Melbourne Strata Office Market

Transcription

1 Melbourne Strata Office Market March, 2012

2 xdisclai mer x STAFF RESPONSIBLE FOR THIS REPORT WERE: Director Senior Consultant Job Code Roger Scrivener Trent Preece MPEV-0593 Urbis Valuation Pty Ltd ABN All Rights Reserved. No material may be reproduced without prior permission. While we have tried to ensure the accuracy of the information in this publication, the Publisher accepts no responsibility or liability for any errors, omissions or resultant consequences including any loss or damage arising from reliance in information in this publication. Australia Asia Middle East urbis.com.au

3 TABLE OF CONTENTS Key Findings... i 1 Melbourne and Victoria An Overview Population Business Environment Infrastructure Economy Melbourne CBD Office Market Stock New Supply Demand Vacancy Rental Growth The Collins Street Factor Summary Melbourne Strata Office Market Overview Existing Stock Recent Developments Market Criteria Critical Success Factors Location Building Type Investment Criteria MPEV

4 Key Findings The Melbourne office strata market is now a well established component within the overall investment office market. There are some 1,800 strata units within the Melbourne CBD, with an average sales turnover approaching 130 units per annum (7% of total stock). Prior to 2000, the market was characterised by the creation of strata units from the conversion of older, conventional office buildings, with few purpose built facilities. However, since 2000, some 500 strata units have been supplied, all in purpose built facilities. In line with broader market trends, building standards are changing. There continues to be a continued broadening in demand for good quality, purpose built strata office facilities in a sound location and with strong sustainability features. As with many other classes of real estate, location is a critical factor in the success of strata office units as an investment opportunity. Often, well built facilities in poor locations will perform less well than poorer quality facilities in a strong location. The Melbourne Docklands precinct has emerged as the new force for office (and other) development in the Melbourne CBD. In less than ten years, over 500,000m 2 of office space has been created within Docklands, with a further 700,000m 2 likely to be supplied during the next ten years. Three of the five new strata CBD office developments constructed since 2007 have been within the Docklands precinct, though notably none has a Collins Street address. Many of the strata units sold in recent years were on the basis of a 12 month vendor leaseback. In many cases, this created an unrealistic expectation of leasing demand from investors. Strata office suites generally command rentals approximately 10% above similar standard conventional office accommodation in the same location. However, lease terms are generally shorter, usually in the range of two to four years. Investment yields for office suites have softened since 2008, in line with the general trend for standard investment offices. Yields for prime strata office suites are currently in the range of 6.5% to 7.0%, with secondary yields generally in the range of 7.0% to 8.0%, on net rents. The strata office market continues to mature, with sound evidence that high quality, sustainable developments in good locations will attract strong interest from both tenants and investors alike. MPEV KEY FINDINGS i

5 1 Melbourne and Victoria An Overview Victoria accounts for only 3.0% of Australia s land mass, yet is responsible for 24.0% of Australia s economic activity. The Victorian economy is bigger than that of Singapore, Hong Kong and New Zealand. Victoria is Australia s most densely populated State and its capital, Melbourne, has a current population of some 4.1 million, second only to Sydney at 4.5 million. 1.1 POPULATION Population AUSTRALIAN STATES & TERRITORIES Current Population (Persons) % of Total Current Population Average Compund Population Growth ( ) Victoria 5,605, % 1.57% New South Wales 7,287, % 1.06% Australian Capital Territory 363, % 1.34% South Australia 1,654, % 0.91% Queensland 4,561, % 2.34% Western Australia 2,331, % 2.07% Tasmania 510, % 0.78% Northern Territory 229, % 1.52% Australia 22,543, % Source : ABS; Urbis Victoria s population of some 5.6 million as at end 2011 is the second largest in Australia, comprising just under 25.0% of the nation s total population. Compound population growth of 1.57% per annum has been achieved in Victoria over the last decade. While below the resource-rich states of Queensland and Western Australia, Victoria s growth has been just above the national average of 1.53% per annum. 1.2 BUSINESS ENVIRONMENT Victoria has enjoyed AAA credit ratings from both Standard and Poor s and Moodys for the last ten years. Economic growth averaged 3.8% per annum in the decade up to Victoria s economy is based on a diverse range of manufacturing, rural and service industries, together with a strong education and R&D base. Victoria is a strong exporter with some A$31.4 billion exported from Melbourne in 2009/10. Melbourne is the home to seven of the top 13 ASX listed companies by market capitalisation: 2 MELBOURNE AND VICTORIA AN OVERVIEW MPEV

6 Major Head Offices (ASX TOP 20) VICTORIA Company Market Capitalsation ($bn) Situated within Victoria BHP CBA 78 Wesfarmers 64 ANZ NAB Telstra Westpac 34 Woodside Petroleum 31 Woolworths 29 Rio Tinto Newcrest Mining Westfield Group 21 CSL Origin Energy 15 Santos 13 QBE Insurance 13 AMP 12 Brambles 11 Suncorp-Metway 10 Macquarie Group 9 Total Source : ASX; Urbis 49.85% In terms of market capitalisation, these seven companies comprise 49.9% of the market capitalisation of the ASX top 20 companies. 1.3 INFRASTRUCTURE Victoria has made substantial investments in infrastructure, particularly over the last decade: Roads Melbourne has an extensive freeway network, with the majority in public ownership, though two components are toll operated. More than $5 billion in major road projects are currently underway including the Peninsula Link Project, the M80 Ring Road Upgrade and the M1 Upgrade. Rail Work is underway on the $4.3 billion Regional Rail Link programme, the largest public transport infrastructure project in Australia. It will deliver a new railway line through Melbourne s western suburbs with standalone tracks for the regional cities of Geelong, Ballarat and Bendigo. Air Melbourne Airport is only 15 minutes from the Melbourne CBD by freeway link, with over 26 million passengers in 2010, including 5.5 million international passengers. Melbourne Airport handles 350,000 tonnes of freight a year, Australasia s largest air freight hub. Shipping The Port of Melbourne is the Southern Hemisphere s largest and busiest container port, handling some 36% of Australia s container traffic, with 2.39 million containers (TEU) in 2010, together with just under 400,000 motor vehicles. MPEV MELBOURNE AND VICTORIA AN OVERVIEW 3

7 Urban Renewal and Events Melbourne has been consistently voted one of the World s Most Liveable Cities for several years and consistently attracts premier international events such as the Australian Tennis Open, Spring Horse Racing Carnival and Formula 1 Grand Prix. Recent infrastructure investments include: Melbourne Convention and Exhibition Centre (largest in Southern Hemisphere); Docklands Precinct Likely to be completed around 2020, this $12 billion project is an extension to the CBD with numerous apartments, office buildings and specialist facilities, including major sports stadium, technology park, television and film studios; AAMI Park Rectangular Stadium for rugby and soccer (31,000 seating capacity); Melbourne Park - $360 million redevelopment of Melbourne Park to secure the future of Grand Slam tennis in Victoria for the long term future. 4 MELBOURNE AND VICTORIA AN OVERVIEW MPEV

8 1.4 ECONOMY Real Final Demand 7% 6% 5% 4% 3% 2% Source : Access Economics, ABS % National & State Employment Growth National CPI & Cash Rate 3.4% 5.0% 3.8% 2.9% 2.4% 1% Australia VIC 0% % 4% 3% 2% 1% 2.9% 3.8% Source : Access Economics; ABS % 2.0% 2.5% 2.8% 1.3% 0.9% 0% % 7% 6% 5% 4% 3% 2% 1% 3.00% 2.3% 3.1% Australia VIC Cash Rate (%) National CPI 4.25% 2.5% 0% National Outlook Real domestic final demand growth (a measure of economic growth) was 3.7% over , higher compared to the previous financial year, but still well below the pre-crisis levels. It is clear that the Australian economy is not immune to global economic turbulence; but final demand growth forecast remains healthy at around 5% for FY2012, as the economy continues to recover. The growth is still driven by strong demand for Australian commodities and high levels of business investment in the mining industry. Given the current economic climate in the developed world, China and India will become even more important as destinations for our exports in the coming years. As a result of the resource sector driving our economy, a two speed economy is prevalent more than ever and there are negative impacts that come with it. The resource boom carries higher interest rates and exchange rates and this mix is weighing heavily on some industries such as manufacturing and tourism. Nationally, employment growth was 2.0% in FY2011, below the previous year (2.9%). Future growth is likely to face constraints due to a general lack of workers and falling business investment. The medium term outlook for employment growth remains modest. Despite the recent increases in unemployment, current lower migration rates are putting downward pressure on population growth, suggesting a possible long term rise in skill shortages and further falls to unemployment. Nationally, inflation rebounded from FY2010 and is at 3.1% for 2011 financial year. Inflation is expected to stabilize in the next few quarters and return back to the RBA s target of 2-3%. The current RBA cash rate is at 4.25%. The direction that interest rates are heading remains subject to significant speculation, with pundits generally favouring a medium term decline. Consumers are more cautious in their spending, with the household saving ratio having increased sharply in recent years. Consumers continue to rebuild their balance sheets, placing a further constraint on consumption expenditure. That is, the growth in nonresource sectors is expected to remain subdued. Victorian Outlook Victoria s real final demand growth was 3.4% over 2011, similar to the levels achieved in the previous financial year. Victoria continues to perform relatively well given its lack of natural resources, such that State final demand is forecast to be relatively stable over the next few years. MPEV MELBOURNE AND VICTORIA AN OVERVIEW 5

9 Key factors impacting Victoria s future growth are: Strong population growth has been a key economy driver in recent years. As national immigration levels decrease (particularly students), Victoria is beginning to feel the pinch. The housing and retail sectors are proving to be vulnerable to the diminishing population growth and falling confidence levels. The rising exchange rate is hurting the manufacturing industry. The Victorian job market is generally strong, with employment growth rates well above the national average. Victorian job growth was 3.7% over the 2011 financial year, well above the national average. However, similarly to the national outlook, future growth is likely to face constraints due to a general lack of workers and falling business investment. Victoria s key industries of manufacturing and education are both highly vulnerable to the rising Australian dollar. This, combined with the slowing population growth rates and retail spending, will keep the overall growth at more modest levels. 6 MELBOURNE AND VICTORIA AN OVERVIEW MPEV

10 2 Melbourne CBD Office Market The total investment grade office stock within metropolitan Melbourne is approximately 8,050,000m 2, of which some 4,100,000m 2 (51%) is within the Central Business District (CBD). 2.1 STOCK As at January, 2012, the total amount of office stock recorded by the Property Council of Australia (PCA) in the Melbourne CBD was some 4,100,000m 2. The Docklands precinct has some 517,000m 2 or 12.6% of the total CBD stock. Melbourne CBD Office Stock BY GRADE (AS AT JAN. 2012) Grade Current Stock (sqm) % of Total Stock Source : PCA; Urbis Premium 623, % A Grade 1,847, % B Grade 931, % C Grade 574, % D Grade 121, % Total 4,099, % Since 1992, no new Premium grade stock has been supplied, with all new construction since that time to an A grade standard. 2.2 NEW SUPPLY Eleven office buildings currently under construction and one project committed to proceed totalling 305,000m 2. 79% of the space in the new projects has already been precommitted. 82% (247,500m 2 ) of the new supply is in the Docklands precinct. 59% (180,100m 2 ) of the new supply is in Collins Street. Refurbishments Two major refurbishments totalling 52,850m 2 are currently under construction and due for completion by end % of this space is precommitted. MPEV MELBOURNE CBD OFFICE MARKET 7

11 Melbourne CBD New Supply UNDER CONSTRUCTION OR COMMITTED AS AT 1/103/2012 APPROXIMATE AMOUNT LEASED at 1/103/2012 APPROXIMATE AMOUNT VACANT at 1/103/2012 NAME / ADDRESS NEW CONSTRUCTION 735 Collins Street, Docklands (Collins Square One) 990 Latrobe Street, Docklands (Digital Harbour) 731 Collins Street, Docklands (Goods Shed South) NLA* (M²) COMP. DATE STATUS MAJOR TENANT(S) BLD GRADE NLA M² % OF TOTAL NLA M² % OF TOTAL COMMENTS 42,000 Jun-12 U/C ATO A 39,150 93% 2,850 7% Five star Green star and ABGR.15 year lease. ATO to vacate 4 CBD buildings (incl Casselden Place and 414 LaTrobe St). Deal negotiated 1/ ,871 Sep-12 U/C Melbourne Water A 12, % 0 0% Six star Green Star. 15 year lease. Melb Water to vacate 100 Wellington Parade, E Melb and some other smaller sites. Deal negotiated 3/ ,195 Sep-12 U/C Pearson Group A 9,395 84% 1,800 16% Five star Green star. Lessee relocating from Camberwell. 850 Collins Street, Docklands (Victoria Harbour) 17,185 Dec-12 U/C Aurecon A 9,390 55% 7,855 46% Five star Green star and 4.5 star ABGR.10 year lease, $492m2 net face, 4%pa reviews. 838 Collins Street, Docklands (Lifestyle Working Collins Street) 171 Collins Street, Melbourne 735 Collins Street, Docklands (Collins Square Two) 700 Bourke Street, Docklands (Bourke Junction) Exhibition Street, Melbourne 150 Collins Street, Melbourne 740 Bourke Street, Docklands 10,257 Mar-13 U/C - A 0 0% 10, % Developer - Lend Lease & Stable Group. Strata development of 137 suites generally ranging from 50 sqm to 75 sqm. 31,634 May-13 U/C BHP Billiton P 11,990 38% 19,644 62% Developer - Cbus and Charter Hall. 10 year lease to BHP over Levels star Green Star, 5 star NABERS. 35,000 Jun-13 U/C Mercer/Marsh A 23,660 68% 11,340 32% Five star Green star and ABGR. Mercer to vacate 11 Exhibition Street, Marsh to vacate 555 Lonsdale Street. Deal negotiated 8/2010 but not confirmed until July 62,000 Jul-13 U/C NAB A 62, % 0 0% Developer - Cbus and ISPT Property. 6 star Green Star, 5 star NABERS, A Grade with Premium grade services, 12 year lease from July Large floor plates of 5,700 Dec-13 U/C RAIA A 1,000 18% 4,700 82% 20 level development with small floor plates of circa 330 sqm being developed by Architects Institute as owner and part occupier. 20,000 Jan-15 U/C Westpac A 14,000 70% 6,000 30% Developer - Grollo and APN. 11 storey 5 star NABER's building at corner of Russell and Little Collins Streets Subject to a precommittment to Westpac for 30,000 Jan-15 U/C Medibank A 30, % 0 0% Developer - Cbus. 313 Spencer Street, Melbourne 27,000 Jan-19 Comm Victoria Police A 27, % 0 0% Developer - Cbus & Australia Post. The be known as City West Police Complex. Sub-Totals 304, ,456 79% 64,446 21% MAJOR REFHMENTS 555 Bourke Street, Melbourne 20,700 End 2012 U/C Holding Redlich A 6,643 32% 14,322 69% Developer - Juilliard Group. Part refurbishment, part new build. 357 Collins Street, Melbourne 32,166 Apr 2012 U/C CBA A 23,447 73% 8,719 27% Developer - Australand. Targeting 4 star Green Star, 5 star NABERS, A Grade. 20,000sqm is refurb, 10,000sqm is new build. Sub-Totals 52,866 30,090 57% 23,041 44% Totals 357, ,546 76% 87,487 24% * Approximate Source : Urbis 8 MELBOURNE CBD OFFICE MARKET MPEV

12 Number of Persons 2.3 DEMAND Within Victoria, total employment has increased on average by 1.29% per annum compound from 1985 to In comparison, white collar employment (the primary occupier of office space) has increased by more than double this rate, by 2.57% per annum compound over the same period. Employment Trends - Victoria TOTAL EMPLOYMENT VS WHITE COLLAR EMPLOYMENT Ave Compound Growth (pa) Total % White Collar % Source : ABS; Urbis Within Victoria, white collar employment growth has been significantly stronger within the Melbourne CBD with an average of 3.46% per annum compound over the 20 year period to 2012 (compared to 1.78% per annum for the whole of Victoria). White Collar Employment Trends VICTORIA & MELBOURNE CBD 600, , , , ,000 Ave Compound Growth (pa) Victoria % Melb CBD % 200, , , , , , , , , ,000 Source : ABS, MCC, Urbis ,000 MPEV MELBOURNE CBD OFFICE MARKET 9

13 Vacancy % Net Face Rents Vacancy % This strong white collar employment growth has fuelled demand for significant new office supply, demonstrated as follows:: Average Annual Melbourne CBD White Collar Employment Growth ( ) 5,792 persons Average Annual Office Space Requirement (based on 1 person per 16m 2 ) 92,672m 2 This figure compares closely with the total average annual net absorption in the Melbourne CBD over the corresponding period of 92,300m VACANCY Although the trend is not even, vacancies have steadily declined from just over 10.0% in 2000 to a current rate of 5.3% as at January, Vacancies are predicted to increase in 2013 as a result of new supply and weak demand conditions in 2012 before falling back to approximately 5.0% in Total Vacancy Melbourne CBD 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Source : PCA, Urbis 2.5 RENTAL GROWTH Where vacancies are above say 7.0% to 8.0%, rental growth is usually flat, with incentives steady or increasing. However, where rental growth is at or below 6.0%, real rental growth is achieved with incentives either stable or declining. Total Vacancy v. Net Face Rent (A Grade) MELBOURNE CBD % 10% 8% Vacancy Rate Net Face Rents (A-Grade) $500 $400 6% 4% 2% $300 $200 $100 0% Note: Adopted rents assume an average standard CBD A Grade building. Source : PCA, Urbis $0 10 MELBOURNE CBD OFFICE MARKET MPEV

14 Rental growth has been low over the past 12 months as a result of weakening economic conditions. Furthermore, we expect rental growth to remain subdued for the next 12 months, partly due to significant new supply coming on line. However, our longer term forecast is for rental growth to be at or above inflationary trends, generally in the range of 3.0% to 4.0% per annum. 2.6 THE COLLINS STREET FACTOR Since the earliest beginnings of Melbourne in the 1830s and 1840s, Collins Street has been the dominant address for commercial activity. In the latter part of the 19 th Century, the intersection of Collins and Queen Streets was the home to major banks and insurance companies and this trend has continued to the present day: Five of Melbourne s nine Premium grade buildings are within Collins Street, including the Premier facilities at 101, 120 and 525 Collins Street. On a like for like basis, the highest office rentals are achieved in Collins Street, with net rentals in the range of $600 to $700 per m 2 being achieved at both 101 Collins Street and 120 Collins Street. Within the traditional CBD, the two new office buildings currently under construction are in Collins Street BHP Billiton, 171 Collins Street and Westpac Bank, 150 Collins Street. The great majority of the CBD s luxury and European brand retailers are located in Collins Street with in excess of 40 outlets. The western extension of Collins Street into the Docklands precinct has enabled a natural extension of commercial activity on Collins Street. The major redevelopment of the Southern Cross Railway Station at the intersection of Collins and Spencer Streets has greatly expanded the capacity for office workers to commute to the CBD from regional Victorian locations. 2.7 SUMMARY A combination of factors has led to the Melbourne CBD (and metropolitan) office market encountering a sustained period of stability and growth. These factors have included: The substantial boom in Inner City residential development has removed sites which potentially could have been developed for offices, thus restricting supply. Tight controls on the availability of credit have ensured that virtually all new office development is substantially (over 70%) precommitted, thus avoiding speculative development. Strong population and in particular white collar employment growth has led to strong demand for office space. Increasing sustainability standards are leading to many older buildings either requiring substantial (expensive) upgrades or declining tenant demand. While significant new supply over the period 2012 to 2013, together with weaker economic conditions is likely to produce higher vacancies and subdued rental and capital value growth over this period, stronger conditions are likely to return from 2014 onwards. MPEV MELBOURNE CBD OFFICE MARKET 11

15 Units 3 Melbourne Strata Office Market 3.1 OVERVIEW The Melbourne CBD strata office market has grown slowly but steadily from small beginnings some 40 years ago. For many years, the majority of strata title offices were created from the conversion of older style traditional office buildings, often leading to poor quality natural light, services and finishes. The first purpose built strata offices appeared in the late 1980s, but still on a small scale and primarily in proximity to the legal precinct. However, as the average size of standard office buildings increased with average floorplates in excess of 1,500m 2 to 2,000m 2, creation of small tenancy areas of say 50m 2 to 100m 2 became increasingly difficult, if adequate natural light was to be provided to all suites. As a result, in order to cater for the accommodation of small businesses, the development of purpose built strata office facilities has now become economically feasible. The continued strong growth in white collar employment creates employment opportunities not only for medium and larger sized organisations but also small, fledgling businesses. These businesses need, initially, to be housed in an office capable of housing say three to four people, but with the opportunity to increase as business grows. These small businesses also need the ability to have occasional use of communal facilities such as meeting rooms and function areas but without providing them within the individual accommodation. Further, businesses are seeking accommodation which provides facilities which meet current day sustainability criteria, which can only be provided in new or substantially refurbished premises. Accordingly, the Melbourne CBD strata office market is now well established and mature, with some 130 strata sales being recorded each year on average over the last decade. However, many of the existing facilities are in relatively poor quality older style buildings and there is clear market demand for modern facilities which meet the demands of current office working practises. CBD Strata Stock ANNUAL SALES Source : Cityscope, Urbis 12 MELBOURNE STRATA OFFICE MARKET MPEV

16 Units 3.2 EXISTING STOCK Over 65% of strata office suites within the Melbourne CBD are located within buildings constructed before 1980: CBD Strata Stock BY DATE BUILT Source : Cityscope, Urbis There were no new strata developments completed in 2010 and 2011, or likely to be completed during The chart above, for the period 2010 to 2013, incorporates two strata developments currently under construction (Lifestyle Working Collins Street, 838 Collins Street 137 units; 35 Exhibition Street approximately 40 units), both of which are due for completion in Accordingly, with only 33% of total units in purpose built strata office buildings, there is continuing demand for the supply of new facilities in order to replace the increasingly ageing stock base. 3.3 RECENT DEVELOPMENTS In response to the demand for purpose built strata office facilities, there have been five new developments within the Melbourne CBD since 2007: Aquavista, 401 Docklands Drive, Docklands (205 units, built 2007); Site One, 757 Bourke Street, Docklands (53 office units, built 2007); Q2, 2 Queen Street, Melbourne (120 units, built 2008); Life Lab, 198 Harbour Esplanade, Docklands (94 units, built 2008); 373 King Street, Melbourne (30 units, built 2009). In addition, a strata office development was undertaken in nearby South Yarra with 96 strata suites completed in Other than 373 King Street, Melbourne, which is a small facility on the CBD fringe, we have provided case studies of each of the above strata developments on the following pages. MPEV MELBOURNE STRATA OFFICE MARKET 13

17 Aquavista 401 Docklands Drive, Docklands DEVELOPER COMPLETION DATE 2007 MAB Corporation & Aldy Group LOCATION Located on the corner of Docklands Drive, Doepel Way, Rakaia Way and Caravel Lane, within New Quay in Docklands, approximately 1,250 metres north of Collins Street. IMPROVEMENTS DESCRIPTION A 17 storey strata office building with ground floor retail and 7 level podium car park and 8 levels of strata offices. Total office NLA 12,810 sqm. IMPROVEMENT SUMMAY NO UNITS AVE SIZE SQM RETAIL SUITES OFFICE SUITES CAR PARKING 411 bays MARKTETING COMMENT Marketing commenced mid-2004 with a 12 month gross rent guarantee at 6.00% of purchase price. Majority of purchasers were investors. TRANSACTION ANALYSIS SALE TYPE NO SALES % STOCK AVE $ SQM PRE-COMPLETION % POST-COMPLETION 60 25% STILL FOR SALE 10 4% $5,987 $5,828 N/A OFF-THE-PLAN TRANSACTION ANLAYSIS UNIT SIZE RANGE NO SALES 0 SQM TO 49 SQM SQM TO 99 SQM SQM AND OVER 12 AVE $ SQM $6,587 $5,744 $4, MELBOURNE STRATA OFFICE MARKET MPEV

18 Site One 757 Bourke Street, Docklands DEVELOPER COMPLETION DATE Pan Urban & Halim Group 2007 LOCATION Located on the south-west corner of Bourke Street and Batmans Hill Drive, within Batman's Hill in Docklands, approximately 200 metres north of Collins Street. IMPROVEMENTS DESCRIPTION A 6 storey mixed-use building comprising ground floor retail, Levels 1 & 2 strata offices known as the Trevormain Business Centre and Levels 3-5 small home offices. IMPROVEMENT SUMMAY NO UNITS AVE SIZE SQM RETAIL SUITES 13 - OFFICE SUITES CAR PARKING 115 MARKTETING COMMENT Marketing commence in mid 2004 with rental guarantees offered at 6.00% gross of the purchase price. TRANSACTION ANALYSIS SALE TYPE NO SALES % STOCK AVE $ SQM PRE-COMPLETION 16 31% $5,689 POST-COMPLETION 3 6% $6,184 STILL FOR SALE 33 63% N/A OFF-THE-PLAN TRANSACTION ANLAYSIS UNIT SIZE RANGE NO SALES AVE $ SQM 0 SQM TO 49 SQM 50 SQM TO 99 SQM 100 SQM AND OVER 2 $6, $5,692 2 $5,129 MPEV MELBOURNE STRATA OFFICE MARKET 15

19 Q2 2 Queen Street, Melbourne DEVELOPER COMPLETION DATE Macquarie Real Estate Equity Fund 2008 LOCATION Located on the western corner of Queen Street and Flinders Street, within the western core of the Melbourne CBD, approximately 200 metres south of Collins Street IMPROVEMENTS DESCRIPTION A 12-storey strata office building comprising ground floor retail and 11 upper levels of strata offices. No onsite car parking. IMPROVEMENT SUMMAY NO UNITS AVE SIZE SQM RETAIL SUITES 9 85 OFFICE SUITES CAR PARKING 0 bays MARKTETING COMMENT Marketing commenced in early 2006 with rental guarantees offered at 6.00% net of the purchase price. TRANSACTION ANALYSIS SALE TYPE NO SALES % STOCK AVE $ SQM PRE-COMPLETION % $6,180 POST-COMPLETION 37 25% $7,026 STILL FOR SALE 2 1% N/A OFF-THE-PLAN TRANSACTION ANLAYSIS UNIT SIZE RANGE NO SALES AVE $ SQM 0 SQM TO 49 SQM 50 SQM TO 99 SQM 100 SQM AND OVER 59 $6, $5,684 3 $4, MELBOURNE STRATA OFFICE MARKET MPEV

20 Life Lab 198 Harbour Esplanade, Docklands DEVELOPER COMPLETION DATE Digital Harbour (Holdings) 2008 LOCATION Located on the eastern side of Harbour Esplanade, within Digital Harbour in Docklands, approximately 800 metres north of Collins Street. IMPROVEMENTS DESCRIPTION An 8 storey strata office building comprising ground level retail units, seven levels of strata offices/apartments and two levels of basement parking. Level 5 primarily used as serviced apartments with other levels primarily office suites. IMPROVEMENT SUMMAY NO UNITS AVE SIZE SQM RETAIL SUITES OFFICE SUITES CAR PARKING 130 bays MARKTETING COMMENT Marketing commenced in mid 2006 with rental guarantees offered at 6.00% gross of the purchase price. TRANSACTION ANALYSIS SALE TYPE NO SALES % STOCK AVE $ SQM PRE-COMPLETION 49 47% $5,866 POST-COMPLETION 23 22% $6,754 STILL FOR SALE 32 31% N/A OFF-THE-PLAN TRANSACTION ANLAYSIS UNIT SIZE RANGE NO SALES AVE $ SQM 0 SQM TO 49 SQM 50 SQM TO 99 SQM 100 SQM AND OVER 29 $5, $5,816 4 $5,739 MPEV MELBOURNE STRATA OFFICE MARKET 17

21 Nine Yarra 9 Yarra Street, South Yarra DEVELOPER COMPLETION DATE Michael L Yates & Associates 2010 LOCATION Situated on the eastern side of Yarra Street, in South Yarra, approximately 3 radial kilometres south-east of the Melbourne CBD. IMPROVEMENTS DESCRIPTION An 18 storey strata office building comprising ground floor retail, podium car parking and upper levels of strata office accommodation. IMPROVEMENT SUMMAY NO UNITS AVE SIZE SQM RETAIL SUITES - - OFFICE SUITES CAR PARKING 255 bays MARKTETING COMMENT Marketing commenced in mid TRANSACTION ANALYSIS SALE TYPE NO SALES % STOCK AVE $ SQM PRE-COMPLETION 42 46% $7,198 POST-COMPLETION 49 54% $6,487 STILL FOR SALE 0 0% N/A OFF-THE-PLAN TRANSACTION ANLAYSIS UNIT SIZE RANGE NO SALES AVE $ SQM 0 SQM TO 49 SQM 50 SQM TO 99 SQM 100 SQM AND OVER 8 $6, $7,313 2 $7, MELBOURNE STRATA OFFICE MARKET MPEV

22 3.4 MARKET CRITERIA The supply of some 500 strata units in the period 2007 to 2008 was generally successful, with a significant number of sales to private investors. In the following table we have provided an overview of the most recent strata developments within the CBD, with one in nearby South Yarra: Recent CBD Strata Projects KEY MARKET INDICATORS Development Name Date of Completion No. of Units Average Unit Areas (m²) Car Parking (bays) Analysis ($ SQM) Pre- Completion Post Completion Rent Guarantee Yields Current Net Market Rent ($ SQM) Aquavista, 401 Docklands Drive, Docklands bays $5,987 $5, % G $375 to $400 Life Lab, 198 Harbour Esplanade, Docklands bays $5,866 $6, % G $375 to $400 Site One, 757 Bourke Street, Docklands bays $5,689 $6, % G $360 to $400 Q2, 2 Queen Street, Melbourne bays $6,180 $7, % N $400 to $475 Nine Yarra, 9 Yarra Street, South Yarra bays $7,198 $6,487 N/A $375 to $425 G = Gross N = Net Source: Urbis From reference to the above, the following financial trends are apparent: Those properties completed between 2007 and 2008 achieved average rates for off the plan sales at or about $6,000 per m 2, with re-sales at a similar level, other than the more centrally located Q2 project where re-sales have reflected average rates in the vicinity of $7,000 per m 2. The Nine Yarra project, which was not completed until 2010 achieved off the plan sales in the vicinity of $7,200 per m 2 on average. The market rental rates for these projects represent a premium of approximately 10.0% above the rate for equivalent standard conventional office space in the same location. Many of the sales in 2007 to 2008 were based upon vendor rental guarantees equivalent to 6.0% gross on the purchase price. However, recent re-sales of strata units in these and other CBD strata offices have generally reflected yields in the range of 6.5% to 7.0% on net income for prime locations and 7.0% to 7.50% in secondary locations. In addition to the analysed financial trends from the most recently completed strata office projects, a broader analysis of all strata office developments to date reveals the following trends and observations: Location None of the above projects are located within the heart of the central CBD or with the benefit of a Collins Street address. Q2, 2 Queen Street, is within the traditional CBD precinct, but still in a secondary sub-locale at the intersection of Queen and Flinders Streets. The Q2 project achieved good pre and post completion sales, with investors generally confident about the ability of the location of this project in attracting tenants. The Aquavista and Life Lab projects are located in the northern section of Melbourne s Docklands precinct, somewhat removed from the primary commercial heart of Docklands centred on the Victoria Harbour and Batmans Hill sub-precincts. MPEV MELBOURNE STRATA OFFICE MARKET 19

23 While the Aquavista project in particular achieved a high level of pre-completion sales, many of the sales were achieved in a pre-gfc environment and with the benefit of 12 month rent guarantees. Post-completion sales of units at both Aquavista and Life Lab have slowed significantly, with Investors apparently less confident about ongoing tenant demand. Age On a like for like basis, new strata developments are achieving premiums generally between 25% - 50% above strata units within older style, converted former office buildings. However, sales of strata units within older style, converted office buildings with a Collins Street (or Little Collins Street) address have achieved rates of at least 10% - 20% above similar quality units in other locations. Accordingly, a new, purpose built strata development with a Collins Street address could reasonably expect a price premium of between 10% - 20% above comparable facilities in other locations. Parking The provision of on-site parking is not considered essential, however public parking within the immediate vicinity is required. To this extent, the Q2 project has no on-site parking, although several public parking stations are within short walking distance. Design To date, the majority of the strata building conversions often suffer from design shortcomings including small entrance foyer, poor natural light and inferior building services. Even some of the new projects have design shortcomings including a small entrance foyer (Life Lab, Q2 and Nine Yarra) and poor natural light (lower levels of Q2 and Nine Yarra, together with Life Lab which fails to fully capitalise on water views). Mixed Use Stand alone, single use strata developments have generally fared better than those which incorporate other uses. The SoHo concept, which incorporates a mix of both office and residential uses has not generally worked well to date, with recent examples including Life Lab and Site One. Purpose built facilities delegated to strata offices provide a strong sense of identity and have generally worked better than mixed use projects, as the office component can often be compromised as a result of a lack of identity for the offices, small entrance foyer and reduced tenant demand. Sustainability The majority of strata office conversions have poor substantiality criteria and even some of the more recently completed projects have low sustainability features when compared with recent traditional office buildings, as the most recent strata office projects were designed some 7-8 years ago. With substantial advances in sustainability standards over the interim period, and with many businesses occupying strata offices operated by a generally youthful age group which has a higher acceptance of the concept of sustainability, new developments offering energy saving and sustainable design practices will be able to be successful in attracting tenants and owner occupiers. 20 MELBOURNE STRATA OFFICE MARKET MPEV

24 3.5 CRITICAL SUCCESS FACTORS Our analysis of the Melbourne CBD strata office market reflects the following elements which have influenced the investment performance of this asset class LOCATION In keeping with the broader office market, location continues to play a critical role in the success or otherwise of strata offices. Within the Melbourne CBD: Collins Street continues to dominate as the commercial address, with office space commanding a rental premium of some 10% to 15% above comparable facilities in other locations within the CBD. Several buildings have not adopted branding associated with a major occupier, but instead have maintained the Collins Street tag, eg 101 Collins Street, 120 Collins Street and 530 Collins Street. Proximity to other office buildings is of significance, particularly as the majority of occupiers of strata office suites depend on the occupants of larger office buildings as their primary client base. There continues to be a steady trend towards the use of public transport, in particular rail and tram. The redevelopment of the Southern Cross Railway Station has been a major success factor in the development of offices within the southern section of Docklands, while the extensive tram network is of great benefit to the rapidly expanding CBD and inner suburban high density residential market. Based on current construction and future proposals, the majority of office space to be provided within the CBD over the next 5-10 years will be within the Victoria Harbour, Batman s Hill and Stadium subprecincts of the Melbourne Docklands. To date, only one strata office project is under construction or proposed in Docklands (Lifestyle Working Collins Street, 838 Collins Street) Accessibility Despite the continuing trend towards public transport, occupiers of strata office suites still require good private vehicle accessibility and parking facilities. Amenity As with the broader office market, the amenity of nearby retail, restaurant, bar and entertainment facilities is important to the strata office market BUILDING TYPE Until the last five years or so, the majority of strata office accommodation was housed in converted, older style traditional office buildings. However, the relative success of the purpose built strata office projects completed in the last five years has clearly demonstrated that small businesses prefer to be housed in modern facilities offering a broader range of features not normally contained within office conversions. These features include: Natural Light As with the residential apartment market, the provision of natural light is a critical success factor, even for suites as small as say 30m 2 to 40m 2. Flexible Work Areas The nature of the occupancy of strata suites is dynamic, with small businesses often expanding (and sometimes contracting) over a short period of time. Accordingly, the ability to increase (or decrease) the size of units while still retaining natural light is an important factor. Sustainability In the broader office market, it is now standard practise for all new buildings to incorporate significant sustainability features, with virtually all recently constructed office buildings incorporating 5 Star Green Star and 5 Star NABERS Rating. Some projects are now targeting 6 Star ratings. If strata projects do not offer similar sustainability features, tenant (and investor) interest is likely to be weaker. Single Use The most successful office buildings have been those which comprise a dedicated office use. Office developments which have been incorporated as part of a larger, mixed use offering including for example substantial retail and/or residential facilities have generally performed less well. MPEV MELBOURNE STRATA OFFICE MARKET 21

25 3.5.3 INVESTMENT CRITERIA Many of the new strata units completed in the period 2007 to 2008 were marketed on the basis of a vendor guarantee at a fixed percentage of the purchase price for the first 12 months post-acquisition. This concept was provided on the basis that tenants could be attracted during the first 12 month period. On reflection, this concept was not entirely successful, as it provided some investors with false expectations as to the level and strength of tenant demand. In our view, a strata office unit will only be successful in the longer term if it is able to meet the fundamental investment criteria, including the following: Location As previously discussed, location is the single most important factor in the investment performance of a strata office unit over the medium to longer term. Within the Melbourne CBD, a central CBD location and/or a Collins Street address is considered to be the single most important feature in attracting tenants and therefore ensuring the best outcome for investors. Leasing Risk The unit must be attractive to tenants, as the majority of strata office units are owned by investors as opposed to owner occupiers. Value for Money A strata office must provide an investor with a reasonable return on investment, and also be attractive to tenants by way of containment of costs. Accordingly, if total costs of occupancy can be materially reduced by factors including lower energy costs, then value for money can be demonstrated. On Site Facilities Although not all occupiers of office suites will utilise on site communal facilities, the provision of a range of features including meeting rooms, bicycle parking and free internet connections assist not only in attracting tenants but also in making the unit attractive to future investors. 22 MELBOURNE STRATA OFFICE MARKET MPEV

26 xoffice locationsx Sydney Level 21, 321 Kent Street Sydney, NSW 2000 t f Brisbane Level 7, 123 Albert Street Brisbane, QLD 4000 t f Melbourne Level 12, 120 Collins Street Melbourne, VIC 3000 t f Perth Level 1, 55 St Georges Terrace Perth, WA 6000 t f Australia Asia Middle East w urbis.com.au e info@urbis.com.au