy to support domestic demand through the downturn.
Threats
The high level of private sector debt - especially mortgage loans - poses a threat to
sustained growth.

A collapse in exports from a drop in resource demand from China and other resource-
hungry countries would severely impact headline GDP growth

Australia is vulnerable to extreme weather that may lead to droughts and floods,
which have become increasingly severe in past years as a result of global climate
change.

Business Environment
SWOT Analysis
Strengths
A highly educated workforce and comparatively modern transport infrastructure
underpin economic prospects.

A number of free trade agreements with countries such as New Zealand, Thailand and
the US serve as a boon for trading activities.
Weaknesses
Despite its openness, Australia requires the Foreign Investment Review Board to
approve any commercial real estate investment by a foreign company or individual
valued at US$5mn or more.

With a population of just over 22mn, the domestic consumer base is small by regional
standards.
Opportunities
Australia is currently in talks with China, Malaysia, the Gulf Co-operation Council,
Indonesia, India, Japan and South Korea regarding potential bilateral free trade
agreements. It is also part of negotiations for the Trans-Pacific Partnership and a
regional south pacific pact, PACER plus.

Upgrade and expansion of urban infrastructure will be needed to sustain population
growth in Australia's main cities, providing opportunities for public-private
partnerships in the future. The government is also targeting infrastructure
improvements to rural areas.

More healthcare infrastructure will be needed to support the ageing population, and
with the introduction of the federal government's National Disability Insurance
Scheme, the industry is likely to see increasing demand for services.
Threats
Corporate taxes for foreign investors in Australia remain higher than in other
countries, and it seems unlikely that the government will succeed to reduce the rates
in the near future.

Recent investment proposals by Chinese firms regarding the resource extraction
sector have raised fears that strategic assets will be lost to foreign players. This has
led to more conditions attached to the sale agreements, which is likely to reduce the

SWOT Analysis - Continued
attractiveness of these assets. It remains to be seen if the recent implementation of a

database to increase transparency around foreign-owned Australian assets will spur
more regulation.

Changes to the industrial relations law by the ruling party to boost its re-election
chances could make it more complicated and costly for businesses to hire and fire
workers.

Industry Forecast
Office Forecast
In spite of macroeconomic pressures weighing on the sector over the past 24 months, the office market has
aligned itself with a gentle growth trajectory across all the cities. With no anticipated change in the supply
and demand dynamic, we expect the sector to stay the course with Sydney, Brisbane and Perth continuing
the gradual growth pattern.
Table: Forecast Rents - AUD/ Square Metre/ Month
2013 (Jan-Jun) 2013

Min Max Trend (% change)
Sydney 27.50 85.00 Increase 1-3%
Melbourne 27.50 56.50 Same 0%
Brisbane 29.00 74.50 Increase 5%
Perth 43.50 77.50 Increase 5%
Source: BMI
Table: Forecast Net Yield, 2010-2017 (%)
2010 2011 2012 2013 2014 2015 2016 2017

Sydney 7% 6-10% 7-8% 6-8% 6-8% 6-8% 6-8% 6-8%
Melbourne 7-8% 5-10% 7-12% 7-12% 7-12% 7-12% 7-12% 7-12%
Brisbane 6% 6-10% 7-13% 7-13% 7-13% 7-13% 7-13% 7-13%
Perth 5-11% 3-9% 7-10% 7-12% 7-12% 7-12% 7-12% 7-12%
Source: BMI

Retail Forecast
The dour outlook for employment forms the backbone of our downbeat growth forecast for private
consumption and imports, as we expect households to cut back amid negligible disposable income growth.
Thus, we are forecasting a slowdown in private consumption growth and expect import growth to record a
contraction in 2013. This contraction in consumption will, in turn, affect the growth prospects of the retail
segment and negatively impact the sector's supply and demand dynamic. Therefore we anticipate that the
market will remain flat over the coming 12 months.
2013 (Jan-Jun) 2013

Sydney 38.50 133.50 Same 0%
Brisbane 36.50 87.50 Same 0%
Perth 30.00 100.00 Same 0%
Source: BMI
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sydney 6-8 6-8% 6-9% 6-8% 6-8% 6-8% 6-8% 6-8% 6-8% 6-8%
Melbourne 6-7 6-7% 4% 6-10% 6-10% 6-10% 6-10% 6-10% 6-10% 6-10%
Brisbane 9-10 7-8% 7-8% 3-8% 3-8% 3-8% 3-8% 3-8% 3-8% 3-8%
Perth 5-6 6-7% 6-9% 3-8% 3-8% 3-8% 3-8% 3-8% 3-8% 3-8%
Source: BMI

Industrial
2013 (Jan-Jun) 2013

Sydney 10.50 19.50 Increase 1-3%
Brisbane 10.25 16.50 Same 0%
Perth 8.50 12.50 Increase 8%
Source: BMI
2010 2011 2012 2013 2014 2015 2016 2017

Sydney 6-8% 6-8% 7-10% 9-10% 9-10% 9-10% 9-10% 9-10%
Melbourne 6-9% 6-10% 7-12% 7-12% 7-12% 7-12% 7-12% 7-12%
Brisbane 7-8% 3-8% 7-10% 7-10% 7-10% 7-10% 7-10% 7-10%
Perth 7-8% 3-8% 8-11% 8-12% 8-12% 8-12% 8-12% 8-12%
Source: BMI

Construction And Infrastructure Forecast Scenario
Industry Forecast Scenario
Table: Australia Construction And Infrastructure Industry Data, 2011 - 2016
2011 2012e 2013f 2014f 2015f 2016f

Construction industry
value, AUDbn 98.2 101.9 106.7 113.2 120.8 129.2
value, US$bn 101.3 105.6 106.7 101.3 95.5 96.9
Construction industry,
real growth, % y-o-y 6.2 2.1 3.0 4.1 4.2 4.3
% of GDP 6.8 6.7 6.8 6.9 7.1 7.1
Total capital investment,

AUDbn 386.7 409.6 424.9 437.5 463.0 494.5
US$bn 399.2 424.1 424.8 391.5 365.8 370.9
% of GDP 26.8 27.1 27.1 26.8 27.0 27.3
Capital investment per
capita, US$ 17,657.3 18,506.6 18,297.2 16,659.2 15,372.3 15,397.7
Real capital investment
growth, % y-o-y 7.2 4.1 2.0 1.0 3.2 4.0
employment, '000 1,094.9 1,115.9 1,146.9 1,190.0 1,236.3 1,285.0
employment, % y-o-y 5.6 1.9 2.8 3.8 3.9 3.9
Total workforce, '000 15,208.6 15,347.4 15,467.4 15,578.3 15,688.5 15,800.0
employees as % of total
labour force 7.2 7.3 7.4 7.6 7.9 8.1
Infrastructure Industry
Value As % of Total
Construction 28.6 28.5 28.8 29.2 29.6 30.0
Value, AUDbn 28.0 29.0 30.7 33.1 35.8 38.8
Value, US$bn 28.9 30.1 30.7 29.6 28.3 29.1
Value Real Growth (%) 8.2 1.9 4.2 5.6 5.7 5.6

Australia Construction And Infrastructure Industry Data, 2011 - 2016 - Continued
2011 2012e 2013f 2014f 2015f 2016f

Value as % of GDP 1.9 1.9 2.0 2.0 2.1 2.1
Residential and Non-

residential Building
Industry Value As % of
Total Construction 71.4 71.5 71.2 70.8 70.4 70.0
Industry Value, AUDbn 70.1 72.9 76.0 80.1 85.0 90.5
Industry Value, US$bn 72.4 75.5 76.0 71.7 67.2 67.9
Industry Value Real
Growth (%) 1.6 2.2 2.6 3.5 3.6 3.7
Industry Value as % of
GDP 4.9 4.8 4.8 4.9 5.0 5.0
Cement production
(including imported
clinker), tonnes 11,592,153.0 11,564,074.4 11,736,804.2 11,930,386.5 12,136,826.3 12,355,719.5
Cement production
(including imported
clinker), tonnes, % y-o-y 6.3 -0.2 1.5 1.6 1.7 1.8
Cement consumption,
tonnes 13,958,475.9 13,963,502.6 14,236,771.2 14,545,795.8 14,864,322.5 15,193,801.5
Cement consumption,
tonnes, % y-o-y 6.2 0.0 2.0 2.2 2.2 2.2
Cement net exports,
tonnes -2,366,323.0 -2,399,428.3 -2,499,967.0 -2,615,409.3 -2,727,496.1 -2,838,082.0
Cement net exports,
tonnes, % y-o-y 5.4 1.4 4.2 4.6 4.3 4.1
e/f = BMI estimate/forecasts. Source: BMI, Australian Bureau of Statistics

Table: Australia Construction And Infrastructure Long Term Forecast, 2017 - 2022
2017f 2018f 2019f 2020f 2021f 2022f

value, AUDbn 138.2 147.8 158.0 169.0 180.6 193.1
value, US$bn 103.7 110.9 118.5 126.7 135.5 144.8
real growth, % y-o-y 4.2 4.2 4.2 4.2 4.2 4.2
% of GDP 7.2 7.3 7.4 7.5 7.6 7.6

AUDbn 528.2 564.1 602.5 643.6 687.4 734.2
US$bn 396.1 423.1 451.9 482.7 515.5 550.6
% of GDP 27.6 27.9 28.2 28.5 28.8 29.1
Capital investment per
capita, US$ 16,248.4 17,149.7 18,106.2 19,122.6 20,202.8 21,350.4
Real capital investment
growth, % y-o-y 4.0 4.0 4.0 4.0 4.0 4.0
employment, '000 1,335.6 1,388.3 1,443.1 1,500.1 1,559.4 1,621.1
employment, % y-o-y 3.9 3.9 3.9 4.0 4.0 4.0
Total workforce, '000 15,908.7 16,015.2 16,120.3 16,224.4 16,325.9 16,425.6
employees as % of total
labour force 8.4 8.7 9.0 9.2 9.6 9.9
Value As % of Total
Construction 30.3 30.5 30.7 30.8 30.9 30.9
Value, AUDbn 41.8 45.1 48.5 52.0 55.7 59.7
Value, US$bn 31.4 33.8 36.4 39.0 41.8 44.7
Value Real Growth (%) 5.3 5.0 4.8 4.6 4.5 4.3
Value as % of GDP 2.2 2.2 2.3 2.3 2.3 2.4

residential Building 69.7 69.5 69.3 69.2 69.1 69.1

Australia Construction And Infrastructure Long Term Forecast, 2017 - 2022 - Continued
2017f 2018f 2019f 2020f 2021f 2022f

Industry Value As % of
Total Construction
Industry Value, AUDbn 96.4 102.7 109.6 116.9 124.9 133.5
Industry Value, US$bn 72.3 77.0 82.2 87.7 93.7 100.1
Industry Value Real
Growth (%) 3.8 3.9 4.0 4.0 4.1 4.2
Industry Value as % of
GDP 5.0 5.1 5.1 5.2 5.2 5.3
Cement production
(including imported
clinker), tonnes 12,612,860.8 12,850,495.7 13,075,797.7 13,353,151.7 12,760,530.4 12,179,446.9
Cement production
(including imported
clinker), tonnes, % y-o-y 2.1 1.9 1.8 2.1 -4.4 -4.6
Cement consumption,
tonnes 15,562,253.7 15,910,998.9 16,248,122.7 16,638,033.9 16,045,412.6 15,521,192.6
Cement consumption,
tonnes, % y-o-y 2.4 2.2 2.1 2.4 -3.6 -3.3
Cement net exports,
tonnes -2,949,392.9 -3,060,503.2 -3,172,325.0 -3,284,882.2 -3,284,882.2 -3,341,745.7
Cement net exports,
tonnes, % y-o-y 3.9 3.8 3.7 3.5 0.0 1.7
e/f = BMI estimate/forecasts. Source: BMI, Australian Bureau of Statistics
Construction And Infrastructure Forecast Scenario
Activity in the Australian construction sector has taken a dip in Q312 (July-September), supporting our
view of a slowdown within the sector in 2012. Latest data from the Australian Bureau of Statistics (ABS)
showed that real growth for the construction industry value contracted by 0.5% year-on-year (y-o-y) in
Q312, the first quarterly contraction since Q409.

Slowing Down
Australia - Construction Real Industry Value Data, By Quarter
Source: Australian Bureau of Statistics, BMI
With this Q312 performance, real growth for the Australian construction sector reached 2.0% y-o-y in the
first nine months of 2012 (5.6% y-o-y in 9M11), placing it firmly en route for a slowdown in 2012. As such,
we maintain our estimate for Australia's construction growth in 2012, of 2.1%.

To Recover From 2013
Australia - Construction (And Sum-components) Industry Value Real Growth, % chg y-o-y
e/f = BMI estimate/forecast. Source: BMI, Australian Bureau of Statistics
Looking ahead, we continue to believe that real growth for Australia's construction sector could improve, to
3.0% in 2013 and 4.1% in 2014. This is due to four factors:
Monetary Conditions Growing Conducive: Since the start of 2012, the Reserve Bank of Australia (RBA)
has been adopting a loose monetary policy in a bid to reignite economic activity, with the cash rate falling
from 4.25% in January 2012 to a 26-month low of 3.0% in December 2012. The lagged impact of monetary
easing means that the positive implications of this easing will only start to translate in 2013. As we do not
expect the Australian job market to recover in 2013, we believe that the probability of insolvency among
existing mortgage owners is likely to rise, creating additional pressure on the RBA to cut rates. We are
forecasting the RBA to lower the cash rate to 2.50% by the end of 2013 and expect this record-low interest
rate to provide additional incentives for the private sector to boost investment in construction projects in
2013 and 2014.

At Previous Lows
Australia - Reserve Bank Of Australia Cash Rate, %
Source: BMI, Australian Bureau of Statistics
Residential Building Recovery: Loose monetary policy conditions outlined above are starting to have
some impact on residential building activity, with work done for the residential building sector stabilising at
around AUD11.3bn in Q3 2012. Recent rate cuts by the RBA and stamp duty cuts by several local
governments have helped fuel some growth in Australian housing prices in recent months. We believe that
this combination of lower borrowing costs and grants are increasing the demand for housing, which in turn
is driving property developers to increase their building activity to meet demand. With the potential for
further rate and stamp duty cuts in 2013, demand for housing could grow in 2013.

Recovering Housing Prices An Upside Risk
Australia - Value Of Work Done For Residential Buildings By Quarter, Seasonally Adjusted, AUDmn
(LHS); Australia Median City Home Values, SA, % chg m-o-m (RHS)
Source: BMI, Australian Bureau of Statistics, RP Data-Rismark
Commodities Boom Not Over: The last couple of months have seen renewed demand for Chinese real
estate, as well as an increase in infrastructure investment by the government to boost China's economic
activity (see our online service, January 18, 'Real Estate Rebound Overtakes Infrastructure Growth For
2013'). Both factors have lead to an increase construction activity in China, boosting Chinese demand for
Australian coal and iron ore. With the Chinese government set to make sizeable infrastructure investments
in 2013 - in mid-January 2013, the Chinese government stated its intention to invest a total of CNY650bn
(US$103bn) in railway construction in 2013 - we expect the demand for Australian coal and iron ore to
remain relatively robust over the near-term.
This supports our view that Asia will remain dependent on Australia's mineral commodities to support
economic growth, which should in turn drive mining (and mining-related infrastructure) activity in
Australia over the long-term. To be sure, we have seen some companies (such as India's GVK and Japan's
Mitsui) make long-term investments into Australia's mining-related construction projects,
while the Queensland state government recently started seeking parties to develop the latest expansion plan
for the Abbot Point port, a key port for coal exports within the state (see 'Real Estate Rebound Overtakes
Infrastructure Growth For 2013').

Off Previous Peak

Australia - Value Of Work Done, Engineering Construction, By Quarter, By Sector, Original, AUDmn
Non-Residential Building Stimulus: The Australian federal government and several state-level
governments have healthy debt positions. The country's federal net government debt stands at a negligible
6.0% of GDP, while state governments such as Victoria and South Australia have low debt levels. Should
global economic conditions continue to weaken and take a turn for the worse, these state governments,
together with the federal government, are in a position to initiate another round of stimulus measures to
boost the construction of non-residential buildings (particularly health care facilities) as seen in H209.
Dampening Growth Potential
While we expect to see an improvement in construction activity in 2013, we highlight that the rate of
recovery is still below the average annual growth rate seen in the Australian construction sector just past the
millennium (7.1% per annum between 2002 and 2011). This is due to several reasons:
Spending Option Limited For Some: Some Australian state governments such as New South Wales and
Queensland are not in a position to finance their infrastructure plans due to their sizeable debts. To address
their lack of fiscal strength, they are privatising some of their assets, but these privatisation plans take time
to complete and are unlikely to provide these states with a cash injection in the near term.

Plenty To Repay
Australia - Outstanding Debt Repayments, By States AUDmn
Accurate As Of February 4 2013. Source: BMI, AOFM, Bloomberg
Limited Upside In Housing Demand: We believe that there is limited upside for housing demand and
prices. Australian households still look relatively overstretched - housing debt-to-disposable-income
remains around 135% - and are generally seeking to pay down their outstanding debt. Furthermore, the
affordability of Australian home prices has not improved as wage growth continues to lag house price
growth by 50%, according to government sources. With the Australian job market unlikely to recover in
2013, we believe that wage growth could stay subdued in the near term.
Investor Caution: We believe that the private sector is still wary about initiating new projects following
the slowdown in global economic activity in 2012. Although the project pipeline in the engineering
construction sector remains sizeable - AUD126bn at the end of Q312 - the pipeline is shrinking, particularly
for mining, oil and gas projects (in BMI's terms, the engineering construction sector includes construction
works in the transport and utilities infrastructure sectors as well as the commodities sectors).

Backlog Tapering Down
Australia - Value Of Work Yet To Be Done, Engineering Construction, By Quarter, By Sector, Original,
AUDmn
China Imbalances Remain: Although China has once again reinvigorated its economy through fixed asset
investment, there is still significant uncertainty regarding the durability of the rebound in the Chinese
economy. The structural hurdles within Chinese economy (shaky financial system, overvalued property
market, expensive infrastructure build-up, and huge industrial overcapacity) still remain and could rear its
ugly head in the near-term, curbing the country's demand for construction and Australian commodities.
Federal Elections: The Australian government is set to hold federal elections in September 2013, and the
country's infrastructure plans could change should there be a change of government. A change in
government has more often than not led to a review of infrastructure projects approved by its predecessor.
This typically results in new feasibility studies and schemes being conducted and crafted respectively,
which could lead to project delays, revisions, or at worse, cancellations.

Macroeconomic Forecasts
Economic Analysis
BMI View: Despite the uptick in mineral prices and Chinese demand, we expect rising costs in Australia to
weigh on investment growth in the mining and energy sectors. Furthermore, we believe that the weak new
orders in the manufacturing and services sectors suggest that growth malaise in the domestic economy
remains. As such, we believe that the weakness in the job market will frustrate the government's efforts to
lift the economy through public spending and policies that encourage household spending. Therefore, we
maintain our expectations that an uptick in the growth of investment and public spending will be insufficient
to avert a slowdown in Australia's growth to 2.1% in 2013, from an estimated 3.2% in 2012.
The recent bounce in mineral and coal prices, alongside the news of a resurgence in new Chinese
investment projects, has once again lifted investor optimism towards resource exporters like Australia. This
has led to much optimism that Australia's mining sector and the economy as a whole could be lifted by
these positive tailwinds. Unsurprisingly, there has been news of miners reopening mines as higher metal
prices now justify operational costs. Iron ore miner, Fortescue, for example, is planning to resume
expansion plans (see Fortescue's Kings Project Back In The Game, 28 Dec 2012). We have revised up our
growth forecast to 2.1% for the full year in 2013 on expectations that investment growth will be stronger
than our previous forecast, but we are still expecting economic activity to slow from the 3.2% pace of
expansion estimated in 2012.

Rising Prices Lift Mining Sector Sentiment
Australia - Iron Ore Fines, USD/Dry MT & Newcastle Coal, USD/MT
Source: BMI
Signs Of Overheating Weigh On Infrastructure Investments
We do not believe that the rebound in the Chinese economy is permanent as structural imbalances remain,
and we also expect that Australia's domestic shortcomings will eventually outweigh any positive impact
from the improving global economy. We believe that the current uptick in the mining sector will be
insufficient to drive economic growth as it has before, despite its impressive contribution to the broader
economy over the past decade.
We expect rising costs and increasingly restrictive environmental policies from the federal government to
place downward pressure on the pace of project development. Investment decisions for large energy
projects such as the Liquid Natural Gas (LNG) projects on Curtis Island (by Arrow Energy) and near
Broome (by Woodside Petroleum and Shell), now due in 2013, were previously delayed due to escalating
costs. Given that costs are likely to keep rising with the short supply of skilled labour, the rise of cheaper
alternatives overseas (such as the US shale gas) and the government's strict ruling on environment and
labour issues suggest further delays are very possible. As such, we believe that growth from these
investments, like many other smaller projects, is far from guaranteed.

More Structural Changes Due In The Labour Market?
Australia - Labour Force By Industry In 1992 (LHS) & 2012 (RHS)
Source: BMI, Australian Bureau of Statistics
Weakness In Other Sectors Further Weighing Down Economy
The historical ramp-up in capital employed in the mining sector came at the expense of growth in non-
commodity sectors, and has left Australian manufacturing and services sectors uncompetitive compared to
its global peers as evidenced by an increase in outsourcing and imports of manufactured goods. Indeed,
these two sectors experienced contractionary pressures for much of 2012 and we maintain a dim outlook as
new orders have remained in contraction according to the Australian Industry Group's survey in January
2013. Moreover, margins have continued to narrow, on the back of heavy discounting by retailers looking to
boost sales, together with rising input costs. We expect both these sectors to suffer further contraction in the
quarters ahead and thus, believe that further job cuts are likely. As such, we maintain our sombre outlook
for Australian's job market, forecasting the unemployment rate to rise to 6.0% by the end of 2013 from the
rate of 5.4% recorded in January.
On top of our downbeat outlook for jobs, the overstretched balance sheet of households suggest that there is
little room for current debt growth to be sustained. Indeed, we believe that the declines in retail sales growth
in the last three months of 2012 are the start of a slowdown in private consumption growth. So far, the lack
of debt deleveraging by households and the lack of reallocation of capital and labour to other sectors of
economy lead us to maintain a languid outlook for the Australian economy.

Austerity Measures To Be Reversed
Given the upcoming elections in September 2013, we believe that the ruling Australian Labor Party (ALP)
will reverse its previous austere fiscal plans, but still maintain environment-friendly policies that are vital to
the preservation of its political ties with the Green Party. We expect the government to refrain from further
cuts in public sector jobs in the election year, although we believe that this will be insufficient to undo the
impact of private sector cuts.
Together with an increase in community aid and funds for the rebuilding of damaged infrastructure, we
expect the federal and state governments to embark on more policies that encourage household spending
(such as stamp duty cuts). However, we are inclined towards the view that households are unlikely to
respond to these incentives as readily as before (for example, home buyers' grant in 2008/09), given the
softer job market and more leveraged households. As such, we believe that the uptick in the mining sector
and fiscal stimulus will be insufficient to avert a slowdown in growth in 2013, estimating full year growth to
come in at 2.1%.
Private Consumption: On the back of our sombre outlook for jobs and our view that households will start
to deleverage, we forecast private consumption to grow at a subdued rate of 1.2% slowing from an
estimated growth rate of 3.0% in 2012.
Gross Capital Formation: The uptick in metal prices and news of stimulus from the Chinese government
has reignited interest in mining and energy investments in Australia. However, the rising costs in the
industry and increasingly intrusive federal government-led policies lead us to keep a more conservative
outlook for the growth rate for investment, forecasting it to come in at 2.1% in 2013.
Public Investment And Consumption: The government already announced in December 2012 that it will
not meet its budget surplus goal this fiscal year (July 2012 to June 2013). As federal elections draw closer,
we believe that the government will reverse its austerity stance for the upcoming fiscal year (July 2013 to
June 2014) in an effort to stave off any economic deterioration that may affect voters' decisions to the
detriment of the ruling ALP. Therefore, we forecast a 2.0% growth in government consumption in 2013,
increasing from an estimated 1.0% in 2012.

Signs Of Import Contraction On The Way...

Australia - Trade Balance, Trend & Seasonally-Adjusted (LHS) & Merchandise Exports & Imports,
AUDmn
Source: BMI, ABS
Net Exports: In line with our expectations for households to begin deleveraging, we believe that the overall
improvement in external demand will be supported by import contraction of 1.2%. Furthermore, we expect
improving external demand conditions in H113 to help boost export growth slightly to 2.0% for the full year
in 2013, from a weak estimated growth rate of 1.5% in 2012.

Table: Australia - Economic Activity
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Nominal GDP, AUDbn 2 1,353.40 1,440.50 1,513.00 1,571.50 1,630.80 1,713.90 1,810.10 1,913.70
Nominal GDP, US$bn 2 1,242.43 1,486.94 1,566.83 1,571.13 1,459.57 1,353.99 1,357.59 1,435.31
Real GDP growth, % change y-o-
y 1,2 2.9 2.3 3.2 2.1 1.8 2.5 2.8 2.9
GDP per capita, US$ 2 56,786 66,598 69,483 68,992 63,470 58,312 57,908 60,626
Population, mn 3 22.3 22.6e 22.9 23.2 23.5 23.8 24.1 24.4
Industrial production index, % y-
o-y, ave 2 3.9 -0.4 2.9 1.7 1.2 1.6 2.1 2
Unemployment, % of labour
force, eop 2 4.9 5.2 5.4 6 6.2 5.8 5.5 5.5
Notes: e BMI estimates. f BMI forecasts. 1 Base Year = FY2008/09 (July-June). Sources: 2 ABS/BMI calculation; 3 World
Bank/UN/BMI.

Industry Risk Reward Ratings

Asia Real Estate Risk/Reward Ratings
The Real Estate Risk reward ratings provide a regional country-by-country comparison of the risks and
rewards for the Real Estate market. The ratings evaluate the industry's current size and growth potential, and
take into account various issues that could affect the industry's development, such as the size and forecasted
development of the construction sector, commercial bank lending, financial infrastructure, per capita GDP,
urbanisation, real estate prices, and lending rates. The score also covers country and industry specific
factors which may inhibit or encourage future development in the Real Estate sector, such as political and
economic stability.
Table: Asia Pacific Real Estate Risk/Reward Ratings
Real estate Country Market Country Real estate

market structure Returns risks risks Risks rating Rank
China 80.0 48.4 68.9 86.7 50.0 73.8 71.4
India 87.5 37.2 69.9 86.7 38.4 69.8 69.8 1
Australia 65.0 91.6 74.3 60.0 75.0 65.3 69.8 2
South Korea 55.0 71.3 60.7 83.3 69.6 78.5 69.6 3
Hong Kong 52.5 91.7 66.2 66.7 74.5 69.4 67.8 4
Malaysia 55.0 59.5 56.6 83.3 60.1 75.2 65.9 5
Taiwan 60.0 67.0 62.4 73.3 59.2 68.4 65.4 6
Singapore 52.5 97.6 68.3 50.0 81.9 61.2 64.7 7
Indonesia 82.5 35.3 66.0 76.7 37.9 63.1 64.6 8
Pakistan 67.5 29.3 54.1 86.7 42.6 71.2 62.7 9
Japan 57.5 77.9 64.6 53.3 73.3 60.3 62.5 10
Philippines 65.0 44.1 57.7 73.3 51.0 65.5 61.6 11
Thailand 45.0 36.7 42.1 86.7 39.4 70.1 56.1 12
Vietnam 65.0 16.7 48.1 73.3 29.6 58.0 53.0 14
Scores out of 100, with 100 the best. Source : BMI

Business Environment Outlook
Business Environment Outlook
Introduction Australia boasts an open investment climate, strong legal framework, firm protection of
property rights and minimal corruption. However, physical infrastructure is coming under increasing strain,
as congestions on roads, railways and at ports suggest that the economy is constrained from reaching its full
economic potential. In fact, the government itself acknowledged the need to address these deficiencies,
making infrastructure investment one of the focal points of its fiscal policy over the past few budgets. A
second issue in Australia is a shortage of skilled labour, but the government appears focused on
modernising the economy by reforming labour laws and boosting education and training to ease skills
shortages.
Table: BMI Business And Operation Risk Ratings
Infrastructure Rating Institutions Rating Market Orientation Rating Business Environment

Afghanistan 21.75 20.07 17.94 19.92
Australia 80.25 85.75 68.14 78.05
Bangladesh 40.49 35.18 39.14 38.27
Bhutan 28.82 43.31 28.98 33.70
Cambodia 37.43 31.76 52.04 40.41
China 66.04 56.58 55.66 59.43
Hong Kong 71.13 84.23 80.65 78.67
India 47.44 41.76 48.78 45.99
Indonesia 49.05 38.66 64.70 50.80
Japan 76.38 77.14 49.77 67.76
Laos 39.15 28.71 35.32 34.39
Malaysia 60.13 74.91 70.88 68.64
Maldives 42.71 43.66 41.29 42.55
Nepal 29.39 29.88 30.76 30.01
New Zealand 69.27 92.65 65.27 75.73
Pakistan 33.42 36.96 41.09 37.16
Philippines 48.63 36.81 60.07 48.50
Singapore 71.91 87.06 81.17 80.04
South Korea 63.00 79.09 71.26 71.11
Sri Lanka 54.29 51.83 47.89 51.34
Taiwan 56.05 68.24 61.35 61.88

BMI Business And Operation Risk Ratings - Continued
Infrastructure Rating Institutions Rating Market Orientation Rating Business Environment

Thailand 60.98 56.76 67.23 61.66
Vietnam 58.19 38.99 62.23 53.14
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
Institutions
Legal Framework Australia's legal system is based on English common law. The structure reflects the
federal structure, with states and territories having their own court systems. The high court is the final court
of appeal in respect of all matters, whether decided in federal or state jurisdictions. Until 1986, the UK's
Privy Council, the final court of the Commonwealth of Nations, was the ultimate avenue of appeal.
The Industrial Relations Court of Australia was established in March 1994 to deal with a range of industrial
relations matters. Legislation that came into force in May 1997 transferred the jurisdiction of the Industrial
Relations Court to the federal court.
The constitution provides for an independent judiciary and, in practice, it is independent of political
influence. The actions of all governments are subject to constitutional interpretation by the high court. For
federal judges, their security of tenure is guaranteed by the constitution.
The legal system is modern, efficiently run and ensures the enforcement of contracts in a non-
discriminatory manner. Commercial disputes are typically resolved through litigation and arbitration, and
Australia has pioneered alternative modes of dispute resolution outside the courts system, which have also
proved highly effective. For example, Australian courts provide quick resolution to intellectual property
disputes.
Investment disputes are rare in Australia. The country is a signatory to all the main international dispute
resolution conventions.

Table: BMI Legal Framework Rating
Investor Protection Score Rule of Law Score Contract Enforceability Score Corruption Score
Afghanistan 1.85 20.07 17.94 19.92
Australia 78.88 85.75 68.14 78.05
Bangladesh 59.10 35.18 39.14 38.27
Bhutan 14.83 43.31 28.98 33.70
Cambodia 31.53 31.76 52.04 40.41
China 64.43 56.58 55.66 59.43
Hong Kong 93.73 84.23 80.65 78.67
India 61.45 41.76 48.78 45.99
Indonesia 53.93 38.66 64.70 50.80
Japan 80.65 77.14 49.77 67.76
Laos 14.03 28.71 35.32 34.39
Malaysia 80.05 74.91 70.88 68.64
Maldives 24.30 43.66 41.29 42.55
Nepal 41.75 29.88 30.76 30.01
New Zealand 94.63 92.65 65.27 75.73
Pakistan 46.35 36.96 41.09 37.16
Philippines 36.35 36.81 60.07 48.50
Singapore 96.23 87.06 81.17 80.04
South Korea 68.45 79.09 71.26 71.11
Sri Lanka 63.20 51.83 47.89 51.34
Taiwan 67.23 68.24 61.35 61.88
Thailand 53.73 56.76 67.23 61.66
Vietnam 24.38 38.99 62.23 53.14
Property Rights Property rights are well protected through the courts, although private property can be
expropriated for public purposes. Due process rights are respected and appropriate compensation is paid.
However, the federal system in operation means each state in Australia has a different regime for the
regulation of land rights.
Intellectual Property Rights Intellectual property rights (IPR) laws afford protection for copyright work,
patents, trademarks and designs. The legislation is primarily based on statute, as is the case in other former

British colonies. IPR disputes are usually litigated in the federal court. A bilateral free trade agreement
between Australia and the US became operational on January 1 2005 and aligns the former's IPR legislation
closely with that of the US. Australia's raft of IPR regulations are regarded as ensuring greater protection
than multilateral agreements such as WTO's Agreement on Trade-Related Aspects of Intellectual Property
Rights and World Intellectual Property Organization treaties.
Corruption Widespread levels of transparency ensure that corruption is kept to a minimum, with effective
monitoring mechanisms in place. Australia is an active participant in international efforts to end the bribery
of foreign officials. Legislation explicitly disallowing tax deductions for bribes of foreign officials was
enacted in 2000.
Infrastructure
Physical Infrastructure Despite its comparatively modern transport infrastructure, traffic congestion in
cities, an ageing railway network and bottlenecks at ports are becoming increasingly important issues.
With the increased fiscal deficit from the FY2011/12, the government has now pushed out infrastructure
spending to ease budgetary pressures and return the fiscal balance to surplus in FY2012/13. As such, the
National Building Project has taken a back seat, with the statutory body, Infrastructure Australia, drastically
reducing the number of projects on priority list. This however, does not change its long-term plans, but
merely aligns the expenditure on infrastructure with additional tax revenues from its carbon tax and mineral
resource rent tax.
Despite these hiccups in financing, we continue to see a need for physical infrastructure to be built as the
population increases. The number of projects under the NBP includes 63 major roads, 11 major railways
and six urban public transport projects. The federal government also remains committed to the roll-out of
the National Broadband Network (NBN), which is slated to improve the internet connectivity and reliability
in rural and urban regions, as well as aid medical institutions in the timely transfer of information.
Labour Force The workforce totals around 12mn, out of an overall population of some 22mn. This
represents a participation rate of roughly two-thirds of the working age population.
Most Australians are employed in the services sector, which accounts for more than 75% of jobs. Industry
accounts for more than 20% of employment. Employment growth has averaged close 2.0-3.0% in recent
years.

While most of the layoffs during the global financial crisis had been focused in the financial industry, a
range of other sectors - including high-tech, information and communication technology, civil engineering,
childcare, teaching and health - still suffered from labour shortages.
Australia enjoys a well-educated labour force. Of those aged 15-64, 48% have post-secondary school
qualifications (37% of these with a degree or higher qualification, 63% with a diploma or vocational
qualification).
The implementation of the ruling Australian Labor Party (ALP)'s election pledges to revert some of the
previous Liberal government's far-reaching deregulation of labour relations has caused some concerns from
businesses over the possibilities of reduced flexibility in the labour market and a rise in trade union power.
However, the slew of regulations already in place should ensure that the labour market remains generally
competitive for business.
The John Howard government introduced wide-ranging reforms of industrial relations intended to boost
labour force participation rates and increase productivity. To increase participation, a package of reforms
was unveiled to encourage unemployed Australians to find work.
The Howard government had put in reforms to lighten the regulatory burden, including altering the way
minimum wages are set by creating a Fair Pay Commission to replace the previous adversarial system for
setting minimum wages. It also wanted to reduce employment protection by overhauling unfair dismissal
laws, leaving them to deal only with companies employing more than 100 staff, as well as extending the
qualification period for unfair dismissal coverage from three to six months.
The efforts by the current ALP government to, among other things, reintroduce collective bargaining has
caused a frenzied debate between business representatives and trade union leaders, who have a different
take on the proposed legislation in the so-called Fair Work Bill presented in November 2008 by former
workplace relations minister and current Prime Minister Julia Gillard. Representatives of the Australian
Chamber of Commerce and Industry and the Australian Industry Group - the two largest employer groups -
have argued that labour market re-regulation will worsen the expected downturn, but have welcomed
concessions offered by the government.
In June 2012, Fair Work Australia approved an AUD17.10 rise in the minimum wage to AUD606.40 per
week, after freezing hikes in the previous year. Australia's industrial relations are thus in a state of flux, with
the ALP government attempting to rebuild parts of the old centralised arbitration system, after a more than
decade-long regime of deregulation under the Liberal-National coalition (1996-2007) restricting union

involvement in the workplace and lifting the old constraints on hiring and firing staff. The recent review of
the Fair Work Act resulted in 53 recommendations, including the enhancement of the government agency in
dispute settlement.
Industrial disputes are rare and the old power of the trade unions was weakened during the 1990s amid
service sector growth. In the federal and state systems, industrial relations tribunals conciliate in industrial
disputes and, if the employer and the union cannot reach agreement, issue an arbitrated settlement binding
on both parties.
Table: Labour Force Quality
Literacy Rate,% Labour Market Rigidity Score Female Labour Participation, %

Afghanistan 28.00 20.00 33.10
Australia 99.00 0.00 58.40
Bangladesh 52.50 28.00 58.70
Bhutan 54.30 7.00 53.40
Cambodia 75.60 36.00 73.60
China 93.00 31.00 67.40
Hong Kong 93.50 0.00 52.20
India 65.20 30.00 32.80
Indonesia 91.00 40.00 52.00
Japan 99.00 16.00 47.90
Laos 72.50 20.00 77.70
Malaysia 91.50 10.00 44.40
Maldives 97.00 18.00 57.10
Nepal 55.20 46.00 63.30
New Zealand 99.00 7.00 61.80
Pakistan 54.20 43.00 21.70
Philippines 93.30 29.00 49.20
Singapore 94.20 0.00 53.70
South Korea 99.00 38.00 50.10
Sri Lanka 90.80 20.00 34.20
Taiwan 96.10 46.00 n/a
Thailand 93.90 11.00 65.50
Vietnam 90.30 21.00 68.00
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 0 = highest score,

Market Orientation
Foreign Investment Policy The landslide victory of the ALP, led by former leader Kevin Rudd, in the
November 2007 general election ended 11 years of rule by the right-leaning Liberal Party. However, the
impact on foreign investment policy is likely to be limited in most sectors.
Central to the ALP campaign was a call for greater use of renewable energy, the abandonment of a planned
nuclear power station building programme and a pledge to sign the Kyoto anti-global warming protocol,
which former prime minister John Howard had refused to be party to. However, none of this is likely to lead
to reduced opportunities in Australia's fossil fuel sector, which includes abundant reserves of coal, oil and
gas. With demand from China and other Asian neighbours skyrocketing, the government will be reluctant to
staunch this flow of valuable income.
The ALP's pledge to scrap labour market reforms introduced by the previous government has triggered
some concerns in the business community, but planned changes are unlikely to dent the country's
competitiveness as an investment destination.
Recent tax reforms, strong overall growth and the liberalisation of crucial economic sectors such as media,
telecoms and utilities will help keep foreign direct investment (FDI) rolling in.
Much of Australia's FDI activity results from cross-border mergers and acquisitions (M&As). The
Australian M&A market is one of the most active markets in the world.
Table: Asia, Annual FDI Inflows
2008 2009 2010
US$bn Per Capita US$bn Per Capita US$bn Per Capita
Australia 46.84 2177.33 25.72 1174.13 32.47 1458.20

Bangladesh 1.09 7.47 0.70 4.76 0.91 6.14
Cambodia 0.82 58.97 0.54 38.57 0.78 55.35
China 108.31 82.98 95.00 72.42 105.74 80.21
Hong Kong 59.62 8607.76 52.39 7497.73 68.90 9769.18
India 42.55 35.73 35.65 29.52 24.64 20.12
Indonesia 9.32 39.66 4.88 20.54 13.30 55.46
Malaysia 7.17 260.78 1.43 51.16 9.10 320.52

Asia, Annual FDI Inflows - Continued
2008 2009 2010

Pakistan 5.44 32.48 2.34 13.71 2.02 11.61
Philippines 1.54 17.12 1.96 21.41 1.71 18.37
Singapore 8.59 1799.63 15.28 3089.31 38.64 7596.32
South Korea 8.41 176.16 7.50 156.39 6.87 142.64
Sri Lanka 0.75 36.74 0.40 19.55 0.48 22.90
Taiwan 5.43 236.13 2.81 121.52 2.49 107.69
Thailand 8.45 123.75 4.98 72.42 5.81 84.10
Vietnam 9.58 111.45 7.60 87.46 8.17 93.04
Source: UNCTAD, BMI.
FDI Regime The investment climate remains favourable, with few restrictions on investment or the
repatriation of earnings and capital.
Although the government supports an open investment policy, there is a nationalist slant to its stance: the
government retains the power to block proposals deemed 'contrary to the national interest'.
The Foreign Investment Review Board (FIRB) screens investment proposals. The regulation of foreign
investment is governed by the Foreign Acquisitions and Takeovers Act (FATA) 1975 and the Foreign
Acquisitions and Takeovers Regulations 1989.
The government operates a sector-specific FDI policy. Although the terms of the FATA were amended in
2007, raising the threshold for investments that require screening, these have recently been lowered with a
view to increase Australia's appeal as a destination for investment in a period of global economic downturn.
Foreign investment proposals that need prior government approval include:
Direct stakes of 15%+ in companies business worth AUD244mn or more, as of 2011. For US investors -
covered by a bilateral investment agreement - an existing notification threshold of AUD1, 062mn for
non-sensitive sectors remains in place.
Proposals to establish new businesses involving a total investment of AUD10mn or more (US investors
again excluded).
All FDI proposals in airports and the media sector, irrespective of size.
Any investment by a state-owned entity.

FDI proposals involving the acquisition of an interest in urban land, where the foreign entity, or the gross
value of the assets of its Australian subsidiaries, exceed AUD200mn (previously AUD50mn).
Table: Trade And Investment Ratings
Openness To Investment Score Openness To Trade Score

Afghanistan 11.20 25.10
Australia 71.10 39.05
Bangladesh 22.05 37.60
Bhutan 16.50 45.05
Cambodia 54.00 82.90
China 47.70 69.95
Hong Kong 49.50 98.90
India 53.80 42.00
Indonesia 56.75 58.25
Japan 7.80 40.05
Laos 69.00 19.75
Malaysia 50.55 98.65
Maldives 87.10 28.00
Nepal 4.80 59.45
New Zealand 40.85 52.55
Pakistan 31.75 51.65
Philippines 46.40 69.55
Singapore 47.70 99.20
South Korea 51.35 83.70
Sri Lanka 50.30 57.30
Taiwan 11.70 91.35
Thailand 61.60 89.50
Vietnam 79.70 96.50
In the majority of industry sectors, smaller proposals are exempt from notification. In practice, relatively
few proposals are rejected and most of those are in the real estate sector. However, there have been several
complaints that the process for evaluating proposals is opaque and that the underlying logic for the FIRB is
not always consistent or clear.

There are no prohibitions on overseas investment or capital repatriation.
The Manufacturing-in-Bond scheme allows exporting manufacturers to import components and materials
free from up-front customs, excise and sales tax charges.
The top destination sectors for FDI are information technology and software, food and beverages, and
metals/mining/hydrocarbons - the mining sector is 50-60% foreign-owned. Key investor countries are the
US, the UK, Japan and Hong Kong/China.
Foreign Trade Regime Spearheaded by the Australia-US free trade agreement (FTA), Canberra has
pursued bilateral trade pacts to secure progress on cornerstone issues such as trade in agricultural products.
It has also pursued multilateral negotiations under the Doha round. Average most favoured nation (MFN)
tariff rates are among the world's lowest - a sign of the country's commitment to trade liberalisation.
Aside from the Australia-US FTA that came into effect in January 2005, there are trade agreements with
New Zealand, Thailand and Singapore. The US FTA eliminated 99% of US-manufactured industrial and
consumer goods tariffs, and all US agricultural product imports. Australia is currently in talks over a
bilateral trade agreement with China, along with the Gulf Co-operation Council, Malaysia and South Korea
(as of August 2011). It is also a member of the of the Asia Pacific Economic Cooperation forum, where it
has argued strongly for accelerating trade liberalisation.
Tariffs/Non-Tariff Barriers Australia's simple average applied tariff fell from 6.1% in 1996 to 4.3% in
2002, and then to 3.53% as of 2006. Nearly half of Australia's applied MFN tariff lines are now zero. Over
85% of tariff line rates are 5% or lower.
The government will continue with its trade liberalising efforts. The few remaining high tariff rates are
being cut - in January 2005, tariff rates on textiles were reduced from 25% to 17.5%. The rate on car
imports was slashed from 15% to 10%. By 2015, textile tariffs will be reduced to 5%, while those for cars
haves been reduced to 5% by the earlier deadline of 2010.
Australia's non-tariff barriers do not have a decisive bearing on merchandise trade. There are virtually no
tariff quotas and few non-tariff barriers of any description, such as subsidies. Anti-dumping measures have
only rarely been exercised.
Tax Regime Tax incentives are deployed for companies in target sectors such as research and development,
pharmaceuticals and venture capital - where capital gains tax exemptions apply to foreign investors from

specific countries, including the US, the UK, Japan, Germany, France and Canada. Tax is levied at federal,
state and municipal levels. Importantly, the ALP administration introduced a number of sweeping changes,
including the 30% Minerals Resource Rent Tax on all extractive businesses, following the China-induced
mining boom in the late 2000s, and the Clean Energy Bill, which would levy a tax on each tonne of carbon
emitted beyond the company's allocated amounts.
Key policies that are currently in place:
Corporate Tax: The standard rate is 30%. Non-resident companies are taxed on Australian-source income
only. Losses may be carried forward indefinitely, but may not be carried back. In May 2010, the ALP
government announced plans to reduce this rate to 28% over the next few years in order to increase
Australia's competitiveness.
Individual Tax: Individual tax rises progressively to 45%. Taxable income from wages, dividends, interest,
rent and royalties is aggregated and charged at progressive rates to 45%, with different bands applying to
residents and non-residents. For FY2011/12, a 'flood levy' of 0.5% and 1.0% to pay for reparations
following the Queensland floods in January 2011 will be imposed on taxpayers earning AUD50,001-
AUD100,000 and more than AUD100,000 respectively.
Indirect Tax: A goods and services tax is levied at a 10% rate. Registration is compulsory for businesses
with annual turnover of more than AUD50, 000. Exports, basic foods, water, education and medical
services are zero-rated.
Capital Gains: Capital gains are generally taxed as income, subject to rollover relief. Non-residents are
subject to capital gains tax only on the disposal of assets that are considered to have a necessary connection
with Australia.
Withholding Tax: Unfranked dividends are taxed at 30%, franked dividends 0%, interest 10% and
royalties 30%.
Carbon Tax: An initial levy AUD23/tonne of carbon emissions will be imposed on polluting companies
from mid-2012, increasing by 2.5% per annum before gradually transitioning into a market-based pricing
mechanism by 2015. This legislation will have significant impact on carbon- or energy-intensive industries,
including mining and aviation.

Table: Top Export Destinations, 2002-2009
2002 2003 2004 2005 2006 2007 2008 2009
China,P.R.: 4,528.10 5,929.40 7,946.10 12,075.00 14,986.90 20,067.20 27,068.10 33,499.20

Mainland
Japan 12,050.90 12,839.70 16,095.20 21,305.10 23,864.60 26,677.10 41,229.10 29,474.90
Korea 5,424.60 5,253.10 6,664.80 8,251.70 9,186.50 11,359.00 15,215.20 12,108.20
India 1,353.80 2,194.30 3,994.60 5,266.30 6,738.90 7,774.40 11,288.10 11,542.80
United 6,247.90 6,141.20 6,995.00 7,052.60 7,547.20 8,514.30 10,290.10 7,599.80
States
TOTAL 61,183.90 67,325.60 82,278.20 100,174.80 116,439.50 135,633.20 177,627.60 147,960.40
TOP 5 29,605.30 32,357.60 41,695.70 53,950.70 62,324.10 74,391.90 105,090.60 94,224.90
% from top
5 trade 48.4 48.1 50.7 53.9 53.5 54.8 59.2 63.7
partners
Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with
data used elsewhere in this report
Operational Risk
Security Risk There remains a general threat from terrorism in Australia. The British Foreign and
Commonwealth Office has warned that terrorist attacks cannot be ruled out and could be indiscriminate,
including in places frequented by expatriates and foreign travellers. The Australian authorities have carried
out a number of arrests as a result of investigations into terrorist networks. On November 3 2005, the
government introduced an urgent amendment to the counter-terrorism legislation in response to an
assessment by Australian intelligence agencies that a terrorist attack in Australia is feasible and could well
occur. Subsequently, on November 8 2005, the Australian police arrested 16 people in Sydney and
Melbourne in a counter-terrorism operation designed to disrupt preparations for a terrorist attack. On March
31 2006, a further three people were arrested on terrorism charges in Melbourne.
Australia's involvement in the US-led 'War on Terror' will probably keep it a potential terrorist target.
Although the government began withdrawing its combat troops (numbering around 500) from southern Iraq
in June 2008, Australia is committed to security operations in Afghanistan. It has around 1,500 soldiers
stationed in southern Afghanistan and the government has indicated its commitment to maintain its military
presence there. With the US pull-out from Afghanistan due by 2014, the Gillard government has announced
that most of the Australian forces will return by end-2013, even as the government continues to provide
international aid and military funding for Afghanistan security forces.

Market Overview
Market Overview
As we head into 2013 three major risks threaten the Australian economy, and by extension the country's real
estate sector: the weak external environment, which could adversely hit exports; the debt-laden consumer
troubled by a weaker housing market and bleak employment outlook; and the acute currency weakness that
could further debilitate the economy should the Australian market lose favour with investors.
While 2011 was a relatively smooth year for the economy, Q112 recorded a stellar growth run and yet our
bearish outlook on the economy remained unchanged. After looking through the figures, though, it seems
that the brunt of Australia's growth weakness will be felt in 2013, rather than 2012.
Our view for a slowdown in Australian economic growth is already playing out in the real estate sector. The
National Australia Bank (NAB)'s Quarterly Commercial Property Survey reported that NAB's Office
Property Index slipped to -2 points in September, with recent economic uncertainty in Australia and
overseas impacting negatively on market confidence. Office property was, however, still the strongest
performing commercial property sub-sector after hotels, and it is expected to overtake hotels in the next
year.
This view is further supported by UK professional organisation the Royal Institution of Chartered
Surveyors, which in March 2012 reported that the Australian commercial property market was showing
increasing signs of stability. Vacancy rates fell and other indicators, such as capital value growth, and
occupier and owner sentiment, remained flat during the period.
Despite the expected slowdown in growth, the value of offices in Australian cities is set to rise by
approximately 3% over the next two years, according to the NAB. The bank's report also forecasts that
office values will rise by 1.6% year-on-year (y-o-y) by December 2012, although retail property values are
expected to decline by 0.5% over the same period.
In 2013 BMI believes that consumer confidence will be a major challenge facing property firms. With the
outlook for the Australian economy having deteriorated, economic volatility will remain a major risk for the
country's real estate sector during the second half of 2012 and going into 2013.

Residential & Non-Residential
The weak outlook for the residential building sector underpins our view that Australia's building industry
will experience anaemic growth in 2013. While mining-related projects will provide some respite for the
sector, we nonetheless expect the residential and non-residential building sector to witness real growth of
just 2.6% y-o-y in 2013.
The ongoing decline in activity in the residential construction sector, the larger component in our residential
and non-residential building industry value, continues to be the main drag on growth within the sub-
industry. We believe this downward trend for homebuilding activity could experience a mild reversal in
2013. Rate cuts by the RBA and incentives (such as the new First-Time Home Owner Grant and stamp duty
cuts) introduced in 2012 have helped fuel some growth in Australian housing prices. This combination of
lower borrowing costs and grants is increasing the demand for housing, which in turn is driving property
developers to increase their building activity to meet demand. With the potential for further rate and stamp
duty cuts in 2013, demand for housing could continue to grow.
However, we believe that there is limited upside for housing demand and prices. Australian households still
look relatively overstretched - housing debt-to-disposable-income remains around 135% - and are generally
seeking to pay down their outstanding debt. Furthermore, the affordability of Australian home prices has not
improved as wage growth continues to lag house price growth by 50%, according to government sources.
With the Australian job market unlikely to recover in 2013, we believe that wage growth could stay
subdued in the near term. Furthermore, we believe that despite the fall in housing prices in 2012, Australia
remains one of the most severely unaffordable place to live globally, due to the housing bubble seen in the
2000s.
Despite this bearish outlook, there are several upside risks, particularly from the non-residential sector. The
Australian federal government and some of its state governments (namely, Victoria and South Australia)
have healthy debt positions. The country's federal net government debt stands at a negligible 6.0% of GDP,
while state governments such as South and Western Australia are debt-free. Should global economic
conditions continue to weaken and turn for the worse, the Australian federal and state governments are in a
position to initiate another round of stimulus measures to boost the construction of non-residential buildings
(particularly health care facilities) as seen in H209.
In addition, since the start of 2012, the RBA has been adopting a loose monetary policy in a bid to reignite
economic activity, with the cash rate falling from 4.25% in January 2012 to a 26-month low of 3.0% in

December 2012. The lagged impact of monetary easing means that the positive implications of this easing
will only start to translate in 2013. As we do not expect the Australian job market to recover in 2013, we
believe that the probability of insolvency among existing mortgage owners is likely to rise, creating
additional pressure on the RBA to cut rates. We are forecasting the RBA to lower the cash rate to 2.50% by
the end of 2013, and expect this record-low interest rate to provide additional incentives for the private
sector to boost investment in construction projects in 2013 and 2014.
Healthcare PPPs to Remain A Key Strength....
Australia has one of the most attractive infrastructure public-private partnership (PPP) markets in the world,
and ranks third behind the UK and France in terms of number and value of deals closed since 2005,
according to a KPMG report. However, arguably Australia's greatest strength is its healthcare PPP market
where, along with the UK, it is a world leader in the private procurement of healthcare provision. Given the
country's public health care system and established PPP precedent, the healthcare PPP market has
flourished, with the state of Victoria possessing the most conducive environment for PPP procurement.
Indeed, given the relatively small number of countries with established health PPP sectors, and with
investors increasingly wary of the demand risk associated with potentially higher margin assets, such as
airports or toll roads, Australia's social infrastructure PPP market will remain attractive.
While the pipeline of new projects is relatively limited compared to the UK and Canada - the average value
of deals is notably higher, with relatively robust support from the Australian government. The Australian
government announced in May 2012, during its FY2011/12 budget, that it would invest US$1.8bn and US
$500mn in healthcare and education facilities over the following six years respectively. These plans could
be accelerated to support economic development over the near term and bring with them encouraging signs
for Australia's PPP market. Moreover, although these multibillion dollar projects carry higher risks (and
bidding costs) for investors, Australia's strong platform for the delivery of healthcare PPPs will continue to
see demand remain strong.
Some of the key healthcare PPPs awarded and under planning in Australia are: a AUD1.2bn children's
hospital in Perth, West Australia, the AUD2.03 (US$2.18bn) Sunshine Coast University Hospital (SCUH)
in Kawana and the US$1.98bn New Royal Adelaide Hospital (NRAH).
.....And Social Infrastructure Projects
Besides hospitals, Australia is also looking to use the PPP model for social infrastructure projects. They
include:

Prisons: In October 2012, the Western Australian state government selected the Assure Partners consortium
as the preferred bidder to build the new AUD232mn Eastern Goldfields Regional Prison project. The
consortium, which consists of Leighton subsidiary John Holland, Pindan, Capella Capital and Honeywell,
will design, construct, finance and maintain the 350-bed prison project at Kalgoorlie. The design phase of
the project is expected to start in January 2013, with construction to be ready by the fourth quarter of 2015.
Stadiums: In December 2012, the government of Western Australia invited expressions of interest for
designing, building, financing and maintaining a new stadium at Burswood, Perth. The capital value of the
project is estimated to be AUD700mn (US$737.86mn). Interested parties can submit their proposals by
February 14 2013. The Stadium Project Definition Plan was released by the government on October 29
2012.
PPP Maturity A Plus
BMI notes that the ability to raise commercial funding - financed by a combination of Australian and
overseas banks - for a complex and potentially risky project on this scale underlines the country's status as
one of the world leaders in the private procurement of healthcare provision. The large-scale and
technologically-advanced nature of the NRAH and SCUH PPP projects highlight Australia's global
pioneering role in the delivery of healthcare PPPs.
A key area of strength for the country's PPP market continues to be the bidding and procurement process.
However, it should be noted that the bidding process - even for unsuccessful bids - can see costs mount, and
the higher the project value, the higher the bidding costs. Indeed, according to a KPMG report, bidding
costs can rise to AUD30 million or more for a large AUD2bn PPP project (including supporting
infrastructure). Yet, a strong regulatory framework and an efficient tendering process are essential to a
flourishing PPP market - particularly in the healthcare sector. In Australia, the average procurement time for
social infrastructure is 17 months, compared to 34 months in the UK.
BMI notes that while Australia ranks only third globally (behind the UK and Canada) in terms of the
number of the total PPP deals closed since 2005 (once adjusted for Australia's smaller population),
according to a 2010 KPMG report, the average value of projects in the country is considerably higher than
the UK and Canada. This is underlined by the large size of the NRAH and SCUH projects - worth a
combined total of US$4.32bn. The size and complexity of projects is testament to the strength of the
Australian PPP model, with such projects a significant source of value creation for the residential and non-
residential construction industry. In contrast, the UK, while still the most active PPP market in Europe (by
some way), closed few large PPP deals in 2010, with the average deal only worth EUR90mn.

Office
Rents And Yields
Australia boasts an open investment climate, strong legal framework, firm protection of property rights and
minimal corruption. Nevertheless, the painful undoing of Australia's built-up imbalances is fast approaching
as the demand for mineral exports, domestic housing market and foreign credit sources all show signs of
exhaustion. Moreover, declining profitability will likely continue to plague the manufacturing and services
sectors, adversely impacting the employment outlook. We do not expect expansionary fiscal and monetary
policies to avert a recession, but believe that these policies will remain in place until 2015 as the country
experiences slow growth in the midst of structural change. Consequently, prospects for the office market in
Australia remain muted.
Nevertheless, in spite of macroeconomic pressures weighing on the sector over the past 24 months, the
office market has aligned itself with a gentle growth trajectory across all the cities according to our newly
collected data covering H212.
Top end rents in Sydney have increased from around AUD41/m2 per month in H111, to AUD85/m2 per
month in H212. The growth however was not the result of sustained increments but a large growth in H211
which has proven to be sustainable. Sydney remains an attractive investment market and high demand
ensures prices are buoyed, this has seen Sydney leapfrog from the third most expensive Australian city, to
the top spot. The strength of the market is underlined by the mirrored growth in rental rates for lower
quality space.
Perth, Brisbane and Melbourne have also seen growth of the last two years, although not in such a
pronounced way as the Sydney market. Perth has maintained its position, surpassing Brisbane, as the second
most desirable city location for offices in the country with average rental rates for Grade A space rising
from just above AUD58/m2 per month to AUD77. In top end rents, the two cities remain broadly on par, but
for office space at the lower end of the quality spectrum Brisbane is notably cheaper indicating that there is
less room for growth than its rival. Melbourne, remains the destination of the most affordable office space
of the major cities.

Table: Historic Rents - 2011-2012 (AUD per m2/month)
Rental Cost - 2011 Rental Cost - 2011 Rental Cost - 2012 Rental Cost - 2012
(Jan-Jun) (Jul-Dec) (Jan-Jun) (Jul-Dec)
Min Max Min Max Min Max Min Max
Sydney 06.66 41.66 33.33 83.33 16.66 83.33 27.50 85.00
Melbourne 06.66 37.50 29.16 54.16 12.50 33.33 27.50 56.50
Brisbane 06.66 66.67 29.26 70.83 29.16 79.16 29.00 74.50
Perth 06.66 58.33 45.83 70.83 15.00 66.66 43.50 77.50
Source: BMI
Table: Net Yield, 2011-H212 (%)
2011 (Jan-Jun) 2011 (Jul-Dec) 2012 (Jan-Jun) 2012 (Jul-Dec)

Sydney 6-8% 6-10% 7-8% 7-9%
Melbourne 6-10% 5-9% 7-12% 7-12%
Brisbane 7-9% 6-10% 7-13% 7-13%
Perth 3-8% 6-9% 7-10% 7-11%
Source: BMI
Table: Terms of Rental Contract/ Leases - H212
Lease terms Rent free months

(in years) (if any)
Sydney 3-5 3
Melbourne 3-10 3-6
Brisbane 1-10 1-3 months
Perth 3-10 2-3 months
Source: BMI

Retail
Rents And Yields
The dour outlook for employment forms the backbone of our downbeat growth forecast for private
consumption and imports, as we expect households to cut back amid negligible disposable income growth.
Thus, we are forecasting a slowdown in private consumption growth and expect import growth to record a
contraction in 2013. This contraction in consumption will, in turn, affect the growth prospects of the retail
segment and negatively impact the sector's supply and demand dynamic.
Unlike the office sector, the retail sector has struggled over the past 24 months, with three of the four cities
surveyed contracting throughout the timeframe. Melbourne has the highest rates for top quality retail space,
it is therefore unsurprising that nominally it suffered the largest contraction commencing H111 at AUD416/
m2 per month and shrinking by almost 25% to AUD300/m2 per month by H212. Brisbane and Sydney
follow a similar trajectory, but Perth managed to post marginal growth from AUD83 rising to AUD100/m2
per month by the end of 2012.
Sydney 33.00 166.00 37.50 166.00 25.00 183.33 38.50 133.50
Melbourne 25.00 416.00 16.66 400.00 16.66 250.00 18.33 300.00
Brisbane 16.66 150.00 33.33 150.00 16.66 83.33 36.50 87.50
Perth 16.67 83.00 25.00 110.00 16.66 83.33 30.00 100.00
Source: BMI


Sydney 6-8% 6-10% 6-7% 5-9%
Melbourne 6-10% 4.5-8% 5-8% 5-10%
Brisbane 3-8% 6-8% 7-10% 7-10%
Perth 3-8% 7.00% 7-9% 7-11%
Source: BMI

(in years) (if any)
Sydney 5-7 3
Melbourne 5-10 2-3 months
Source: BMI

Industrial
Industrial
Rents And Yields
Sydney 08.00 25.00 07.00 20.83 8.33 23.33 10.50 19.50
Melbourne 06.66 16.66 05.00 15.00 4.16 10.00 5.42 15.25
Brisbane 05.83 16.66 09.00 20.83 5.83 20.83 10.25 16.50
Perth 04.16 25.00 07.50 10.00 6.25 10.41 8.50 12.50
Source: BMI

Sydney 6-8% 6-10% 7-10% 7-9%
Melbourne 6-10% 6-11% 7-12% 7-12%
Brisbane 3-8% 6-10% 7-10% 7-10%
Perth 3-8% 9% 8-11% 7-11%
Source: BMI


(in years) (if any)
Sydney 1-10 1-3 months
Melbourne 3-10 2-3 months
Source: BMI

Competitive Landscape
The Australian commercial real estate market continues to be fairly balanced because, structurally, the
industry operates in a way that restricts overdevelopment. Careful bank lending policies and plenty of
paperwork mean that when demand for space dropped off in 2008 and 2009 there was not suddenly a large
glut of vacant property. It can take more than a year just to get permission to start a new development.
The industry operates in an economy that - despite weak consumer sentiment and structural changes - is
performing reasonably well, supported by demand for its rich natural resources from China, a reducing
threat of interest rate rises, low unemployment and a strong infrastructure sector. Our outlook for the
economy is bearish, however.
Commercial Real Estate Dominated By A Few Key Players
Industry analysts expect that in 2013 Australia's commercial real estate market, particularly in Melbourne,
will be dominated by foreign investors. The Sydney Morning Herald reports that Australia has done well
out of the global economic downturn in terms of real estate and is attracting the attention of expanding
Asian developers.
Commercial real estate in the country tends to be owned by a number of key listed players. More than 60%
of investment grade property assets in Australia are owned by real estate investment trusts (REITS),
according to Colonial First State Fund Manager. These include the major listed REIT players Westfield
Group, Stockland Group, General Property Trust and Mirvac. Together, Westfield, Stockland and the
debt-laden Centro Properties own the majority of the country's large retail centres. Commercial property
in the major city centres is also predominantly owned by listed REIT players including General Property
Trust and Commonwealth Property Trust.
Current new developments under way are also predominantly from major REITs. Lend Lease, Multiplex
and Leighton Holding tend to be the major players in commercial and infrastructure development in
Australia. Westfield, Stockland and Mirvac undertake major retail developments in Australia, and Mirvac
and Meriton Group undertake a number of major residential projects. There are also a number of smaller
players who represent smaller developments, but the Australian real estate sector is dominated in terms of
ownership and development by a few major players in the listed REIT sector.

The REIT sector in Australia is one of the most sophisticated and mature in the world. The listed property
sector first commenced in Australia in the 1970s, and by 2007 the sector constituted more than 10% of the
S&P/ASX 200; at its peak more than 40 stocks. At this time it also constituted, in terms of market
capitalisation, more than 11.5% of the global REIT market. Prior to the financial crisis, a number of the
REIT players aggressively expanded into offshore property markets, using a mix of debt and equity funding.
As such, the risk profile of the Australian REIT sector was quite high prior to the global financial crisis. The
crisis had a significant effect on the sector. By October 2011, REITs only constituted around 6% of the
S&P/ASX 200, comprising 12 stocks. After the financial crisis there was dramatic consolidation in the
sector and a number of smaller REITS were taken over. The sector is diminished, more conservatively
managed and has lower growth (and risk) profiles.
Leighton: On Track, But Not Out Of The Woods
Leighton Holdings continues to be on track to return to profitability for the calendar year of 2012. Revenues
for the company grew by 6.5% y-o-y in the first nine months of 2012 (January-September 2012), while net
profits reached AUD317mn (US$330mn) in 9M 2012, compared to a loss of AUD325mn over in same
period in 2011.
Work in hand however, has fallen from AUD47.3bn at the end of June 2012 to AUD45.3bn at end-
September. According to Leighton, this is due to the sale of Thiess Waste Management and foreign
exchange movements. Despite the fall, we believe that Leighton's work in hand is still near the record-levels
seen in end-September 2011.
This turnaround in earnings means that Leighton has achieved about 70-80% of its profit guidance for 2012
- in March 2012, the company had cut its profit guidance by a third to AUD400-450mn. The company
appears to be confident in meeting this profit guidance and has reconfirmed it in October 30 2012.
There is cause for Leighton's management to be optimistic. One of its major loss-making projects - the
Brisbane Airport Link road - has been completed and the company reports that it has made substantial
progress in commissioning the Wonthaggi desalination plant in Victoria by end-2012.
However, we still see a real risk of Leighton being afflicted by projects delays in 2013. Most of Leighton's
project backlog was acquired before the company tightened its risk management system and we doubt that
the company has a clear understanding of the risks it faces from these projects. A key project that could face
delays is the AUD1.3bn Gorgon LNG jetty and marine structures projects in Western Australia. The project,

scheduled to be completed by October 2013, had faced weather-related and technical challenges in
mid-2012 and required additional resources to complete the work in a timely manner.
Middle East Troubles Not Over
Leighton's Middle East joint venture (JV), Al Habtoor Leighton (HLG), remained a major drag on the
company's financials in 9M12, and we doubt this would change in early 2013. Indeed, Leighton's
management referred to the operating conditions for HLG as 'challenging' on October 30 2012. Although
HLG won a number of projects in 2012 - the most notable project being the US$120mn contract to build
Qatar's first railway link - and had no further announcements of writedowns, we believe that the JV will
continue to face stiff competition for new contracts and difficulties in receiving payment for completed
projects - HLG is estimated to hold up to AUD2bn worth of receivables. An ongoing investigation into
bribery allegations regarding one of Leighton's subsidiaries in Iraq could also cost Leighton valuable
resources if any damages need to be paid.
Australia Construction Potential Limited
The growth potential of the Australian construction market - the company's main source of revenues - is
also limited. Many major miners in Australia have slammed the brakes on investment and this represents a
major downside risk to Leighton's future earnings and new project orders. Leighton's management reported
in October 30 2012 that it is 'experiencing some minor slowdown in activity in the mining sector', while its
affiliate, Australian construction and mining company Macmahon Holdings, cut its 2012 profit guidance by
more than 50% in October 2012, due primarily to problems with the construction of earthworks at the Hope
Downs 4 railway project. While Leighton has said that this mining slowdown has not affected their
forecasts for 2012, it remains to be seen if this is the case given that the Australian infrastructure and
resources markets account for around 75% of Leighton's revenues.
Besides a near-term slowdown in mining-related projects, other factors dampening project growth in the
Australian infrastructure sector include the lack of fiscal strength among some Australian state governments
to finance their infrastructure development plans, the differences in infrastructure planning between federal
and state-level governments, and the uncertain outlook for Australian power plants due to the introduction
of the Clean Energy legislative.
We also believe that the Australian residential building construction sector is unlikely to provide many
project opportunities for Leighton over the near-term. Although recent interest rate cuts have helped fuel
some growth in the Australian housing prices (suggesting increased housing demand), we believe this is a

short-term phenomenon and that there is still substantial room for home prices to fall. Australian households
still look relatively overstretched and are generally seeking to pay down their outstanding debt during this
period of economic uncertainty.
Resolving Internal Issues
We believe that the lack of projects opportunities could be an upside risk to Leighton's earnings as it could
allow Leighton to focus on completing its existing order backlog on time and within budget. It could also
allow the company to focus on resolving the deficiencies in its risk management system. In our May 2012
analysis of Leighton's financial performance, we had highlighted that Leighton's repeated failures to identify
and manage the risks to project execution suggests a serious weakness in its risks management system.
Leighton has since appointed a new Chief Risk Officer and formed a tender review and risk committee to
identify 'high-risk' projects. Leighton is also tightening control over the projects tendered by its subsidiaries,
where these subsidiaries would focus on projects based on their core competencies and their core markets.
In November 2012, Leighton announced that it will restructure the boards for each of its subsidiaries over
the next three months. Under the plan, it would eliminate the need for independent directors - who have no
say in the operations of the subsidiary - within the subsidiaries and form advisory boards that consist of
non-executive directors from Leighton. These advisory boards will serve as external advisors to the
subsidiaries, while the board for each of the subsidiaries will consists of senior executives from Leighton
and from the particular subsidiary, ensuring that Leighton has a greater degree of control over its
subsidiaries.
In addition, the lack of projects opportunities could allow Leighton to resolve its debt issues. In our August
2012 analysis of Leighton's financial performance, we had highlighted that Leighton's debt levels had nearly
hit record-highs due to cost overruns among its projects and difficulties in receiving payment for completed
projects. This debt issue is a pertinent risk as poor credit conditions globally and a strong Australian dollar
could make it more difficult and more costly for Leighton to access credit from overseas markets.
At present, Leighton is trying to reduce its debt levels by selling non-core assets such as Thiess Waste
Management and issuing bonds to refinance short-term debt. In early November 2012, Leighton issued US
$500mn worth of 10-year bonds in the US, its first offering in that currency. While this issuance could
alleviate the company's near-term debt problems by delaying their repayments to a later date, we highlight
that it could work against the company in the future. The cost of financing this debt issue could escalate
over time once the Australian dollar depreciates, a highly possible scenario given that the Australian dollar
is near record-highs.

Tough Times Also Mean Opportunities
Overall, we believe that Leighton is not out of the woods yet. Having said that, we have long highlighted
that Leighton's current price is attractive for investors if viewed from a long-term perspective. Leighton's
valuations have been trading at near-record lows and in our opinion, are a deep discount to Leighton's
growth potential as they fail to price in the company's exposure to dynamic Asian markets. Even though the
high Australian dollar would reduce Leighton's earnings from Asia ventures, Asia still has significant
deficits in infrastructure and would present numerous growth opportunities for Leighton.
Furthermore, we believe that the slowdown in the Australian mining sector is not the start of a prolonged
decline, but rather a temporary check on the sector's growth performance. Asia will need mineral
commodities to support economic growth, and this demand should drive mining (and mining-related
infrastructure) activity in Australia over the long term. As a result, Leighton's exposure to this sector would
still pay dividends over the long term, potentially as early as 2013.
At present, Leighton's stock price is trading at around AUD17.50 at the time of writing, within its multi-
month trend channel. Should the company overcome its internal issues and ensure earnings growth in 2013,
we believe that it could reach or break the key resistance line of around AUD20.

Company Profile
Bovis Lend Lease
SWOT Analysis
Strengths
BLL is a well established company with a strong back catalogue of projects.

International company with a global portfolio.

Lend Lease delivered continued profit growth for the financial year ended 30 June
2012.

Lend Lease's reputation as a sustainability leader

Strong market position is enhanced by US$15.3bn in construction backlog revenue,
circa 90,000 residential units backlog and funds under management of US$12.3bn.
Weaknesses
Its profitability has been affected by the global financial crisis and its aftermath.
Opportunities
There is potential for expansion as the Australian economy shows stronger growth

Significant project pipeline - US$20bn urban regeneration pipeline.

The company's portfolio has been re-positioned and is generation 60% of earnings
from their domestic market - Australia.
Threats
There will be further effects on BLL if the economic recovery falters.
Company Overview Founded in Australia in the 1950s and listed on the Australian Stock Exchange, Lend
Lease is a leading real estate specialist that creates, enhances and manages real estate
assets around the world. The group's activities are primarily focused in the regions of
Asia Pacific, Europe and the US, and cover over 40 countries on six continents.
Lend Lease operates three core businesses: project management and construction;
property investment management; and property development. Its development
business focuses on three key competencies: retail, communities and privatisation.
Lend Lease operates an integrated business model, and its earnings are well diversified
by market sector and geography.

Bovis Lend Lease is a wholly owned subsidiary of Lend Lease Corporation, a company
listed on the ASX. Bovis Lend Lease is the majority profit earner in Lend Lease's project
management, design and construction business.
On 10 September 2012, the group announced it had identified certain discrepancies

and issues in relation to the reporting and recognition of profits and losses on two
projects within the Abigroup operations, which involve the potential under-reporting of
anticipated profit on one
project and the potential under-reporting of the anticipated loss on another project. A
thorough investigation of these matters and all the surrounding circumstances is being
conducted in conjunction with the group's external auditors.
Strategy In 2012 the company introduced a unifying Lend Lease vision that underpins their
strategy and operations. The vision is 'to create the best places', a phrase that
encapsulates what the firm aspires to do. The strategy is to achieve a balanced and
diversified portfolio and to continue to recycle capital from property assets and non-
core businesses to invest in higher yielding opportunities.
Lend Lease has a clear 'Restore, Build, Lead' strategy to realise and deliver long term
sustainable growth for the Group. As part of the Restore phase, we have reorganised
the Group into a regional structure and we are now focused on continuous business
improvement by investing in systems, processes and people to drive efficiency. In the
Build phase, the Group has secured a significant portfolio with $20 billion across our
urban regeneration pipeline, circa 90,000 residential units backlog (land lots and built-
form), $15.3 billion construction backlog revenue, together with $12.3 billion of funds
under management. We are now focused on delivering these projects, including
Barangaroo South where we recently announced $2 billion of commitments for the
funding and development of the first two commercial towers, and secured tenants
Westpac, KPMG and Lend Lease.
Financial Data Lend Lease delivered continued profit growth for the financial year ended 30 June 2012,
with an Operating Profit after Tax of $507.2 million, a 4.5 per cent increase on the prior
year
Operational Data CEO: Murray Coleman
Group financial controller: Tony Lombardo
Chairman Bovis Lend Lease: John Spanswick
Company Details Bovis Lend Lease
30 The Bond
30 Hickson Road

Millers Point NSW 2000
Australia
Postcode
Country Desc
Area Desc
Dial Prefix/Tel: +61 2 9236 6111
Fax: +61 2 9252 2192
Email
Website

Brookfield Multiplex
SWOT Analysis
Strengths
BM is a well established company with a strong back catalogue of projects.

Over 50 years market experience.

The group has operations and offices in Australia, New Zealand, Canada, Europe and
the Middle East.

US$10.1bn workbook.

Breadth and diversity across construction sub-sectors including commercial real
estate, residential projects, healthcare facilities and Infrastructure.
Weaknesses
Increasing competition.
Opportunities
There is potential for expansion as the Australian economy shows stronger growth.

Potential to leverage in the Australasian market.
Threats
There will be further effects on BM if the economic recovery falters.
Company Overview Multiplex was founded in 1962 as a private company in Perth and the company was
acquired by Brookfield Asset Management in a transaction that was completed in
January 2008. The re-named Brookfield Multiplex is a fully integrated company in the
fields of commercial, retail and residential property development, construction,
management services and infrastructure.
The parent company, Brookfield, is publicly listed on the NYSE, TSX and Euronext
Amsterdam stock exchanges under the symbols of BAM, BAM.A and BAMA
respectively.
The company's current projects portfolio includes 33 Mackenzie Street and 700 Bourke
Street, Melbourne, City Square, Perth (also known as 125 St George's Terrace),
Pasadena Shopping Centre, Adelaide and Beachfront Cotton Beach, Tweed Coast,
New South Wales.

In January 2012 Brookfield Multiplex secured the contract to extend and refurbish
Brisbane's Indooroopilly Shopping Centre. Commencing in Q112 and continuing for 30
months, the development of Indooroopilly will include the addition of around 30,000m2
of new retail space comprising:
a new mall and fresh food area;

a new 14,200m2 David Jones department store;
a newly fitted out Myer department store on a reconfigured two-level footprint;
a new supermarket;
additional parking spaces;
significant upgrades to external facades; and
a facelift for existing retail precincts within the centre.
Following the redevelopment, the size of Indooroopilly Shopping Centre's retail space
will increase to around 115,000m2 and will house around 340 speciality retailers.
As of February 2013, the company's website has the orderbook at US$10.1bn, with the
following breakdown: Health (39%), Commercial (21%), Residential (13%), Hotel (12%),
Retail (8%), Infrastructure (4%) and Education (3%).
Financial Data Workbook at February 2013: US$10.1bn
Company Details Brookfield Multiplex
Level 22
135 King Street
Sydney
NSW 2000

Mirvac
SWOT Analysis
Strengths
Mirvac is a well established company with a strong back catalogue of projects.

Over 40 years experience in the industry.

Market capitalisation AUD4.6bn

Diverse portfolio of assets across the office, retail and industrial sectors
Weaknesses

More than 50% of its portfolio is office space.

High exposure to just Sydney and Melbourne, according to Reuters.
Opportunities
Further, banks are more reluctant to lend to smaller developers, providing better
potential pricing for the larger players such as Mirvac.
Well placed to benefit from any growth in the retail segment.
Threats
Interest rates may rise, putting pressure on sales in the residential division.

Geographic limitations mean the company is reliant on the Australian economy and
therefore susceptible to any volatility or weakness.
Company Overview Established in 1972, Mirvac has more than 39 years of experience in the real estate
industry In Australia. Mirvac is a leading integrated real estate group, listed on the
Australian Securities Exchange with activities across the investment and development
spectrum. Mirvac Property Trust, part of the stapled entity of Mirvac Group, has a
diverse portfolio of assets across the office, retail and industrial sectors, leased to
quality tenants including leading Australian and international companies. Mirvac's
integrated business approach includes using the specialised in-house asset
management team - Mirvac Asset Management - that is responsible for all leasing and
property management across the entire portfolio. Mirvac's retail team manages retail
assets across Australia, including Orion Springfield Town Centre, Broadway Shopping

Centre and Rhodes. Mirvac Hotels and Resorts has approximately 5,900 rooms under
management across 47 properties in Australia and New Zealand, making it one of the
largest Australian-owned hotel groups. Mirvac is also one of the leading brands in the
Australian development and construction industry.
Leighton Properties will partner Landcom and Mirvacon an urban reconstruction project
began in H212, according to World Property Channel. The project is the next phase of
the Green Square Town Centre redevelopment in Sydney, which will consist of office,
retail and residential development at an overall cost of US$1.7bn. The project is due for
completion by 2022.
Mirvac's office portfolio achieved growth of 4.2% in operating income for the year
ended June 30 2011. Occupancy increased from 97.5% to 97.8%, with an average
weighted lease expiry of 6.3 years.
The company's retail portfolio achieved growth of 4.3% in net operating income for the
year ended June 30 2011, while occupancy costs remained sustainable at 13.2%.
Occupancy increased from 97.9% to 99%.
Strategy The group continues to remain focused on managing its capital position prudently by
monitoring and accessing diversified sources of capital, including both domestic and
international markets. This ensures Mirvac can continue to meet its strategic objectives
without increasing its overall risk profile.
Financial Data The statutory profit after tax attributable to the stapled unitholders of the trust for the
year ended June 30 2012 was AUD507.7mn
The operating profit (profit before specific non-cash and significant items) was
AUD402.1mn.
Company Details Mirvac
Level 26
60 Margaret Street
Sydney
NSW 2000
Australia
Fax +61 29080 8111

Stockland Group
SWOT Analysis
Strengths
Stockland is a well established company with a strong back catalogue of projects.

Over 60 years experience in the market.
Weaknesses

In March 2012 the company downgraded its earnings by 3.5% from 31.6c to 30.5c
per security, triggering the biggest sell-off of its securities since 2009.
Opportunities
Threats
Any rise in interest rates would put pressure on sales in the residential division.
Company Overview Established in 1952, Stockland is Australia's largest diversified property group, actively
managing a portfolio of assets including residential communities, retirement living,
shopping centres, office and industrial assets. Currently the company consists of five
main divisions.
The office portfolio comprises 28 properties valued at US$2.5bn.
The industrial portfolio is valued at US$1.0bn, with 15 properties incorporating well over
1mn m2 of building area.
The retail portfolio comprises 39 retail centres valued at approximately US$4.2bn. The
properties accommodate more than 2,600 tenants, generating over US$5bn in retail
sales.
The company is a leading residential developer in Australia, focused on delivering a

range of master-planned and mixed-use communities in growth areas across the
country. Currently the company has 84,500 lots and projects with a total end value of
approximately US$22.0bn in its residential division. Stockland also has a range of
quality apartment projects in high profile locations across Australia, with a remaining
end-market value of approximately US$0.6bn.
Stockland is a retirement living operator within Australia, with 7,879 established units
across five states. The portfolio includes a short-medium term development pipeline of
over 2,552 units.

It planned to wind down its UK business by June 30 2012, with an expectation of a

profit contribution of around AUD10mn from the sale of London assets.
The company's financial difficulties are continuing. In March 2012 it blamed tighter
controls on lending by banks, higher interest rates and bad weather for an earnings
downgrade that sent its shares tumbling.
In March 2012 the company downgraded its earnings by 3.5% from 31.6c to 30.5c per
security, triggering the biggest sell-off of its securities since 2009. About 50mn
securities were sold the following day, compared with its historical daily average of
14mn units, as its share price dropped 4.4%, or 14c, to AUD3.0.
Stockland managing director Matthew Quinn said the company's earlier guidance had
been based on strong sales in the first two months of 2012 and a high level of 'leads'
from potential buyers. Since the start of March however, buyers' confidence had
evaporated. The level of cancellations rose to about 20% and fewer inquiries had
converted into sales.
The Sunshine Coast Regional Council dropped a potential legal challenge to

Stockland's largest project, the Caloundra South community development, in October.
The project covers 2,310ha and is planned to provide about 20,000 homes, a large
town centre for shopping, retirement living villages, 170,000m2 of retail and commercial
space, and 650,000m2 of business and industry space.
In August 2011, the company was reported to be the most sustainable property
company in the world by Dow Jones.
In November 2011 it sold Melbourne Riverside Plaza in a AUD201mn deal with Dexus.
Financial Data
Company Details Stockland
Level 25
133 Castlereagh Street
Sydney 2000
Australia
Fax: (02) 8988 2000

Leighton Holdings
SWOT Analysis
Strengths
Established presence in the Australian market, dating back more than half a century.

Geographic diversification across Asia Pacific and the Middle East.

Sale of a stake in Indian unit to local partner will allow company to leverage off local
knowledge to grow presence in booming infrastructure sector.

World's largest contract miner.

Growing presence across Asia Pacific countries and the Middle East.

JV between John Holland and Al Habtoor Leighton could allow the company to
capitalise on substantial contract opportunities in the GCC rail sector.
Weaknesses
Property development division is struggling due to severe downturn in private
construction.

Exposure to currency risks, especially in light of strong Australian Dollar.

Leighton's Middle East joint venture (JV), Al Habtoor Leighton (HGL), is likely to
remain a drag on Leighton's financials as the JV is still unable to sustain itself,
requiring funds from the parent company to stay afloat.

Lapses in risks management system -- announced a profit writedown just six weeks
after assuring in investors that problems with the Airport Link road project had
stabilised and that it could deliver a net profit of AUD600-650mn for 2012.

Al Habtoor Leighton is likely to remain a drag on Leighton's financials as the JV is still
unable to sustain itself, requiring funds from the parent company to stay afloat.
Opportunities
Rising Australian government spending on infrastructure ensures new public-sector
contracts will be up for grabs.

GCC infrastructure sector continues to boom, with Leighton positioning itself to take
advantage of the rail sector potential.

SWOT Analysis - Continued

Chronic deficits in infrastructure for many Asia Pacific countries ensure many
contracts are up for grabs.

Mining sector expansion based on Chinese demand for commodities over the long
term will bolster demand for infrastructure within Australia.
Threats
Resignation of two senior board members in August - Chairman David Mortimer and
CEO David Steward - and ACS purchase of Leighton's parent company Hochtief
suggests that the strategic direction of Leighton is still in a state of flux.

Australian dollar (versus US dollar) has returned back to record highs, negatively
impacting revenues from foreign projects for Australian construction companies.

A hard landing in China could see demand for raw materials weaken, causing mining
companies to reconsider capital expenditure plans.

Notable failure for toll road projects in Australia due to inflated traffic. projections
could hit investment in that sector.
Company Overview Leighton was established in 1949. It began life as a small, privately owned civil
engineering company before diversifying over the years into a fully integrated
infrastructure solutions provider, across construction, mining and services. It is able to
handle project development and contracting services and has operations in 20 different
countries across the Asia Pacific and Middle East regions. Leighton Holdings'
subsidiaries include John Holland and Theiss. The company is 55% majority owned by
German construction major Hochtief.
Strategy Leighton Holdings is facing trouble from every angle, with little respite expected. The
company's exposure to high-growth international markets is being eroded by an
exceptionally strong Australian dollar; domestic projects have been hit by delays and its
Middle East operations are still awaiting payment. Despite a strong fundamental
strategy, these issues are weighing on both the company's share price and its profit
outlook.
Declining Work In Hand: Leighton's work in hand, an indicator of future earnings, has
continued to decline slightly - from AUD45.6bn (US$48.8bn) at the end of December
2010 to AUD44.6bn (US$47.8bn) in December 2011 - and this inhibits the potential for
revenue growth for the company in 2012. Over the past six months, the company did

not win any major projects in several key overseas markets such as the Middle East,
India and Mongolia, while Indonesia's work in hand did not improve because of new
contracts, but rather due to the resumption of mining works previously affected by
extreme bad weather. Leighton also did not win sufficient projects in Australia to
maintain its order backlog, with work in hand from Australia declining by 9.6% y-o-y.
Australian Dollar Remains Elevated: As of December 2011, about 35% of Leighton's

work in hand was derived from overseas markets and these projects stand to benefit
should the Australian dollar depreciate. This has not taken place. The Australian dollar
remains elevated at US$1.0773/AUD and continues to erode earnings from Leighton's
overseas ventures. While we still expect the Australian currency to depreciate over the
course of 2012 due to an ever-weakening Chinese economy, its persistence at an
elevated level suggests that this depreciation could take place at a latter-than expected
date.
Middle East Venture Not Panning Out: Leighton's Middle East JV, Al Habtoor
Leighton (HGL), is still unable to sustain itself, requiring funds from the parent company
to stay afloat. The JV suffered a loss of AUD154mn (US$165mn) for the six month
period to December 2011, similar to the loss of AUD158mn (US$169mn) in the same
period in 2010. We believe that HGL's negative impact on Leighton is likely to continue
in 2012. Leighton remains keen on pursuing projects in the Middle East (it has recently
approved an additional US$127mn of financing for the JV), but HGL appears to be
unsuccessful in capturing or realising the region's growth potential. The JV continues to
face difficulties with receiving payment for completed projects and stiff competition for
new contracts. Between July and December 2011, the JV won two new projects with a
combined value of US$596mn, but it had bid for more than US$7bn worth of projects.
To make matters worse, Leighton had disclosed that its subsidiary, Leighton Offshore,
is under investigation by the Australian police regarding illegal payments for an oil
export contract in Iraq. The resolution of this case could cost Leighton valuable
resources that could be used for winning project tenders in 2012.
More Delays For Victorian Desalination Project: The AUD3.5bn (US$3.7bn)

Wonthaggi desalination plant in the Australian state of Victoria is proving to be a greater
than expected drag on Leighton's financial performance, with the company increasing
the provision for cost overruns from the project by AUD218mn (US$233mn) to
AUD496mn (US$531mn). Although the project is about 90% completed, there could be
delays during the commissioning phase.
This has since transpired in March 2012, with Leighton announcing another rounds
writedowns for the Wonthaggi desalination plant and the the Brisbane Airport Link road.
Domestic Support
The Australian mining sector, Leighton's main source of revenues, continues to exhibit
significant growth potential for the company. Despite the passing of the carbon tax law
in November 2011 and a potential near-term slowdown in the demand for commodities
from China, mining companies in Australia have continued to announce a swathe of

new coal and iron ore projects (see table). These investments will require extensive
ancillary infrastructure to power their operations and transport their extracted minerals
which should mean plenty of opportunities for a company such as Leighton. Indeed, at
the end of December 2011, about 35% of Leighton's order backlog in Australia involves
the resources market, while 58% comes from the infrastructure market.
Commodity prices are also expected to remain elevated by historic levels over the long
term and this will continue to drive mining activity (and the demand for mining-related
infrastructure) in Australia. Meanwhile, the Australian government remains keen on
improving social infrastructure facilities, presenting growth opportunities for Leighton
over the long term. The Australian government had announced in May during its FY
2011/12 budget that it will invest US$1.8bn and US$500mn in healthcare and education
facilities over the next six years, respectively.
Leighton has already won a couple of projects in this sector. In July 2011, the Western
Australian government awarded John Holland, a subsidiary of Leighton, an AUD1.2bn
contract to manage the counstruction of a children's hospital in Perth. Meanwhile in
June 2011, SA Health Patnership - a consortium led by Leighton Contractors - reached
financial closure on one of the largest public private partnership projects in Australia,
the US$1.98bn New Royal Adelaide Hospital.
Furthermore, Leighton's exposure to several key markets with sizeable demand for
infrastructure is likely to place in the company in good stead. While some regions such
as the Middle East are expected to creating vast opportunities for Leighton due to their
huge fiscal expenditure on infrastructure, other regions such as Mongolia and Indonesia
are expected to offering significant opportunities due to their lack of infrastructure to
support their growing mining sectors.
Activity/projects In January 2013, Reuters reported that Ontario Teachers' Pension Plan Board has
emerged as a final-round bidder for the fibre-optics business of Leighton Holdings, a
business valued as much as AUD870mn (US$908.15mn). PCCW is also preparing a bid
of around AUD300mn for two of Leighton's smaller data businesses, Metronode and
Infoplex. Bidders are working on a February 9 2013 deadline.
In January 2013, Leighton Holdings secured contracts worth a total of AUD1.2bn (US
$1.3bn) for Inpex's Ichthys liquefied natural gas project in Australia. Leighton revealed
through a stock exchange filing that one of its units has been awarded a AUD923mn
(US$1bn) contract for developing infrastructure for the natural gas project's onshore
site, as well as a four-year maintenance contract. The awards have boosted the firm's
contracts pertaining to the oil and gas industry to more than AUD4.5bn (US$4.87bn).
Ichthys is said to be a US$34bn project between Total and Inpex.
In December 2012, Leighton Holdings announced that it had been awarded an

AUD200mn (US$210mn) contract to build the new Elizabeth Quay in Perth, reports
International Construction. Leighton Holdings will be responsible for the construction of
a 2.7-hectare (ha) inlet, parks, promenades, roads and a connecting bridge at the 10ha

site on Perth's waterfront. The development of the quay is part of an AUD2.6bn (US
$2.7bn) redevelopment of Perth's waterfront. Construction is scheduled to commence
in Q113, with an expected completion date of mid-2015.
In December 2012, Leighton Holdings' wholly owned subsidiary John Holland was
awarded the second stage of the new Perth children's hospital in West Australia, after
completing the first stage of the AUD1.2bn project. The second stage is valued at
around AUD851mn and is scheduled to start construction works in mid-2015.
In December 2012, Leighton Holdings announced that it has completed the Wonthaggi
desalination plant in Victoria.
In November 2012, the BHP Billiton Mitsubishi Alliance awarded Thiess two contracts
worth AUD220mn (US$230.3mn) for work in Australia. Under the contracts, the
company will offer construction services for the Caval Ridge Mine Project in the Bowen
Basin in Central Queensland. The company will build a coal preparation plant within a
coal handling and preparation plant, in addition to a rail loop and holding roads.
In November 2012, the Gateway WA consortium, a consortium lead by Leighton

Holdings' subsidiary, Leighton Contractors, started detailed planning for the Gateway
WA Perth Airport and Freight Access Project. The AUD1bn project involves
improvements around Perth Airport, as well as the nearby Kewdale and Forrestfield
industrial estates, including extra lanes on Tonkin Highway, new interchanges and the
upgrade of Leach Highway to an expressway. The Gateway WA Project, jointly funded
by the State and Federal governments, is expected to be completed by 2017.
In November 2012, Leighton Holdings' subsidiary, Leighton Asia, India and Offshore
Group, was selected by Wynn Resorts to design and build the Wynn Cotai integrated
hotel resort in Macau. Construction works was scheduled to start in December 2012
and be completed in early 2016.
In November 2012, Leighton Holdings wrote off its AUD63mn investment in Brisbane
troll road operator BrisConnections.
In October 2012, John Holland was appointed as the Preferred Respondent to design,
construct and maintain the East Goldfields Regional Prison replacement. The
AUD232mn involves the construction of a new 350-bed prison at Kalgoorlie.
In September 2012, Leighton Holdings announced that it had completed the sale of
Thiess Waste Management to Remondis AG & Co for AUD218mn.
In September 2012, Leighton's Indonesian subsidiary, Leighton Contractors Indonesia,

is to build the Australian Embassy in Jakarta. The contractor will work on the
AUD230mn (US$240mn) contract as part of a joint venture with local contractor PT
Total Bangun Persada.The Australian Embassy complex will occupy a
40,500squaremetre brownfield site in Jakarta's Patra Kuningan district. Construction is
scheduled for completion in late 2015.
In August 2012, The Qatar Foundation awarded Leighton Holdings' unit Habtoor
Leighton Group (HLG) a contract worth US$124mn for the construction of a rail system

in Qatar. This will be the country's first rail system, part of its preparations for the FIFA
(Soccer) World Cup in 2022. Under the contract, HLG is to construct a battery-operated
tram system, designed to move students around Doha Education City. HLG is expected
to complete the system by 2015.
In July 2012, subsidiaries of Leighton Holdings secured a construction contract for a

coal-fired power plant project in Davao City and Davao del Sur in the Philippines. The
contract, which is worth around AUD122mn, has been awarded for the Therma South
power plant, which is being developed by Aboitiz Power Corporation's subsidiary
Therma South. Construction work on the 300MW plant is to take 37 months.
Financial Data The improvement in Leighton Holdings' financial performance after a poor FY2010/11
(July - June) continued in the quarter ending December 2011. Revenues for the six
month period ending December 2011 grew by 38% year-on-year (y-o-y) to reach
AUD10.1bn, while profit after tax grew by 57% y-o-y to reach AUD340mn (US$364mn)
over the same period despite suffering from further writedowns. Although this rise in
profitability includes the sale of Leighton's HWE mining iron ore business to BHP Billiton
- the company made an after-tax gain of AUD163mn (US$175mn) from the sale -
operating margin did improve sharply from 0.7% in H110/11 to 6.8% in H111/12,
suggesting that Leighton is generating higher returns from its projects.
Given these bullish financial figures, Leighton initially believes that its earlier profit
guidance of AUD600-650mn (US$643-696mn) for the 12-month period ending June 30
2012 is attainable. In fact, Leighton states that it could also deliver a similar level of net
profit for the 12-month period ending December 31 2012 (January - December) - the
company is moving to a calendar-year financial year so as to align its reporting
protocols with its majority shareholder, Hochtief and the German construction group's
main owner, Spain-based ACS.
This outlook has since changed, with Leighton announcing another round of writedowns
on two of its biggest projects, prompting the company to cut its net profit forecast for
2012 by a third to AUD400-450mn. In a media statement released on March 29 2012,
Leighton expects the Brisbane Airport Link road in Queensland to cost the company an
additional AUD148mn this financial year, while the Wonthaggi desalination plant in
Victoria will cost an extra AUD106mn.

Demographic Forecast
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is
the total population of a country a key variable in consumer demand, but an understanding of the
demographic profile is key to understanding issues ranging from future population trends to productivity
growth and government spending requirements.
The accompanying charts detail Australia's population pyramid for 2011, the change in the structure of the
population between 2011 and 2050 and the total population between 1990 and 2050, as well as life
expectancy. The tables show key datapoints from all of these charts, in addition to important metrics
including the dependency ratio and the urban/rural split.
Source: World Bank, UN, BMI

Table: Australia's Population By Age Group, 1990-2020 ('000)
1990 1995 2000 2005 2010 2012f 2015f 2020f
Total years 17,096 18,118 19,164 20,404 22,268 22,919 23,793 25,241
0-4 years 1,260 1,300 1,276 1,289 1,458 1,535 1,588 1,661
5-9 years 1,262 1,293 1,354 1,339 1,365 1,413 1,523 1,645
10-14 years 1,244 1,296 1,337 1,400 1,406 1,413 1,426 1,576
15-19 years 1,396 1,276 1,328 1,399 1,505 1,508 1,500 1,505
20-24 years 1,369 1,420 1,299 1,426 1,643 1,647 1,629 1,602
25-29 years 1,419 1,394 1,447 1,389 1,626 1,690 1,742 1,714
30-34 years 1,391 1,454 1,432 1,510 1,498 1,557 1,693 1,802
35-39 years 1,315 1,425 1,495 1,488 1,630 1,608 1,557 1,745
40-44 years 1,259 1,332 1,450 1,538 1,536 1,593 1,679 1,600
45-49 years 985 1,258 1,342 1,469 1,586 1,578 1,563 1,703
50-54 years 818 974 1,258 1,339 1,471 1,531 1,588 1,565
55-59 years 730 803 968 1,239 1,319 1,364 1,453 1,570
60-64 years 735 707 791 942 1,233 1,271 1,285 1,419
65-69 years 660 689 678 760 905 1,020 1,181 1,236
70-74 years 489 589 630 628 702 745 844 1,108
75+ years 765 907 1,079 1,247 1,387 1,444 1,543 1,790
f = BMI forecast. Source: World Bank, UN, BMI

Table: Australia's Population By Age Group, 1990-2020 (% of total)
1990 1995 2000 2005 2010 2012f 2015f 2020f
0-4 years 7.37 7.17 6.66 6.32 6.55 6.70 6.67 6.58
5-9 years 7.38 7.14 7.06 6.56 6.13 6.17 6.40 6.52
10-14 years 7.28 7.15 6.98 6.86 6.31 6.17 5.99 6.24
15-19 years 8.16 7.04 6.93 6.86 6.76 6.58 6.30 5.96
20-24 years 8.01 7.84 6.78 6.99 7.38 7.19 6.85 6.35
25-29 years 8.30 7.70 7.55 6.81 7.30 7.38 7.32 6.79
30-34 years 8.14 8.03 7.47 7.40 6.73 6.79 7.11 7.14
35-39 years 7.69 7.87 7.80 7.29 7.32 7.02 6.54 6.91
40-44 years 7.36 7.35 7.57 7.54 6.90 6.95 7.06 6.34
45-49 years 5.76 6.94 7.00 7.20 7.12 6.89 6.57 6.75
50-54 years 4.78 5.38 6.57 6.56 6.61 6.68 6.67 6.20
55-59 years 4.27 4.43 5.05 6.07 5.92 5.95 6.11 6.22
60-64 years 4.30 3.90 4.13 4.62 5.54 5.54 5.40 5.62
65-69 years 3.86 3.80 3.54 3.72 4.06 4.45 4.96 4.90
70-74 years 2.86 3.25 3.29 3.08 3.15 3.25 3.55 4.39
75+ years 4.48 5.00 5.63 6.11 6.23 6.30 6.49 7.09
f = BMI forecast. Source: World Bank, UN, BMI

Table: Australia's Key Population Ratios, 1990-2020
1990 1995 2000 2005 2010 2012f 2015f 2020f
Dependent ratio, % of total working age 1 49.7 50.4 49.6 48.5 48.0 49.3 51.7 55.6
Dependent population, total, '000 2 5,679 6,074 6,355 6,663 7,222 7,571 8,104 9,016
Active population, % of total 3 66.8 66.5 66.8 67.3 67.6 67.0 65.9 64.3
Active population, total, '000 4 11,417 12,045 12,809 13,740 15,046 15,348 15,689 16,224
Youth population, % of total working age 5 33.0 32.3 31.0 29.3 28.1 28.4 28.9 30.1
Youth population, total, '000 6 3,766 3,889 3,967 4,028 4,228 4,362 4,537 4,883
Pensionable population, % of total working
age 7 16.8 18.1 18.6 19.2 19.9 20.9 22.7 25.5
Pensionable population, '000 8 1,914 2,185 2,388 2,635 2,994 3,209 3,568 4,134
f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of total
population; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+.
Table: Australia's Rural And Urban Population, 1990-2020
1990 1995 2000 2005 2010 2012 2015 2020
Urban population, % of
total 85.4 86.1 87.2 88.2 89.1 89.4 89.9 90.6
Rural population, % of total 14.6 13.9 12.8 11.8 10.9 10.6 10.1 9.4
Urban population, '000 14,573.6 15,560.0 16,701.4 17,988.2 19,841.1 20,493.9 21,390.2 22,868.0
Rural population, '000 2,491.5 2,512.0 2,451.6 2,406.6 2,427.3 2,424.8 2,403.1 2,372.6

Methodology
How We Generate Our Industry Forecasts
New Approach
This round of real estate reports incorporates a new approach. In each of the countries surveyed, we have
made contact with local sources (typically major commercial real estate agents) and asked them 10
questions in relation to three sub-sectors - office, retail and industrial. We have combined the answers into
the data tables and text that form part of the Real Estate Market Overview and the Industry Forecast
Scenario.
In taking this 'grass-roots' approach, we believe we have ensured that we identify, in a timely fashion, key
issues that will likely drive rents and yields over the short, medium and long term. We have developed a
framework that facilitates comparisons between cities and sub-sectors in different countries. In developing
our long-term forecasts, we have focused on net yields. Our view is that, as yields are driven by both rentals
and capital values, the movements in yields provide a convenient short-hand for what is and is not expected
to be happening in markets.
Our forecasts are based largely on qualitative judgements. Given that, in most of the countries that BMI
surveys, the real estate protagonists are still dealing with the aftermath of the global financial crisis, it is
questionable how valuable a quantitative approach would be. In part due to BMI's own macroeconomic
research and partly because of the insights gleaned from our in-country sources, we are normally able to
comment in an informed way on the likely directions for rentals and capital values. Nevertheless, we
recognise that we can and should refine the methodology and incorporate greater quantitative aspects over
time as we accumulate more data on each of the various markets that we survey.
In mid-2012, our researchers conducted further interviews with the local sources in order to confirm details
pertaining to rental levels and rental yields. In many cases, the new data has caused us to revise our
forecasts for 2012-2017.
Overview
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being

examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and
encourage the use of objective views, uses a 'general-to-specific' method. BMI mainly uses a linear model,
but simple non-linear models, such as the log-linear model, are used when necessary. During periods of
'industry shock', for example a deep industry recession, dummy variables are used to determine the level of
impact.
Effective forecasting depends on appropriately-selected regression models. BMI selects the best model
according to various different criteria and tests, including, but not exclusive to:
R2 tests explanatory power; Adjusted R2 takes degree of freedom into account;
Testing the directional movement and magnitude of co-efficients;
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value);
All results are assessed to alleviate issues related to auto-correlation and multi-co-linearity.
BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMI's
forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot
structural breaks, anomalous data, turning points and seasonal features where a purely mechanical
forecasting process would not. Within the real estate industry, this intervention might include, but is not
exclusive to, new investments across sectors, or projects getting cancelled; general investment climate and
business environment changes; domestic or regional trends changing; macroeconomic indicators; and
regulatory changes.
Example Of Construction Value Model:
(Construction Value)t = 0 + 1*(GDP)t + 2*(Inflation)t + 3*(Lending Rate)t + 4* (Population)t +

5*(Government Expenditure)t + 6*(Construction Value)t-1 + t
Construction Industry
A number of principal criteria drive our forecasts for each construction and engineering variable:
Construction GDP And Infrastructure Spending Figures for construction GDP and infrastructure
spending are based, where possible, on national accounts as published by the relevant central banks, as well
as primary government/ministry sources and official data. Where these are unavailable, construction GDP
forecasts are based on a range of variables, including:

Stated infrastructure and development programmes;
Likely increases owing to related urban or industrial sector developments;
Political factors, such as an electorally motivated public works programmes.
Construction as a percentage of GDP is calculated using BMI's macroeconomic and demographic forecasts.
Employment Within The Construction IndustryThese figures are forecast based on:
The growth or otherwise of the construction industry;
Company results and expansion plans.
Bank Lending
We assume that the growth rate for each of the three variables (assets, loans and deposits) varies over time.
The growth rate in 2012 is deemed to be the actual growth rate achieved over the 12 months to the point in
time for which the latest data is available. In practice, this is usually a date in late 2012. The growth rate in
2013 is assumed to be a weighted average - 80% of the actual rate achieved in the previous year and 20% of
the long-term nominal rate of growth in GDP that BMI projects for the five years to the end of 2015. The
growth rate in 2014 is assumed to be a weighted average where the respective ratios are 60% and 40%. In
2015, the ratios are reversed. In 2016, the ratios are 20% and 80%. In 2017, the three variables are assumed
to increase at the annual rate of growth in nominal GDP over the five years. In effect, 2017 is the only year
of the five where the actual growth of the variables achieved in 2011 has no impact on the projected growth
rates.
Real Estate/Construction Business Environment Rating
BMI's Real Estate/Construction Business Environment Rating (RECBER) provides a globally comparative,
numerically based assessment of the risk/return trade-off for the industry in each state covered by BMI's
real estate reports. In order to provide clients with a detailed assessment of this trade-off, the overall rating
is made up of two distinct sub-ratings.
Limits Of Potential Returns
Evaluates the industry's current size and growth potential, and also assesses broader industry/state
characteristics that may enable or inhibit the industry's development.
Risks To Realisation Of Returns
Evaluates issues within (a) the real estate sector, and (b) broader country risk vulnerabilities that increase
uncertainty surrounding the stability of anticipated returns on investment into each state.

These ratings themselves comprise sub-ratings.
The 'limits' rating comprises:
Real estate market. This evaluates industry growth/size dynamics.
Country structure. This evaluates the broader economic/socio-demographic environment.
The 'risks' rating comprises:
Real estate risks. This covers real estate-specific factors, including finance.
Country risk. This evaluates the industry's broader country risk exposure.
Weighting
Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal
weight. Consequently, the following weight has been adopted.
Table: Weighting Of Indicators
Component Weighting
Limits of potential returns 50%, of which
Real estate market 65%
Country structure 35%
Risks to realisation of returns 50%, of which
Real estate risk 65%
Country risk 35%
Source: BMI
In all cases, scores are out of 100, with a higher score indicating greater potential returns (returns), or lower
risks (risks).
Indicators
The following indicators have been used. Overall, the rating uses five subjectively measured indicators, and
over 20 separate indicators/datasets.

Limits Of Potential Returns - Real Estate-Specific Factors
The ratings score for limits of potential returns considers four real estate-related factors, each of which is
given equal weighting.
Construction output, US$bn (previous year). Absolute size of construction sector used as proxy for size
of real estate sector.
Construction sector real growth, compound annual growth rate (CAGR) (previous year to three years
hence). Indicates prospects for, and confidence in, the construction sector, and hence a proxy for
prospects/confidence for real estate sector.
Total commercial bank lending, US$bn (end previous year). Real estate projects are long term and capital
intensive, with most finance obtained from commercial banks. Indicates funding availability.
Commercial bank lending, CAGR (previous year to three years hence).This indicates prospects for the
stability of finance and, implicitly, its cost. In times of crisis, this is likely to be the most volatile
indicator.
Limits Of Potential Returns - Country Structure
The ratings score for limits of potential returns considers three other factors, each of which is given equal
weighting.
BMI's Business Environment Rating for financial infrastructure. This captures the efficiency of the
commercial banking sector - and other elements of the financial services industry - in making funding
available to the real estate sector.
Per capita GDP, US$. Higher per capita GDP correlates with the expansion of the middle classes, which
are the key market for residential real estate, and the users of commercial and retail real estate properties.
Urbanisation, % of total population living in urban areas. Urbanised states tend to be more conducive
markets for real estate development, as they have deeper, more mature markets. That said, our scoring
methodology views favourably less urban, or even predominantly rural, states that are characterised by
persistently strong construction sector growth.
Risks To Realisation Of Returns - Real Estate-Specific Factors
The ratings score considers three factors that are directly relevant to the real estate sector. These are each
given equal weighting. They are:
Lending risks, ratio of the growth in nominal lending (ie by commercial banks to non-bank customers) to
the nominal growth in GDP over a five-year period (last year to current year plus three). It is assumed
that lending volumes and nominal GDP should, generally, grow at the same rate. If lending growth
substantially exceeds nominal GDP expansion, this would suggest deterioration in risk standards by
lending institutions. Conversely, if nominal GDP rises substantially faster than bank lending, then the
cost of finance for real estate ventures is likely to rise (thereby affecting profitability).

Financial institution confidence, change in the loan to deposit ratio over a five-year period (last year to
current year plus three). This is used as a proxy for the stability of finance. Thus, a rapid decline in the
ratio (ie a lending squeeze) is penalised. Conversely, we are more tolerant of a rise in lending, as in itself,
this may be positive for the industry. High rates of lending growth are penalised as they could indicate an
investment bubble unless the state's Country Risk Short-Term Economic Rating - a proxy for
vulnerability to an economic shock - is very high.
Real estate prices, % change y-o-y. There are a number of methodological challenges in identifying
suitable proxies for real estate prices in each country. Nevertheless, where possible, we have identified a
national index (usually for house prices) and assess annual growth. The rating is symmetrical, in that high
growth (which indicates a bubble) is penalised, as is sharp price falls (which indicates that bubbles have
been burst). Where no real estate price index is available, this indicator does not affect the overall score
for this section.
Risks To Realisation Of Returns - Country Risk Factors
BMI's Long-Term Economic Rating. A measure of long-term economic stability.
BMI's Business Environment Legal Framework Rating. Denotes the strength of legal institutions in each
state - security of investment can be a key risk in some emerging markets.
BMI's Business Environment Bureaucracy Rating. Denotes the ease of conducting business in the state.
Sources
Sources used in real estate reports include UN statistics, national accounts, housing and economy ministries,
officially released company results and figures, trade bodies and associations and international and national
news agencies.

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Q2 2013

Part of BMIs Industry Report & Forecasts Series

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Business Monitor International 2013 Business Monitor International

BMI Industry View ............................................................................................................... 7

Industry Forecast .............................................................................................................. 14

Macroeconomic Forecasts ............................................................................................... 28

Industry Risk Reward Ratings .......................................................................................... 34

Market Overview ............................................................................................................... 47

Business Monitor International Page 4

Table: Terms of Rental Contract/ Leases - H212 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Competitive Landscape .................................................................................................... 57

Company Profile ................................................................................................................ 62

Demographic Forecast ..................................................................................................... 77

Business Monitor International Page 5

BMI Industry View

Business Monitor International Page 7

Business Monitor International Page 8

Australia Real Estate/Construction SWOT

Business Monitor International Page 9

Business Monitor International Page 10

Business Monitor International Page 11

Business Monitor International Page 12

SWOT Analysis - Continued

attractiveness of these assets. It remains to be seen if the recent implementation of a

Business Monitor International Page 13

Table: Forecast Rents - AUD/ Square Metre/ Month

2013 (Jan-Jun) 2013

Table: Forecast Net Yield, 2010-2017 (%)

2010 2011 2012 2013 2014 2015 2016 2017

Business Monitor International Page 14

Table: Forecast Rents - AUD/ Square Metre/ Month

2013 (Jan-Jun) 2013

Table: Forecast Net Yield, 2010-2017 (%)

Business Monitor International Page 15

Table: Forecast Rents - AUD/ Square Metre/ Month

2013 (Jan-Jun) 2013

Table: Forecast Net Yield, 2010-2017 (%)

2010 2011 2012 2013 2014 2015 2016 2017

Business Monitor International Page 16

Construction And Infrastructure Forecast Scenario

Industry Forecast Scenario

Table: Australia Construction And Infrastructure Industry Data, 2011 - 2016

2011 2012e 2013f 2014f 2015f 2016f

Total capital investment,

Business Monitor International Page 17

Australia Construction And Infrastructure Industry Data, 2011 - 2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f

Residential and Non-

e/f = BMI estimate/forecasts. Source: BMI, Australian Bureau of Statistics

Business Monitor International Page 18

2017f 2018f 2019f 2020f 2021f 2022f

Total capital investment,

Residential and Non-

Business Monitor International Page 19

2017f 2018f 2019f 2020f 2021f 2022f

e/f = BMI estimate/forecasts. Source: BMI, Australian Bureau of Statistics

Construction And Infrastructure Forecast Scenario

Business Monitor International Page 20

Source: Australian Bureau of Statistics, BMI

Business Monitor International Page 21

To Recover From 2013

e/f = BMI estimate/forecast. Source: BMI, Australian Bureau of Statistics