The document provides an overview of the residential property market in Australia, including: - Housing prices have declined 4.5% since March 2011, a greater decline than during the GFC, with Brisbane experiencing the largest decrease. - Key drivers of the market include low interest rates and population growth, while private debt levels, the Eurozone crisis, and bank lending policies act as restraints. - The market is showing signs of stabilizing, with the first positive quarterly growth since 2010, though recovery is not expected until late 2012 or 2013. - Building approvals have fallen 14.8% nationally since March 2011, close to 20-year lows, with all states experiencing declines except NSW

1. Regular research papers and articles providing sector
specific insights and issues analysis – Real Estate and
Construction sector.
July edition 2012 – Real Estate and Construction
Industry
Intelligence Unit
Grant Thornton’s Industry Intelligence Unit (IIU) This edition includes:
blends the latest information and analysis of specific • A synopsis of the national
industries drawn from publicly available sources with residential property market,
updated from the previous real
pragmatic, commercial and practical initiatives to
estate and construction IIU
improve stakeholder value. • A discussion of the current state of
the residential property market with
Welcome to our latest edition of the Real an emphasis on the capital cities
Estate and Construction IIU. Grant • Case studies:
Thornton has increased its focus on the – Realisation of farmland
real estate and construction industry and properties – Water Access
it is apparent from the available data that Licences
the real estate and construction market – Selling industrial property –
continues to be significantly adversely Limiting discounts applied for
affected by the flow-on effects of the contamination
Global Financial Crisis (GFC). – Registration of easements on
title – Electricity sub-stations
– Sales strategies for property
assets – In-one-line at a
discount vs. orderly sell down

2. IIU Real Estate and Construction July 2012
Residential property update
In the period directly after the worst interest rate policies employed by the The most common view appears
of the Global Financial Crisis, the banks, prospects for capital growth in to be that the growth in housing prices
Australian residential property market the property market remain low for the will recover after a period of negative
experienced significant capital growth foreseeable future. adjustment and price correction during
compared to other international It may come as a surprise to 2012.
markets, particularly the European and many that average Australian capital
US property markets. Since late 2010, city residential property values have Latest statistics
the Australian property market has depreciated by 4.5% during the period Borrowing for housing remained slow
encourntered a widespread negative March 2011 to March 2012 – a greater during 2011 and early 2012. This has
capital growth as a consequence of decline than the 2.6% fall at the height of been associated with weakness in the
mounting negative economic sentiment the GFC in 2008, and 6% off their peak housing market and was reflected in
as well as multiple natural disasters over of early 2011. the overall decline in debt to income
the past 18 months. Whilst residential property has ratio since the highs of 2010. Much of
Taking into consideration recent experienced a period of adjustment, the the effect of the RBA rate cuts has been
developments such as these natural decline year on year and subsequent mitigated by the banks’ decision to begin
disasters and the Eurozone debt crisis, increase in value during the March 2012 moving their lending rates independently
the Australian property market has still quarter across the cities has not been to the RBA target cash rate. As seen
proven itself to be fairly robust when homogenous. Between March 2011 to in the ‘Household Indebtedness
compared to other asset classes and, in March 2012, Brisbane experienced a and Interest Payments’ chart below,
particular, to property markets in other 4.1% decrease in residential property payments are now down from 12% in
developed nations. values, whilst the Hobart market saw the September 2011 quarter to 11.7%.
Due to current global economic declines of 0.7% during the same period. While household debt servicing is below
conditions, a lack of confidence in the The following is a summary of the its historical high it is still significantly
Eurozone economies, difficulty in current major drivers and restraints on above the 1985 to 2000 average.
finding credit lines and changes in the growth in the residential property market. Housing prices in the capital cities fell
modestly for the year ended March 2012
by an average of 2.7% across the country.
Drivers Restraints
However, this downward trend slowed in
• Shortage of housing • Changes to bank lending-rate policies to move
the March 2012 quarter, with the median
• Reserve Bank of Australia (RBA) cuts to the independently to the Reserve Bank of Australia
underlying cash rate • Concerns over the Carbon Tax house price increasing by 0.9%. This
• Strong disposable income growth • Eurozone debt crisis represents the first positive quarterly
• Continuing low unemployment rate • Decrease in first home owners assistance result since June 2010. In comparing the
• Population growth • Removal of fiscal stimulus
• First home owners grants and stamp duty • Rising consumer debt growth in values of residential properties
concessions • Rising consumer default rates across the major capital cities, Brisbane,
• Record low rental vacancy rates • Continuating softening of commodity prices Adelaide and Melbourne have declined
(NT, QLD, SA)
• Decrease in building approvals
most notably, while Perth and Canberra
• Planning constraints have shown slower contraction, and
• Shortage of finance for developers and home Sydney has remained relatively flat as
owners
(see the charts below).
Industry Intelligence Unit 2

3. Household indebtedness and interest payments
The following chart highlights recent
movements in the RBA’s target cash rate.
Source: ABS; RBA
200 Debt-to-income Interest payments 16 Effective Change in New cash
Date cash rate rate target
Percent of household disposable income*
Total Percentage Percent
150 12 points
Owner-occupier 6 June 2012 -0.25 3.50
housing 2 May 2012 -0.50 3.75
100 8 7 Dec 2011 -0.25 4.25
2 Nov 2011 -0.25 4.50
3 Nov 2010 +0.25 4.75
Investor
housing 5 May 2010 +0.25 4.50
50 4 7 Apr 2010 +0.25 4.25
3 Mar 2010 +0.25 4.00
Personal 2 Dec 2009 +0.25 3.75
0 0 4 Nov 2009 +0.25 3.50
1990 1997 2004 2011 1997 2004 2011 Source: RBA
*Household disposable income excludes unincorporated enterprises and is before interest payments;
debt-to-income uses annual income.
Even though the RBA made two
consecutive rate cuts at the end of 2011,
the major banks have claimed that
Average housing prices* external funding pressures have not
Source: RBA, RP Data-Rismark allowed them to pass on these cuts in
full to borrowers. Consequently, the
700
spread between the RBA cash rate and
Sydney Canberra the average rate on new and outstanding
600 variable loans increased by 0.05% in real
Perth terms over these two rate cuts.
Australia
500 The most recent rate cut (June 2012)
$’000
Brisbane has seen a continuation of the major
400 Adelaide banks’ interest rate strategy. Recent
Melbourne moves by a number of major banks
300 have shaved up to 0.15% off the RBA’s
Regional* decision. The RBA has stipulated that the
rationale behind the 0.50% cut in May,
200
2006 2009 2012 2006 2009 2012 over and above the historical 0.25%,
was to counteract any independent
*Excluding apartments; measured as areas outside of capital cities in mainland states.
adjustments and consequent negative
effects on consumer and business
sentiment by the big four banks.
Value of housing loan approvals* This discrepancy is likely to continue,
with the banks indicating in February
Source: ABS, RBA
2012 that any further cut may not be
1.4 4 passed on in full following the RBA
decision. This stance has also manifested
Percent of housing credit outstanding
Non-FHB
owner-occupiers
in recent bank decisions to shift lending
1.2 3
rates outside of official RBA decisions.
Total
With this increase in rates in real
0.8 2 terms over and above the RBA cash rate,
Investors
along with the expiration of government
incentive schemes, over the course of
0.4 1 2011, the total number of housing loan
approvals stabilised following dramatic
First home buyers falls in 2010. Since the expiration of the
0 0
first home owners stamp duty concession
2004 2008 2012 2004 2008 2012
scheme in December 2011 demand for
*Net of refinancing. housing loans has eased.
Industry Intelligence Unit 3

4. IIU Real Estate and Construction July 2012
Around Australia –
Capital city snapshot
Capital City Summary Residential property markets in the
Adelaide • Median house price - $437,085 capital cities of Australia are generally
• Since March 2011, Adelaide has been one of the weakest performing capital cities experiencing similar trends. However,
with a decrease in growth of 3.9% the increase in the values of residential
• In the three months to March 2012, dwelling value growth has decreased by 0.3%
properties across the capital cities has
Brisbane • Median house price - $433,244
not been homogeneous, with some
• Since March 2011, house prices have decreased by 4.1%, well underperforming
the other capital cities experiencing particularly strong growth
• In the three months to March 2012, dwelling value growth has fallen by 0.3% over the March 2012 Quarter whilst
Canberra • Median house price - $561,782 others have experienced weak growth
• Since March 2011, house prices have decreased by 3.1% and in some cases modest declines. This
• In the three months to March 2012, dwelling value growth has risen by 0.9%.
is especially true of Darwin, which
Darwin • Median house price - $628,552
achieved 6.0% growth during the most
• Since March 2011, house prices have decreased by 1.5%
• In the three months to March 2012, dwelling value growth has risen by 6.0%, recent quarter far outperforming all
making Darwin the best performing city for the quarter other cities. Overall the national average
Hobart • Median house price - $325,282 growth was 0.9%, representing the first
• Since March 2011, house prices have decreased by 0.7% making Hobart the best quarterly rise since June 2010.
performing of all capital cities
The latest statistics suggest that
• In the three months to March 2012, dwelling value growth has increased by 1.0%
the period of decline in median house
Melbourne • Median house price - $529,077
• Since March 2011, house prices have decreased by 3.6% prices in capital cities during 2011
• In the three months to March 2012, dwelling value growth has risen by 1.6% is near its end and prices will now
Perth • Median house price - $531,065 stabilise across 2012 and a period of
• Perth’s residential market has not performed up to the level of its boom between improvement is expected into 2013.
2005 and 2007. In fact, for the period from December 2010 to December 2011,
Sydney and Canberra are expected to
Perth’s decrease in growth of 3.1% was the third lowest (only underperformed by
Brisbane and Darwin) see growth in a range of 4-6% and 2-4%
• In the three months to March 2012, dwelling value growth has risen by 0.1% respectively. Marginal levels of growth
Sydney • Median house price - $641,037 are expected for Brisbane and Perth, with
• Since March 2011, house prices have decreased by 0.9% Melbourne expected to remain stable and
• In the three months to March 2012, dwelling value growth has risen by 1.4%
consolidation occurring in Adelaide with
Source: RP Data, APM
contraction slowing.
Industry Intelligence Unit 4

5. Softening demand for housing stock Residential approvals, March 2012 – State/Territory comparisons
has had a corresponding knock-on Change
effect on private building approvals
State/Territory Number (a) Monthly (a) Annual (b)
which, since March 2011, have fallen
New South Wales 2,682 2.3% -6.6%
by 14.8%, closely following the trend
Victoria 3,571 -1.5% -21.1%
seen during the 2010 period of a 16%
Queensland 2,282 1.7% -9.6%
decline. Overall, approvals are close to
South Australia 746 1.3% -22.2%
their 20 year lows. Year on year, all states
experienced a decline in the number Western Australia 1,611 1.6% -10.3%
of approvals with NSW and QLD the Tasmania 176 2.1% -23.8%
only states with single digit declines. A North Territory 52 -13.6% -24.1%
moderate recovery in housing starts is ACT 176 -18.6% -17.5%
expected within the next year, however Australia 11,298 0.3% -14.8%
this is partially contingent on further
rate cuts by the RBA. The table below
outlines residential building approvals
and private apartment approvals on a
state by state basis.
In summary, it seems that the decline
in housing prices since late 2010 is slowly
coming to an end. Prices have recently
shown signs of stabilising, yet in general
the housing market continues to be
easing. The most common view is that
after a period of negative adjustment and
price correction during 2012, the market
will recover in the latter part of the year
and into 2013.
Residential building approvals, monthly
Source: ABS, RBA
18
Total
15
12
Private houses 2012/13 Federal Budget Key points:
$’000
9
Scrapped $1 billion tax breaks for green buildings program
Private The bad news for the real estate and construction industry in the 2012/13 Federal Budget started
6 apartments with the scrapping of the promised 1% reduction to the company tax rate which was to provide some
tax relief to small businesses from 1 July 2012, with larger taxpayers to follow. The Government
3 advised these funds would be redirected to fund the loss carry back provisions.
Public housing
The managed investment trust withholding tax rate will double from 7.5% to 15% from 1
0
July 2012
2000 2004 2008 2012
The Federal Budget has stipulated an increase in the managed investment trust withholding tax rate
*Smoothed line is a 13-period Henderson trend. from 7.5% to 15% from 1 July 2012. This tax rate applies specifically to foreign investors. The net
effect of this development is a doubling of the tax rate for multiple classes of trusts including Real
Estate Investment Trusts. This is likely to dampen foreign investment and create a negative follow on
effect to demand within the real estate and construction industry.
The government has scrapped Capital Gains Tax (CGT) discount for non-residents.
The CGT discount for non-residents has been removed. Whereas previously the discount was 50%,
this change effectively increases the CGT payable upon disposal by 100%. Foreign investors are
taxed almost exclusively on investment in real property, so this will have a direct and immediate
impact on real estate investment within Australia. In addition to discouraging new investment in the
property market, foreign investors will be reluctant to divest of their assets and realise an increased
tax liability within the new regulatory environment. The increase in the tax rate is therefore likely to
reduce the supply of available housing.
Industry Intelligence Unit 5

6. IIU Real Estate and Construction July 2012
Case studies
The Australian economy is often referred Realisation of Farm Land Properties – Water Access
Licences (WALs)
to as a two speed economy, where the
Partners of Grant Thornton were recently involved in the
property and construction sectors operate realisation of a number of farms in the Northern Tablelands of
independently to the mining sector which New South Wales on behalf of a major secured creditor.
has seen an ongoing boom in recent Following the appointment as Receivers, it was determined
that a number of these rural properties possessed approved
times. During the course of 2011/2012,
water access licences in respect of groundwater, artesian bores
there has been a significant increase in and rivers running through the properties. It was found that
the number of high profile property and there was an amendment to the legislation in 2004 with regard
construction companies reported in the to the registration of a secured creditor’s interest over the water
media experiencing cash flow problems entitlements on a property, whereby the entitlements are now
viewed as a separately identifiable asset to the land. Prior to this
or solvency issues in respect of work–in- time, water access licences automatically travelled with the land
progress. Of note is Reed Constructions in a similar manner to development applications which normally
which is currently under review from the travel with the property to which they are attached. Upon
NSW Government due to its involvement in appointment, the Receivers were required to perfect the secured
creditor’s interests over the water access licences as well as run a
a number of public roads and infrastructure
successful marketing and advertising campaign. The WALs can
projects which have not been completed. have a significant impact on the saleability of the property.
Recent speculation in the media has indicated The interesting lesson learned was that upon appointment,
that a significant number of sub-contractors it is imperative to ensure that the secured creditor has registered
their interest over any water access licences attached to the rural
will experience a flow-on effect as a result
property so that when the property is offered for sale, they can
of many large building and construction be included as part of the marketing information memoranda
companies experiencing cash flow difficulties and sale contract.
or lack of work flow and new projects.
In the past year, Grant Thornton has been Selling Industrial Property – discounts applied for
contamination
involved in a number of complex property Partners of Grant Thornton were appointed as Voluntary
matters which have highlighted some Administrators over a number of industrial properties around
important issues to be aware of in certain the Newcastle area in New South Wales. A number of these
circumstances. properties were contaminated as a consequence of historical
industrial usage.
The properties were taken to the market seeking expressions
of interest from potential purchasers. It was determined that,
in most instances, purchasers required a significant amount of
time to complete due diligence of the property to ascertain the
level of contamination and the estimated remediation costs.
Industry Intelligence Unit 6

7. Quite often the scope of works which an environmental
surveyor is engaged to include will affect the final outcome in
respect of the environmental report. For example, the number
of bore hole samples taken will in some instances directly
impact on the number of adverse findings on the property.
While it is not possible to predetermine the level of testing
that an environmental consultant will adopt in respect of each
property, a close review of the manner and type of sampling can
often have a significant effect on the outcome.
In some instances, where a site is “capped” (encapsulated
or sealed with concrete), it is not necessary for bore hole
core samples to be taken through concrete slab penetrations,
hard stand areas, or concrete areas in respect of the industrial
workshop or shed areas when testing to determine any below
ground contamination. It has also been determined via several
recent appointments that where the subject property is near
waterways or groundwater, contamination might not necessarily
directly relate to the subject property to which we have been
appointed but may emanate from groundwater leeching of
contaminants from an adjoining property some distance away.
In essence, being pro-active and providing contamination
reports on industrial properties being offered for sale including
an estimate of the remediation costs has been an effective tool
when realising industrial property for secured creditors. This
can place a “ceiling” on the discount factor that can be applied
by a potential purchaser in respect of the contamination.
Registration of Easements on Title - Electricity sub-stations
Partners of Grant Thornton were recently engaged as Receivers
to realise vacant industrial sub-divided lots in Northern Sydney
in New South Wales on behalf of a secured lender.
Subsequent to their appointment, it was determined
that the lots over which we had been appointed formed part
of a number of other lots in an approved sub-division. In
consenting to the sub-division, Council noted there was a
requirement for the installation of an electricity sub-station to
power the industrial lots. This required the registration of an
easement by the electricity supplier on the property over which
we were appointed.
By closely liaising with the respective electricity service
provider, the Receivers were able to complete all works
required for the installation of the sub-station in a timely
manner as well as ensure that the easement registered on title
by the electricity company in such a manner that the property
was not adversely affected (i.e. the easement ran alongside
the boundary of the property subject to our appointment as
opposed to directly traversing the property). The Receivers
were also able to ensure that the property was marketed
with electricity available as opposed to vacant land, which
significantly increased the value of the property and offers from
parties expressing an interest.
Upon completion of the sub-station and electrification
(connection to the existing power grid), the Receivers
successfully sold the property to a purchaser who required
power for their industrial warehousing site at a price far in
excess of the valuation.
Industry Intelligence Unit 7

8. Sales Strategies for Property Assets - In-one-line at
discount vs. orderly sell down
Partners of Grant Thornton were recently appointed as
Receivers over a commercial strata unit complex in New South
Wales.
At the time of appointment, approximately 22 out of the
original 44 commercial units were still available for sale. The
tenancy mixture of the available-for-sale units comprised
approximately 50% tenanted and 50% vacant units.
The Receivers commenced the marketing and advertising
campaign shortly after their appointment and found that the
agents were struggling to attract expressions of interest for the
units.
After approximately six months, only three of the 22 units
were realised. The Receivers believed it was necessary to revise
the strategy in collaboration with the secured creditor in order
to determine the costs and benefits of realising the remaining
commercial units in-one-line, as opposed to an orderly sale
of the units which was likely to take over 40 months. It was
determined that by applying a discount and realising the assets
in-one-line would significantly reduce the loss likely to be
incurred by the secured creditor in comparison to holding the
assets and selling them on an individual basis over an extended
period of time.
We have found that in many instances, a discount factor
of 20% to 30% is usually applied to commercial properties
by potential purchasers where there are a number of complete
strata commercial shared sites for sale in-one-line. In some
instances, applying a discount will still yield a better result than
attempting to sell the properties in an orderly fashion over an
extended period of time after taking into consideration interest
and holding costs.
Our National Real Estate and Adelaide Melbourne Sydney
Dale Ryan Andrew Hewitt Peter Berg
Construction Team
Partner – Privately Held Business Partner – Recovery & Partner – Tax
Grant Thornton is a national full service T +61 8 8372 6535 Reorganisation T +61 2 8297 2509
accounting and business advisory E dale.ryan@au.gt.com T +61 3 8663 6003 E peter.berg@au.gt.com
practice that specialises in working with E andrew.hewitt@au.gt.com
Brisbane Trevor Pogroske
property and construction businesses Sian Sinclair Perth Partner – Recovery &
of all makes and types, big and small. National Industry Leader – Craig Simon Reorganisation
We closely work with our property and Real Estate & Construction Partner – Privately Held Business T +61 2 8297 2601
Partner – Tax T +61 8 9480 2030 E trevor.pogroske@au.gt.com
construction clients, so we understand
T +61 7 3222 0330 E craig.simon@au.gt.com
this complex and diverse market well. E sian.sinclair@au.gt.com John O’Donnell
If you would like to discuss any aspect Partner – Privately Held
Business
of the above, please do not hesitate
T +61 2 9286 5448
to contact one of our industry experts E john.odonnell@au.gt.com
detailed below.
Peter Grealish
Senior Manager – Recovery
& Reorganisation
T +61 2 8297 2610
E peter.grealish@au.gt.com
Industry Intelligence Unit 8

9. IIU Real Estate and Construction July 2012
Industry Intelligence Unit
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