Prices soar as offshore investment dominates

Transcription

1 Research and Forecast report First Half 2016 Australia & New Zealand CBD OFFICE Prices soar as offshore investment dominates Is Australia becoming too expensive? Accelerating success.

2 Second Half 2015 Australia & New Zealand Second Half 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 CBD OFFICE HOTELS New breed of tenants Strategic owners adapt to change Destination Australia Arrivals increase as accommodation sector takes off Accelerating success. Accelerating success.

3 Metro Office CBD OFFICE Contents The view from offshore - Is Australia still a target for investment? 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 First Half

4 14 Moore St, Canberra City Leased on behalf of Quintessential Equity 4 A Colliers International publication

5 Metro Office CBD OFFICE The view from offshore Is Australia still a target for investment? Nerida Conisbee National Director Research, Australia nerida.conisbee@colliers.com Australian CBD office space is just one per cent of global office floorspace, however for such a small market it is remarkably popular with investors. In our 2015 Global Investor Outlook survey, Sydney and Melbourne were ranked as the second and third most popular destinations in which global investors wanted to target. London which has an office market more than three times larger than Sydney, ranked first. Offshore investors now own 17 per cent of Australian office stock, around twice as much as they did five years ago. Investment levels continue to rise. In 2015, offshore investors accounted for 67 per cent of total direct investment in CBD office buildings. If indirect investment is included, this proportion is a lot higher. The reasons behind Australia s reputation as an attractive destination for offshore capital are well documented. Australia s strong economy, high transparency and low sovereign risk continue to play a key role in driving investment decisions. However, yield compression is continuing to occur and some investors are beginning to see Australia as too expensive. We consider this is unlikely to lead to a significant reduction in offshore investment in CBD Office investment in Australia as a global investment destination In 2015 offshore investors purchased far more than they sold in Australia, which is in direct contrast to Australian investors who were net sellers of property. Right now offshore investors overwhelmingly see Australia as a good market to be in and made a direct push to enter the market or dramatically boost their portfolios. For CBD office property, the strength of offshore buyers is even more apparent, with these groups buying half of all office buildings in By value Chinese investors spent more buying CBD offices in 2015 than Australian investors. Whereas historically Singaporean, US and Canadian investors dominated investment, Chinese are now eclipsing all of these groups when it comes to purchasing this asset class. The key challenge for offshore investors is that although Australia is a particularly popular target, the small size of the market makes it difficult for them to access stock. Although the main Australian CBD markets contain 15.5 million sqm of office, the majority of offshore capital continues to target Sydney and Melbourne which reduces the amount of stock available to less than 10 million sqm CBD OFFICE MARKET SIZE OF KEY CITIES Million sqm Tokyo Paris New York London Shanghai Sydney Note: Cities included are those that attracted the most cross-border capital for office assets in 2015 Source: Colliers Edge CBD Office Research & Forecast Report First Half

6 The other issue is that Australian CBD office ownership is becoming more concentrated. The top five owners, all Australian institutions, now control more than 20 per cent of total stock and these groups have a tendency to hold CBD office assets for long time periods. The ability of offshore groups to purchase prime CBD office properties is going to become increasingly difficult unless an acquisition of a major owner is undertaken. CBD OFFICE OWNERSHIP, 2009 AND 2015 % of total stock 60.0% 50.0% % 30.0% 20.0% Incentives on Australian property are high from both an historical perspective, as well as in comparison to overseas. Currently, the vacancy in Sydney CBD office is 6.3 per cent and incentives are 31 per cent. The last time incentives were at this level in Sydney was in June 1992 when the vacancy was sitting at 20.3 per cent. In comparison to global markets, New York has a vacancy rate at 10 per cent and incentives are just 10 per cent. For other major offshore capital destinations such as Shanghai and Tokyo, incentives are likely to be high however there is little consistent data available to understand these properly. CBD OFFICE VACANCY AND INCENTIVES FOR KEY CITIES, % 30.0% Vacancy Incentives 10.0% 0.0% Australian Institution Private Offshore Government Other Source: Colliers Edge Vacancy/Incentives 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Sydney CBD Paris London New York Note: Incentives are offered in Shanghai and Tokyo however these levels are typically not disclosed Source: Colliers Edge High incentives impact upon yields and although Australian office yields are high, once incentives are taken into account ( effective yields) they are reduced dramatically. Borrowing costs also make a difference. Sydney effective yields are currently at 4.2 per cent, higher than London at 3.1 per cent however the Bank of England s interest rate is currently sitting at 0.5 per cent compared to Australia at two per cent CBD OFFICE YIELDS AND EFFECTIVE YIELDS FOR KEY CITIES 8.00% 7.00% 6.00% Effective Yield Yield 6.7% 6.0% 6.0% 5.00% 4.00% 3.00% 2.7% 2.8% 3.5% 3.1% 3.8% 3.5% 3.5% 4.7% 3.7% 3.8% 3.8% 3.7% 4.1% 2.00% 1.00% 0.00% Hong Kong London Munich New York Singapore Brisbane Sydney Melbourne Source: Colliers Edge What are offshore investors thinking now? Riverside Centre, 123 Eagle Street Brisbane Leasing on behalf of The GPT Group In late 2015 and early 2016, we held one on one interviews with 10 major offshore investors in Australian property including Real I.S, Deutsche Bank, TH Real Estate, Invesco, CPPIB and GIC. It was a mix of investors with an Australian presence, as well as those with no local operations. Not surprisingly, particularly given the high levels of investment made in 2015, sentiment towards Australian property remains strong. 6 A Colliers International publication

7 Metro Office CBD OFFICE Amazon, Sydney & Melbourne Designed with Information Architects Inc. Australian property is getting expensive but there are still a lot of reasons to buy There was a general consensus that Australian property is getting expensive. Although Australian yields are generally higher than comparable markets, once Australia s high tenant incentives and higher borrowing costs are taken into account, the gap tightens significantly. Having exposure to Australian property is now considered to be a necessity for most large global players. For some, it is a low risk way to have Asia Pacific exposure in a portfolio. A decade ago, Australian property was not on the radar for many global investors and it was at this time that Australia represented exceptionally good value when compared to similar options. Australia s exceptional economic growth record remains one of the main reasons for such strong interest in Australian property however the sophistication and maturity of our property markets are also a factor. Australia s transparency, strong governance and robust planning regime are well established. In addition, we are considered to have a relatively friendly foreign investment policy and tax regime. More directly, the close links between listed capital markets and real estate is considered to make pricing efficient. Our lease terms are also considered favourable, particularly long lease terms. The indexation of rents to inflation is also highly valued. The current recovery in occupier markets, particularly Melbourne and Sydney, is seen as supporting pricing. Looking to innovative ways to enter the market The popularity of Australian property and the focus on Sydney and Melbourne prime assets as the top targets means that it is increasingly difficult to access stock. As a result, offshore investors are increasingly looking at different ways to increase their exposure to the market with flexibility in the ways in which they will invest being a focus. Even though the majority of investors still focus on core, one alternative entry method is to move up the risk curve. This can be in a range of ways, either by purchasing lower grade stock and looking to value add through upgrades or conversion to residential, buying in secondary locations or investing in property types such as student accommodation, self storage and retirement living. Looking for value add opportunities is at present the far more popular option. Capital partnering with local groups is another option and there continues to be a large number of these deals. Offshore groups look to these for a number of reasons including the ability to build scale quickly, the ability to tap into local expertise and accessing development pipeline. Australian institutions are generally well established with good track records and hence retain the ability to mitigate risk also contribute to their attractiveness. Other ways that large offshore groups look to increase their exposure to Australian property include company acquisitions, public to private deals, investing in wholesale funds, investing in companies (both listed and unlisted) and providing debt. CBD Office Research & Forecast Report First Half

8 The market is not without risk The most frequently cited concern about investing in Australia was economic risk. The end of the mining boom, risks associated with a slowdown in China, disruptive conditions in financial market and housing market risk are all seen as potential problems. Again, it not seen as completely negative as there is room to move with monetary policy and the weaker currency is supporting the larger non-mining states of New South Wales and Victoria. Vishant Narayan Managing Director, Real I.S. Australia Australia is getting more expensive Australian property is becoming expensive, even relative to major cities such as London. Yields are still higher however once incentives (e.g. 11 per cent incentives for London prime office compared to Sydney at 30 per cent) and interest rates are taken into account, the gap becomes minimal. A decade ago, this was not the case. There was a significant gap and Australia was a standout as being very well priced relative to other countries. Economic growth is attractive We made the decision to increase our exposure to Australia dramatically in A major factor driving that decision was the strong economic growth story. We are still looking to buy in Australia however globally we are looking closely at other markets. For example, Paris has been a big focus for us over the last quarter. Importance of Australia in a global portfolio For most global investors, it has become important to have exposure to Australian property and this is why we have seen such a dramatic rise in offshore ownership of Australian assets. The strong flow of capital has also lead to yields becoming more in line with global markets. 530 Collins Street, Melbourne Valued on behalf of GPT Wholesale Office Fund 8 A Colliers International publication

9 Metro Office CBD OFFICE Stephen Philp Head of Capital Transactions Australia, TH Real Estate Natasha-J Lee Assistant Vice President, Deutsche Bank Singapore Price growth was strong in 2015 Our view is that whereas Australian real estate represented compelling value relative to other comparable global real estate markets over 2015, strong upward market pricing lowered this conviction. While international real estate investment into Australia has always been a cyclical feature of the market, it is apparent by the volumes and diversity of foreign investment that the Australian real estate market has become a more prominent and integrated global investment market. Despite higher pricing levels, Australia s location in Asia and relative liquidity will continue to attract foreign investment. There are still many reasons to invest There are still many compelling structural and macro reasons to invest here with continued economic growth being a major factor, as well as high levels of transparency and clear title and relatively stable government and legal structures. Most Australian real estate markets (outside of the mining investment boom states) are now moving into income growth and this is attractive. We consider that the cap rate compression that has been occurring will slow as we move into the next phase of the cycle. The Australian dollar remains an important consideration for most offshore groups, and hedging decisions have an impact on asset affordability. Even though yields have firmed significantly, this has been offset somewhat by a depreciating local currency, particularly for those investors that have held unhedged positions. Office and retail are our preferred sectors Our currently preferred sectors are Office, particularly multitenanted Sydney and Melbourne CBD core and most types of retail. Right now we consider Industrial to be getting too expensive given expected rent growth. In the US, TH Real Estate are very active in multifamily and we would be interested in offering a similar product in Australia if this became feasible. There is a lot to like about Australian property There are many characteristics attractive about Australian property including the high levels of transparency and the rigorous and clear legal and regulatory framework which gives investors significant security in their property rights. Compared to other countries in Asia, higher excess returns relative to the 10 year bond rate provides a margin of safety should interest rates rise faster than expected. The close linkage of real estate to the listed capital markets is also important. This, combined with high transparency, makes the pricing of assets in Australia efficient. Low volatility is also an attractive feature, particularly compared to Asian markets. This is partly attributable to longer lease terms. Office fundamentals will continue to improve in 2016 We invest across all asset classes in Australia however our preferred sectors at the moment are: Office, particularly in Sydney and Melbourne Logistics with longer leases and stable or stepped up rents Retail, particularly non-discretionary suburban retail such as neighbourhood centres. The office sector we find attractive as we believe that healthier fundamentals will continue in The challenge is strong competition for assets and further tightening of yields. We anticipate that in the near term, headwinds for the Australian property market remain particularly around softness in the economy as a result of the slow down in the mining sector, as well as the generous incentives being offered to tenants. Hedging costs continue to be a drag on returns for our investors, although this has improved. CBD Office Research & Forecast Report First Half

10 Our perspective CBD OFFICE 2015 ENQUIRIES BY CAPITAL CITY Sum of space requirement (m²) SYDNEY ` 480,947 MELBOURNE 356,092 AUSTRALIA EXPERIENCED GROWTH IN CBD OFFICE A GRADE YIELDS ADELAIDE 127,838 BRISBANE 104,949 BRISBANE 7.0 % 6.7 % SYDNEY 7.1 % 6.0 % PERTH 92,107 CANBERRA 81,071 PERTH 7.9 % 7.4 % ADELAIDE 8.0 % 7.4 % CHINA LEADS THE WAY IN CBD OFFICE INVESTMENTS IN AUSTRALIA FOR 2015 CANBERRA 7.2 % 7.2 % MELBOURNE 6.8 % 6.0 % TENANT TRENDS TO WATCH IN Nice time to be an employee greater focus on wellness 2 Gradual shift to an owner s market in Sydney and Melbourne CBDs 3 Shortage of B Grade space in Sydney CBD CHINA AUSTRALIA USA 4 Centralisation of tenants to slow 5 Demand from Finance and Insurance tenants to remain weak 6 Precinct amenity to remain a focus Accelerating success. How else can we help you? Speak to one of our property experts today. au.office@colliers.com

11 AUSTRALIA FIRST HALF 2016 SYDNEY CBD EXPECTED TO SHOW HIGHEST RENTAL GROWTH FROM GLOBAL SNAPSHOT OF VACANCY RATES December % 10.7% 6.4% 5.9% 1.5% -9.5% Dubai 25% Canberra 15% Beijing 7% Perth 19% Chicago 15% Sydney 6% Los Angeles 16% New York 14% Tokyo 5% SYDNEY MELBOURNE BRISBANE Washington DC 15% Adelaide 14% London 3% ADELAIDE CANBERRA PERTH Mumbai 15% Brisbane 15% Singapore 9% Melbourne 8% Hong Kong 3% INVESTMENT TRENDS TO WATCH IN Offshore investors to continue to dominate 2 Concentration of ownership 3 Move from a focus 4 on capital growth to income growth Mergers and acquisitions to continue 5 Australian groups to continue to move offshore 6 CBD Office conversions to residential to slow For more information about Colliers International and working with us visit:

12 Research and Forecast report First Half 2016 SYDNEY CBD OFFICE Fundamentals improving Despite financial markets suffering a rocky start to 2016, overall conditions within the Sydney CBD office market appear to be improving. There had been some concern that cap rate compression had been driven purely by the hunt for yield without many other supporting drivers. However, we now see more reason to become constructive on Sydney CBD assets other than just relative asset class yields. On the investment side we remain of the view that foreign capital will continue to flow into our markets although domestic competition for assets may heighten as hurdle rates applied by domestic funds are lowered. In leasing markets, the combination of residential and infrastructure related withdrawals combined with an influx of Information Technology (IT) tenants have led to rental growth and falling vacancy. Indeed, the outlook for secondary asset metrics is improving. Investment market Offshore skew becoming more pronounced In 2015, overall Sydney CBD office investment volumes increased by seven per cent on 2014, although we note the skew is now heavily weighted to offshore investment which now accounts for 70 per cent of the total. The most notable offshore transaction was the acquisition of Investa Property Group s nine asset portfolio by China Investment Corporation (CIC) for $2.45 billion at a sharp yield of five per cent which repriced the market. Looking forward it s reasonable to assume that given the small amount of China s outbound real estate investment relative to local investment, we could see this offshore skew become more pronounced. Further evidence of consolidation in the listed property space became apparent when Dexus Property Group (DXS) announced its intentions to acquire Investa s listed portfolio (IOF) using a mix of scrip and cash for an estimated value of $2.5 billion. However more recently CIC has been reported to be running the numbers over IOF implying there is some possibility of a counter bid coming to market. If the CIC bid were successful, this would only add weight to the volume of offshore investment entering the Australian CBD office market. Either way the probability of further bids from other sources such as unlisted domestic or offshore capital cannot be ruled out given the intense competition for assets. In other key offshore investments, the Hong Kong Monetary Authority was revealed as the mystery investor within Lend Lease s International Tower One, taking a $350 million slice of the development subject to Foreign Investment Review Board approval. DOMESTIC/OFFSHORE SALES VOLUME SYDNEY CBD OFFICE Sales Volume ($ Billions) $7 $6 $5 $4 $3 $2 $1 $ Domestic Offshore Source: Colliers Edge ME Bank Sydney & Melbourne Project managed on behalf of ME Bank 12 A Colliers International publication

13 Metro Office CBD OFFICE Wharf 10, 52 Pirrama Road, Pyrmont Leased on behalf of Marks Henderson Funds Management Rebasing of hurdle rates An interesting dynamic to consider in the future will be the potential re-entry of domestic wholesale funds back into the Sydney office market. With such high levels of compression taking place in office market metrics over the past two years, many of these funds with return hurdle rates of per cent have effectively found themselves priced out of the market as transactions drive down rates well below eight per cent. Market speculation suggests that a number of these funds will seek endorsement from investors to lower return hurdles in 2016 which to date have been quite sticky and misaligned with current market conditions. Should this shift occur, it has the potential to bring a significant volume of capital back into play. For example four of our largest domestic wholesale funds; AMP Capital Wholesale Office Fund (AWOF), the Lend Lease managed Australian Prime Property Fund Commercial (APPFC), GPT Wholesale Office Fund (GWOF) and Investa Commercial Property Fund (ICPF) are sitting on an average gearing of 14.8 per cent and have combined Gross Assets of $15.7 billion as at 31 December SYDNEY OFFICE MARKET AVERAGE YIELDS 8% 7% 6% 5% 4% 3% 2% 1% 0% Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Yield/ Rate/ Spread Leasing market Secondary market tightening The Sydney CBD leasing market is benefitting from multiple tailwinds, particularly in the secondary market. We estimate that up to 368,000sqm of stock has been earmarked to be withdrawn from the Sydney CBD office market through to 2019 and beyond, some 60,750sqm of which will be acquired by the state government for the construction of the metro line project. Almost all of this stock is from B and C Grade assets, leading to an element of upheaval in the sector. It is understood that some tenants in the state government acquisitions have already received notifications to exit premises by as early as December 2016, therefore it s unsurprising that demand for floor space under 500sqm has lifted. This will ensure continued tightening of incentives in the secondary market. By the end of 2015 average incentives had reduced from the high 20 per cent mark to circa 25 per cent. Recent transactions at the commencement of 2016 are averaging per cent. Unsurprisingly, vacancy is falling within the secondary market on the back of this withdrawal as demand for smaller office suites increases. Withdrawn assets that are seeing an outflow of tenants driving this demand include 175 Castlereagh, 12 Castlereagh, 39 Martin Place, and 55 Hunter which all have smaller floorplates under 500sqm. Given that much of the activity has been induced by government policy and will be supported by government compensation to tenants, it will be interesting to observe the incentive levels offered by landlords to tenants displaced by acquisitions. Spread to Bonds Prime Grade 10-Year Govt Bond Rate Source: Colliers Edge/RBA CBD Office Research & Forecast Report First Half

14 The Rocks Walsh Bay Western 39 Martin Place City Core 55 Hunter Street 12 Castlereagh Street Midtown 175 Castlereagh Street Source: PCA Tech tenants driving demand Outside the secondary market, tenant demand is also strong, particularly due to activity within the IT sector. Notable leases include Apple at 20 Martin Place (6,200sqm), Expedia at 1 Martin Place (4,500sqm), LinkedIn at 1 Martin Place (3,576sqm) Dropbox at 5 Martin Place (2,000sqm) and Amazon at 2 Park Street (9,260sqm). Serviced office providers have also looked to capitalise on the increase in high end demand with Regus taking space in the core precinct. Regus has taken 2 floors at 20 Martin Place following the floor it opened in late 2015 at 52 Martin Place. Also following this theme, fintech hub start up Stone & Chalk announced its move to take up 2,300sqm of agile office space at 50 Bridge Street in mid The decision came after the company outgrew its original office space of 1,230sqm at 45 Clarence Street. Additionally, with Google and Atlassian still looking for suitable premises, we feel the uptake of CBD stock by the IT sector will support the Sydney leasing market in the near term. Strategic importance of western corridor While the CBD core is benefiting from an influx of IT tenants, we believe the western corridor will benefit from its strategic location and positioning. Until now, Barangaroo has been viewed as a development site, or work in progress, however as the project reaches its final stages and key tenants fill floors, the dynamics of the broader CBD will begin to change. Assets within the western corridor will effectively bridge Barangaroo/Walsh Bay with the CBD core, becoming strategically important to businesses that service clients in both areas. Furthermore, tenants displaced by withdrawals will look to this corridor to service their existing clients in the Core and, potentially, Walsh Bay corridors. Another interesting dynamic occurring within the CBD precincts is the polarisation between the north and south. Conversion for highest and best use has often been driven by a lack of residential and hotel accommodation within the CBD, however this is mostly occurring south of the core precinct. As a result, this region is becoming more mixed use in nature with a variety of residential, hotel and retail assets being developed. Meanwhile the north appears to be more tilted toward pure commercial with both current and future developments essentially bringing more office stock online. Quality enquiry Finally, our data suggests that enquiries throughout the later stages of 2015 and into early 2016 have been improving in quality which is a positive leading indicator. Prior to this, when vacancy and incentive levels were higher, the objective of many enquiries was to obtain a better set of leasing metrics, and this was often achievable given the number of options available to tenants. However we have observed that enquiry is now being driven more by genuine expansion requirements as opposed to tenants simply seeking better deals. 14 A Colliers International publication

15 Metro Office CBD OFFICE Supply and vacancy The vacancy rate is expected to experience further downward pressure as a result of the aforementioned withdrawal in office space for the proposed CBD Metro stations. Consequently, Colliers International forecasts indicate the vacancy rate will decline to 5.09 per cent, the lowest level since the GFC, by January The withdrawals, all secondary class assets, are expected to increase the demand for A and B Grade space as displaced tenants look to secure new locations. Approximately 78 per cent of the floorspace to be withdrawn will be from B Grade properties. This is projected to create a shortage in the availability of smaller leases, given the average size of lease in the withdrawn development are 413sqm with only four leases being in excess of 900sqm. Meanwhile, average floorplates delivered over the past six months have been 1,930sqm in size. In the near term however the vacancy rate is expected to remain stable at just over six per cent. Since July 2015, approximately 134,860sqm of space was completed, with an additional 128,500sqm scheduled for completion over the next six months. Of the total 263,360sqm, over 81 per cent of the delivered space was pre-committed. This significant supply will therefore be countered by pre-commitment and withdrawal of commercial floorspace. SYDNEY CBD VACANCY Vacancy 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Vacancy Long-term vacancy Source: Colliers Edge/PCA OMR/Deloitte Economics 2 Park Street, Sydney Valued on behalf of GPT RE Limited as Responsible Entity for General Property Trust and Charter Hall Wholesale Management Limited (CHWML) as Trustee of Charter Hall Office Trust (CHOT) How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Daniel Lees Associate Director Research Tel daniel.lees@colliers.com CBD Office Research & Forecast Report First Half

16 Research and Forecast report First Half 2016 MELBOURNE CBD OFFICE The Docklands story continues Development in the Docklands precinct of Melbourne s CBD began in 2002 with the construction of NAB s Headquarters at 800 Bourke Street, and 14 years later the success of Docklands as a commercial precinct in Melbourne continues. A number of major pre-commitments, as well as leasing of backfill and sublease space have occurred, proving that the area is still in demand from CBD core tenants and suburban tenants looking to move into the city. The Melbourne pre-commitment market continues to remain strong, despite years of new supply, particularly in Docklands. In 2015, Lang Walker s Collins Square development attracted major tenants such as KPMG, Maddocks and Link, and late in the year, Lendlease confirmed the signing of Arup, in addition to their own commitment to their new Melbourne Quarter development. A number of other major tenants who are in the market looking for space are also believed to be circling Docklands developments, including Minter Ellison (10,500sqm), IAG (30,000sqm to 40,000sqm), Deloitte (25,000sqm) and HWT (13,000sqm). Based on the developments in the pipeline and the level of precommitment activity in the market, we estimate that commercial development in Docklands should be near completion by While the pre-commitment market in Docklands is well known, the success of leasing small and medium sized tenancies is less understood. These come to the market as either backfill, sublease or leftover space in new, primarily pre-committed developments. Cbus Property s 720 Bourke Street is a good example of small and medium sized tenants being attracted to Docklands. Following Medibank s relocation to the building in late 2014, a further 17,000sqm remained for lease. Over 2015, a number of tenants of varying sizes have taken space, leaving only about 1,200sqm of space currently available. Tenants who have committed include tenants who were previously located in Collins Street s eastern core - Chubb Insurance (1,578sqm) and CASA (1,340sqm) as well as smaller tenants who continue to grow into more space, such as Esuperfund, who originally took 1,623sqm in the building and have now taken an additional 770sqm, for a total tenancy of 2,400sqm. Esuperfund originally started their business in a small, strata suite in Docklands. Demonstrating just how successful a year the leasing market in Docklands was, the vacancy rate has decreased from 7.2 per cent in January 2015, to five per cent in January Net absorption for the year was 67,418sqm. Following all the smaller leasing deals in the second half of the year, 16,097sqm of space was leased in the second half of the year alone. To put this in perspective, the Western Core a much larger precinct at 1,598,802sqm vs 812,499sqm in Docklands had an increase in vacancy of 13,833sqm over the second half of Bourke Street, Docklands Sold on behalf of The GPT Group Rents in Docklands also continue to keep pace with the CBD A Grade average. The space leased in 720 Bourke achieved rents 16 A Colliers International publication

17 Metro Office CBD OFFICE in the high $400s to low $500s, which is at a slight premium to the current A Grade average of $467/sqm. While it is true that the eastern core of the CBD will still consistently perform better in terms of rent than the rest of the CBD and Docklands, the quality of the space on offer in Docklands ensures that rents remain comparable with the majority of the CBD core. COLLIERS INTERNATIONAL RESEARCH FORECASTS MELBOURNE CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents $467 $486 A Grade Net Effective Rents $316 $350 A Grade Incentives 32% 28% A Grade Yields 5.99% 5.5% A Grade Capital Values $7,884 $8,452 A Grade Vacancy Rate 6.5% 8.6% Total Market Vacancy Rate 7.7% 8.0% Supply Additions (m²) 125,824 98,500 Leasing market Rents climb as demand strengthens Average net face rents across Premium and A Grade buildings climbed by their greatest level in years over Premium net face rents increased by an average of 5.8 per cent and A Grade net face rents by a slightly higher 6.1 per cent. These increases are well ahead of the 10 year averages for each of these grades, which are 2.6 per cent and 5.1 per cent respectively. This increase in rents has occurred after a period of sustained low rental growth. Not only have net face rents grown, but we have seen an increase in effective rents, as incentives start their descent downwards, albeit slowly. Over the 2015 calendar year, net effective rents grew by 5.9 per cent for A Grade property, and a very healthy 7.1 per cent for Premium Grade. The aforementioned net face rental growth played a key role in this, but a subtle shift down in incentives also helped. Both grades saw a decline in incentives of one percentage point over the year. Looking forward, we anticipate that declines in incentives in 2016 will be more pronounced, and are currently forecasting a drop from an average of 31 per cent for Premium Grade currently, to 28 per cent by the end of We also expect A Grade incentives to fall to around the same levels. Tenant demand remains elevated As new supply continues to be added to the Melbourne CBD market (125,824sqm in 2015) in significant levels, it therefore follows that demand for space from tenants both existing CBD 520 Collins Street, Melbourne Leased on behalf of Mering Corporation tenants, as well as metro tenants is the key reason for the increase in effective rents. The Melbourne market absorbed a total of 116,763sqm of space in Vacancy also decreased from 400,783sqm in January 2015, to 344,480sqm in January 2016 a huge drop of 56,303sqm. This is also the lowest amount of space available since July Demand is evident from both smaller tenants who have taken up multiple smaller suites that have been offered for the first time in some of Melbourne s premier buildings such as 120 Collins Street as well as the medium sized tenants, who typically drive the Melbourne market and absorb backfill and part floors. Mirvac s 367 Collins Street is a good example of attracting demand from these tenants, and it is now fully leased. In the second half of 2015 deals were done with Regus (1,1167sqm), Australian Institute of Company Directors (1,800sqm), Red Cross (1,200sqm), Bensons Property Group (1,116sqm) and VIMG (357sqm). At the newly completed 567 Collins Street, Connective Broker Services took 2,057sqm on Level 20. In the Eastern Core, 101 Collins Street has just signed the first childcare centre for that precinct. Guardian Childcare will occupy 2,300sqm in the space that is known as 101 Collins East, and will have contracts to provide childcare services to 101 Collins Street major occupiers, which will no doubt further enhance the reputation of 101 Collins Street as Melbourne s premier building. CBD Office Research & Forecast Report First Half

18 MELBOURNE CBD NET FACE RENTS $/sqm/pa $700 $650 Premium A Grade B Grade $600 $550 $500 $450 $400 $350 $300 $250 $200 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Source: Colliers Edge Investment market Sep-18 before, and illustrates the growing maturity of the Melbourne market, as some assets owned by offshore owners come to the end of their investment cycle. Despite the dominance of US buyers, Asian buyers were also prevalent, and made a renewed entry into the Melbourne market after being absent in Some of these buyers were encouraged by the decline in the value of Australian dollar, which made investments into Australia more affordable. The biggest of these purchases was China Investment Corporation s (CIC) 50 per cent purchase of 120 Collins Street for $401 million. Other major sales were CIMB TCA s purchase of 575 Bourke Street ($90 million), Straits RE s purchase of 114 William Street ($125 million) and Sterling Global s purchase of 383 LaTrobe Street ($70.7 million), albeit on long settlement terms. Offshore groups dominate the buy and sell side Sales of office property in the Melbourne CBD in 2015 reached a crescendo in December, when deals totalling $1.066 billion transacted. Initial indications are that the early part of 2016 will follow suit, with just over $400 million in transactions currently in due diligence. In addition to these sales, five buildings that form part of Walker Corporation s Collins Square development are currently for sale, and could fetch up to $2.5 billion. In total, $2.8 billion worth of office stock transacted in This is down on 2014 figures, when $4.04 billion transacted this included almost $830 million of transactions as part of the CPPIB/Dexus buyout of the Commonwealth Property Office Fund. The notable transaction trend in 2015 was the depth of demand for individual assets that came to market. It was not uncommon to see four or five under bidders in each transaction that were in the immediate vicinity of the successful bidder. Not surprisingly, this resulted in significant yield compression. A Grade assets compressed from 6.75 per cent in December 2014, to 5.99 per cent in December The rate of compression for Premium Grade assets was the same, declining from 6.16 per cent to 5.38 per cent over the same period. Evidence from some of the transactions completed in late 2015 particularly that of the Southern Cross Towers transaction suggests that further yield compression in the order of around 25 basis points is likely for the early part of The Collins Square transaction also has the potential to provide a new benchmark for A Grade yields in While much discussion has been made of the buy up of Asian assets in Australian markets, it was actually buyers from the USA who were the biggest purchaser in Melbourne in USA buyers consisting of Blackstone (Southern Cross Towers), Pembroke Real Estate (161 Collins Street) and LaSalle Investment Management (222 Exhibition Street) purchased 43 per cent of the total volume of office assets sold in Melbourne in On the sell side, offshore groups greatly increased their activity, with 41 per cent of sellers (by $ volume) being offshore vendors. This is by far the biggest proportion of offshore vendors we have seen 120 Collins Street, Melbourne Valued on behalf of Investa Commercial Property Fund (ICPF) 18 A Colliers International publication

19 Metro Office CBD OFFICE MELBOURNE CBD OFFICE SALES - OFFSHORE ACTIVITY % % of total sales by $ volume 80.00% 60.00% 40.00% 20.00% 0.00% Purchaser Vendor Source: Colliers Edge Supply, vacancy and demand Pre-commitments kicking off the next supply cycle The first pre-commitments in what is anticipated to be the next major supply cycle in Melbourne were finalised in late December Arup and Lendlease have signed up for circa 5,500sqm and 6,000 to 7,000sqm respectively to Lendlease s One Melbourne Quarter, which in total will be 25,000sqm. Lendlease are anticipated to build a further 75,000sqm of commercial space at Melbourne Quarter over the next few years, as well as further office space in Victoria Harbour. Combined with Collins Square s three buildings that are currently being built for a variety of pre-committed tenants including KPMG and Link as well as Mirvac s building at 664 Collins Street for Pitcher Partners, a total of 179,000sqm of space is currently under construction in Docklands, with 93,500sqm committed. The completion of 567 Collins Street in July 2015 added a further 54,000sqm of space to the Melbourne market in the second half of the year. In total, new supply of 125,824sqm was completed, and 116,763sqm of space was absorbed for the year. There has also been a major decrease in vacancy, from 9.1 per cent in January 2015 to 7.7 per cent in January 2016, which can be attributed to these good absorption figures as well as strong levels of withdrawals at 65,364sqm. In Melbourne, an average of 40,000sqm of space a year has been withdrawn from the market over the past 10 years, so 2015 s withdrawal figures are well above average. The supply story for Melbourne looks set to continue over the medium term outlook also. A total of eight buildings covering almost 450,000sqm of space are mooted for the Melbourne 460 Lonsdale Street, Melbourne Managed on behalf of private client CBD. This includes Cbus s mixed use development at 447 Collins Street, which will comprise approximately 50,000sqm of office space. This space looks set to be added to Melbourne s supply over the next three to five years, and is coming at a time when Melbourne s employment growth levels are forecast to require an additional 100,000sqm of space per annum over the next 10 years to accommodate the growing white collar workforce. Coupled with continuing withdrawals of older office space for residential conversion, the long term outlook for Melbourne s office market is positive and we are forecasting the total market vacancy rate to drop to 6.3 per cent by the end of This is just below the long term average level of 6.6 per cent and represents a balanced market. MELBOURNE S CBD SUPPLY CYCLE - COMMITTED AND MOOTED DEVELOPMENTS Tower 4, 727 Collins St (Link) Tower 2, 727 Collins St (KPMG, Maddocks, AECOM) One Melbourne Quarter Tower 5, Collins Square 664 Collins Street (Pitcher Partners) Wesley Church 477 Collins Street 447 Collins Street 405 Bourke Street 82 Collins Street Melbourne Quarter (remaining) 180 Flinders Street 839 Collins Street (Victoria Harbour) Source: Colliers Edge 525 Collins St Mooted Committed Remaining 0 20,000 40,000 60,000 80, , ,000 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 First Half

20 Research and Forecast report First Half 2016 BRISBANE CBD OFFICE New buildings reshape the CBD Three office buildings that are currently under construction will both literally, and figuratively, reshape the Brisbane CBD. As discussed in further detail in the supply section, one of the most intriguing elements of each of these developments is the location. The boundaries of the CBD are expanding, new ant tracks will develop or be enhanced and underutilised areas will be regenerated. Beyond the physical changes to the CBD, the affect 1 William Street, 180 Brisbane (Ann Street) and 480 Queen Street will have is beginning to flow through the market. Notwithstanding that the PCA reported the current vacancy rate in Brisbane at 14.9 per cent at the end of 2015, more important than that what has happened in Brisbane is the story of what is to come. At the bottom of the previous vacancy cycle in the wake of the GFC, the flight to quality resulted in the withdrawal of many secondary buildings for redevelopment, refurbishment or conversion. The subsequent competition for tenants and favourable credit conditions led to the development of or refurbishment to high quality A-Grade space. In turn with the development of 111 Eagle Street and now 480 Queen Street there is substantial vacancy and refurbishment pressure on the existing premium stock. With some 27,000sqm of backfill space to be brought to market, there s a substantial opportunity to modernise these buildings further. The opportunity for this has previously been prevented by sheer lack of vacancy. Upon the completion of 480 Queen and 180 Brisbane in the first half of 2016; prime vacancy is expected to increase to above 16.5 per cent for the first time since the early 1990 s. With below trend forecasts for white collar employment growth in the short to medium term and no identified major tenant requirements until 2019, the surface mood in Brisbane should be pessimistic. However, where some see disaster, others see opportunity. The addition of some 200,000sqm of prime stock is a vote of confidence in the underlying conditions and upside to be found in the Brisbane markets. Further, the looming vacancy will force further refurbishment or withdrawal of older stock. BRISBANE CBD OFFICE - VACANCY FORECAST 450, % 400, % 350, % 300, , , , % 12.0% 10.0% 8.0% 6.0% 100, % 50, % 0 0.0% 2010 H H H H H H H H H1 Vacant Space (sqm) 2014 H H H H H H H H H H H H H2 Total Vacancy Rate (%) Premium A Grade B Grade C Grade Total Vacancy Rate (RHS) Source: PCA OMR July 2015/Colliers Edge Mitsubishi Brisbane & Melbourne Project managed on behalf of Mitsubishi Brisbane & Melbourne 20 A Colliers International publication

21 Metro Office CBD OFFICE Leasing market New entrants to the CBD in IT&T and education Several requirements emerging from new entrants to the CBD office market form the IT&T and education sector led enquiry in late While other sectors continue to employ cost efficiency measures and are achieving lower floor space per FTE ratios, these, albeit individually modest requirements ran against a trend towards negative net absorption in the half. Capitalising on competitive net rental rates, these entrants are opening up new services to the CBD. Following the IT&T and education occupants, a heads of agreement has been signed by Tatts group for approximately 18,000sqm in Daisho Co. Limited 180 Brisbane; abandoning plans to develop a consolidated headquarters in Breakfast Creek. This deal is evidence of the growing spread between the market net effective rent and the cost of construction in fringe locations. With the exception of the Tatts deal, the most active tenant of the market has been in the 1,000 to 3,000sqm requirement tenant, with several leases struck in this range during Smaller tenants that have traditionally occupied secondary stock have started to take advantage of current incentives to upgrade into prime stock. This activity has been limited to date, however, is expected to be a theme until the next round of major corporate requirements expected in Backfill space driving incentives higher An unprecedented volume of backfill space in prime and premium buildings will see vacancy levels including sub-lease space peak at just below 20 per cent in prime buildings. The largest volume of space being brought to market by Grocon as the Riverside Selection is made up of the collective lease tails of tenants relocating to 480 Queen Street. This space is currently being marketed at a significant incentive level of up to 50 per cent of the face rent, although this incentive is heavily influenced by the short lease terms offered. With no immediate large requirement on the horizon the vacancy levels, led by backfill and sublease space are expected to maintain. Dynamic workplaces are the way forward As businesses are no longer confined to traditional workplaces, they are investing extensive time and money into creating dynamic formats. Demographic changes, the economy, seamless intuitive technology, health and lifestyle, and the growing importance of our CBDs are all influencing the evolution of workplaces. As small and medium-sized enterprises (SMEs) have less capital available than larger corporations, many hybrids are operating adopting various elements. Most new business workplaces are now incorporating collaboration hubs, 180 Brisbane, 180 Ann Street, Brisbane Leasing on behalf of Daisho Co. Ltd function rooms, café-style kitchens and flexible workspaces with videoconferencing capabilities. From a lifestyle perspective, more weight is being placed on the requirement for end of trip facilities, activated spaces and precinct amenity. To illustrate the importance of employee amenity, Grocon s 480 Queen Street will deliver an innovative premium office tower incorporating an extensive retail hub spanning over three precincts. The development will provide unique urban retail spaces featuring dual connectivity, dynamic rooftop spaces with panoramic views and its town centre will comprise 1,600sqm of retail floorspace across a mix of cafes, food and service retail opportunities. It will also feature the first high-rise public park in Brisbane catering for both businesses and the public. Competition for tenants heats up between A-Grade and Premium space As premium space comes to market, there has been a trend towards tightening in the rental premium (in net effective rents) between older premium buildings and new or recently refurbished A-Grade buildings. Constructed or fully refurbished in the CBD Office Research & Forecast Report First Half