PFA Annual Conference 2016 - Property Funds · PFA Annual Conference –May 2016 Divergence and disruption Page 6 The Future of Banking Dr Ken Henry AC, NAB Chairman, address to the

PFA Annual Conference 2016

Divergence and Disruption

May 2016

PFA Annual Conference –May 2016

Divergence and disruption

Page 2

Disclaimer

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Property – the value dichotomy and emerging trends The banking landscape

Core banking

• “Post GFC we have emerged into a complex property

market which the PFA Conference 2016 will explore.

• We have the Divergence of property, a value

dichotomy, in which capital market forces and

fundamentals tell a different story regarding the value of

property.

• And, we have Disruption where emerging trends in

technology are reshaping the nature of the workplace;

consumption and distribution are impacting the office,

retail and industrial property sectors; and crowd

sourced funding is making an impact on the finance

sector”

• This presentation will explore some of the trends and

issues that banks are facing with respect to divergence

and disruption, and the associated impacts

Regulation

Cost of Funds

Risk Appetite

Required Return

Customers and

Relationships

Competition



Page 4

Section1: The Future of Banking

Section 3: Trends in Commercial / Industrial

Section 4: Trends in Residential

Section 5: Conclusion

Section 2: Key Trend - Cost of Funds



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The Future of Banking

Dr Ken Henry AC, NAB Chairman, address to the AFR Banking & Wealth Summit, April 5, 2016

• Running a bank successfully means having a good sense of shareholder expectations, attracting, motivating

and retaining high performing staff knowing what it takes to attract reliable funding from depositors, institutional

pools and other banks, but most importantly, it means having a very good understanding of what the banking

customer wants

• Our customers are looking for a relationship with a bank that understands their business, and the markets in which

they operate, well enough to anticipate their financial services needs. Many of them want to think of the bank as

a reliable and trustworthy partner. Not just a business partner, a partner that helps them realise their

aspirations; aspirations they harbour for themselves, for their families, in some cases for future generations, and for

their communities.

• The importance of a deep interest in the aspirations of our customers is being driven, Board down, through our

business. We are determined to be customer-focussed. We know that this is what will drive our success.

• Successful businesses put the customer at the centre of everything they do.



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• While people want their money safe, and the institutions looking after their money strong, they also want the

increased convenience and better quality service that digital offerings promise.

• We are finding that customers have liquid expectations; they want the best practise service they experience in

one sector to be matched across all sectors.

• But digital financial innovation also poses the possibility of disruption; that is, the disruption of banking

incumbents

• All of the roles played by banks are contestable. In fact, banks only get to play these roles today because they

out-competed earlier providers of each of these services. This is worth bearing in mind as we think about the

contestability posed by digital challengers.



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• We understand that we need to keep pace with our customers’ expectations. We know that we have to be

forward-looking; not looking to what our competitors are doing, and matching them, but looking to ensure that our

customers have the best of what digital innovation can deliver.

• Yet today’s digital challengers are targeting all of the roles traditionally played by banks. Each of these roles

is of significant interest to governments and regulators. So far, policy makers and regulators have barely begun to

respond to the challenges posed by digital innovation and disruption; but they will.

• Just what that regulatory response might look like is too early to judge.

• Thus, while the digital revolution poses a substantial challenge to contemporary models used to deliver

banking services, it doesn’t spell the end of banking, nor of banks per se. Rather, it suggests that banks will

transform, probably quite dramatically, as they become even more significant digital players.

• No doubt there are a large number of fintech entrepreneurs wanting to test what I have just said. And there

may well be governments and regulators, including in Australia, who want to see them do it. We are all learning,

after all.



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Page 9

Cost of Funds

NAB 5y CDS vs iTraxx Australia (Source: Bloomberg)

The cost of term wholesale funding is the primary driver of cost of funds for banks. In recent months the cost of issuance has increased

significantly reflecting global market volatility and the economic outlook

• The CDS curve is a proxy for changes in the cost of funding in capital markets as it reflects the cost to insure debt.

• iTraxx is an equally weighted index for the CDS of the 25 most traded and liquid entities in the Australian market (including the major banks).

• iTraxx also provides a proxy for credit spreads in the Australian market.



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Major Bank Term Wholesale Funding Issuance

3 and 5 Year banks senior unsecured issues & $A domestic secondary market Index

Term wholesale funding issuance costs for the major banks have increased significantly in recent months

• 3 and 5 year spreads were at all time lows in early 2007

• The global financial (and liquidity) crises lead to significant increases in funding costs and issuances

• In 2012 the Euro sovereign crises lead to another round of volatility and spread increases

• Since 2013, spreads have remained relatively stable, until late in 2015



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Recent Bank $A MTN Issuance

Secondary Trading Remains Volatile

5 Year $A MTN Issuance

A clear trend in recent issuance pricing and unusually high secondary market volatility is apparent

Issuer Issue Date Maturity Tenor Volume Price Format

CBA 8/10/2015 19/10/2018 3Yrs 2000 78FLOATIN

G

ANZ 20/01/2016 25/01/2019 3Yrs 1400 88FLOATIN

G

NAB 18/02/2016 25/02/2019 3Yrs 2250 98FLOATIN

G

WBC 8/03/2016 10/05/2019 3Yrs 2150 100FLOATIN

G

3 Year $A MTN Issuance

Issuer Issue Date Maturity Tenor Volume Price Format

CBA 13/07/2015 17/07/2020 5Yrs 1500 90FLOATIN

G

WBC 17/07/2015 28/07/2020 5Yrs 2700 90FLOATIN

G

WBC 17/07/2015 28/07/2020 5Yrs 200 90 FIXED

WBC 22/10/2015 28/10/2020 5Yrs 2100 108FLOATIN

G

CBA 12/01/2016 18/01/2021 5Yrs 1800 115FLOATIN

G

CBA 12/01/2016 18/01/2021 5Yrs 200 115 FIXED

ANZ 31/03/2016 7/04/2021 5Yrs 175 118 FIXED

ANZ 31/03/2016 7/04/2021 5Yrs 2400 118FLOATIN

G



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Yield Curve

$A 3yr SWAP

$A 5yr SWAP

Swap rates remain at historic lows, and appear stable

Yield Curve

0

1

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3

4

5

6

7

8

9

Jan 0

7

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6Sw

ap

Rate

(%

)

0

1

2

3

4

5

6

7

8

9

Jan 0

7

Jan 0

8

Jan 0

9

Jan 1

0

Jan 1

1

Jan 1

2

Jan 1

3

Jan 1

4

Jan 1

5

Jan 1

6Sw

ap

Rate

(%

)

29/04/2016 1 Month ago 12 Months ago

Cash 2.00% 2.00% 2.25%

1m 2.03% 2.09% 2.22%

2m 2.12% 2.25% 2.24%

3m 2.16% 2.30% 2.25%

4m 2.22% 2.37% 2.26%

5m 2.26% 2.41% 2.29%

6m 2.30% 2.46% 2.30%

1y 2.05% 2.21% 2.13%

2y 2.04% 2.16% 2.17%

3y 2.08% 2.18% 2.25%

4y 2.30% 2.38% 2.45%

5y 2.35% 2.43% 2.55%

6y 2.41% 2.48% 2.63%

7y 2.47% 2.54% 2.71%

10y 2.64% 2.69% 2.90%

The curve has fallen

1.50%

1.70%

1.90%

2.10%

2.30%

2.50%

2.70%

2.90%

29/04/2016 1 Month ago 12 Months ago



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Page 14

Office Rents and Yields

Melbourne Prime Net Effective Rent Brisbane Net Effective Rent

Melbourne Prime Investment Yield Range Brisbane Prime Investment Yield Range

Rental growth has been muted although yields continue to firm

Source(s): Jones Lang LaSalle REIS, Dec 2015

Sydney Prime Net Effective Rent

Sydney Prime Investment Yield Range



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Industrial Rents and Yields

Melbourne Prime Nominal Net Rent Brisbane Prime Nominal Net Rent

Melbourne Prime Investment Yield Range Brisbane Prime Investment Yield Range

Industrial yields have firmed significantly over the last 2 years

Source(s): Jones Lang LaSalle REIS, Dec 2015

Sydney Prime Nominal Net Rent

Sydney Prime Investment Yield Range



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Page 17

NAB Residential Property Survey

About the Survey

Breakdown of respondents in the NAB Residential Property Survey

About the Survey

• The NAB Quarterly Australian Residential Property Survey was first launched in Q1 2011.

• The survey was expanded from NAB's Quarterly Australian Commercial Property Survey, which was launched in April 2010. Given the large number of

respondents who are also directly exposed to the residential market, NAB expanded the survey questionnaire to focus more extensively on the Australian

residential market.

• The large external panel of respondents consisted of Real Estate Agents/Managers, Property Developers, Asset/Fund Managers and Owners/Investors.

• Around 270 panellists participated in the Q1 2016 Survey and the breakdown of our Survey respondents - by location, property sector and business type - are

shown below.

Source(s): NAB Residential Property Survey Q1 2016



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Residential Property – New Developments and Established Property

Overseas buyers are trending down, while tighter credit and income security are notable constraints for buyers




Page 19

Foreign Buyers and Type of Property purchased by foreign buyers

The overall share of foreign buyers in Australian property markets fell to a 2 ½ year low in both new and established markets in Q1’16.




Page 20

Residential Property – Market Performance

The charts below show the expectations for national house price growth next year to be broadly unchanged at 0.4%; Expectations for

rental growth over the next year to soften in all states




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Page 22

Conclusion


• “The future’s uncertain and the end is always near” – James Morrison, The Doors

• Long term, genuine, reciprocal relationships will always stand the test of time and markets!

PFA Annual Conference 2016 - Property Funds · PFA Annual Conference –May 2016 Divergence and disruption Page 6 The Future of Banking Dr Ken Henry AC, NAB Chairman, address to the

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