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The level of inflation, the cost of debt, and property valuations are the variables that will have
the most influence on the financial performance of the Trust in the near term. Global economic
growth, the resilience of the Australian economy, the strength of the home improvement
and outdoor living sector, and the ongoing evolution and financial success of the Bunnings
business, will be more important for the Trust’s performance in the longer term.
1
ECONOMIC AND PROPERTY MARKET CONDITIONS
For the year ended 30 June 2016, there was strong investor
demand for Bunnings Warehouse properties, which resulted in
significant capitalisation rate compression, to a historical low,
as demonstrated in the chart below.
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 growth outlook for the Australian economy, and the
global economic outlook generally. The current strength of the
property market is reflected in the value of the Trust’s portfolio at
30 June 2016, and will also continue to be a factor in property
acquisitions in the near term, which may limit portfolio growth while
these economic conditions prevail. The Trust will remain disciplined
in its investment approach to ensure it is best placed to create value
from any new property investments over the medium term.
The current low inflation rate, as measured by the Consumer Price
Index (“CPI”), will result in lower incremental growth of rental income
for the Trust in the near term. Approximately 62 per cent of the
Trust’s rental income is subject to CPI annual adjustment and
38 per cent is subject to fixed annual adjustments, 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 2016, the average CPI increase for
leases in the portfolio was 1.6 per cent, which applied to annual
escalations for leases comprising 57 per cent of the rental income for
properties subject to a review during the year (“base rent”). For the
year ending 30 June 2017, CPI reviews will apply to 53 per cent
of the base rent, with leases subject to a market rent review
comprising 10 per cent of the base rent, and with the balance of
37 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 strength and outlook for the home improvement and outdoor
living market in Australia and the ongoing financial success
of the Bunnings business is important for the future financial
performance of the Trust.
Bunnings is continuing to deliver solid organic growth, with 8.0
per cent like-for-like sales growth for the nine month period
ended 31 March 2016
2
, reflecting the strength of its business
model, and the resilience of the home improvement and outdoor
living market in general.
1
This outlook contains forward-looking statements and assumptions. Please
refer to the Important notice on the inside cover of this report
2
Source: Wesfarmers third quarter results announcement, 21 April 2016, page 3
OUTLOOK
Capitalisation rate trends for Bunnings properties
PortfolioTransactionAvg Cap Rate
BWPPortfolio Cap Rate
NewBunnings StoreTransactions (Trend Line)
Dec-10
6%
5%
4%
7%
8%
9%
10%
Oct-11
Jul-12
May-13
Mar-14
Jan-15
Nov-15
Jun-16
NewBunnings StoreTransactions
Secondary Market BunningsTransactions
Bunnings Portfolio
Acquisitions by BWP
BWP Trust Annual Report 2016
12
Business Review