RESEARCH & CONSULTING

Key Findings Population growth in Newcastle expected to average 1,770 persons per annum between 2014 and 2031

Gross Regional Product (GRP) was estimated to be $14.23 billion as at 2014, significantly above other major regional NSW centres Home to a significant and diverse Looking ahead, the CBD is entering a Diverse economy - no single employment base, Newcastle is the strategic period of revitalisation, underpinned by industry contributed more than and economic centre for the Lower Hunter, government funding as part of the 12% to GRP. As at 2011, the LGA accounting for the bulk of the region’s white Newcastle Urban Renewal Strategy, supported 88,175 jobs, accounting collar and administrative workforce. Its infrastructure development, and a growing for 44% of total jobs within the proximity to the broader region through population base. This changing CBD Lower Hunter region significant road and rail networks including landscape will inevitably strengthen demand for employment space. With tenant Newcastle CBD is set to the new Hunter Expressway, coupled with its demand expected to remain focussed experience jobs growth of 7,841 strong ties with Asia through the Port of within the city’s A Grade stock, moderate over the next 20 years. 60% of Newcastle makes Newcastle a logical choice downward pressure on the vacancy rate is these jobs are anticipated in white for economic investment. anticipated, as only a limited number of collar industries, equating to office demand of circa 80,000m² new office projects are planned. The Newcastle economy has undergone

significant structural change over the past Office demand has been From an investment perspective, only a two decades transitioning from a concentrated in the A Grade handful of sales have occurred in recent manufacturing based economy towards market where the vacancy rate is years, which reflects a lack of available currently 2.7%, making it one of higher order service industries such as health assets being offered to the market rather the tightest A Grade markets in the care, professional services and education. than weaker demand. With non-CBD assets country Subsequently, local office demand has been trading at a large discount in comparison to boosted, particularly within the A Grade Although a thinly traded investment those positioned in core CBD locations, we office market where the vacancy rate is market, the most recent A Grade expect considerable firming in office yields amongst the lowest in the country at 2.7%, office transactions recorded core over the next two years as investors move compared with an Australian non-CBD A market yields of sub 8% up the risk curve. Grade average vacancy of 8.0%.

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Newcastle Airport expansion was Page 1. completed in February 2015. Having Key Findings already seen total passenger movements Market overview and future trends increase by close to an average of 10% Newcastle is the capital of the Hunter per annum over the past 10 years, the Page 2. region, the second largest city in New 2,600m² extension to the existing terminal Introduction South Wales (NSW) and one of Australia’s Newcastle in context building has created a new arrivals hall largest regional economies. Located and provides a dedicated area for Page 3 & 4. 160km north east of Sydney the area is permanent customs, immigration, and Future Growth Drivers home to The Port of Newcastle, which is quarantine facilities in readiness for Highlighting Newcastle's growth the economic and trade centre for the potential international services. The position through government resource rich Hunter Valley and for much formal completion of Stage 1 means strategy, planning, infrastructure of the north and northwest of NSW. The Newcastle Airport is able to discuss and jobs Port of Newcastle is the world's largest future direct international services to and coal export port and is one of Australia's from Newcastle without infrastructure Page 5, 6 & 7. largest ports by throughput tonnage. being a barrier. The entire project is Office Market Reflecting increasing global demand, a Economic, employment and office expected to be completed in late 2015. record 164.3 million tonnes of trade was market trends handled by the Port of Newcastle in 2014, Visitor expenditure is increasingly an annual increase in port trade of 5.3%. important across Newcastle and the Hunter impacting a number of sectors in Accessibility to Newcastle is also the economy. According to the Newcastle increasing with the opening of The Hunter Destination Management Plan (2013) Expressway to traffic in March 2014. The visitors inject $722 million of direct expressway has improved travel times for expenditure into Newcastle’s economy motorists between Newcastle and the contributing to almost $1.3 billion of Upper Hunter and has improved journeys indirect expenditure across sectors across the broader network. including retail, transport and education. In Newcastle, the visitor economy directly Furthermore, in a boost to Newcastle and and indirectly contributes to over 10,000 the wider Hunter region, Stage 1 of the jobs.

Newcastle’s Strategic Location Newcastle’s position makes it a natural value-adding, services and distribution point

Annual Projected Population Growth Rates 2011 - 2031

1.0% 1.0%

0.9%

0.8%

0.7% 0.7%

0.6% Newcastle LGA NSW (exc. Sydney)

2 NEWCASTLE INSIGHT SEPTEMBER 2015 RESEARCH

State government’s plans for Newcastle, In February 2015 Minister for Planning, with the City securing $103 million Pru Goward announced planning towards the CBD light rail plan. approval for the University of Newcastle to expand into the city centre, with a $95 In 2013, on the basis of the strategic Light Rail million, education and business precinct. directions outlined in NSW Government’s The new campus will be one of the first projects to be completed in the CBD Newcastle Urban Renewal Strategy, the The existing rail line, originally built to since the NSW Government released the NSW Government committed $460 million move freight to the harbour, now divides Newcastle Urban Renewal Strategy in to revitalise the Newcastle city centre. The the city centre in half. The decision to 2012. Newcastle Urban Transformation and replace rail services with bus services from Transport Program has been established a new transport interchange at Wickham With around 4,000 students, plus staff, to deliver this commitment. recognises that the commercial core is no starting at the campus in 2017, activity in

longer close to Newcastle Station; the the CBD will increase helping to stimulate This Program seeks to “revitalise the emerging commercial core is at the the local economy and accelerating the Newcastle city centre by strengthening western end of the city, and the rail line city’s rejuvenation, similar to the recent connections between the city and creates a physical barrier between this WSU commitment in Parramatta. waterfront, creating employment area and Honeysuckle. opportunities and delivering new transport connectivity”. This program comprised of As a result of the changing urban Hunter Street Mall three elements: landscape, it is envisaged that the new 2 km light rail route will better serve the main As part of the City’s urban  The introduction of a new light rail activity areas of the city and improve transformation, UrbanGrowth NSW and system linking Wickham to Pacific connections. Once the preferred light rail GPT are working closely with Newcastle Park route is determined (expected in coming City Council in preparing a concept plan  The activation of Hunter and Scott months), construction is anticipated to for their 20,000m² city centre site that Streets linked to the delivery of light commence shortly after, which will then would feature new retail, commercial and rail follow the opening of the Wickham residential components. The  The urban transformation of surplus Transport Interchange in 2017. development proposes high density government lands, the delivery of residential, convenience retail, markets, housing, and the delivery of improved University Expansion entertainment, cultural and leisure public domain, including parks, activities. There are plans for an Eat entertainment precincts and public In 2015 Times Higher Education ranked Street and an entertainment precinct. spaces, consistent with Newcastle the University of Newcastle in the top 3% There is also provision for recreation and City Council’s vision for the city centre. of all universities across the world, and open spaces. It is expected a revised second in Australia and number 30 in the development application will be lodged The 2015/16 State Budget reiterated the world for universities under the age of 50. later in 2015.

Newcastle Proposed Light Rail Options

3

Population Growth by Age, Newcastle LGA

Growth Age Cohort 2009 2014 2014% % Growth p.a. Local Market (2009-2014) Demographics 0-19 36,063 36,171 22.6% 108 0.1% 20-39 47,080 49,865 31.2% 2,785 1.2%

Off the back of solid economic 40-54 29,768 30,852 19.3% 1,084 0.7% conditions, underpinned by mining and 55-64 16,216 18,124 11.3% 1,908 2.2% transport infrastructure projects, the Newcastle LGA has enjoyed solid 65+ 22,768 25,009 15.6% 2,241 1.9% population growth over the past decade. Total 151,895 160,021 100% 8,126 1.0% At the same time, growth in student numbers at the University of Source: ABS, Knight Frank Research Newcastle has ensured strong population growth in younger age cohorts. overseas migration to the Newcastle Looking ahead, population growth is As at June 2014, the Newcastle LGA had LGA totalled 5,303 persons, in addition expected to remain strong (see Figure a total population of 160,021, making it to a large inflow of residents from the 4), underpinned by growth in all age the 4th most populous LGA in NSW LGAs of Port Macquarie-Hastings, cohorts. According to the NSW outside of Sydney. Over the past 10 Greater Taree and Tamworth Regional. Department of Planning & Environment, years, population growth has averaged At the same time, Newcastle has the Newcastle LGA is set to encompass 1.0% per annum, only slightly below the enjoyed a solid net gain of 1,194 a population of approximately 190,100 NSW average of 1.2% per annum over persons from Sydney between the two persons by 2031, indicating growth of the same period. most recent Census periods. around 1,770 persons per annum from 2014. More recently, national population growth By age, Newcastle has a young has eased following a slowdown in net demographic structure with 53.8% of In line with current trends, population overseas migration due to the tapering residents aged 39 or below, reflecting growth is expected to be greatest within back of mining related activities. the area’s connection to the University persons aged 65+, increasing by an However for Newcastle, a modest uptick of Newcastle. From a population growth average annual rate of 2.3% to 2031. in population growth was recorded over perspective, persons aged 55-64 and Similarly, population growth in the the 12 months to June 2014. 65+ experienced growth rates of 2.2% dominant working age group (20-64) is and 1.9% per annum respectively over expected to remain strong at around 740 The area’s population growth has the five years to June 2014. This rate of persons per annum to 2031. The area’s stemmed from a combination of overseas growth is considerably above the ageing demographic is likely to present migration and inflows from neighbouring broader average for Newcastle, however employment opportunities to younger and nearby LGAs. Between the two most below the state average recorded over age cohorts as persons aged 65+ begin recent Census periods (2006 & 2011), the same period. to retire from the local workforce.

Newcastle Historical Population Household Composition, Newcastle Newcastle Population Growth Growth vs. Lower Hunter & NSW Projections by Age Population Number and Growth Rate June 2014 2009-2031

2,500 1.6% 70% 200,000 Projection 190,100 63% 181,850 61% 180,000 173,300 1.4% 60% 164,350 56% 160,021 2,000 160,000 151,895 1.2% 50% 140,000 1.0% 1,500 120,000 40% 0.8% 100,000

1,000 30% 0.6% 80,000 22% 21% 20% 60,000 0.4% 20% 500 13% 40,000 11% 10% 10% 0.2% 10% 6% 8% 20,000 0 0.0% 0% 0

Couples Families Lone Persons Other 2009* 2014* 2016 2021 2026 2031

2008 2009 2005 2006 2007 2010 2011 2012 2013 2014

POPULATION GROWTH P.A. ANNUAL GROWTH RATE (RHS) NEWCASTLE LGA LOWER HUNTER NSW 0-19 20-39 40-54 55-64 65+

4 NEWCASTLE INSIGHT SEPTEMBER 2015 RESEARCH

Economy (see Figure 6). Given this diversity, Over the five years to 2011, employment Newcastle is well placed to capitalise on growth in the LGA totalled 7,043, with Newcastle is not only a large urban emerging growth sectors, namely being health care (+2,046 jobs), professional, centre, but it is also the key contributor healthcare, education and information scientific and technical services (+1,192 to the Lower Hunter region’s wealth, technology. At the same time, its jobs) and education and training (+919 employment and economic stability, proximity and ease of accessibility to the jobs) experiencing the largest growth. accounting for just under half (48%) of region’s key tourism assets including the Over the same period, jobs growth of the region’s economic output (GRP). wine district via the new Hunter 4,375 was recorded in the dominant white The LGA’s employment diversity Expressway ensures the area has the collar industries (see Figure 7). coupled with its strong linkages with opportunity to capitalise on the growing While private sector employment in mining related activities through the Port tourism market. Newcastle provides the dominant source of Newcastle ensures further business of jobs, representation from the growth and investment will follow. Employment Government sector is significant. Behind

the City of Sydney and Parramatta LGAs, As at the 2011 Census, Newcastle The labour market within Newcastle has Newcastle has the highest level of undergone significant structural changes accounted for 44% of total jobs within Government employment in NSW with the Lower Hunter region, significantly over the past two decades, transforming 18,840 employees working across Local, above the next largest LGA (Lake the once dominant manufacturing centre State and Federal agencies, representing Macquarie at 26%). At the same time, into one of the most diverse employment 21% of total jobs. By tier, the bulk of the area is the hub for commercial and centres in NSW. The closure of the BHP Newcastle’s Government jobs are located administrative activity, accounting for steelworks in 1999 forced the local at the State level (67%), while a further 47% of the region’s white collar economy to evolve, with a significant shift 28% are at the Federal level. workforce (63,164 jobs), with just under towards financial and services sectors half of these workers living outside of underpinning recent growth. the LGA boundaries, highlighting the What Businesses are economic importance of Newcastle. As at the 2011 Census, the Newcastle Located in the CBD? LGA supported 88,175 jobs, of which For the LGA itself, the local economy is 63,164 or 72% were within a white collar As at June 2014, there were 2,600 significant with its 2014 Gross Regional capacity (those who require office space). businesses trading within the Newcastle Product (GRP) estimated at $14.23 As mentioned earlier, Newcastle CBD (Newcastle - Cooks Hill SA2 region), billion, considerably above other major accounts for 47% of the Lower Hunter 55% of which were sole trading/non NSW regional economies (see Figure 5). region’s white collar workforce, with just employing businesses while a further The diversity of the local economy is under 30,000 white collar workers 28% only employed between 1 and 4 workers. This represents growth of 169 reflected in the value added by industry traveling from outside the LGA for work. businesses over the two years to June with no single industry contributing 2014. more than 12% to Newcastle’s GRP

Gross Regional Product Gross Regional Product Employment & Employment Growth By Major Regional NSW Centre (2014) By Major Industry (2014) White Collar Industries (2006-2011)

18,000 $16 Bn Health Care & Financial & Social Assistance Insurance Services $14 16,000

Other $12 10.3% 14,000 Manufacturing $10 31.2% 9.6% 12,000

$8 10,000 Education & Training $6 Health 10.2% Care & 8,000 Public Administration Social & Safety $4 Assistance 6,000 Professional, Scientific 6.6% 11.3% Financial & Insurance $2 Services & Technical Services Education & Training 6.6% 4,000 Administrative & 7.3% Rental, Hiring 2011 AT AS EMPLOYED PERSONS Information Media & $0 7.0% Support Services & Real Estate Telecommunications Construction Services 2,000 Rental, Hiring & Real

Tweed Professional, Estate Services Scientific & 0 Newcastle Technical Services

Wollongong Electricity, Gas, Water -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

Hastings Central Coast Central Coffs Harbour Coffs & Waste Services

Port Macquarie- Port ANNUAL EMPLOYMENT GROWTH (2006-2011)

5

From an office space perspective, there Office Market The most recent Property Council of were 1,601 businesses located within the Australia (PCA) data as at January 2015 dominant white collar industries Fundamentals recorded 255,166m² of total office space accounting for 62% of total businesses. across the Newcastle CBD. Even though By size, 87% employed four or less The Newcastle Office precinct is generally A Grade stock represents a third of the workers, indicating solid demand for known as being the area bounded by total market (87,786m²) a lack of vacancy smaller office provisions. Newcastle Harbour to the north running shows higher quality stock is in demand. from Pacific Street in the east to just past Tudor Street to the northwest. The In the 12 months to January 2015 the Demand Projections Property Council define the CBD into the overall CBD vacancy rate in Newcastle following three zones (see Map 3): Newcastle is expected to experience was 8.7% with A Grade at 2.7% (see significant employment growth over the  City East; Figure 9), making it one of the tightest A next 20 years, underpinned by service  City West; Grade markets in the country. In industries, reflecting a strong link between  The Honeysuckle Precinct comparison, the combined A Grade population growth and employment vacancy rate across Australian non-CBD opportunity. Over the 20 years to 2031, an Whilst Newcastle is a relatively large markets was 8.0% at the same period in additional 19,200 jobs are expected to be market in comparison to other NSW January 2015. created (960 per annum). Industries which regional markets it is reasonably small in are forecast to experience the largest comparison to suburban Sydney markets. Being a relatively small market Newcastle growth are professional, scientific and The Newcastle office market is fairly is susceptible to volatility and whilst it is technical services (+3,470 jobs), health typical of a regional location in that there a market which hasn’t seen a lot of care (+2,482 jobs) and accommodation are a number of larger established office speculative development, any and food services (+2,436 jobs). buildings generally occupied by the completions that occur without being various levels of Government and also fully leased, can lead to spikes in the

semi-Government agencies or vacancy rate, as apparent in 2010. A For the Newcastle CBD (Newcastle - corporations. Beneath these buildings Grade vacancy levels inflated in January Cooks Hill SA2), employment growth of there are a number of good quality, 2010 to 10.1%, however, this was a 7,841 is expected over the 20 years to investment office buildings and at the result of increasing stock levels rather 2031, 4,681 of which is anticipated within lowest level of this hierarchy is office than decreasing demand. A Grade stock white collar industries (those who require accommodation above shops and in small increased by 26,289m² during 2008 and office space). Based on these projections one and two storey buildings. 2009, with no withdrawals. and a conservative office density ratio of

20m² per worker, office demand in the The commencement of construction of the Over the year to January 2015, overall Newcastle CBD is expected to total $94 million court complex on land net absorption within the Newcastle 93,600m² over the next 20 years. Given adjacent to Newcastle City Council’s main office market was 10,238m² with A Grade that a share of this demand is expected to office is likely to see renewed interest in stock representing 9,120m² (see Figure be absorbed in existing office provisions the Civic precinct from legal, professional 10). This was a positive change given the through reduced densities and absorption and allied services providers. The Civic negative net absorption experienced for of vacant stock, we estimate office Precinct adjoins the Newcastle West A Grade stock throughout 2012 demand to be in the order of 80,000m². precinct of the city. The development is (-1,293m²) and 2013 (-1,974m²).

due for completion in October 2015.

Newcastle CBD Employment Growth CBD Office Vacancy, 2008 – 2015 Newcastle CBD Total Net & Office Demand By Grade (%), at January Absorption, 2008 – 2015 White Collar Industries (2011-2031) By Grade (m²), 12 months to January 16

1,600 35,000 15,000 14 1,400 30,000 12 10,000 1,200 10 25,000 1,000 5,000 8

800 20,000 6 0 600 15,000 4

400 2 -5,000 10,000 200 0

-10,000

- 5,000

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 2011-2016 2016-2021 2021-2026 2026-2031 Jan-08

NEWCASTLE A GRADE NEWCASTLE TOTAL

Jan-15 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 NEWCASTLE CBD EMPLOYMENT GROWTH (LHS) AUST NON CBD A GRADE AUST NON CBD TOTAL A GRADE SECONDARY NEWCASTLE CBD OFFICE DEMAND - M² (RHS)

6 NEWCASTLE INSIGHT SEPTEMBER 2015 RESEARCH

Rents and Incentives Mooted Office Development Sites—See Map Below Similar to the vacancy rate, rents vary Development NLA Office Floorplate Car considerably by grade in Newcastle, where ID & Project Address Owner at present, A Grade net face rents currently Stage (sqm) Levels Size spaces range from $320-$400/m² (see Figure 11). 1. 168 Parry Street Construction Spartohori 4,720 5 1,080 78

Newcastle has traditionally been a market 2. 18 Honeysuckle DA Approved Doma 7,000 5 1,300 112 where minimal incentives have been 3. 291 King Street DA Approved Mesimo 9,600 4 2,400 160 provided to tenants. With the wave of construction in the Honeysuckle Precinct 4. 12 Stewart Avenue Planning Spartohori c.10,000 n/a n/a n/a and supply additions during 2006 - 2009, Source: PCA, Knight Frank Research c. Circa owners had been offering incentives up to 15%, whilst trying to maintain face rental necessary prior to commencement. General and Justice) and sold with a 10 levels. Now that surplus stock has largely Beyond this, 12 Stewart Avenue year WALE. The other notable recent been absorbed, there has been a (adjacent to 168 Parry Street) has the transaction was the May 2014 sale of corresponding reduction in incentives, potential to add a further circa 10,000m² the Hunter Water Corporation where they currently average 10% for A to the market, however the project has headquarters at 36 Honeysuckle Drive Grade stock. not yet sought a DA, but has gained for $25.825 million (7.9% core market

Government architecture approval. yield). Development Activity Sales and Newcastle CBD Office Net Face Rents & Stock A moderate increase in office supply is Investment Activity By Grade of Stock, September 2015 anticipated over the next few years and $400 90,000 While no Newcastle CBD commercial follows 11,090m² of new stock added to transactions have been recorded in 2015 80,000 the market during 2014. Imminent office $350 as assets have become more tightly supply will stem from 168 Parry Street 70,000 held, investor demand has remained $300 (4,720m²) and the refurbished 266 King 60,000 strong. The last major deal to occur was Street (14,157m²) office building, both of $250 50,000 the government sale and lease back of which are expected to be completed 237 Wharf Road, situated on Newcastle $200 40,000 towards the end of 2015. Harbour, in December 2014. The three 30,000 $150 Further potential supply in the medium storey A Grade building (2,598m² office 20,000 term includes the DA approved projects of NLA) sold at auction for $14.855 million, $100 10,000 18 Honeysuckle Drive (7,000m²) and 291 reflecting a core market yield of 7.27%. $50 0 King Street (9,600m²). While both projects The building was 100% leased to NSW A Grade B Grade C Grade D Grade are being actively marketed, timing Government (occupied by Transport for NET FACE RENT (M²) STOCK (M² - RHS) remains uncertain with pre-commitments NSW, RailCorp NSW and Attorney

Property Council of Australia CBD Boundary and Mooted Office Development Sites

Under Construction DA Approved Planning

7

RESEARCH & CONSULTING Matt Whitby Group Director Head of Research & Consultancy +61 2 9036 6616 [email protected]

Paul Savitz Associate Director +61 2 9036 6811 [email protected]

Luke Crawford Senior Analyst +61 2 9036 6629 [email protected]

COMMERCIAL RESEARCH Nick Hoskins Director - NSW +61 2 9036 6766 [email protected]

RESIDENTIAL RESEARCH Michelle Ciesielski Director +61 2 9036 6659 [email protected]

Knight Frank Research provides strategic advice, consultancy services The Lower Hunter includes the five local government areas (LGAs) of Newcastle, Lake and forecasting to a wide range of Macquarie, Port Stephens, Maitland and Cessnock. clients worldwide including developers, investors, funding Abbreviations & Glossary: organisations, corporate institutions WSU: Western Sydney University (formerly the University of Western Sydney) Core Market Yield: The percentage return/yield analysed when the assessed fully leased net and the public sector. All our clients market income is divided by the adopted value/price which has been adjusted to account for recognise the need for expert property specific issues (i.e. rental reversions, rental downtime for imminent expiries, capital independent advice customised to expenditure, current vacancies, incentives, etc.) their specific needs. NSW DP&E: NSW Department of Planning & Environment ABS: Australian Bureau of Statistics NIEIR: National Institute of Economic and Industry Research BTS: Bureau of Transport Statistics

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Knight Frank Research Reports are available at KnightFrank.com.au/Research