BWP TRUST ANNUAL REPORT 2015
10
ECONOMIC AND PROPERTY
MARKET CONDITIONS
Slow global economic growth, and continuing low interest
rates have resulted in strong demand for prime real estate
over the last 12 months. Recent sales of Bunnings Warehouse
properties reflect this. Demand for property is expected to
remain strong, while these factors continue to dominate the
macro-economic outlook.
The extent to which property capitalisation rates tighten further,
is likely to be a function of how long interest rates continue
at current levels. The current strength of the property market
is reflected in the value accretion of the Trust’s portfolio at 30
June 2015, and will also be a factor in property acquisitions
in the near term, which may limit portfolio growth while these
economic conditions prevail. The current relatively low inflation
environment, as measured by the Consumer Price Index (“CPIâ€)
results in lower incremental growth of rental income for the Trust.
Approximately 65 per cent of the Trust’s rental income is subject
to CPI annual adjustment, other than in years in which respective
properties are due for a market rent review (typically every five
years for most of the Trust’s existing portfolio).
For the year ended 30 June 2015, the average CPI increase
was 2.5 per cent, which applied to annual escalations under
leases comprising 59 per cent of the rental income for
properties subject to a review during the year (“base rentâ€).
For the year ending 30 June 2016, CPI reviews will apply to
58 per cent of the base rent, with leases subject to a market
rent review comprising seven per cent of the base rent, and
with the balance of 35 per cent reviewed to fixed increases of
three to four per cent.
The level of income growth the Trust derives from market rent
reviews will depend on property specific factors and what
relevant evidence is available from time to time for comparable
Bunnings Warehouses or other comparable properties. It is
therefore difficult to predict the likely growth from market rent
reviews, particularly when often the outcome of individual
market reviews is the subject of a binding determination by an
independent expert.
HOME IMPROVEMENT RETAIL SECTOR
PERFORMANCE AND GROWTH
The ongoing success of the Bunnings business, the strength and
direction of the underlying home improvement and outdoor living
markets, and the ongoing viability of other existing customers is
important for the future growth of the Trust, at the expiry of existing
leases and for the opportunity for new acquisitions.
Bunnings is continuing to deliver solid organic growth, with
9.2 per cent like-for-like sales growth for the nine month
period ended 31 March 2015
2
.
It is also continuing to invest
significantly in future growth and has indicated that it expects
to further expand its store network, adding approximately 15 to
18 new stores per annum over the next two years, and up to 10
to 14 per annum thereafter
3
.
2016 FINANCIAL YEAR DISTRIBUTION
On the basis of continued rental growth from the existing
portfolio, and no significant unforeseen changes in the operating
environment, the Trust could expect distribution per unit growth of
approximately five per cent for the 2016 financial year.
1
This outlook contains forward-looking statements and assumptions.
Please refer to the Important notice on the inside cover of this report
OUTLOOK
The direction of global and domestic interest rates (and the impact these have on commercial property activity in
Australia), the trajectory of the Australian economy (including inflationary impact), and the resulting performance
of the home improvement and outdoor living sector are the main economic and market factors that will influence
the performance of the Trust in the near term
1
.
Maribyrnong, VIC
2
Source: Wesfarmers third quarter results announcement, 29 April 2015,
page 4
3
Source: Wesfarmers Strategy Briefing Day materials, 20 May 2015,
page 93
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