Australia Real Estate Report Q4 2012

Q4 2012
www.businessmonitor.com
aUstralIa
real estate Report
INCLUDES BMI'S FORECASTS
ISSN 2040-7580
Published by Business Monitor International Ltd.
AUSTRALIA REAL ESTATE
REPORT Q4 2012
INCLUDES 5-YEAR FORECASTS TO 2016
Part of BMIs Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: August 2012
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Australia Real Estate Report Q4
Business Monitor International Ltd Page 2

CONTENTS
Executive Summary......................................................................................................................................... 5
SWOT Analysis ................................................................................................................................................ 7
Australia Real Estate/Construction SWOT............................................................................................................................................................. 7
Australia Political SWOT....................................................................................................................................................................................... 7
Australia Economic SWOT .................................................................................................................................................................................... 8
Australia Business Environment SWOT ................................................................................................................................................................. 8
Real Estate Market Overview .......................................................................................................................... 9

Market Analysis Office ............................................................................................................................... 12
Table: Historic Rents 2011-2012 (AUD per m2/month) .................................................................................................................................... 12
Table: Net Yield, 2011-2013 (%) ......................................................................................................................................................................... 12
Table: Terms of Rental Contract/ Leases H112 ................................................................................................................................................ 12
Supply And Demand............................................................................................................................................................................................. 13
Industry Forecast Scenario ....................................................................................................................................................................................... 13
Table: Forecast Rents AUD/Square Metre/ Month ........................................................................................................................................... 13
Table: Forecast Net Yield, 2008-2016 (%) .......................................................................................................................................................... 14
Market Analysis Retail................................................................................................................................ 15

Rents And Yields .................................................................................................................................................................................................. 15
Table: Net Yield, 2011-2013 (%) ......................................................................................................................................................................... 15
Table: Terms Of Rental Contract/Leases H112 ................................................................................................................................................ 15
Table: Forecast Rents AUD/Square Metre/Month ............................................................................................................................................ 16
Market Analysis Industrial ......................................................................................................................... 17

Rents And Yields .................................................................................................................................................................................................. 17
Table: Net Yield, 2011-2013 (%) ......................................................................................................................................................................... 17
Table: Terms Of Rental Contract/Leases H112 ................................................................................................................................................ 17
Table: Forecast Rents AUD/Square Metre/Month ............................................................................................................................................ 18
Forecast Scenarios........................................................................................................................................ 19
Infrastructure Report ................................................................................................................................................................................................ 19
Table: Australia Construction And Infrastructure Industry Data And Forecasts, 2008-2016 .............................................................................. 19
Table: Australia Construction And Infrastructure Industry Long-Term Forecasts, 2013-2021 ........................................................................... 20
Construction And Infrastructure Forecast Scenario ............................................................................................................................................ 22
Macroeconomic Forecast.......................................................................................................................................................................................... 28
Table: Australia Economic Activity................................................................................................................................................................... 31
Real Estate/Construction Risk Reward Ratings ......................................................................................... 32

Real Estate/Construction Risk/Reward Ratings ........................................................................................................................................................ 32
Table: Asia Pacific Real Estate Risk/Reward Ratings.......................................................................................................................................... 32
Australia Business Environment ............................................................................................................................................................................... 32

Table: BMI Business And Operation Risk Ratings ............................................................................................................................................... 33

Institutions ........................................................................................................................................................................................................... 33
Table: BMI Legal Framework Rating .................................................................................................................................................................. 34
Infrastructure ....................................................................................................................................................................................................... 36
Table: Labour Force Quality ............................................................................................................................................................................... 38
Market Orientation .............................................................................................................................................................................................. 39
Table: Asia Annual FDI Inflows ....................................................................................................................................................................... 39
Table: Trade And Investment Ratings .................................................................................................................................................................. 41
Table: Top Export Destinations, 2002-2009 ........................................................................................................................................................ 44
Operational Risk .................................................................................................................................................................................................. 44
Competitive Landscape ................................................................................................................................ 45

Company Profiles .......................................................................................................................................... 49
Bovis Lend Lease (BLL) ....................................................................................................................................................................................... 49
Brookfield Multiplex (BM) ................................................................................................................................................................................... 51
Laing ORourke ................................................................................................................................................................................................... 53
Leighton Holdings................................................................................................................................................................................................ 54
Mirvac.................................................................................................................................................................................................................. 56
Stockland Group .................................................................................................................................................................................................. 58
Demographic Data ......................................................................................................................................... 60

Table: Australia's Population By Age Group, 1990-2020 ('000).......................................................................................................................... 61
Table: Australia's Population By Age Group, 1990-2020 (% of total) ................................................................................................................. 62
Table: Australia's Key Population Ratios, 1990-2020 ......................................................................................................................................... 63
Table: Australia's Rural And Urban Population, 1990-2020 ............................................................................................................................... 63
BMI Methodology ........................................................................................................................................... 64

How We Generate Our Industry Forecasts .......................................................................................................................................................... 64
Construction Industry .......................................................................................................................................................................................... 65
Bank Lending ....................................................................................................................................................................................................... 66
Real Estate/Construction Business Environment Rating ...................................................................................................................................... 66
Table: Weighting Of Indicators............................................................................................................................................................................ 67
Sources ................................................................................................................................................................................................................ 69

Executive Summary
The Australia Real Estate report examines the Commercial Office, Retail, Industrial and Construction
segments in the context of a sector which is structurally balanced. 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 18 months and examines how best to maximise returns in the commercial real
estate market, while minimising investment risk and exploring the impact of the countrys resources
boom.
The Australian commercial real estate market 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 outlook for the economy
in 2012 is bearish, and the country will be negatively affected by the expected slowdown in Chinese
economic growth.
Having consulted our in-country sources in July 2012, with newly collected data covering the first six
months of the year, we can confirm that while rents in some regions experienced strong growth, it seems
our view for a slowdown in Australias economic growth has already started to play out although the
office sector seems to be resisting this trend for the time being.
Key Points
There is a resources boom in Australia at present, built significantly but not entirely on exports
to China. This is putting money into the economy and bolstering downstream industries.
After looking through the figures, though, it seems that the brunt of Australia's growth weakness
will be felt in 2013, rather than 2012. As such, while keeping our outlook for a H212 recession
unchanged, we have bumped up our growth figure for this year, from 0.8% to 2.1%, while more
than offsetting this by a reduction in our 2013 forecast, from 3.0% to 0.9%.
Leighton is confident that it will meet its net profit forecast of AUD400-450mn for the calendar
year of 2012. We note however that the company still faces several headwinds over the course of
2012 (i.e. risk management issues, potential project delays, losses from Middle East operations,
and falling orders from the Australian mining sector). These concerns are not only likely to make
it difficult for Leighton to meet its 2012 profit forecast based on its operations alone, but could
also cap any upside potential on its stock price in 2012.

We believe that the economic slowdown in China is dampening capital expenditure for mining
and infrastructure projects in Australia. This is a major downside risk to the construction sector
and we have revised down our 2012 real growth forecast accordingly, from 1.5% to 0.5%.

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 from the global economic
slowdown.
The resources sector remains strong.
Threats Weakening investor sentiment could result in a subdued market in 2012.
Australia Political SWOT
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
one that is unlikely to disappear over the medium term.
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.

Australia Economic SWOT
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 notwithstanding the current
global recession 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 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.
Australia Business Environment SWOT
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.
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.
Threats Corporate taxes for foreign investors in Australia remain higher than in other countries,
even as the government has promised to gradually reduce rates over the medium term.
Recent investment proposals by Chinese firms regarding the resource extraction sector
have raised fears that strategic assets will be lost to foreign players.

Real Estate Market Overview

As we head into the second half of 2012 three major risks threaten the Australian economy, and by
extension the countrys 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 weaken 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. Indeed, we were
surprised by the Q112 strength, and see the potential for downward revisions in coming months. After
looking through the figures, though, it seems that the brunt of Australia's growth weakness will be felt in
2013, rather than 2012. As such, while keeping our outlook for a H212 recession unchanged, we have
bumped up our growth figure for this year, from 0.8% to 2.1%, while more than offsetting this by a
reduction in our 2013 forecast, from 3.0% to 0.9%.
Australias real estate industry operates in an economy that despite weak consumer sentiment and
structural changes is performing reasonably well, supported by demand from China for its rich natural
resources, a reducing threat of interest rate rises, low unemployment and a strong infrastructure sector.
Our outlook for the economy is bearish, however, given the above mentioned concerns.
In political terms, the ruling Australian Labor Party's grip on power has become increasingly tenuous,
scoring dangerously low on opinion polls. The introduction of the carbon tax in July of 2012 should
provide some brief respite in terms of better support from the Australian Greens, a political ally in
parliament. An Australian Labor Party defeat would have implications on a number of national issues,
including broadband access, carbon tax and laws on industrial relations.
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 NABs
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 Institute of Chartered
Surveyors which in March 2012 reported that the Australian commercial property market was showing
increasing signs of stability. Vacancy rates fell and demand declined at a slower pace during Q411
compared to previous quarters. 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 a March 2012 survey by the county's National

Australia Bank . The bank's report also forecasts that office values will rise by 1.6% y-o-y by December
2012, although retail property values are expected to decline by 0.5% over the same period.
In 2012 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 countrys real estate sector during the second half of 2012.
Mining and Maturity

The large players in Australia's construction market have similar characteristics: Leighton Holdings,
WorleyParsons, and Bovis Lend Lease. They have a long and established presence in Australia, which
gives them a deep understanding of the country's business environment. Through mergers and
acquisitions, these companies have also gained significant technical knowledge in a wide range of
construction disciplines. This strategy of acquiring broad and deep expertise has allowed them to take on
increasingly diverse and complex infrastructure projects.
As a result, they are able to diversify their revenue streams into different businesses and different parts of
Australia. This forms the cornerstone for their sustainable success in the Australian market. Leighton, for
example, is not only the largest construction company in Australia but also the largest contract miner in
the world, with expertise in project management, property development and design.
Mining A Positive
The presence of a booming mining sector in Australia has made it beneficial for construction companies
to diversify and offer mining services. Construction companies such as Downer EDI, NRW Holdings
and Macmahon Holdings provide mining services, allowing them to achieve double-digit growth in their
revenues over the last financial year. Leighton's mining business in Australia had also achieved double-
digit growth in its revenues but was weighted down by poor performance in its other businesses. In fact,
other than WorleyParsons, which focuses on the hydrocarbons market, Australian companies with an
overseas presence and which do not provide mining services ie, Lend Lease and UGL have generally
underperformed against companies that do otherwise.
The presence of a booming mining sector also means that the bulk of the opportunities for infrastructure
projects in Australia are located at the major mining states, namely Queensland, Western Australia, New
South Wales. BMIs Key Projects Databases show that the bulk of the roads, railways, ports and power
plant projects (key infrastructure facilities to support mining activity) under construction or being planned
in Australia are located in these three states. Western Australia also has a vibrant market for wind power
and water utility projects due to its arid climate.
Having said that, this does not mean that Australian companies do not operate in other states. South
Australia's arid climate also presents opportunities for wind power and water utility projects, while
Victoria is keen to improve its freight links to the state capital of Melbourne the state is carrying out the

US$5.3bn Melbourne Regional Rail Link project, which involves subsidiaries of Leighton Holdings and
Lend Lease.
Better Prospects In Services

There is a high number of Australian construction companies that mainly focuses on providing
engineering services ie, WorleyParsons, Lend Lease, Monadelphous, and Transfield Services. In our
opinion, this highlights the level of maturity in Australia's construction market as engineering services
such as design, project management and consultancy services require a highly skilled workforce. This
focus on engineering services is financially beneficial for Australian companies. Service-oriented
companies typically have lower overheads due to lower equipment and manpower requirements. This not
only reduces their demand for capital resulting in lower net gearing but also allows them to operate at
a high margin than companies that carry out construction works. This is particularly pertinent in
Australia, where strong labour laws make it more costly to carry out construction works than in other
Asian countries.
Stability And Predictability Favoured

Having said that, Transurban, a company that only operates and develops toll roads in Australia is
particularly favoured by investors among the major construction companies in Australia. The company's
price-to-earnings ratio was trading at 63x, significantly higher than any construction company in
Australia. We believe this premium is primarily due to the stable and predictable cash flows provided by
Transurban's portfolio of toll roads. The company is also expanding rapidly in its latest financial year it
generated the fastest growth in revenues among construction companies in Australia, and has a very high
operating margin to absorb any cost increases.
We do, however, note that these stellar financials are fuelled by debt. With the exception of Lend Lease,
the company has the highest debt-to-earnings ratio and the lowest interest coverage ratio among the
construction companies. This could pose a downside risk to its financial performance. Australia is
heading for a sharp slowdown in its economy, and this could result in a decline in traffic volumes among
Transurban's toll roads.

Market Analysis Office
Table: Historic Rents 2011-2012 (AUD per m2/month)
Rental Cost 2011 Rental Cost - 2011 Rental Cost - 2012 % Change
(Jan-Jun) (Jul-Dec) (Jan-Jun) (y-o-y)
Min Max Min Max Min Max
Sydney 06.66 41.66 33.33 83.33 16.66 83.33 150 - 100%
Melbourne 06.66 37.50 29.16 54.16 12.50 33.33 -11 - +88%
Brisbane 06.66 66.67 29.26 70.83 29.16 79.16 338 - 19%
Perth 06.66 58.33 45.83 70.83 15.00 66.66 588 - 21%
Source: BMI
Table: Net Yield, 2011-2013 (%)
2011 (Jan-Jun) 2011 (Jul-Dec) 2012 (Jan-Jun) 2012 (Jul-Dec) 2013
Sydney 6 - 8% 6 - 10% 7 - 8% 7 - 8% 7 - 8%
Melbourne 6 - 10% 5 - 9% 7 - 12% 7-12% 7-12%
Brisbane 7 - 9% 6 - 10% 7-13% 7-13% 7-13%
Perth 3 - 8% 6 - 9% 7 - 10% 7 - 10% 7-12%
Source: BMI
Table: Terms of Rental Contract/ Leases H112
Lease terms (in years) Rent free months (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

Supply And Demand

BMIs infrastructure team maintains its bearish view on construction activity in 2012, with real growth
for the construction sector forecast to reach 1.5% in 2012. This could well translate into a slowdown in
new office space becoming available, with the result that supply may lag behind demand.
BMI maintains its positive outlook for Australias mining and natural resources sectors, which should be
the driving force behind demand for new office space. The recent trend for flights-to-quality in office
space rental is likely to continue, with the result that prime office space should be more in demand than
cheaper office space over the coming months.
In March 2012 Leighton Properties and Grosvenor Fund Management Australia announced that the
Eclipse Tower in Parramatta has now had 80% of its office space leased, reports Property Observer. The
office building will be the only A-grade commercial building in the Australian city when it is completed
in August 2012. Parramatta has an average vacancy rate of around 9%, while only 25,000m2 of new
office space is scheduled to be built in the city over the next two years.
Leighton Properties will partner Landcom and Mirvac on an urban reconstruction project due to begin 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 whole project is due for completion by 2022.
Industry Forecast Scenario
Table: Forecast Rents AUD/Square Metre/ Month
2012 (Jul-Dec) 2013
Min Max Trend (% change)
Sydney 16.66 83.33 Same 0%
Melbourne 12.50 33.33 Increase 0 - 4%
Brisbane 29.16 79.16 Same 0%
Perth 15.00 69.93 Increase 3 - 5%
Source: BMI

Table: Forecast Net Yield, 2008-2016 (%)
2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Sydney 7=8% 7 - 8% 7% 6-10% 7-8% 6-8% 6-8% 6-8% 6-8%
Melbourne 6-7% 6 - 7% 7-8% 5-10% 7-12% 7-12% 7-12% 7-12% 7-12%
Brisbane 5.00% 6 - 7% 6% 6-10% 7-13% 7-13% 7-13% 7-13% 7-13%
Perth 6-8% 8 - 9% 5 - 11% 3-9% 7-10% 7-12% 7-12% 7-12% 7-12%
e/f = estimate/forecast. Source: BMI

Market Analysis Retail

Rents And Yields
Sydney 33.00 166.00 37.50 166.00 25.00 183.33 -24 - +10%
Melbourne 25.00 416.00 16.66 400.00 16.66 250.00 -33 -40%
Brisbane 16.66 150.00 33.33 150.00 16.66 83.33 0% -44 %
Perth 16.67 83.00 25.00 110.00 16.66 83.33 0%
Source: BMI
Sydney 6 - 8% 6 - 10% 6 - 7% 5-6% 5-6%
Melbourne 6 - 10% 4.5 - 8% 5 - 8% 5-8% 5-8%
Brisbane 3 - 8% 6 - 8% 7 - 10% 7 - 10% 7 - 10%
Perth 3 - 8% 7.00% 7 - 9% 7-8% 7-8%
Source: BMI
Table: Terms Of Rental Contract/Leases H112
Sydney 5-7 3
Melbourne 5 - 10 2 - 3 months
Perth 5-10 2-3 months
Source: BMI

Supply And Demand

We believe that Australian retail rentals have a difficult year ahead. Australian private consumption rose
by a seasonally adjusted 1.0% quarter-on-quarter in Q211, accelerating considerably from the 0.6% figure
recorded in the preceding quarter. We believe the post-flood bounce, however, will not be sustainable.
This is reflected in the fact that the Westpac-Melbourne Consumer Sentiment index has fallen
precipitously over the past few months, with monthly growth dipping by a seasonally adjusted 4.8% m-o-
m (three-month moving average) in August. In tandem, retail sales have also been sluggish with virtually
no growth in Q211. This supports our view that private consumption growth will fall significantly in
2012, dipping to 1.5%. This in turn should put downside pressure on demand for retail rental space.
On the supply side, Jones Lang Lesalle reports that construction of retail units has been moderate,
reflecting BMIs view that the Australian construction sector is headed for a slowdown. Nevertheless,
given the ongoing lacklustre retail environment, BMI does not expect demand to outpace supply in 2012.
Table: Forecast Rents AUD/Square Metre/Month
2012 (Jul-Dec) 2013
Sydney 25.00 177.00 Same 0%
Perth 16.66 83.33 Decrease -5%
Source: BMI
2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Sydney 6-8 6 - 8% 6 - 9% 6-8% 6-8% 6-8% 6-8% 6-8% 6-8%
Melbourne 6-7 6 - 7% 4.0% 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%
Perth 5-6 6 - 7% 6 - 9% 3-8% 3-8% 3-8% 3-8% 3-8% 3-8%

Market Analysis Industrial

Rents And Yields
Sydney 08.00 25.00 07.00 20.83 8.33 23.33 +4% -7%
Melbourne 06.66 16.66 05.00 15.00 4.16 10.00 -38 -40%
Brisbane 05.83 16.66 09.00 20.83 5.83 20.83 +0 - 25%
Perth 04.16 25.00 07.50 10.00 6.25 10.41 +50% -58%
Source: BMI
Sydney 6 - 8% 6 - 10% 7 - 10% 9-10% 9-10%
Melbourne 6 - 10% 6 - 11% 7-12% 7-12% 7-12%
Brisbane 3 - 8% 6 - 10% 7 - 10% 7 - 10% 7 - 10%
Perth 3 - 8% 9% 8 - 11% 8 - 11% 8 - 12%
Source: BMI
Table: Terms Of Rental Contract/Leases H112
Sydney 1-10 1-3 months
Melbourne 3 - 10 2 - 3 months
Perth 3 - 10 2 - 3 months
Source: BMI

Supply And Demand

According to Colliers, an ongoing lack of new development combined with steady tenant demand,
particularly in the Sydney area, has kept the industrial market tight over H211. Given that we expect a
slowdown in construction, BMI believes this scenario is likely to continue over the coming months.
In demand terms, the leasing market has remained stable with the majority of leases signed being
renewals, as uncertainty surrounding the economy stalls the implementation of expansion plans. This has
caused incentives to tighten in some markets, due to declining vacancy rates over the past six months,
accounting for the drastic fall in industrial rents which our in-country sources reported in Sydney. As our
outlook for the Australian economy remains bearish, we believe vacancy rates are unlikely to improve
over the coming months.
Table: Forecast Rents AUD/Square Metre/Month
2012 (Jul-Dec) 2013
Sydney 8.33 24.00 Same 0%
Perth 6.25 10.41 Same 0%
Source: BMI
2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Sydney 6-7% 7% 6 - 8% 6-8% 7-10% 9-10% 9-10% 9-10% 9-10%
Melbourne 6-9% 6 - 9% 6 - 9% 6-10% 7-12% 7-12% 7-12% 7-12% 7-12%
Brisbane 7-8% 7 - 8% 7 - 8% 3-8% 7-10% 7-10% 7-10% 7-10% 7-10%
Perth 8-9% 7 - 8% 7 - 8% 3-8% 8-11% 8-12% 8-12% 8-12% 8-12%

Forecast Scenarios
Infrastructure Report
Table: Australia Construction And Infrastructure Industry Data And Forecasts, 2008-2016
2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f
Construction industry
value, AUDbn 84.5 82.2 91.9 98.2 100.4 106.0 112.8 120.2 128.1
value, US$bn 70.7 64.2 84.4 101.3 96.4 87.5 84.6 90.2 96.1
Construction industry, real

growth, % y-o-y 6.4 -1.5 5.4 6.2 0.5 3.6 4.0 4.1 4.2
Construction industry, %
of GDP 6.9 6.6 6.8 6.8 6.8 6.9 6.9 7.0 7.1
Total capital investment,

AUDbn 355.0 346.3 363.4 386.9 397.8 413.9 434.4 462.8 492.4

US$bn 296.8 270.5 333.6 399.4 382.0 341.4 325.8 347.1 369.3

% of GDP 28.8 27.6 26.8 26.8 26.9 26.8 26.6 26.9 27.2
Capital investment per

capita, US$ 13,796.6 12,351.7 14,981.7 17,666.4 16,666.9 14,708.4 13,862.0 14,589.4 15,332.9
Real capital investment

growth, % y-o-y 8.2 -3.1 5.0 6.9 1.0 2.0 2.5 4.0 4.0
employment, '000 987.0 988.3 1,036.4 1,094.9 1,099.5 1,136.2 1,177.7 1,222.7 1,270.5
employment, % y-o-y 4.3 0.1 4.9 5.6 0.4 3.3 3.7 3.8 3.9
Total workforce, '000 14,551.9 14,814.0 15,046.1 15,209.3 15,348.0 15,467.9 15,578.7 15,688.8 15,800.2
employees as % of total
labour force 6.8 6.7 6.9 7.2 7.2 7.3 7.6 7.8 8.0
Infrastructure Industry
Value As % of Total
Construction 26.9 28.0 27.3 28.6 28.7 29.3 29.9 30.5 31.0
Value, AUDbn 22.8 23.0 25.1 28.0 28.8 31.1 33.8 36.7 39.8
Value, US$bn 19.0 18.0 23.1 28.9 27.7 25.6 25.3 27.5 29.8
Value Real Growth (%) 11.9 1.2 6.2 8.2 1.0 5.8 6.2 6.3 6.0
Value as % of GDP 1.8 1.8 1.9 1.9 1.9 2.0 2.1 2.1 2.2

Table: Australia Construction And Infrastructure Industry Data And Forecasts, 2008-2016
2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f
Residential and Non-

residential Building
Industry Value As % of
Total Construction 73.1 72.0 72.7 71.4 71.3 70.7 70.1 69.5 69.0

Industry Value, AUDbn 61.7 59.2 66.8 70.1 71.6 75.0 79.1 83.6 88.3

Industry Value, US$bn 51.6 46.2 61.3 72.4 68.7 61.9 59.3 62.7 66.2

Industry Value Real
Growth (%) -1.9 -4.2 10.1 1.6 0.3 2.8 3.0 3.2 3.4

Industry Value as % of
GDP 5.0 4.7 4.9 4.9 4.8 4.8 4.8 4.9 4.9
f = BMI forecasts. Sources: BMI Calculation/ILO
Table: Australia Construction And Infrastructure Industry Long-Term Forecasts, 2013-2021
2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f
value, AUDbn 106.0 112.8 120.2 128.1 136.4 145.3 154.8 164.8 175.5
value, US$bn 87.5 84.6 90.2 96.1 102.3 109.0 116.1 123.6 131.6
Construction industry, real

growth, % y-o-y 3.6 4.0 4.1 4.2 4.2 4.2 4.2 4.2 4.2
Construction industry, %
of GDP 6.9 6.9 7.0 7.1 7.2 7.2 7.3 7.4 7.5

AUDbn 413.9 434.4 462.8 492.4 523.9 557.4 593.0 630.9 671.2

US$bn 341.4 325.8 347.1 369.3 392.9 418.0 444.8 473.2 503.4

% of GDP 26.8 26.6 26.9 27.2 27.5 27.8 28.0 28.3 28.6
Capital investment per

capita, US$ 14,708.4 13,862.0 14,589.4 15,332.9 16,117.0 16,944.7 17,820.1 18,747.2 19,729.0
Real capital investment

growth, % y-o-y 2.0 2.5 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Table: Australia Construction And Infrastructure Industry Long-Term Forecasts, 2013-2021
2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f
employment, '000 1,136.2 1,177.7 1,222.7 1,270.5 1,320.2 1,372.0 1,425.8 1,481.7 1,540.0
employment, % y-o-y 3.3 3.7 3.8 3.9 3.9 3.9 3.9 3.9 3.9
Total workforce, '000 15,467.9 15,578.7 15,688.8 15,800.2 15,908.8 16,015.2 16,120.2 16,224.2 16,325.5
employees as % of total
labour force 7.3 7.6 7.8 8.0 8.3 8.6 8.8 9.1 9.4
Value As % of Total
Construction 29.3 29.9 30.5 31.0 31.5 31.9 32.3 32.6 32.8
Value, AUDbn 31.1 33.8 36.7 39.8 42.9 46.3 49.9 53.7 57.6
Value, US$bn 25.6 25.3 27.5 29.8 32.2 34.8 37.4 40.3 43.2
Value Real Growth (%) 5.8 6.2 6.3 6.0 5.7 5.6 5.4 5.2 5.1
Value as % of GDP 2.0 2.1 2.1 2.2 2.3 2.3 2.4 2.4 2.5

Industry Value As % of
Total Construction 70.7 70.1 69.5 69.0 68.5 68.1 67.7 67.4 67.2

Industry Value, AUDbn 75.0 79.1 83.6 88.3 93.5 99.0 104.9 111.1 117.9

Industry Value, US$bn 61.9 59.3 62.7 66.2 70.1 74.2 78.6 83.4 88.4

Industry Value Real
Growth (%) 2.8 3.0 3.2 3.4 3.5 3.6 3.6 3.7 3.8

Industry Value as % of
GDP 4.8 4.8 4.9 4.9 4.9 4.9 5.0 5.0 5.0
f = BMI forecasts. Sources: BMI Calculation/ILO

Construction And Infrastructure Forecast Scenario

China Slowdown Affects Infrastructure Spend
BMI View: We believe that the economic slowdown in China is dampening capital expenditure for
mining and infrastructure projects in Australia. This is a major downside risk to the construction sector
and we have revised down our 2012 real growth forecast accordingly, from 1.5% to 0.5%.
Boosted By Infrastructure
Construction Industry Data
f=BMI forecast, Source: BMI Calculation
Construction activity in Australia proved to be relatively resilient in H211, despite the lack of new
projects within the residential and non-residential building sector. The latest data from the Australian
Bureau of Statistics (ABS) shows that real growth for the construction industry value reached 6.4% in
H211, bringing full-year construction real growth to 6.2%, an improvement from the 5.4% seen in 2010.

Infrastructure Outperformance
Australia Construction (And Sum-Components) Industry Value Real Growth, % Chg Y-O-Y
e/f = BMI estimate/forecast. Source: BMI, Australian Bureau of Statistics
This outperformance is primarily due to activity in the engineering construction sector. The latest data
from the ABS shows that work carried out for the sector has been trending upwards since the start of
2011, with all-time highs recorded in Q311 and Q411 (see chart below). This rapid surge in activity
significantly boosted the full-year work done for the engineering construction sector, from AUD77bn in
2010 to AUD99bn in 2011.
Further data breakdowns show that this surge in activity in H211 for the engineering construction sector
is also due to the energy commodities sector, with the start of construction works for several large-scale
mining and natural gas projects boosting the sector's work done to all-time highs in Q311 and Q411.
These mining and energy projects have, in turn, significantly increased activity in the transport and
utilities sub-sectors as these projects have boosted the demand for electricity and transport links within
Australia.

Infrastructure Sees Correction

Australia Value Of Work Done, By Sector, Seasonally Adjusted, AUDmn
Source: BMI, Australian Bureau of Statistics
Engineering Work Reached Plateau

Australia Value Of Work Done, Engineering Construction, By Sector, Original, AUDmn
Source: BMI, Australian Bureau of Statistics
Mining-Related Infrastructure Faces A Blip

However, it appears that this boom is starting to slow, with the engineering construction sector registering
lower figures in Q411 from those seen in Q311. This is a sign that the economic slowdown in China,
which is Australia's main market for commodities, is starting to dampen capital expenditure for mining
and infrastructure projects in Australia. In May 2012, Australia's largest miner, BHP Biliton announced
that it is reconsidering its plan to invest US$80bn in its mining operations, due to China's downward

growth revision. The company has since indicated that it may delay the construction of at least two mega
projects.
The Queensland government has decided to reduce the scope for the US$9bn Abbot Point port expansion
project as one of the major potential investors, Australian miner Rio Tinto, stated in April 2012 that it
had ended talks to partake in the expansion project, citing 'a weaker global economy and rising costs'. The
project was initially expected to develop up to six new terminals to ship coal to clients in Asia, but this
decreased to two terminals.
These reductions in capital expenditure from the mining sector have dampened our outlook for Australia's
railway and port infrastructure sub-sectors, as their strong growth potential are both contingent on equally
strong growth in the mining sector. Along with base effects, the railway and port infrastructure sub-
sectors are expected to see a contraction of 0.8% and 7.0% in 2012 respectively.
Blip In 2012
Australia Railways And Ports Infrastructure Industry Value Real Growth, % chg y-o-y
These reductions in expenditure for the engineering construction sector are also expected to be a major
downside risk for the growth outlook of the broader construction sector. As such, we have revised down
our 2012 forecasts for the Australian construction sector construction sector, from 1.5% to 0.5%.
No Help From Residential

We do not see a respite from the residential building construction sector. Housing prices continue to be on
a downward spiral, since peaking in May 2010. Other than a reprieve in March 2012, the slide in housing

value continued in the first four months of 2012, averaging -0.2% month-on-month (seasonally adjusted),
according to data from property research group RP Data-Rismark.
We remain convinced that homebuilding activity could continue to decline in Australia as there is still
substantial downside scope for home prices in the property correction cycle. Additional housing subsidies
that were provided for home buyers since the global financial crisis have ended throughout Australia.
This will have the effect of increasing the upfront down-payments for home buyers from AUD7,000 to
AUD14,000, making it more likely that buyers will stay out of the market. Growth of housing-related
credit should continue to decline, as fewer new loans are taken out and households pay down their
outstanding debt. Australian households are still looking relatively overstretched, with debt-to-disposable-
income remaining around 135%, capping any upside potential for financing housing activity.
In A Downward Trend
Australia Value Of Residential Buildings, Seasonally Adjusted, AUDmn (LHS); And Australia
Median City Home Values, SA, % Chg M-O-M (RHS)
Source: BMI, RP Data-Rismark, Australian Bureau of Statistics
Non-Residential May Provide Relief

One upside risk for the broader construction sector, which comes from the non-residential building sector,
is the fact that the Australian federal government and some of its state 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 South and Western Australia have negative net debt positions. Should global
economic conditions continue to weaken and take a 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, inflation has also tapered down in Australia and has provided leeway for the government to
initiate rate cuts to stimulate economic growth. In May 2012, the Reserve Bank of Australia cut interest
rates by 50 basis points to bring the cash rate to 3.75%. We believe there is the possibility for rate cuts all

the way to 3.00% if the Australian economy performs below expectations and this could drive the private
sector to boost investment in construction projects. Overall, we are forecasting real growth for the
residential and non-residential building sector to reach 0.3% in 2012.
Some States In The Black

Australia State Net Borrowing/ Lending, % Of State GDP
Source: BMI, Australian Bureau Of Statistics
Long-Term Optimism Still In Place

However, over the long term, we believe that the infrastructure and non-residential building sectors will
drive construction activity, and we forecast real growth for the construction industry to average 4.1% per
annum between 2013 and 2021. Our outlook is driven by Australia's attractive business environment and
greenfield opportunities, which are rare in developed markets. Australia has one of the most developed
public-private partnership models globally and sits at the top of our developed states risk/reward ratings.
This position will ensure continued investment in the sector.

Long-Term Trend Is Up
Australia Infrastructure Industry Value Data, By Industry, AUDbn
Macroeconomic Forecast
Staring Recession In The Face
BMI View: Several indicators show that the Australian economy is entering into recession, in line with
our long-held view that the economy is due for structural correction. We believe that more price declines
are coming in the housing market, and with business profitability on the decline, the unemployment rate
is set to soar. As such, we maintain our forecast for 2012 real GDP growth of 0.8%, versus consensus
estimates of 3.4%, and have downgraded our 2013 and 2014 forecast to 2.6% and 2.9% respectively,
versus consensus forecasts of 3.3% for both years.
On account of optimism towards Australia's mining sector, consensus forecasts for 2012 and 2013 growth
remain at 3.4% and 3.3% respectively, as most analysts continue to see exports and mining capital
expenditures driving the economy. We believe contraction in domestic demand, which is likely already
under way, will likely outweigh growth from the mining industry (which is likely itself to come in much
weaker than widely expected). We believe that impact from monetary policy tools will do little to prevent
continued economic weakness, and as such, we are happy to maintain our 2012 real GDP growth forecast
at 0.8%, far below the Bloomberg consensus estimate of 3.4%.
Weakness Spreading Through The Economy

The Australian housing market continues to decline and prices have already fallen around 6.1% from their
bubble peak in 2010. We continue to expect further price corrections to be aggravated as housing

subsidies for home buyers end in the few remaining states, which will have the effect of increasing the
upfront down payment by AUD7,000 to AUD14,000. Buyers are thus more likely to stay out of the
market and the lack of demand is likely to put further downward pressure on house prices. Growth of
housing-related credit should continue to decline, as fewer new loans are taken out and households pay
down their outstanding debt. Capital losses from price declines should also deter investors from more
investment in real estate, and we should see growth of investment housing-related credit dip into negative
territory.
As a consequence of the continued weakness in the housing market, we have seen recent surveys from
manufacturing, services and construction sectors in April reflect a marked slowdown in activity, which is
very much in line with our expectations for the weakness in the housing market to spill over into other
parts of the economy. As aggregate demand shrinks further as a result of the deteriorating housing
market, businesses will be forced to make adjustments to their capital and labour expenditures. With
wages continuing to rise despite the poor outlook for revenue and price growth, profit margins will be
squeezed, setting the stage for a surge in unemployment. Along with the declines in house prices, the
softer job market is likely to send the domestic saving rate higher. We expect consumption growth fall
sharply in 2012 and remain below the long-term average over in the next few years.
We continue to expect a contraction in investment growth in 2012 as sectors such as housing and services
continue to shrink and resources are reallocated to other parts of the economy. This reallocation is likely
continue over the medium term, weighing down on aggregate demand. We have downgraded our growth
estimates for 2013 and 2014 to expect the return to capital spending growth to happen more slowly.
Furthermore, with the government deferring large capital outlays further out into the future (beyond
2014), the near term upside growth potential for private investment is much lower. As such, we have
toned down our 2013 and 2014 estimates for private investment growth from 4.9% to 3.2% and 4.0% to
3.7% respectively.
Growth From Mining Spending To Fall Short

While exports from the mining sector, namely iron ore and coal, have boosted export growth over the past
few years and contributed to headline growth, this strong performance is unlikely to be repeated in the
coming years. Demand is less likely to continue on its previous growth path as steel production in China
contracts, putting downside pressure on commodity prices. With much lower prices, miners should face
shrinking margins which would lead companies to review and likely reduce planned capital spending. As
such, we believe that the mining sector will not be able to offset the ongoing contraction in the other
sectors, leaving the Australian economy to slip into recession.
Policy Tools Will Have Little Impact

While the Reserve Bank of Australia (RBA) has acted aggressively with a 50 basis point rate cut in the
face of weaker credit and price growth, the impact on mortgage and funding costs is likely to be short-
lived. To combat the stubborn upward trend of servicing costs, we expect the RBA to continue easing

monetary conditions, and have thus lowered our year-end forecast for 2012 to 3.0%. In comparison to the
RBA's accommodative policy stance, the ruling Australian Labour Party (ALP) has tightened its belt,
gearing its FY2012/13 budget for a return to surplus through austerity.
Targeting a small cash surplus of AUD1.5bn, the government chose to cut expenditures and defer
purchases of capital goods in favour of increasing direct payouts to families in this budget. Despite the
government's attempts to balance its books, the lack of growth from the private sector will likely put
upward pressure on welfare expenditures. As such, we expect fiscal expenditures to grow by3.0% in
FY2012/13 versus government forecasts of 0%, and foresee the fiscal balance to remain in deficit, coming
in at 2.0% of GDP (2.4% on calendar-year basis). Even in the event that weak growth in the domestic
economy pressures the government to abandon its surplus target, we expect the measures will be too late
to stem the downward spiral in the economy. Thus, we maintain our outlook for 2012 real GDP growth of
0.8% and now expect growth to come in at 2.6% in 2013 before returning closer to trend at 2.9% in 2014.
Consumption: Cutbacks Likely To Accelerate

We continue to expect households to cut back and increase saving, and maintain our 2012 forecast for
consumption growth to come in at 1.8%, far below the economy's long term average of 3.3%. As
declining house prices increases the pressure on household to cutback on their expenditures, company
profits are likely to see similar declines. In turn, we expect headline unemployment rate to soar, erasing
the recent slight improvements in the unemployment rate recorded in Q112. Moreover, the recent declines
in overall labour participation and the number of full-time employed staff suggest that the recent gains in
the headline number could easily reverse.
As economic activity in manufacturing and services industries continue to decline, employers will
inevitably resort to an absolute reduction of their workforce, rather than converting to part-time staff, in
effort to control costs. We believe the service sector will likely be the worst hit. Furthermore, with more
public sector job cuts on the way, we maintain our expectations for the unemployment rate to increase to
at least 6.4% by the end of 2012 and expect consumption growth to remain below average over the
medium term.
Gross Capital Investment: Deferred And Delayed

We continue to expect 2012 growth in gross capital investment to come in at -2.4%, a drastic decline
from the 8.3% recorded in 2011. In part, our long-held outlook for demand weakness in the housing
market continues to weigh down our expectation for capital expenditure growth. The latest data on
volume of land sales and dwelling approvals continues to support our view, with sales volume continuing
to slow in Q411, now at their lowest volume in five quarters and below the trough recorded in the
previous crisis. Growth in dwelling approvals have remained in negative territory for the first three
months of 2012. We expect these recent low volumes to give way to more falls in prices as buyers and
developers stay on the sidelines, with growth in real estate related investment staying subdued while the
economy undergoes structural changes.

With rising input and labour costs in the midst of subdued demand, margins are likely to come under
pressure, weighing on private sector capex. Coupled with the government's deferment of infrastructure
and capital expenditure out beyond 2013/14, we have revised our forecast to a slower rate of recovery in
capital expenditure growth, bringing our overall gross fixed capital formation forecast for 2013 and 2014
to 3.2% and 3.7% respectively.
Net Exports: Helping By Default

We maintain our expectations for the external balance to act as a smaller drag on headline growth in
2012, and continue to expect imports to fall sharply as households cut back on consumption. Compared to
import growth of 11.6% in 2011, we expect 0.0% real import growth in 2012 while we believe export
growth will bounce back from its 1.6% contraction in 2011 to grow at 2.0% in 2012. Although there is
growing downside risk to our 2012 export growth forecast, we believe that the lack of import growth will
support the improvement in the overall trade balance, and reduce its drag on headline growth in 2012.
Table: Australia Economic Activity
2011e 2012f 2013f 2014f 2015f 2016f

2
Nominal GDP, AUDbn 1,441.8 1,478.8 1,547.1 1,630.3 1,718.9 1,810.0
2
Nominal GDP, US$bn 1,488.2 1,471.8 1,330.5 1,222.7 1,289.2 1,357.5
Real GDP growth, %

1,2
change y-o-y 2.0 0.8 2.6 2.9 2.9 2.9
2
GDP per capita, US$ 66,657 65,267 58,425 53,170 55,520 57,904
3
Population, mn 22.6 22.9 23.2 23.5 23.8 24.1
Industrial production
2
index, % y-o-y, ave 0.4 2.9 2.0 2.1 2.2 2.1
Unemployment, % of
2
labour force, eop 5.3 6.4 6.4 6.0 5.8 5.5
e f 1 2
Notes: BMI estimates. BMI forecasts. Base Year = FY2008/09 (July-June); Sources: ABS/BMI Calculation.
3
World Bank/UN/BMI.

Real Estate/Construction Risk Reward Ratings
Real Estate/Construction Risk/Reward Ratings
Table: Asia Pacific Real Estate Risk/Reward Ratings
Real Real
estate Country Market Country estate
market structure Returns risks risks Risks rating Rank
China 80.0 45.1 67.8 86.7 49.4 73.6 70.7 1
Australia 65.0 91.6 74.3 60.0 74.5 65.1 69.7 2
Hong Kong 50.0 91.7 64.6 73.3 76.7 74.5 69.5 3
South Korea 52.5 71.3 59.1 76.7 69.9 74.3 66.7 4
India 87.5 37.2 69.9 73.3 39.3 61.4 65.7 5
Taiwan 60.0 67.0 62.4 73.3 59.7 68.5 65.5 6
Malaysia 55.0 56.2 55.4 83.3 59.9 75.1 65.3 7
Philippines 65.0 44.1 57.7 76.7 50.7 67.6 62.6 8
Indonesia 82.5 35.3 66.0 66.7 37.8 56.6 61.3 9
Pakistan 67.5 29.3 54.1 80.0 42.5 66.9 60.5 10
Japan 57.5 77.9 64.6 43.3 73.3 53.8 59.2 11
Thailand 47.5 36.7 43.7 80.0 63.7 74.3 59.0 12
Singapore 37.5 94.2 57.4 43.3 82.2 56.9 57.1 13
Vietnam 70.0 16.7 51.3 60.0 48.0 55.8 53.6 14
Scores out of 100, with 100 the best. Source : BMI
Australia Business Environment

Introduction
Australia boasts an open investment climate, strong legal framework, firm protection of property rights
and minimal corruption. However, physical infrastructure has at times proved inadequate, with congestion
on roads, railways and at ports constraining 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 Institutions Market Orientation Business

Rating Rating Rating Environment
Afghanistan 26.6 24.7 20.5 23.9
Australia 75.0 78.2 70.1 74.4
Bangladesh 41.6 21.8 29.3 30.9
Bhutan 23.0 48.5 24.4 32.0
Cambodia 31.4 24.2 50.9 35.5
China 56.3 52.4 46.6 51.8
Hong Kong 70.0 80.7 85.2 78.7
India 47.4 42.0 42.9 44.1
Indonesia 37.1 31.2 52.3 40.2
Japan 78.3 80.1 55.9 71.4
Laos 36.8 22.6 19.8 26.4
Malaysia 55.3 66.9 67.9 63.4
Maldives 40.3 52.5 30.7 41.2
Nepal 28.1 32.6 23.2 27.9
New Zealand 77.4 91.0 77.1 81.8
Pakistan 35.5 32.9 41.7 36.7
Philippines 50.7 39.0 60.0 49.9
Singapore 79.0 83.9 79.4 80.8
South Korea 71.2 52.7 53.5 60.6
Sri Lanka 45.7 42.5 40.0 42.7
Taiwan 60.6 67.0 60.4 62.7
Thailand 59.5 59.3 67.8 62.2
Vietnam 47.8 36.7 51.0 45.2
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 Contract
Protection Score Rule Of Law Score Enforceability Score Corruption Score
Afghanistan 1.2 13.7 29.2 6.3
Australia 52.9 91.8 76.5 92.8
Bangladesh 33.0 28.5 4.6 25.4
Bhutan 12.7 52.9 99.1 65.6
Cambodia 16.7 14.8 40.4 21.3
China 58.5 26.8 86.4 29.3
Hong Kong 90.5 44.9 84.5 81.8
India 64.2 65.4 11.3 45.3
Indonesia 34.7 37.3 23.3 37.8
Japan 82.5 82.1 75.9 90.0
Laos 1.2 11.1 50.6 6.2
Malaysia 76.9 56.5 43.9 45.8
Maldives 40.1 41.7 57.7 46.4
Nepal 44.5 27.0 35.8 25.7
New Zealand 92.4 92.7 83.7 96.6
Pakistan 46.5 15.1 35.7 14.1
Philippines 38.7 48.5 33.9 25.1
Singapore 95.6 72.6 76.7 60.1

Table: BMI Legal Framework Rating
Investor Contract
Protection Score Rule Of Law Score Enforceability Score Corruption Score
South Korea 11.1 77.0 40.3 68.4
Sri Lanka 51.4 52.3 35.3 26.1
Taiwan 64.2 72.4 70.2 72.5
Thailand 63.9 37.7 79.3 38.0
Vietnam 31.9 24.7 66.9 17.4
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. 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 resource rent tax, each to come into force only in 2012
and 2013 respectively. Meanwhile, the government is on track to FY2011/12 budget allocates
AUD954.3mn in new funding and outlines plans for accelerated investment in the Nation Building
Program (NBP) - the government's plan to invest AUD36.2bn on transport infrastructure over a six-year
period between FY2008/09 and FY2013/14.
The government is also allocating AUD394.4mn for projects under the AUD6bn regional infrastructure
fund, while providing annual funding of AUD7bn to several small- and large-scale projects. The number
of projects under the NBP includes 63 major roads, 11 major railways and six urban public transport
projects. This massive backlog of projects is supporting our forecast for the transport infrastructure sector
and we are expecting the sector's real growth to average 4.0% per annum between 2011 and 2015,
reaching a nominal value of AUD16.7bn by 2015.
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 2010, Fair Work Australia approved an AUD26.12 rise in the minimum wage to AUD569.90 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.
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. However, the recent industrial action undertaken by Qantas in late 2011, has raised
concerns on

Table: Labour Force Quality
Labour Market Female Labour

Literacy Rate,% Rigidity Score Participation, %
Afghanistan 28.1 20.0 n/a
Australia 99.0 24.0 45.3
Bangladesh 47.9 28.0 39.8
Bhutan 47.0 7.0 31.7
Cambodia 73.6 36.0 48.8
China 90.9 31.0 45.9
Hong Kong 93.5 0.0 46.1
India 61.0 30.0 28.3
Indonesia 90.4 40.0 37.0
Japan 99.0 16.0 41.6
Laos 68.7 20.0 50.7
Malaysia 88.7 10.0 35.2
Maldives 96.3 18.0 41.1
Nepal 48.6 46.0 45.0
New Zealand 99.0 7.0 46.1
Pakistan 49.9 43.0 18.7
Philippines 92.6 29.0 38.3
Singapore 92.5 0.0 41.3
South Korea 97.9 10.0 41.3
Sri Lanka 90.7 20.0 39.8
Taiwan 96.1 46.0 20.9
Thailand 92.6 11.0 46.3
Vietnam 90.3 21.0 n/a
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = 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 top three 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 46.8 2177.3 25.7 1174.1 32.5 1458.2
Bangladesh 1.1 7.5 0.7 4.8 0.9 6.1
Cambodia 0.8 59.0 0.5 38.6 0.8 55.4
China 108.3 81.5 95.0 71.2 105.7 78.8
Hong Kong 59.6 8607.8 52.4 7497.7 68.9 9769.2
India 42.5 35.7 35.6 29.5 24.6 20.1
Indonesia 9.3 39.7 4.9 20.5 13.3 55.5
Japan 24.4 193.0 11.9 94.0 -1.3 -10.0
Malaysia 7.2 260.8 1.4 51.2 9.1 320.5
New Zealand 4.6 1074.9 -1.3 -299.1 0.6 128.4
Pakistan 5.4 32.5 2.3 13.7 2.0 11.6

Table: Asia Annual FDI Inflows
2008 2009 2010
US$bn Per Capita US$bn Per Capita US$bn Per Capita
Philippines 1.5 17.1 2.0 21.4 1.7 18.4
Singapore 8.6 1799.6 15.3 3089.3 38.6 7596.3
South Korea 8.4 176.2 7.5 156.4 6.9 142.6
Sri Lanka 0.8 36.7 0.4 19.5 0.5 22.9
Taiwan 5.4 235.3 2.8 121.1 2.5 107.3
Thailand 8.4 123.7 5.0 72.4 5.8 84.1
Vietnam 9.6 111.4 7.6 87.5 8.2 93.0
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 34.7 6.2
Australia 68.6 35.1
Bangladesh 13.8 34.3
Bhutan 33.7 24.6
Cambodia 82.6 81.6
China 39.9 65.5
Hong Kong 96.8 97.7
India 36.8 38.9
Indonesia 39.4 60.0
Japan 5.6 34.4
Laos 35.9 17.7
Malaysia 47.5 97.2
Maldives 27.5 43.0
Nepal 46.8 20.9
New Zealand 71.4 76.1
Pakistan 59.6 51.4
Philippines 59.5 62.1
Singapore 67.9 99.6
South Korea 4.9 77.5
Sri Lanka 22.3 57.3
Taiwan 0.0 87.0
Thailand 54.8 89.0
Vietnam 80.7 86.1

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
has 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 announced a 'tax plan for the
future' that promised to introduce 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. While
the bill was passed by the lower house in late 2012, as the ALP rallied support from the Greens, it could
be shot down in the Senate as was done with the previous bill. The bill is scheduled to be debated in the
Senate in early 2012.
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:
Mainland 4,528.10 5,929.40 7,946.10 12,075.00 14,986.90 20,067.20 27,068.10 33,499.20
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
States 6,247.90 6,141.20 6,995.00 7,052.60 7,547.20 8,514.30 10,290.10 7,599.80
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
partners 48.4 48.1 50.7 53.9 53.5 54.8 59.2 63.7
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.

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 2012 Australia's commercial real estate market, particularly in Melbourne,
will be dominated by foreign investors, as is reflected by the US$1bn in foreign investment in 2011. 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 REITS, according to Colonial First
State Fund Manager. These include the major listed REIT players including Westfield Group, Stockland
Group, General Property Trust and Mirvac. Together, Westfield, Stockland, and the debt-laden
Centro Properties own the majority of the large retail centres. Commercial property in the major city
centres are also predominantly owned by listed REIT players including General Property Trust and
Commonwealth Property Trust.
Current new developments under way are also predominantly from the major REITs. Lendlease,
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 the major residential projects. There
are also a number of smaller players who do the smaller end in terms of 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 REIT sectors 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 and at its peak over 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 global financial crisis had a significant effect on the sector. By October 2011, the
sector constituted more than 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.
Investor Outlook
Reflecting Australias growing links with China, Chinese buyers now account for an increasing
percentage of all foreign investment in Australian real estate, accounting for 40% of foreign sales on the
Gold Coast and 35% in Brisbane, according to The Australian. Chinese investment is on the rise
nationally as cashed-up buyers from mainland China and Hong Kong purchase golf courses and shopping
centres, as well as residential real estate. Steam Leung, the director of Colliers International's Asian
investment services division, recently sold a shopping centre in the Sydney beach suburb of Dee Why to a
Chinese investor for AUD17mn. Mr Leung said his sales to Asian buyers had doubled since the financial
crisis in 2008. According to Australias strict foreign investment rules, foreigners can only buy newly
built properties, with a few exceptions.
Leighton: Tough Times Ahead For 2012

Leighton is confident that it will meet its net profit forecast of AUD400-450mn for the calendar year of
2012. We note however that the company still faces several headwinds over the course of 2012 (ie risk
management issues, potential project delays, losses from Middle East operations, and falling orders from
the Australian mining sector). These concerns are not only likely to make it difficult for Leighton to meet
its 2012 profit forecast based on its operations alone, but could also cap any upside potential on its stock
price in 2012.
Leighton Holdings' recent annual general meeting saw its senior management reaffirm the company's
profit guidance of AUD400-450mn (originally stated in March 2012) for the calendar year of 2012. This
is despite reporting a net loss of AUD80mn for the first quarter of 2012 and announcing another two-
month delay for the Brisbane Airport Link road in Queensland the project is now scheduled for
completion by August 2012, missing the June 2012 deadline stated in March 2012.
We are less optimistic about Leighton's prospects. Indeed, the company has yet to resolve earlier issues
that underpinned our bearish near-term outlook for Leighton, while new concerns are arising due to a
slowdown in the Australian and Chinese economies.
The Problem Lies Within

We believe that the first major concern is Leighton's risks management system. The company has
repeatedly failed to identify and manage the risks to project execution, resulting in several changes to its
net profit forecasts and its completion dates for key projects. The Brisbane Airport Link road is a recent
example, where the company had only just announced in March 2012 that it could complete the project

by June 2012. In our opinion, this shows that Leighton's risks management system, be it size or
sophistication, has failed to keep up with the rapid increase in the company's project orders work in
hand for Leighton has increase more than sevenfold between 2000 and 2012.
We do note that Leighton is taking steps to address this deficiency in risk management. It has recently
appointed a new Chief Risk Officer and has formed a tender review and risk committee to identify 'high-
risk' projects. During the AGM, Leighton also stated that it aims to have a tighter control over the projects
tendered by its subsidiaries, where these subsidiaries would focus on projects based on their core
competencies and their core markets.
While these are all positive steps, we believe that the new risk management system would only have a
material impact on future projects and not on its existing backlog. Leighton's work in hand was around
AUD45bn at the end of 2011, and we doubt that Leighton has a clear understanding of the risks it faces
from these projects. For example, the delays to the Brisbane Airport Link took place because Leighton
had believed that it could accelerate the completion of the commissioning phase for the project from four
months to two months. This failed to transpire, which suggests that assumptions about other projects
could be overly optimistic. This means that there is still a lot of potential for further delays and cost
overruns in Leighton's project backlog. One key project to note is the AUD3.5bn (US$3.7bn) Wonthaggi
desalination plant. The project has faced numerous revisions in its completion date and is scheduled in
March 2012 to complete its commissioning phase by the end of 2012.
Middle East Troubles Not Over

Leighton's Middle East joint venture (JV), Al Habtoor Leighton (HGL), was a major drag on the
company's financials in 2011, and we doubt this would change in 2012. Although the JV has won a few
projects in recent months the most important project being the US$480mn property redevelopment
project in Dubai the JV continues to face difficulties in receiving payment for completed projects and
stiff competition for new contracts. Leighton aims to launch an initial public offering for HGL by 2016.
Not only do we believe this is an optimistic outlook, but we view this move as a bearish signal for the
HGL as it appears that the company is keen to reduce its exposure to the JV.
Furthermore, it appears that one of Leighton's subsidiaries, Leighton Offshore, is still being investigated
by the Australian police over bribery allegations in 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.
Mining No Longer A Life-Saver

To compound Leighton's woes, recent evidence show that the economic slowdown in China, Australia's
main market for commodities, is starting to damper capital expenditure for mining and infrastructure
projects in Australia, with major miners such as BHP Biliton and Rio Tinto reconsidering or delaying
their plans to invest in their mining operations. This a major downside risk to Leighton's future earnings

as the Australian market is Leighton's main source of revenues. The company generates 47% and 31% of
its revenues from the Australian infrastructure and resources markets respectively.
Having said that, this could potentially 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.
Tough Times Also Mean Opportunities

Overall, we believe that it could be tough for Leighton to meet its 2012 profit forecast based on its
operations alone, and asset sales in non-core operating activities would most likely be needed to meet the
profit forecast. Furthermore, we believe that Leighton is unlikely to resolve the concerns stated above
within 2012, and as therefore, we see little upside potential for the company's stock price valued
AUD17.45 at the time of writing within 2012. The company has already broken the key multi-month
support line of AUD22 and has tested the support line of AUD16.8.
Having said that, we believe that Leighton's current price is attractive for investors if viewed from a long-
term perspective (ie, beyond 2012). At present, Leighton's price-earnings ratio based on FY2010/11
(July-June) results is at 10.0x and is closing in on the all-time low of 7.5x, while its current price-to-
book ratio of 2.6x is almost at its all-time low of 2.5x.
These valuations are a deep discount to Leighton's growth potential and do not price in the company's
exposure to dynamic Asian markets. Asia has significant deficits in infrastructure and would present
numerous growth opportunities for Leighton. The Australian dollar has also begun to depreciate
aggressively, from its peak of US$1.08/AUD in February 2012 to the current US$0.98/AUD. This would
boost Leighton earnings from its Asia ventures.
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. Commodity prices are 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. As a result, Leighton's exposure to this
sector would still pay dividends over the long term.

Company Profiles
Bovis Lend Lease (BLL)
Strengths BLL is a well established company with a strong back catalogue of projects.
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.
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 groups 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 Leases project management,
design and construction business. In 2010 this business earned AUD86mn after tax.
In March 2011, Lend Lease bought Valemus for AUS960mn (previously known as Bilfinger
Berger Australia), which was established in 2004 as the holding company for BBAGs
investments in Australia. Baulderstone had been acquired by Bilfinger Berger AG in 1993.
Abigroup was acquired by Bilfinger Berger AG in 2004. Valemus is now Lend Leases
infrastructure business and operates under the Lend Lease name.
The New South Wales Government has approved a Concept Plan amendment for the AUD6bn
redevelopment of Barangaroo South in Sydney by Lend Lease.
Conditions have also been met for project agreement on the AUD2.5bn Royal National
Agricultural and Industrial Association of Queensland urban regeneration project in Brisbane.
Lend Lease has completed the purchase of the Jurong Gateway in Singapore mixed-use site,
renamed Jem, and raised GBP220mn for the new UK Infrastructure Fund, which it manages.
The company sold a stake in its US shopping centre, King of Prussia Mall, for AUS521mn in
H111. The Australian reported that UBS estimated that large asset sales accounted for 43% of
the companys H111 profit.
In November 2011 Lend Lease said it had been chosen as a preferred developer for a
redevelopment project in Perth, worth about AUS1bn (US$1 billion). The project is a four-hectare
(ha) mixed-use precinct on the banks of the Swan River, including commercial offices and retail.
Lend Lease Group announced that an Abigroup joint venture (JV) has commenced work on
Stage 1 of the new Wiggins Island Coal Export Terminal in Gladstone, Queensland, in November

2011, having a contract value of AUS290mn. Abigroup, part of the Lend Lease's Australian
infrastructure business, is in a 50/50 JV with Golding Contractors. The work is due to be
completed by June 2013.
Financial Highlights Statutory profit after tax year for FY11: AUD493mn (June 2010 AUD345.6mn)
Cash held: AUD1bn
Gearing: 8.9%
Key Statistics Year established: 1949
Full-time employees : 6,800 in Australia
Key Personnel CEO: Murray Coleman
Group financial controller: Tony Lombardo
Chairman Bovis Lend Lease: John Spanswick
Contact Details Bovis Lend Lease

30 The Bond
30 Hickson Road
Millers Point NSW 2000
Australia
Tel: +61 2 9236 6111
Fax: +61 2 9252 2192
www.bovislendlease.com

Brookfield Multiplex (BM)

Strengths BM is a well established company with a strong back catalogue of projects.
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.
Multiplex was acquired by Brookfield Asset Management in a transaction that was completed in
January 2008.
Brookfield Multiplex is a fully integrated company in the fields of: commercial, retail and residential
property development, construction, management services and infrastructure.
The Multiplex Group de-listed from the ASX in December 2007, when it was acquired by
Brookfield. It still publishes a full annual report that is available from the companys website.
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 current projects portfolio includes 33 Mackenzie Street and 700 Bourke Street, Melbourne,
City Square (Perth) (also known as 125 St Georges 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 Brisbanes
Indooroopilly Shopping Centre. Commencing in Q112 and continuing for 30 months, the
2
development of Indooroopilly will include the addition of around 30,000m of new retail space
comprising:
a new mall and fresh food area,
a new 14,200 square metre 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 Centres retail space will
2
increase to around 115,000m and will house around 340 speciality retailers.
Workbook at June 2011 US$8.3bn

Key Personnel CEO: Ross McDiven
CFO: Brian Kingston
Company Address Level 22,

135 King Street,
Sydney
NSW 2000
Tel: +61 2 9322 2000
Fax: +61 2 9322 2001
www.brookfieldmultiplex.com
www.au.brookfield.com

Laing ORourke
Strengths LOR is a well established company with a strong back catalogue of projects.
A number of senior managers departed in March 2012.
Threats There will be further effects on LOR if the economic recovery falters.
Company Overview Laing ORourke began operations in Australia in 2004. It is the Australian subsidiary of UK-based
Laing ORourke, which claims it is the largest privately owned construction firm in the UK. Laing
ORourke was created through the acquisition of Laing by R. ORourke & Son in 2001.
The Australian operation grew substantially with the acquisition in 2006 of Barclay Mowlem, one
of Australias leading multi-disciplined construction and services companies.
Current projects include a AUD65mn rail stabling facility for City Rail in western Sydney, the
2
AUD110mn K10 berth at Koorgang Island coal terminal and the 6,500m , mixed-use McLachlan
and Ann development at Fortitude Valley, Brisbane, with a 22-floor residential tower and 12-floor
commercial building.
In March 2012 a number of senior managers left Laing ORourke as the contractor reshuffled its
senior team. One company source said: A number of high-profile people within the firm have now
gone, with others also let go in the next rank down. It looks like others could go and feels like a
reinforcing of the old guard at the company.
Departures include Lisa Scenna, managing director of the Explore Investments Group; Paul
Copeland, head of rail; Duncan Symonds, director infrastructure; Lee Marks, commercial director
and David Hills, construction director. An ORourke spokesman said: This is a handful of changes
at a company of our size and is not any sort of restructuring.
Financial Highlights The Australian subsidiary does not publish separate financial results.
Key Personnel Chairman: Jim Sloman
CEO Australia: Andrew Wilson
Chief Operating Officer Australia: Steve Hollingshead
Contact Details Innovation Place, 100 Arthur Street, North Sydney, NSW 2060
Phone: 61 2 9903 0300
Fax: 61 2 9903 0333
www.laingorourke.com.au

Leighton Holdings
Strengths Leighton is a well established company, with a strong back catalogue of projects.
Leighton generated a profit after tax of AUD340mn for the six-month transitional year from
1 July 2011 to December 31 2011, based on strong performances across the core
construction and mining operations in Australia and Asia.
Weaknesses Its profitability has been affected by the global financial crisis and its aftermath. It made a
loss in FY2010/11.
One of Leighton's perceived strategic advantages lies in its exposure to emerging markets
in Asia; however, this has conversely been highlighted as a weakness, due to the relative
strength of the Australian dollar as a result of strong demand for the country's
commodities.
Threats There will be further effects on Leighton Holdings if the economic recovery falters.
Company Overview Leighton Holdings is the parent company of a group that includes: Leighton Contractors, Thiess,
John Holland, Habtoor Leighton, Leighton International, Leighton Properties and Leighton Asia.
Each of these companies is kept intentionally separate, maintaining individual marketplace

identities, tailored advisory boards and/or management committees, and possessing differently
honed corporate cultures.
In 1983 Leighton acquired Thiess Contractors. The acquisition introduced HOCHTIEF, a major
German contractor, as the groups largest shareholder and also fundamentally changed the
structure of the organisation. The company acquired John Holland in 2000.
HOCHTIEF is now a majority shareholder in Leighton Holdings with a 54.9% stake. Leighton
Holdings Limited is listed on the ASX, and a full annual report is available from the companys
website.
In addition to its current Australian projects, Leighton is also involved with 17 major projects in the
Gulf states and two in Macau.
Current projects in Australia include:
One One One Eagle Street, a premium grade office development in Brisbane, worth
AUD338mn (Leighton Contractors).
Melbourne Airport two expansion projects under the Strategic Terminal Expansion
Programme (John Holland) worth AUD229mn.
Canberra water security works worth AUD244mn (John Holland).
In March 2012 Leighton Properties and Grosvenor Fund Management Australia announced that the
Eclipse Tower in Parramatta has now had 80% of its office space leased, reports Property
Observer. The office building will be the only A-grade commercial building in the Australian city
when it is completed in August 2012. Parramatta has an average vacancy rate of around 9%, while

2
only 25,000m of new office space is scheduled to be built in the city over the next two years.
Leighton Properties will partner Landcom and Mirvac on an urban reconstruction project due to
begin 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.
The companys largest subsidiary, Thiess, has suffered numerous industrial disputes at one plant
and, according to The Australian, massive over-spend which has caused problems for the
company.
A new CEO and chairman were appointed in September. The Sydney Morning Herald suspected
someone had squeezed the board and questioned the stability of the company.
Leighton Holdings credit rating was downgraded in October by Standard and Poors from BBB/A-2
to BBB-/A/3. CFO Peter Gregg said the decisions rested on concerns over parent Hochtief, and
said Leighton deserved a higher rating.
The AUD5.7bn Wonthaggi desalination plant in south-east Victoria is a year behind schedule, with
the possibility of a fine for the company. It is possible the company could declare an impairment on
this project, following the announcement of a writedown on Brisbane's Airport Link in February
2011. This AUD4.1bn project, which saw work halted as a result of the Queensland floods, was
another reason for the first profit outlook downgrade of the year.
In October 2011, A joint venture (JV) of Gammon Construction and Leighton Asia was awarded a
HKD8.9bn (US$1.14bn) contract by Hong Kong's subway operator MTR Corporation to build a
terminus station for an express rail link between Hong Kong and China. The contract will include
the development of West Kowloon Terminus Station North, which is part of the Hong Kong section
of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL). Construction operations under
the contract are scheduled to begin in October 2011, with completion expected in 2015.
The company generated a profit after tax of AUD340mn for the six-month transitional year from 1
July 2011 to 31 December 2011.
Revenue (2010/11): AUD19.377bn. (2010/11): loss of AUD409mn
Work in hand: AUD46.2bn
Key Personnel Chairman: Stephen Johns
CEO: Hamish Tyrwhitt
Contact Details Leighton Holdings, 472 Pacific Highway

St Leonards NSW 2065, Australia
Tel: +61 2 9925 6666
Fax +61 2 9925 6000
www.leighton.com.au

Mirvac
Strengths Mirvac is a well established company with a strong back catalogue of projects.
More than 50% of its portfolio is office space.
High exposure to just Sydney and Melbourne, according to Reuters.
Further, banks are more reluctant to lend to smaller developers providing better potential
pricing for the larger players such as Mirvac.
Threats Interest rates may rise in 2012, putting pressure on sales in the residential division.
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. Mirvacs retail team manages retail assets across
Australia, including Orion Springfield Town Centre, Broadway Shopping Centre and Rhodes.
Mirvac Hotels and Resorts have 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 Mirvac on an urban reconstruction project due to
begin 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.
In October, it sold Taree City Centre for AUD55.3mn, slightly above book value.
Colonial First State reported in September that Mirvac had sold 50% of its Hoxton Park project for
AUD97.4mn on 7.5% yield.
Reuters reported in August 2011 that the company expects 5%+ of rental growth in Sydneys
office space market over the following year, citing tight supply and modernising office
requirements.
Mirvacs office portfolio achieved growth of 4.2% in operating income for the year ended 30 June
2011. Occupancy increased from 97.5% to 97.8%, with an average weighted lease expiry of 6.3
years.
The companys retail portfolio achieved growth of 4.3% in net operating income for the year
ended 30 June 2011, while occupancy costs remained sustainable at 13.2%. Occupancy
increased from 97.9% to 99%.

Financial Highlights For FY11 the company reported net profit after tax of AUS358.5mn, up 30.2% y-o-y.
Key Personnel Chairman: James MacKenzie
Managing Director: Nicholas Collishaw
Contact Details Level 26
60 Margaret Street
Sydney NSW 2000
Ph +61 2 9080 8000
Fax +61 2 9080 8111
www.mirvac.com.au

Stockland Group
Strengths Stockland is a well-established company with a strong back catalogue of projects.
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.
Threats Any rise in interest rates in 2012 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.

2
The Industrial portfolio is valued at US$1.0bn, with 15 properties, incorporating well over 1mn m
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

masterplanned and mixed-use communities in growth area 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 Top 5 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 plans to winds down its UK business by 30 June 2012, with an expectation of a profit
contribution of around AUD10mn from the sale of London assets.
The companys 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.
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 Stocklands 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
2 2
villages, 170,000m of retail and commercial space, and 650,000m 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 AUS$201mn deal with Dexus.
Stockland has said that it expects its earnings per share in the year to end-June 2012 to be about
the same as2011. The group warned that it was too early to tell whether November's 25 basis
point interest rate cut had improved conditions.
Financial Highlights Stockland released its results for the 2011 financial year in August.
Highlights were:
A continuing realignment of its asset portfolio in line with its strategy of the 3-Rs Residential,
Retirement Living and Retail.
Underlying Profit was AUD752.4mn, up 8.7% from AUD692.3mn in FY10, underpinned in

particular by growth from residential communities.
Net profit was AUD754.6mn and revenue AUD2.36bn, up from 2.60bn the previous year.
Underlying earnings per security in FY11 was 31.6 cents, up 8.6% on the previous year.
Chairman Graham Bradley said Stockland maintained a conservative balance sheet policy
throughout FY11, with low gearing and ample liquidity. Gearing at 30 June 2011 was 22%
measured by net debt to total tangible assets net of cash on deposit, below its target range, but
up from 18% in 2011. He said the gearing policy was considered prudent given the challenges
faced by global financial markets.
FY11 Net profit: AUD754.6mn (2010 AUD478.4mn)
FY11 Revenue: AUD2.36bn (2010 AUD2.06bn)
Assets at 30-6-11: AUD14,571mn (2010 AUD13,957mn)
Key Personnel Chairman: Graham Bradley
Managing Director: Matthew Quinn
Contact Details Level 25, 133 Castlereagh Street, Sydney 2000, Australia
Phone: (02) 9035 2000
Fax: (02) 8988 2000
www.stockland.com.au

Demographic Data
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
1
total working age 49.7 50.4 49.6 48.5 48.0 49.3 51.7 55.6
Dependent population,
2
total, '000 5,679 6,074 6,355 6,663 7,222 7,571 8,104 9,016
Active population, % of
3
total 66.8 66.5 66.8 67.3 67.6 67.0 65.9 64.3
Active population, total,

4
'000 11,417 12,045 12,809 13,740 15,046 15,348 15,689 16,224
Youth population, % of
5
total working age 33.0 32.3 31.0 29.3 28.1 28.4 28.9 30.1
Youth population, total,

6
'000 3,766 3,889 3,967 4,028 4,228 4,362 4,537 4,883
Pensionable population,
7
% of total working age 16.8 18.1 18.6 19.2 19.9 20.9 22.7 25.5
Pensionable population,
8
'000 1,914 2,185 2,388 2,635 2,994 3,209 3,568 4,134
1 2 3
f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total
4 5 6 7 8
population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 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

BMI 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 thinking is that, as yields are
driven by rentals and capital values, the movements in yields provide a convenient short-hand for what is
and is 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 because of BMIs own
macroeconomic research and in part 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-2011, 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 2011-2016.
Overview
BMIs 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 BMIs
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 BMIs macroeconomic and demographic

forecasts.
Employment Within The Construction Industry

These 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 2011 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 2011. The
growth rate in 2012 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 2016. The growth rate in 2013 is assumed to be a weighted average where the respective ratios are
60% and 40%. In 2014, the ratios are reversed. In 2015, the ratios are 20% and 80%. In 2016, the three
variables are assumed to increase at the annual rate of growth in nominal GDP over the five years. In
effect, 2016 is the only year of the five where the actual growth of the variables achieved in 2010 has no
impact on the projected growth rates.
Real Estate/Construction Business Environment Rating

BMIs 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 BMIs 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 industrys current size and growth potential, and also assesses broader industry/state
characteristics that may enable or inhibit the industrys 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 industrys 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 45%
Source: BMI
In all cases, scores are out of 100, with 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.
BMIs 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. But high rates of lending growth are penalised as they
could indicate an investment bubble unless the states 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
BMIs Long-Term Economic Rating. A measure of long-term economic stability.

BMIs 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.
BMIs Business Environment Bureaucracy Rating. Denotes the ease of conducting business.
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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Australia Real Estate Report Q4 2012

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Q4 2012

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2012

Business Monitor International 2012 Business Monitor International.

Business Monitor International Ltd Page 2

Real Estate Market Overview .......................................................................................................................... 9

Market Analysis Retail................................................................................................................................ 15

Market Analysis Industrial ......................................................................................................................... 17

Real Estate/Construction Risk Reward Ratings ......................................................................................... 32

Business Monitor International Ltd Page 3

Table: BMI Business And Operation Risk Ratings ............................................................................................................................................... 33

Competitive Landscape ................................................................................................................................ 45

Demographic Data ......................................................................................................................................... 60

BMI Methodology ........................................................................................................................................... 64

Business Monitor International Ltd Page 4

Business Monitor International Ltd Page 5

Business Monitor International Ltd Page 6

Australia Real Estate/Construction SWOT

Strengths This sector in Australia is technically sophisticated and globally competitive.

Threats Weakening investor sentiment could result in a subdued market in 2012.

Australia Political SWOT

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

Business Monitor International Ltd Page 7

Australia Economic SWOT

Strengths A free market economy supported by a highly educated workforce.

Australia Business Environment SWOT

Business Monitor International Ltd Page 8

Real Estate Market Overview

Business Monitor International Ltd Page 9

Mining and Maturity

Business Monitor International Ltd Page 10

Better Prospects In Services

Stability And Predictability Favoured

Business Monitor International Ltd Page 11

Market Analysis Office

Table: Historic Rents 2011-2012 (AUD per m2/month)

Min Max Min Max Min Max

Sydney 06.66 41.66 33.33 83.33 16.66 83.33 150 - 100%

Melbourne 06.66 37.50 29.16 54.16 12.50 33.33 -11 - +88%

Brisbane 06.66 66.67 29.26 70.83 29.16 79.16 338 - 19%

Perth 06.66 58.33 45.83 70.83 15.00 66.66 588 - 21%

Table: Net Yield, 2011-2013 (%)

2011 (Jan-Jun) 2011 (Jul-Dec) 2012 (Jan-Jun) 2012 (Jul-Dec) 2013

Melbourne 6 - 10% 5 - 9% 7 - 12% 7-12% 7-12%

Brisbane 7 - 9% 6 - 10% 7-13% 7-13% 7-13%

Perth 3 - 8% 6 - 9% 7 - 10% 7 - 10% 7-12%

Table: Terms of Rental Contract/ Leases H112

Lease terms (in years) Rent free months (if any)

Brisbane 1-10 1-3 months

Perth 3-10 2 - 3 months

Business Monitor International Ltd Page 12

Supply And Demand

Industry Forecast Scenario

Table: Forecast Rents AUD/Square Metre/ Month

2012 (Jul-Dec) 2013

Min Max Trend (% change)

Sydney 16.66 83.33 Same 0%

Melbourne 12.50 33.33 Increase 0 - 4%

Brisbane 29.16 79.16 Same 0%

Perth 15.00 69.93 Increase 3 - 5%

Business Monitor International Ltd Page 13

Table: Forecast Net Yield, 2008-2016 (%)

2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f