New breed of tenants

Transcription

1 Research and Forecast report Second Half 2015 Australia & New Zealand CBD OFFICE New breed of tenants Strategic owners adapt to change Accelerating success.

2 First Half 2015 Australia First Half 2015 Australia First Half 2015 Australia and New Zealand First Half 2015 Australia and New Zealand 2015 Australia Want real time data that matters most to your business? Colliers Edge is a subscription service developed by our in-house property research specialists, drawing on the expertise of our national network of operators. We provide clients with a quarterly series of real estate data, collected in a consistent and timely manner to ensure the highest standard of quality. Colliers Edge has the longest data time series for office, industrial and retail markets across all major Australian cities. Updated quarterly, Colliers Edge is an all-encompassing data analytics tool that can help your business make informed decisions. Want better insights, faster? Talk to a Colliers Edge expert today. Nerida Conisbee National Director Research nerida.conisbee@colliers.com Luke Dixon Associate Director Research luke.dixon@colliers.com colliers.com.au/colliersedge Improve your perspective. We have. Property Research worth talking about. Research and Forecast Report Research and Forecast Report Research and Forecast Report Research and Forecast Report Research and Forecast report METRO OFFICE HOTELS INDUSTRIAL RETAIL HEALTHCARE AND RETIREMENT LIVING Dial for demand Size does matter Large format retail outperforms Enquiry for metro assets on the rise Hungry for prosperity? Hotel capital flows break new ground Building scale Investors expand collections Changing of the guard Boutique to corporate - a shift in ownership Accelerating success. Accelerating success. Accelerating success. Accelerating success. Accelerating success.

3 Metro Office CBD OFFICE Contents The new tenant: how building owners are adapting to change 5 Our perspective CBD office 10 CBD office market snapshots 1. Sydney Melbourne Brisbane Perth Adelaide Canberra Auckland 36 Our experience CBD office 38 How else can we help you? Speak to one of our property experts today. au.office@colliers.com Partner with our Research and Consultancy team Our highly experienced team of professionals can partner with you to ensure your next project has a positive outcome. We deliver strategic advice across a full range of property sectors, ensuring that your decisions are fully informed. au.consultancy@colliers.com For more information about Colliers International And working with us visit: CBD Office Research & Forecast Report Second Half

4 5 Martin Place, Sydney Leased on behalf of Cbus Property and DEXUS Property Group 4 A Colliers International publication

5 Metro Office CBD OFFICE The new tenant: how building owners are adapting to change CBD office tenants are changing. In Australia they are getting smaller, less likely to be in finance or government and currently taking advantage of market conditions. As competition for the best people becomes a major issue, particularly in the competitive technology sector, there is a greater focus on using real estate to attract and retain staff. New Zealand is experiencing its own unique changes. Although finance and insurance remains a stalwart of CBD occupiers, the number of architects and engineers setting up business in the CBD has increased rapidly. Owners are responding to these changes with the way that they lease space, develop and plan for the future of their buildings. Nerida Conisbee National Director Research, Australia nerida.conisbee@colliers.com Chris Dibble Associate Director Research and Consultancy, New Zealand chris.dibble@colliers.com Who is the new tenant? The new tenant is getting smaller. The decline in average tenancy size is being driven in part by an absence of really large deals taking place which is more a cyclical element given the long leases that large corporations typically take. However there are a number of structural issues also occurring. The first is that there has been significant growth in small to medium size enterprises looking for space. Average lease enquiry levels in the sub 1,000sqm category in Australia have grown as a percentage of total leases. In 2009, it amounted to 71 per cent of total deals. This has grown consistently to currently account for 83 per cent. AVERAGE LEASE ENQUIRY SIZE, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10% 6% 7% 5% 5% 5% 16% 14% 12% 12% 20% 19% 79% 81% 83% 83% 71% 74% sqm 1,000-2,999sqm >3,000sqm New Zealand s percentage of tenants occupying less than 1,000sqm has remained relatively stable at around 70 per cent over the last five years. However, the number of employees growing within these smaller businesses is increasing. This increase in density rather than leased space is a signal to owners on efficiency as a primary tool for leasing campaigns. CBD Office Research & Forecast Report Second Half

6 The second structural change is that we expect to see a wave of part floor occupiers enter the Australian and New Zealand CBD markets over the next two years as a large number of these leases expire. The number is expected to be much higher than single floor and multi floor users over the next two years. It is therefore expected that it will not just be new tenants entering the market that are after smaller tenancies, but also existing users looking for new space. NUMBER OF LEASE EXPIRIES BY SIZE, Multi Floor User Single Floor User Part Floor Premium A B In New Zealand, tight market conditions have led to a rise in tenants searching for more efficient space. Examples include Fonterra and Meredith Connell. The tenant moves will see a gradual lift in vacated space that will be highly favoured by part floor occupiers. The third is that as more tenants move to more flexible ways of working, the space per employee reduces. Workspace ratios continue to decline however the decline is gradual with some sectors being impacted more than others. Technology groups in particular have far lower workspace ratios than other groups. These groups are expected to be a major contributor to office demand and hence this will be a major driver downwards of these ratios. New Zealand s example is the listed company Precinct Properties Innovation Centre in the Wynyard Quarter. The more than 40,000sqm of staged development, which is adopting a technology and innovation focus for its tenants, will provide collaboration hubs and shared working spaces for a range of tenants including start-ups. Taking advantage of market conditions In Australia, tenants are receiving record levels of incentives as owners actively compete for their occupancy. Perth CBD currently has the highest A Grade incentives in Australia at 38 per cent, closely followed by Brisbane CBD at 34 per cent. We have never recorded incentives this high in Perth CBD while all other cities are now at levels not seen since the early 1990s. It is not just incentives that tenants are typically expecting with other conditions also in strong demand including more flexible lease terms when setting up a lease, or lease tail coverage if leaving an existing tenancy early. It is rare for incentives to hit zero in Australian CBD markets. The few exceptions have been when there was no vacancy as was the case in Perth and Brisbane CBDs in The lowest Sydney CBD has ever reached was in mid 2000 when vacancy hit 4.5 per cent and incentives declined to four per cent. We consider it likely that incentives will continue to remain historically high, even as the vacancy rate declines, primarily because tenants now have expectations of some form of abatement, generally as a fitout being included as part of the lease. Sydney CBD vacancy rate is currently 6.3 per cent and is expected to continue to decline over the next two years. This is similar to 1997 when the vacancy rate was roughly similar and a similar market dynamic was occurring. At this time, incentives were just 15 per cent, half of what they are currently. Across the Tasman, incentives in New Zealand are reducing as landlords become more confident in their ability to increase rents. In Auckland, the major supply and demand imbalance has kept incentives low. Auckland s CBD employment grew by 20 per cent between 2010 and 2014, with 2015 shaping up to be another bumper year. Wellington has always had low incentives and 2015 is no different. Currently, Auckland and Wellington have the lowest prime vacancy rates in the Asia Pacific. Bias to business services and technology 151 Macquarie Street, Sydney Managed on behalf of CorVal Partners Limited A recovery in tenant demand in Australian CBD office markets has historically been led by a recovery in finance and insurance 6 A Colliers International publication

7 Metro Office CBD OFFICE 8 Mahuhu Crescent, Auckland Sold on behalf of Harbour 5 Limited employment in the Sydney CBD. As a legacy of the Global Financial Crisis, the recovery this time is still being led by the Sydney CBD but right now finance and insurance are not dominating growth, with technology and business services sectors instead leading. Financial year to date, business services accounts for 23 per cent of CBD office enquiry, followed by IT&T with 18 per cent of enquiry. It isn t quite the end of finance and insurance and we are starting to see the early stages of demand in this sector. At present, it appears that growth is dominated by boutique occupiers however it is likely to move to larger occupiers over the next two years. Greater focus on location There are many reasons why a tenant may prefer either a CBD location or metro location. This can include access to employees, close proximity to retail or ease of access by car or train. In both Sydney and Melbourne CBDs, there is a current centralisation of tenants taking place. In the case of Melbourne, there are strong financial reasons to make the move into the CBD. Historically, Melbourne CBD has not had much movement of tenants between CBD and metro locations with most tenants preferring to stay in either location. This has changed over the past 12 months where the cost of being in the Melbourne CBD has dropped significantly when compared to metro markets. In 2010, to be in the inner-east office precinct of Melbourne, it was $47/sqm cheaper when compared to the CBD. In 2015, this differential has dropped to just $9/sqm. In Sydney CBD, the differential is not as significant; however, we are seeing even greater movement of tenants from metro markets. It is likely part of this is affordability driven given the high incentives being offered; however, close proximity to public transport, vibrancy retail amenity are also considered important. In other Australian cities, the trend is not as pronounced, even though markets like Brisbane and Perth CBDs are very affordable at present. A greater dependence on car travel is considered to be a major factor here, as is the ability to purpose build an office building in the metro markets, a factor which appears to be important in these markets. In Auckland, tenants starved of choice in the CBD are moving to the CBD Fringe. Some are benefiting from lower total occupancy costs together with comparable amenity and facilities. A workplace that is easy to get to is important for occupiers and ease of access by public transport and bicycle is seen as particularly important. Car access is also important but the importance of this is declining over time. Wanting to make a good impression on employees, clients, service providers and stakeholders The ability to attract and retain staff is critical for employers. As employment markets continue to improve, particularly in NSW and the technology sector, using property in the battle to attract talent is gaining strength. Because of the high levels of amenity that CBDs provide, as well as the radial nature of Australia s public transport systems, having a CBD location is frequently a talent attraction tool. Auckland s City Rail Link (CRL) if undertaken within local government, rather than central government timeframes, could provide a signifcant impetus to CBD growth in the current cycle. A greater amount of green space is also emerging as an important factor for many tenants. This space can be located within the building, or can be public space around the building. These areas are typically used by employees during breaks, as well as to hold more formal meetings. CBD Office Research & Forecast Report Second Half

8 A CBD location is also important for many occupiers in order to be close to clients and to a lesser extent, service providers. This is particularly true for business services occupiers who rely on other major CBD occupiers for business. Although most occupiers typically want the best locations within a CBD (e.g. Martin Place, Sydney or Collins Street, Melbourne), some firms with a large shareholder base will look to lower cost options as a way to show they are financially cautious. How are things changing? Owners putting up with high incentives... for now Incentives have been particularly high in all Australian CBD markets for some time now. However, we consider that these tenant friendly conditions will start to unwind over the next two years. Incentives typically take some time to come down, even when market conditions are improving. Sydney CBD incentives have started to decline, while we consider Melbourne, Brisbane and Adelaide CBD levels at peak. INCENTIVE LEVELS FOR A-GRADE CBD OFFICE BUILDINGS (%), JUNE 2015 & JUNE 2016 A sense of place is seen as desirable by many occupiers, not just technology tenants. This can mean different things for each tenant but can include the provision of outdoor space (e.g. balcony or rooftop garden) to being in a heritage style building. This is generally a challenge in a CBD market where the outdoor space is not readily available and a heritage building typically lacks the base level services required. The ideal building configuration Based on our discussion with tenants, side core configuration is now the most popular option for tenants and many are particular about the size of the floorplate. Most tenants are now typically demanding between 1,200 and 2,000sqm. In Australia, demand for large floorplate campus style buildings is not currently seen as the preferred option. Most tenants typically prefer a vertical campus. This is likely to be partly driven by availability of sites, particularly in CBD locations. In New Zealand, the expansion of the CBD office market will be in both high rise and campus style premises over the next five years. Precinct Properties and Manson TCLM announcing high rise office towers, subject to pre-commitment levels. The opening up of Wynyard Quarter has provided a number of businesses the opportunity to occupy campus style buildings. Goodman are currently building three major office premises of approximately 40,000sqm on adjoining sites with a central open space in Wynyard Quarter. Incentives (%) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jun-15 Jun-16 Technology tenants are they different? There is currently strong demand from technology tenants for space in the CBD and the type of space they are after is somewhat different from the other dominant office user categories of finance and insurance, business services and government. Similarly to these organisations, they are trying to find the right environment to attract staff. For technology companies, this involves creating an environment that is more aligned to the creative people they are trying to attract. Within their tenancies they like to customise their environments; hence, includes ceiling finishes and carpet is not typically desired. There is a strong preference for a central location, partly because employees will often work non-standard hours and need close proximity to services at all times. 201 Kent Street, Sydney Designed and Project managed on behalf of De Lage Landen 8 A Colliers International publication

9 Metro Office CBD OFFICE 818 Bourke Street, Melbourne Sold on behalf of GPT Group Accommodating small tenancies The growth in demand for small tenancies is expected to remain strong and this provides a challenge for both these occupiers, as well as owners of buildings. For companies in the early stages of growth, a 10 year lease can be difficult to commit to. Many of them are growing at a fast pace and have difficulty determining their requirements in 12 months, let alone 10 years. Similarly, it can be difficult for owners to accommodate small suites within an office building. To develop a new building, it is difficult to coordinate a large number of small tenants to enable sufficient pre-commitment. Most major owners of Australian buildings are currently developing some form of co-working space in their buildings. This is still embryonic in New Zealand, albeit growth in this sector is enivatable. This type of work accommodation provides a solution to the demand for small tenancies, but also provides new leasing opportunities in low demand markets. These co-working spaces are offered in different ways including providing existing tenancies in the building with overflow space to new tenancies wanting access to space for short term purposes, or to allow them to work in an environment that allows for knowledge sharing with other organisations. In the US, organisations such as WeWork do not own buildings but instead lease office space and then provide space to individuals or companies under a membership structure. WeWork is the now the fastest growing lessee of new office space in New York City and has recently pre-committed an entire building in Brooklyn. Regus, an established operator that operates globally, including Australia, now partners with major owners to provide overflow or flexible space for tenants in a co-branded format. Somewhere to store bikes and have a shower Having a place for employees to store their bicycles and associated end of trip facilities is particularly important and has been considered more important than car parking for some time now. There are a lot of reasons for this including lower levels of car ownership amongst younger generations, the increasing cost of car parking and difficulties with traffic congestion. Continued popularity of cycling is another factor driving this. As is the number of people who exercise during breaks and need a place to change and shower. Taking advantage of strong residential conversion opportunities Strong demand for residential development sites is now giving owners of secondary office building an alternative option for use. This is having the impact of increasing prices of secondary office buildings but is also leading to a decline of secondary space. As yet it is not having a strong impact on rental levels for lower grade space however this is likely to occur, particularly in a market like Sydney where we are starting to see a decline in the vacancy rate. The other challenge to the market is availability of space for smaller occupiers, as well as start-ups, a market that is generally well catered for with secondary buildings. It is likely that this will also lead to increased demand for co-working environments that are now being offered. CBD Office Research & Forecast Report Second Half

10 Our perspective CBD OFFICE HOW WILL VACANCY RATES LOOK IN 2016? JUN-15 JUN-16 SYDNEY AND MELBOURNE FIRMLY IN RECOVERY MODE FOR NET EFFECTIVE RENTS SYDNEY PERTH 16.6% 8.1% 17.1% 13.5% % 4.3% % -19.5% 15.3% 6.3% 5.5% 15.6% MELBOURNE % 2.4% BRISBANE % -0.4% 13.5% 15.0% 7.7% 19.8% ADELAIDE CANBERRA SYDNEY BRISBANE PERTH % 1.6% % 0.2% MELBOURNE ADELAIDE CANBERRA TOP 7 INVESTMENT TRENDS FOR 2015 Yield compression of 50-75bp anticipated to occur over second half 2015 Greater level of capital sourced from equity markets, rather than debt Private investors hit a record high first half of the year, purchasing more than $1 billion of CBD office buildings Fund through developments continue to be sought after Tenant demand in Sydney and Melbourne firmly in recovery mode, providing confidence for the investment market China dominates CBD office investment Influx of capital set to continue Accelerating success. How else can we help you? Speak to one of our property experts today. au.office@colliers.com

11 AUSTRALIA SECOND HALF 2015 SYDNEY EXPECTED TO LEAD OFFICE SUPPLY OVER NEXT 12 MONTHS SYDNEY 204,100 PERTH 99,303 MELBOURNE 71,768 BRISBANE 61,300 ADELAIDE 24,197 CANBERRA 7,972 Sydney CBD expected to have the most new development enter the market with the completion of Barangaroo T2 & T3 and 200 George Street. Sydney CBD new supply will be supported by the market due to a strong recovery in white collar employment growth over the next 12 months Perth and Brisbane CBDs expected to have high levels of new supply; vacancy will increase due to soft leasing markets. LEASING TRENDS TO WATCH IN 2015 Co-working spaces continue to develop as smaller tenants grow and occupiers look for flexible options Incentives expected to remain historically high, with slight reduction as markets begins to recover Sydney and Melbourne CBDs see a strong trend of re-centralisation of tenants Office building conversions expected to lead to a reduction in secondary space availability IT&T and business services tenants dominate enquiry levels, while finance and insurance sectors see modest recovery For more information about Colliers International and working with us visit:

12 Research and Forecast report Second Half 2015 SYDNEY CBD OFFICE Office remains hot property High levels of tenant activity are evident within the Sydney CBD from a very busy six months to 1 July Office vacancy declined to 6.3 per cent. Whilst withdrawal of office stock for conversion has assisted the leasing market, the vacancy decrease was primarily the result of strong floorspace uptake from new tenants locating into the CBD and texisting tenants expanding. A number of large CBD backfill vacancies are expected to be leased soon, including 255 Elizabeth Street and 10 Shelley Street expected to be fully leased. As vacancy falls further we expect protracted tightening and lowering incentives as landlords are more bullish. There remains a distinct lack of quality smaller tenancies, particularly for sub-300sqm floorspace, therefore the subdivision trend will persist for longer-term vacancies. The investment sales market recorded a quieter six months. This was due to a lack of investment stock available, not a decrease in investment demand. Pricing continues to improve with capital values rising and yields compressing in the deals which occurred. Demand from offshore capital to invest in Sydney CBD was apparent with 77 per cent of total sales by value being to overseas buyers. The major market talking point has been the sale of the Investa Office Portfolio to China Investment Corporation (CIC) for a reported $2.45 billion. This represents the largest direct property deal in Australian history. The strong pricing achieved for the portfolio is being carefully analysed by all major owners to understand the impact on valuations, with the transaction considered to include a component for a portfolio premium given the scale and quality of assets included in the transaction. Sales activity in the Sydney CBD is expected to increase in the second half of 2015 now that the Investa portfolio has transacted. Vendors have a guide on current pricing and purchasers can hunt for other opportunities. Given strong capital values and the low interest rate environment vendors may however continue to question how to deploy capital liberated from sales prompting quieter investment conditions for the remainder of COLLIERS INTERNATIONAL RESEARCH FORECASTS SYDNEY CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents* $665 $683 A Grade Net Effective Rents* $418 $435 A Grade Incentives* 30% 30% A Grade Yields* 6.7% 6.5% A Grade Capital Values* $9,900 $10,402 A Grade Vacancy Rate 6.7% 4.6% Total Market Vacancy Rate 6.3% 5% Supply Additions (m²) 23, ,900 1 Macquarie Place, Sydney Designed and Project Managed on behalf of Pacific Life Re 12 A Colliers International publication

13 Metro Office CBD OFFICE The renaissance of Martin Place as a focus for tech firms and financial services continues. Significant deals over the last six months include Challenger committing to 9,200sqm at 5 Martin Place; Apple reportedly taking 6,200sqm at 20 Martin Place; and Commonwealth Bank of Australia taking space at 1 Market Street, 2 Market Street and 420 George Street. Colliers International secured two new whole-floor tenants for nearly 3,000sqm of floorspace at A Grade 60 Margaret Street within six months of the previous tenant, Thompson- Reuters, relocating their back-office operations to 19 Harris Street. One floor was leased to Serco who consolidated from various locations in the CBD, with a second floor leased to Injury Treatment, who has expanded from metropolitan Sydney to open a new CBD office. They were attracted by the favourable commercial terms and increased level of staff amenity available in the city Core precinct. The speed of these transactions demonstrates the level of tenant activity in the prevailing market. SYDNEY CBD OFFICE: AVERAGE NET EFFECTIVE RENTS ($/SQM) $1,200 $1,000 $1,069 Jun-15 Jan-15 Jun-14 $800 $600 $814 $673 1 Market Street, Sydney Leased on behalf of Investa Property Group Leasing market Affordable stock outperforms The first half of 2015 saw the leasing turnaround which first emerged in 2014 gather pace, leading to a busy six months. Vacancy is down due to both stock conversion and strong floorspace uptake from a range of occupier types. Well located, affordable B Grade office stock is performing strongly. With the availability of secondary stock reducing landlords are now able to capitalise on this. B Grade incentives have tightened, especially for fitted out floorspace. Such floorspace has demonstrated good tenant retention. A Grade demand is solid, driven by business growth and tenant flight to quality. Premium incentives remain flat but are expected to be subject to downwards pressure going forwards as a result of positive absorption and small tenancy suites offering tenants a plug and play style of solution. The Western Corridor remains extremely tight with an A Grade vacancy of 3.6 per cent. Midtown is also tight, particularly low and mid-rise space without term restrictions, as stock is removed for conversion. As predicted by Colliers International 12 months ago, this had the effect of pushing tenants north in a flight to quality. $400 $200 $- Premium A-Grade B-Grade Small tenancies are king Tenant activity is focused on smaller occupiers of sub-300sqm resulting from business services and tech occupiers, distinct from the large space demanding banks and lawyers who have traditionally driven Sydney CBD take-up. Landlords now recognise this dynamic, being willing to sub-divide larger vacancies. Landlords gain a rental premium to offset the subdivision costs and consequential lower net lettable area. The benefits of speculative subdivision and fit-outs have been demonstrated by: Chifley Tower, MLC Centre, 45 Clarence Street, 6-10 O Connell Street, 25 Bligh Street, 10 Spring Street, and 55 Clarence Street. Based on the Colliers International Demand Index, 55 per cent of the companies wanting office space this year have sought less than 500sqm and this is being experienced across the board for Premium, A and B Grade tenancies. In 2012, this figure was 39 per cent. Smaller tenants offer a number of advantages over larger tenants by being capable of letting up quicker, paying higher face rents and accepting lower incentives. CBD Office Research & Forecast Report Second Half

14 Premium market expected to turn Up until now, the weak point of the leasing market has been premium floorspace in the north east city core with large vacancy persisting in Aurora Place, Governor Macquarie Tower and Chifley Tower. Chifley Tower has made significant in-roads with its whole floor vacancies and is likely to be down to having just one whole floor vacant by quarter four 2015 and we are optimistic Aurora Place will see a reduction in vacancy over the next six months. Tech occupiers remain the CBD powerhouse, with new entrants taking up vacant office floorspace and existing occupants expanding, being attracted by the transport and amenity that the CBD offers their staff. There are multiple occupiers in the 3,000sqm to 10,000sqm bracket chasing limited opportunities particularly in the value market. Landlords are gaining confidence in market fundamentals and have shown a desire to push back on incentives. Tenants still however, expect a strong offer with a mismatch in expectations relative to landlords. The market may see an impasse between larger landlords and tenants until the expectations of both parties becomes more aligned. Investment market Rising prices for falling sales volumes The first half of 2015 has been characterised by much talk but little transactional action in the Sydney CBD. Some $2.1 billion of office property sold during the six months to 1 July 2015 compared to $2.9 billion over the same period last year. Notwithstanding this, the sales which have occurred exhibited strong cap rate compression and high capital values. Despite unsatisfied pent up investor demand the market is constrained by the tightly held nature of stock. Owners recognise that with prices such as they are and in the low interest rate environment, reinvestment of capital from sales is problematic. Another difference is that the residential developers who were aggressively acquiring stock last year are finding it harder to secure such assets this year. The reluctance of owners to sell has stimulated off market negotiations. Demand is strong from buyers at every level of the market: strata, leasehold, freehold, small and large buildings. The strongest demand remains focused on office assets with long WALE of five plus years or for properties with redevelopment potential. New entrants from overseas are apparent in the buyer profile including the Dalian Wanda Group, Shanghai Shenglong Investment Group Co Ltd and the Qatar Investment Authority. SYDNEY CBD INVESTMENT SALES BY BUYER TYPE Value of Sales ($bn) 3.5 Domestic Offshore 3.0 $2.89 bn 2.5 $2.20 bn $2.05 bn 2.0 $1.54 bn H H H H Strong pricing evident Investment trends remain distinguished between the pure investment market and properties purchased for change of use. Pure investment opportunities are still attractive to investors due to returns with higher yields than other major international office markets. Market fundamentals remain sound particularly in view of improving leasing conditions. The speed with which the market is moving is evident from the recent deals pertaining to Lend Leases Barangaroo Towers. The most recent deal in June related to Tower 1. It saw an open ended fund set up which included equity injections by the Qatar Investment Authority (QIA) and Lend Lease as investors at 37.5 per cent each and APPF Commercial at 25 per cent. The QIA contributed $525 million for this deal which was the highest value office investment in the first half of 2015 and equivalent to a sub-six percent yield. By comparison part shares in the first two Barangaroo Towers sold to APG Asset Management/Abu Dhabi Investment Authority on a 6.5 per cent yield in the first half of 2014, demonstrating compression of 0.5 percentage points over a year. 179 Elizabeth Street, Sydney Selling on behalf of La Salle Investments Other major sales in the first half of 2015 included: Gold Fields House, which was purchased by Dalian Wanda Group for $415 million in January for a mixed use residential/hotel redevelopment; a 25 per cent stake in 161 Castlereagh Street, which was acquired by Blackstone on behalf of Ivanhoe Cambridge for $240 million on 14 A Colliers International publication

15 Metro Office CBD OFFICE a 5.7 per cent reversionary yield in April; and Elizabeth Street, which was acquired from Cbus by Hong Kong based Evoce JV Aoyuan Property for $120.7 million in March. This last asset was originally purchased by Cbus Property for $57 million in July 2013, demonstrating significant capital uplift over the period due to residential development approval having been obtained and the market improving over that period. Benchmark expected to be reset further Over the next six months the commercial investment market is expected to see more capital value increases and lower yields resulting from the Investa Property Group portfolio sale and other hotly contested opportunities such as 420 George Street, which is expected to come to market later this year. With yields already tight it remains to be seen whether the leasing market turnaround will trigger further yield compression or whether this improving demand has already been factored in by purchasers. Yield compression will eventuate for any trophy assets which reach the market particularly in light of the metrics displayed by the sale of the Investa Property Trust assets. Supply, vacancy and demand Vacancy to fall further The six months to 1 July 2015 witnessed strong floorspace uptake of 60,405sqm. Further pre-commitments to Barangaroo Tower 1 have been announced with Marsh and McLennan Companies and Servcorp signing, taking pre-commitment of this building to 48 per cent. This bring total pre-commitments at Barangaroo to 66 per cent. New supply to hit market Approximately 591,000sqm of office floorspace that is under construction, approved or proposed over the next two years in Sydney CBD. Of this around 264,000sqm is pre-committed, equivalent to 45 per cent of the total pipeline. Based on our projections vacancy will fall further despite the sizeable pipeline as a result of strong floorspace uptake and stock withdrawal for conversion. Anticipated stock withdrawal is equivalent to 137,000sqm over the next two years. Tech occupiers to drive demand Tenant uptake of floorspace over the next two years will remain strong. Tech occupiers will remain the CBD s growth engine. A number of tech occupiers have active requirements including: Atlassian, Google, DropBox, Amazon, Service Now and Expedia. There remain several large enquires in the market from financial services including: Suncorp, CBA and ING. Resolution on a number of these requirements is believed to be imminent and the impact of this tenant quest for floorspace can only be positive for both the leasing and sales market. The latest Property Council of Australia (PCA) data shows continued vacancy decline and strong floorspace uptake in the Sydney CBD. A Grade vacancy fell from eight per cent to 6.7 per cent in the six months to 1 July SYDNEY CBD A GRADE INCENTIVES VS VACANCY RATES 35% 12% A-Grade Incenitves A-Grade Vacancy 30% 10% Average A-Grade Incentives 25% 20% 15% 10% 8% 6% 4% A-Grade Vacancy Rate 5% 2% 0% 0% Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 1 Margaret Street, Sydney Designed and Project Managed on behalf of Cuscal Limited How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Tom Duncan Associate Director Research Tel tom.duncan@colliers.com CBD Office Research & Forecast Report Second Half

16 Research and Forecast report Second Half 2015 MELBOURNE CBD OFFICE The future is... smaller The Melbourne CBD office leasing market is in the midst of a demand revival, with healthy enquiry data being reported by our agents. Enquiry has increased from 166,904sqm to 287,069sqm between July 2014 to July This represents a 72 per cent increase. The major industries driving enquiry demand in the Melbourne CBD are IT&T firms at the smaller end of the market, and for larger enquiries, the government sector is very active. Looking at our historical enquiry data over a longer time period, it is the emergence of the smaller tenant that is of most interest to owners. In 2009, nine per cent of all enquiries were for space over 3,000sqm, and 71 per cent were for space under 1,000sqm. In 2014, only five per cent of enquiries were for the larger size requirement, while sub-1,000sqm enquires now account for 82 per cent of the market. There are multiple reasons for the 180 Lonsdale Street, Melbourne Leased on behalf of DEXUS Property Group and QV Investments increase in enquiry from smaller tenants. No doubt the historically high incentives are playing an important role. Incentives in the CBD have now been around the 30 per cent mark for two years. This has made CBD office space relatively affordable for smaller firms and start-ups, which may have previously looked at metro markets when considering office space. The closing of the gap between net effective rents in the metro and CBD markets demonstrates this. In 2010, a tenant in the city fringe could expect to (effectively) pay 27 per cent less in rent than the CBD, and 40 per cent less in the outer east. In 2015, an inner east tenant is only paying 16 per cent less in the Inner East and 21 per cent less in the outer east. Over the first six months of 2015, a number of tenants in fringe locations have committed to moving into the CBD, continuing the trend of centralisation in this city. VECCI, Australian Red Cross Society, Caydon Property, Victoria Police, Leightons and Engineering Australia are all examples of tenants who have moved, or will be moving, from city fringe locations, into the CBD. Jemena and NEC will also be making the move from the outer east into the CBD. The net result of the increasing demand from smaller size tenants has been the gradual reduction in average office lease sizes in the Melbourne CBD. In 2010, the average lease signed was 1,353sqm, but by 2014, this had reduced to 848sqm a reduction of just over one third. CBD landlords are starting to respond to this trend. We first saw the trend of floors being speculatively split up in order to attract smaller tenants occurring in secondary grade buildings. Now, owners of Prime Grade buildings including Investa Property Group at 120 Collins Street and The GPT Group at 360 Elizabeth Street have split vacant floors into smaller tenancies. Owners like Investa Property Group and The GPT Group are recognising where the largest pool of potential tenants lie, and are being proactive in meeting the market. Investa have been successful in recently leasing a whole floor at 120 Collins Street in this manner, and are capitalising on this success by splitting a further floor in this prestigious Melbourne building. 16 A Colliers International publication

17 Metro Office CBD OFFICE COLLIERS INTERNATIONAL RESEARCH FORECASTS MELBOURNE CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents $ % A Grade Net Effective Rents $ % A Grade Incentives 33% 28% A Grade Yields 6.6% 6.1% A Grade Capital Values $6,935 $7,350 A Grade Vacancy Rate 7.7% 6.4% Total Market Vacancy Rate 8.1% 6.8% Supply Additions (m²) Leasing market Demand revival continues 168,550 m²* *year to July ,768 m²** **year to July 2016 increased across all grades in the Melbourne CBD, albeit only moderately for the A and B Grade markets, at 0.3 per cent and 0.9 per cent, respectively. Secondary tenants looking for creative space options As discussed earlier in the report, the improvement in demand in the Melbourne CBD is being led by the smaller end of the market i.e. tenants looking for 500sqm or less for space. This is having a positive effect on the secondary grade market, as the vast majority of upcoming lease expiries in this category of the market are currently located in secondary grade space. One of the noticeable trends in this end of the market is that a growing proportion of smaller tenants are now demanding more creative space options, and are increasingly moving away from the traditional office fitouts. Landlords that have long term vacant floors that are view or light impaired are now beginning to respond to this demand, by refurbishing these floors to attract The leasing market continues to experience solid demand. Demand from the smaller end of the market is being led by IT&T firms. Linkeo, Software One and Message Media are all examples of IT and Communications firms that have recently committed to space in the Melbourne CBD. Message Media have taken a whole floor of 1,115sqm at 367 Collins Street, while Linkeo and Software One have taken smaller suites at 120 Collins Street. In a major deal signed by a tenant in the technology sector, NEC has taken two sublease floors from Medibank at 720 Bourke Street. NEC will occupy approximately 5,600sqm of space, and are moving into the CBD from their long term location in Springvale Road, Mulgrave, which they recently sold. Colliers International represented NEC and helped secure the space, and also sold the Springvale Road site for them in early A Grade incentives to be maintained Our outlook for incentives remains the same as earlier in the year that is that they will continue to average 33 per cent for A Grade space. Incentives for Premium Grade space may see a slight move downwards towards the end of the year, as sought after space in these buildings is taken up. The strong demand from the smaller tenant segment means that incentives for B Grade space should also begin a downward descent from 34 per cent currently to an average of 33 per cent by year s end. Net face rents continue to increase however, with the Premium Grade market recording the biggest increase over the second quarter of 2015, increasing from an average of $553/sqm in March 2015 to $563/sqm in June This resulted in 2.9 per cent growth in Premium Grade net effective rents over the quarter. In another pleasing sign for the market, the growth in face rents and steady incentives meant that net effective rents 222 Exhibition Street, Melbourne Sold on behalf of AMP Wholesale Office Fund CBD Office Research & Forecast Report Second Half

18 these tenants. The refurbishment often involves exposing the ceilings, adding de-cals to walls, polishing concrete floors and generally adding a more urban atmosphere to the space. EXPIRIES BY SIZE Multi Floor Users Single Floor Users Suite Users A Grade Premium Grade B Investment market Unprecedented deman for quality Melbourne CBD investments Australia is currently experiencing unprecedented demand for core office investment from both domestic and offshore investors. There is the largest ever pool of buyers targeting assets coupled with the lowest cost of debt in history. Investors of all types have huge capacity and due to Melbourne being Australia s second largest core market, it is on all buyers lists. On the supply side of investments, as most investors are underweight to Melbourne and are net buyers, there is a lack of core supply. The significant net demand is in turn continuing to compress market yields and total returns, which are now nearing the lows of previous cycles. We expect the supply landscape will change in quarter three and quarter four of calendar 2015 as institutional owners capitalise on sale premiums driven by pricing from the Investa asset sales and overwhelming buyer demand. Due to the compression of cap rates for CBD office towers with favourable lease profiles, many investors are now turning their attention to well-located buildings with value-add characteristics. Investor appetite for core real estate has continued throughout 2014 into 2015 with 575 Bourke Street the first asset to transact, selling for approximately $90 million. 222 Exhibition Street and 114 William Street were both hotly contested marketing campaigns, with 114 William Street selling for $125 million and 222 Exhibition Street in due diligence with an offshore party. There is some further activity in the $80 million - $150 million market, with Colliers International currently marketing 460 Lonsdale Street, which is anticipated to trade for over $90 million. We continue to see major domestic and offshore core investors scour the Melbourne market for acquisition opportunities, knowing that metrics will be in favour of the sell-side. Prior to 2014, core investors had the luxury of being able to achieve total returns above 8.5 per cent. However, the pool and motivation of buyers have deepened and accelerated rapidly in the past 12 months, to the point where core buyers are having to accept total returns under 8.5 per cent, or compromise on the quality of the assets they are pursuing. For the highest quality core assets it is difficult to achieve eight per cent in the current environment. Improving leasing conditions in Melbourne are anticipated to assist active investors to pay the low cap rates necessary and achieve required total returns. The buy-side capacity of domestic and offshore investors for core office investment in Melbourne are equally as deep, although domestic investors have been more successful in their buying recently. In 2014, we witnessed 12 core transactions over $100 million for a total of approximately $2.4 billion. Of this amount approximately $1.8 billion or 75 per cent was acquired by domestic investors, with The GPT Group and GPT Wholesale Office Food (GWOF) accounting for $1.2 billion across four transactions was the first year since 2010 that an Asian institutional investor did not acquire in Melbourne. Their activity was replaced with that of investors from the US and UK, with acquisitions Invesco (321 Exhibition Street - $208 million); TIAA Henderson (699 Bourke Street - $73 million); Hines (818 Bourke Street - $152.5 million); and M&G (628 Bourke Street - $129.6 million). 367 Collins Street, Melbourne Leased on behalf of Mirvac 18 A Colliers International publication

19 Metro Office CBD OFFICE MELBOURNE CBD OFFICE SALES $4,000 $3,500 $3,000 Millions $AUD $2,500 $2,000 $1,500 $1,000 $500 $ (Year to June) Supply, vacancy and demand End of mini supply cycle has been reached The Melbourne CBD has witnessed the completion of three new buildings over the first half of 2015, totalling just over 70,000sqm of space. In the Docklands precinct, both 699 Bourke Street (19,000sqm) and 313 Spencer Street (27,000sqm) have reached practical completion and are fully committed, by AGL and Victoria Police, respectively. The third building to reach completion was Charter Hall s 570 Bourke Street (27,000sqm). Investa s 567 Collins Street also reached completion in July 2015, however this completion will be recognised in the PCA s January 2016 vacancy figures. This building was almost 80 per cent committed to at practical completion. The completion of the abovementioned developments marks the end of the current mini-cycle. The Melbourne CBD won t see any further completions until very late in 2016, when two of Walker Corporation s Collins Square towers should reach completion. This means the market has the remainder of 2015 as well as virtually all of 2016 to absorb current space in the market. It is for this reason that we see 2016 as the year when incentives start their descent. Vacancy has peaked Despite the increase supply in the Melbourne CBD, the vacancy rate in the Melbourne CBD decreased to 8.1 per cent over the first half of 2015, a significant change from the January 2015 figure of 9.1 per cent. The reason for the decrease was a combination of factors namely the movement of a major tenant into the CBD (Victoria Police), increasing demand, as well as some major withdrawal activity. 414 La Trobe Street, Melbourne Leased on behalf of The Juilliard Group Over the past 10 years, Melbourne has averaged just over 19,000sqm of withdrawals every six months. In the first half of 2015 we saw almost 47,000sqm of office space withdrawn from the market. The major withdrawal from the market was 555 Collins Street (36,000sqm), which has recently been sold to the Fragrance Group and is expected to be converted to a residential site. Further withdrawals of space occurred at 360 Collins Street (16,768sqm), where space is being refurbished. Given the increase in demand that we have seen over the past six to 12 months, our outlook for vacancy has changed quite significantly. We now see that vacancy peaked in January 2015, and we now see vacancy hovering between 7.5 and eight per cent through to January Of course, there are a number of developers with projects waiting for pre-commitments before they are confirmed, any announcement of these (and the associated backfill they could potentially leave in the market) will have implications for the forecast vacancy rate. Our vacancy forecast does; however, assume that a number of these projects will go ahead, with around 50 per cent pre-commitment rate. MELBOURNE CBD OFFICE MARKET VACANCY & ABSORPTION Net Absorption m² 120, ,000 80,000 60,000 40,000 20, ,000 Jan-08 Jul-08 Jan-09 Net Absorption Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Vacancy Rate Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Forecast Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 12% 10% 8% 6% 4% 2% 0% How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Anneke Thompson Associate Director Research Tel anneke.thompson@colliers.com CBD Office Research & Forecast Report Second Half

20 Research and Forecast report Second Half 2015 BRISBANE CBD OFFICE Tenants expect more for less The Brisbane CBD is witnessing an unprecedented level of residential development activity along with accommodation establishments. At present, there are seven applications for hotels in the planning, development approval or construction phase collectively proposing over 1,500 rooms. Further to this raft of development applications, Queens Wharf will also deliver multiple hotels, including Brisbane s first six-star hotel. Brisbane City Council s implementation of the infrastructure charges subsidy for developers of student accommodation has also contributed to an exponential unfolding in development applications for student accommodation, with over 8,000 student beds in the pipeline for the CBD and Southbank. The government incentive has generated a wave of economic activity and with players such as Macquarie Capital, GIC and Scape looking to invest; this combined with strong underlying drivers is set to position student accommodation as a major property sector. This news comes as welcome to Brisbane CBDs office market, which continues to experience subdued conditions as the economy transitions from the mining and resources sector into more broader based economic growth. Brisbane s low levels of occupancy, particularly in B Grade are fuelling the focus for conversion. Already, some older and obsolete stock has been converted although refurbishments continue to be the preferred option. As an example, the owners of 310 Ann Street will now refurbish and reposition the asset due to financial viability over a residential conversion. Turning to the capital market, after a period of muted investment activity, a handful of assets have exchanged hands over the past few months, with one trophy asset of record value. Waterfront Place transacted at $635 million and is due for settlement in October. The vendors achieved a 46 per cent gain in the value of the office tower and the adjoining Eagle Street Pier retail precinct. The Brisbane Polo Club, a three-level 1,425sqm heritage listed building located at the foot of the Waterfront Place office tower also transacted and was purchased by a Singaporean investor behind listed developer Fragrance Group for $10 million. While its future use is uncertain, it is an indication of the significant appetite of investors, both foreign and domestic in Brisbane s commercial market. Brisbane s underperformance in the last year was driven largely by job losses in public administration and the finance and insurance sectors as companies and government responded to the downturn in the resources sector. While the prospects for the office market are weak, a return to jobs growth shows that recovery is underway. The low interest rates will fuel Brisbane s housing market and activity in the property and finance and insurance services sectors. Subsequently, a lift in these employment sectors in the CBD is anticipated. The return of labour to government is also expected to see some expansion in public sector jobs. Low interest rates are supporting borrowing and spending. Despite some increases in bond rates recently, the cost of debt for sovereigns and creditworthy private borrowers remain remarkably low and this will propel further investment activity in Brisbane s office market. 20 A Colliers International publication 363 Adelaide Street, Brisbane Sold on behalf of Investa Property Group