GLOBAL CAPITAL INVESTMENT IN AUSTRALIA

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1 FIRST HALF 2012 NATIONAL RESEARCH & FORECAST REPORT GLOBAL CAPITAL INVESTMENT IN AUSTRALIA Asian Capital Dominates Acquisitions Suncorp Place, 259 George Street, Sydney Suncorp Place was the largest foreign investment transaction in the Second Half of Memocorp purchased this asset in July 2011 for $395 million. FOREIGN CAPITAL INFLOW FORECAST - 6 MONTHS OVERALL INVESTMENT KEY HIGHLIGHTS OFFICE INDUSTRIAL RETAIL HOTELS Foreign buyers made up 42% of all commercial property transactions in Asian buyers comprised 34% of all offshore capital inflows into Australian property markets in the Second Half of There was circa $7.7 billion worth of foreign investment in Australian property in 2011, up 51% from $5.1 billion in Foreign investors have continued to direct capital into Australian property markets over the second half of 2011, purchasing 58 assets valued at $2.8 billion, during the six month period. A combination of property portfolio sales, direct property transactions and company, fund and REIT takeovers and mergers during 2011, led to a total of 150 properties with a value of circa $7.7 billion changing hands over the course of the year, up from $5.1 billion during An unemployment rate of 5.2%, annual GDP growth of 2.5% and higher yields for Prime grade assets, compared to other global markets, made the Australian property market an attractive place for investment in In addition to this, economic, political and transactional transparency continue to drive foreign capital to Australian property markets. Over the course of the year, foreign buyers made up 42% of commercial transactions within Australia. Asian investors continue to dominate offshore capital inflows into the Australian market, making up 34% of all foreign property asset purchases in the second half of Evidence of the determination from offshore buyers to secure the right asset can be seen in the off market transactions which have been secured at below market average yields. Examples of this are; Memocorp s off market acquisition of 259 George Street in Sydney at a yield of 6.3% which is considered to be 25 to 50 basis points below the total market A grade average and Aviva s 50% purchase of Hoxton Distribution Park at 7.5%, being 25 basis points below the market average. CAPITAL FLOWS INTO AUSTRALIAN PROPERTY SECTORS SECOND HALF 2011 Number of Sales OFFICE INDUSTRIAL RETAIL HOTEL Value of Sales Average Yield Average Sales Rate Largest Capital Flow Origin Largest Capital Flow Destination 25 $1,937,400, % $6,291 United States Sydney 12 $380,000, % $2,097 United Kingdom Sydney 6 $234,600, % $5,697 United States Sydney 4 $145,500,000 N/A $117,439 United States Gold Coast TOTAL MARKET 58 $2,858,100, % $4,407 United States Sydney Source: RCA/Colliers International Research

2 Investment Trends Private equity firms have increased their exposure in Australia and are typically seeking an IRR on equity invested of 20% or more. WHO S INVESTING The 2011 calendar year saw a broad range of foreign investors entering into Australian property markets both directly through the acquisition of individual assets or portfolios or indirectly via investments in non-performing loan portfolios, the take private of listed AREIT s, Joint Ventures and Mezzanine Loans. In the case of Joint Ventures and Mezzanine Loans many of the groups investing in these sectors have taken advantage of the tougher credit conditions imposed by the GFC and a greater need for equity and debt from most major local property groups. Investors have included private high net worth individuals, pension funds, sovereign wealth funds and major private equity groups. Examples of some of the larger private equity groups and Investment Banks that invested in Australia during 2011 include Morgan Stanley Real Estate Investing, LaSalle Investment Management and JP Morgan. Blackstone RETURN PROFILE Core investors who are yield driven and take long term positions are primarily from the Europe and the US and include some of the world s largest pension funds. These investors are targeting secure Prime grade assets with long secure leases in place. Asian investors have mainly been directing their investment positions to targeting those assets in which they can add some value to take advantage of a short to medium term capital gain. Private equity firms are opportunistic investors who are typically seeking an IRR on equity invested of 20% or more. Another trend over the course of the year was not only the strong appetite from foreign investors for direct assets but also the increasing demand for indirect investments in property companies, non-performing loans and mezzanine lending. Some examples of these indirect investments include: US Private equity firm Blackstone took the publicly listed Valad Property Group private through cash consideration of A$1.80 per stapled security. The deal valued the company s shares at approximately $208m with Blackstone also taking on $598m worth of liabilities, the overall offer was valued at $806m. With a much stronger balance sheet Valad is firmly back on a growth trajectory. The last week of 2011 saw Orchard Funds Limited sell its funds management business to a Global private equity real estate fund managed by Morgan Stanley Real Estate Investing. In addition to acquiring the responsible entity of Orchard, Morgan Stanley Real Estate Investing is in the process of recapitalising three of Orchard s property funds being; the Orchard Diversified Property Fund, Orchard Commercial Office Fund and Chevron Renaissance Property Trust, through capital injections and rights issues of $A200 million. Also in December the same Morgan Stanley Real Estate Investing Fund acquired a portfolio of non-performing loans with a face value of $700 million from Lloyds Bank Australian subsidiary the Bank of Scotland International. The loans are primarily secured by various completed development projects and development sites on the Gold Coast. December 2011 saw Government of Singapore Investment Corporation (SGIC) affiliate, Reco Ambrosia Pte, and the Public Sector Pension Investment Board of Canada sign a binding agreement to pay $1.2 billion for 85% of the Charter Hall Office REIT (CQO). The agreement was signed on the condition the REIT completes the sale of its U.S. properties by March 2012 with a vote by shareholders expected on March 15. Under the agreement Charter Hall will join the consortium with an initial investment of 15% and will continue to manage CQO on an unlisted basis. In the first half of 2011 LaSalle Investment Management was an active investor on behalf of its Asia Opportunity Fund No. 3. Investments included the acquisition of Novotel Melbourne on Collins Street and the Australia on Collins retail complex for $204 million and equity investmements in residential development Joint Ventures in Sydney with Toga Group, Leighton Properties and Australand. COLLIERS INTERNATIONAL P. 2

3 Economic Update OVERVIEW Sovereign debt issues in Europe and a slow recovery in the United States, as well as inflation and slowing growth concrens in China have caused uncertainty in relation to the strength of the global economic recovery. Negative sentiment has flowed through to the domestic economy with a dampening effect on sectors outside mining and resources. Despite this, the fundamentals of the Australian economy remain sound. A key indicator of the strength is the Australian labour market with unemployment currently at 5.2%, compared with 8.3% in the UK and 8.5% in the US. FOREIGN EXCHANGE/CURRENCY Ongoing global economic uncertainty saw the Australian Dollar reach a record high in late July 2011, trading at $US cents. The Australian dollar has been volatile over the past few months and is currently trading at around $US105 cents, after slipping below parity to $US97 cents in the last week of November INTEREST RATES The Reserve Bank of Australia (RBA) decided to keep the official cash rate on hold at 4.25%, at its monthly board meeting in February The reasons behind the RBA s decision were recent signs of underlying strength in some major economies, including the United States and China, also the Australian economy appeared to be growing at close to trend. The board stated that inflation has declined, as the large rises in food prices resulting from the floods a year ago have been unwinding and is expected to fall further during the first half of In its monetary policy statement, the RBA noted that interest rates for borrowers have declined to be close to their medium-term average, as a result of the actions at the Board s previous two meetings and looking forward should demand conditions weaken materially, the infl ation outlook would provide scope for easier monetary policy. DEBT The risk and uncertainty associated with sovereign debt and economic growth issues across a number of European countries and the US has led to a flight to quality from investors since the start of the global financial crisis in This saw the spread of borrowing costs between AAA and BBB debt peak in December 2009 at nearly 2.00% and has remained around 125 basis points since. This is in stark comparison to a 25 basis point difference between 2003 and This spread begun to slowly rise over Q3 and Q and finished the year at 1.6%. The flight to quality to AAA investments has also seen a return of positive spreads between average Prime grade office yields and the AAA debt borrowing rate which was 3.6% as of December AUSTRALIAN DOLLAR EXCHANGE RATES PRIME GRADE OFFICE YIELD VS. AAA DEBT RATE $ % Foreign Currency per Australian Dollar $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 SGD USD Euro Borrowing Rate and Yield 7.0% 5.0% 3.0% 1.0% -1.0% $ % Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jan-02 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Jun-11 Dec-11 USD SGD Euro Spread AAA Debt National Average Prime Grade Office Yield Source: RBA / Colliers International Research Source: Bloomberg / Colliers International Research COLLIERS INTERNATIONAL P. 3

4 By Property Sector Hoxton Distribution Park, Hoxton Park Mirvac sold a 50% interest in this asset to Aviva Investors in September The sale price was $97.4 million and represented a yield of 7.5%. OFFICE MARKET DOMINATES The office market continued to be the favoured property sector for foreign buyers during the second half of 2011, making up 71.8% of all offshore acquisitions within Australia. A total of 25 office properties were purchased by foreign capital with a value of $1.9 billion, during the six month period. Declining vacancy rates, stable tenant demand combined with rental growth in some Prime grade office markets have been the main driver behind these acquisitions. Prime grade yields, of between 6.25% and 7.25%, compared with 5.00% to 6.00% in London and New York office markets, have increased competition for quality assets in Australia s office market. The largest office asset to sell to a foreign buyer in the second half of 2011 was Suncorp Place 259 George Street, Sydney. This property sold to Memocorp Australia for $395 million in July 2011, on a tight reversionary yield of 6.3%. It is understood that the capital for the acquisition is underpinned through the Singaporean owner of the Australian business. HIGH RETURNS DRIVE INDUSTRIAL Acquisitions by foreign buyers of industrial assets continued to remain strong during the second half of 2011 with 12 industrial assets valued at circa $380 million transacting during the six month period. The main driver behind these acquisitions was the attraction of high yielding, quality assets with a lack of new supply providing future growth prospects for Prime grade markets. The largest deal to take place in 2011 was the purchase by Aviva Investors of the Hoxton Distribution Park from Mirvac. Aviva paid $97.4 million for a 50% stake in the property representing a yield of 7.5%. RETAIL ATTRACTS INVESTORS Foreign capital flows into the retail sector made up 12% of all offshore acquisitions during the second half of 2011 with six assets valued at circa $865 million transacting. Globally competitive yields, low volatility of returns and lower vacancy rates then comparable global centres are currently attracting capital to the Australian retail market. The largest foreign retail property purchase in 2011 was the 50% stake in the Northland Shopping Centre by CPP Investment Board valued at $455 million. This super regional centre was an attractive buy due to its large catchment area, diverse tenant profile and high foot traffic this is reflected in the tight 6.23% yield attributed to this sale. CBD HOTELS TARGETED Hotels in Australia have slowly begun to attract further foreign investment making up 8.5% of offshore property purchases with four assets selling in the second half of CBD, business driven hotel assets have been the major targets for buyers, as the leisure and resort sector continues to see a slowdown of overseas tourists due to the high Australian Dollar. The Novotel Melbourne on Collins was the largest sale in 2011, purchased by LaSalle Investment Management for $140 million in June VALUE OF CAPITAL FLOWS INTO AUSTRALIA BY SECTOR $8,000 $ Millions $7,000 $6,000 $5,000 $4,000 Retail Office Hotel Industrial $3,000 $2,000 $1,000 $ Source: RCA / Colliers International Research COLLIERS INTERNATIONAL P. 4

5 By Country of Origin 1 Alfred Street, Sydney This building was part of the Valad Property Group portfolio which was acquired by Blackstone. The property is currently an A grade office building however, a DA is currently being assessed for the development of a high end luxury residential apartment building. ASIA CONTINUES TO DRIVE FLOWS Capital inflows from Asia accounted for 34% of total foreign investment in Australian property during the second half of The comparative strength of the Australian economy combined with the ongoing economic uncertainty in Europe and the US has seen Asian investors re-direct funds that would normally be bound for these markets. Buyers from Singapore have been driving capital flows from Asia, making up 19% of total foreign capital investment in Australia over the second half of Tightly held property markets in Asia, such as Hong Kong, currently provide investors yields of between 4.00% and 6.00% which further enhances the yield profile of property sectors in Australia. NORTH AMERICA North American investors have found preference in directing capital to Australia s office and retail sectors. Capital from this region made up 34% of foreign investment during the second half of 2011 with circa $972 million being invested during the period. The majority of this investment occurred via the purchase of Valad Property Group by Blackstone This accounted for 27 properties worth circa $570 million. Slow growth and ongoing uncertainty in the US economic recovery has led to North American institutions moving capital offshore to seek higher, less volatile returns and growth prospects. EUROPEAN INVESTORS REMAIN SUBDUED The sovereign debt crisis which has engulfed the European economy over the past 24 months has limited investment and capital flows from European institutions. Despite this, Australia saw circa $413 million of foreign capital being poured into direct property from Europe in the second half of This accounted for 15% of all foreign capital flows into the Australian property market during the period. Most of the purchases have been long term, yield driven acquisitions with European buyers looking for assets with long, secure leases with strong convents. MIDDLE EAST & AFRICAN CAPITAL BEGINS TO EMERGE Middle Eastern and African investors were limited to one buyer in 2011 comprising 17% of total global capital flows into Australia. This buyer was Growthpoint Properties from South Africa who purchased eight assets during the second half of 2011, valued at circa $473 million. CAPITAL FLOWS INTO AUSTRALIA BY COUNTRY OF ORIGIN Malaysia 13% China 1% Hong Kong 1% Sweden 1% Germany 6% UK 8% United States 34% United States Singapore South Africa Malaysia UK Germany South Africa 17% Source: RCA/Colliers International Research Singapore 19% Hong Kong China Sweden COLLIERS INTERNATIONAL P. 5

6 By Capital Destination Southern Cross West Tower, Bourke Street, Melbourne A 50% interest in this 22 storey A grade office building was bought by Brookfield Prime Property Fund for $120 million in July SYDNEY SEES MAJOR INCREASE IN OFFICE INVESTMENT The Sydney market accounted for 55% of all foreign capital flows during the second half of 2011, valued at circa $1.5 billion. Office and industrial assets were the main focus of foreign capital flows into the Sydney market over the second half of Nine office assets valued at $1 billion and five industrial properties worth $299 million were purchased by offshore buyers in Sydney over the past six months. A lack of Prime grade industrial and office stock in Sydney has led to rental growth for quality assets over the past six months, leading to increased capital flows into these sectors from risk adverse investors. MELBOURNE ATTRACTS RETAIL FLOWS Melbourne attracted 20% of all offshore capital flows into Australia during the second half of The six month period saw more than $575 million worth of property across 16 transactions taking place in Melbourne during the period. The majority of sales were office assets worth $434 million across seven transactions. The stability and growth prospects of Melbourne s office and retail markets combined with declining vacancy rates and forecast rental growth have all been drivers behind the push from overseas buyers into the market. BRISBANE INDUSTRIAL MARKET Total offshore capital flows into the Brisbane market increased by 6.5% from $425 million in the first half 2011 to $455 million in the second half of One of the largest transactions was the purchase of two office assets by Growthpoint Properties from Australian Property Growth Fund. The first property was 333 Ann Street which was bought for $111 million while the second was CB1 & CB2 which were sold for $99.3 million. PERTH AND ADELAIDE OFFICE SALES Office assets were the main focal point for foreign buyers in both Perth and Adelaide over the course of The resources and mining boom has seen vacancy rates decline in the Perth market, driving rental growth and in turn interest from investors. The sale of the Citigate Perth Hotel for $60 million in December 2011 was the largest foreign investment in Western Australia during the second half of The property was purchased by GIC in a joint venture with Host Hotels & Resorts. Adelaide saw a total of $37.2 million in foreign capital flows during the second half of 2011 across two transactions. The largest being the sale of 7 Laffer Drive, Bedford Park for $24.5 million to Growthpoint Properties. DESTINATION OF FOREIGN CAPITAL FLOWS INTO AUSTRALIA Adelaide Gold Coast 1% 3% Brisbane 16% Other 5% Sydney 55% Sydney Melbour Brisbane Gold Coa Adelaide Melbourne 20% Other Source: RCA/Colliers International Research COLLIERS INTERNATIONAL P. 6

7 By Buyer Type 333 Ann Street, Brisbane This A grade building was purchased by Growthpoint Properties, from South Africa, in December 2011 for $109 million on an equivalent reversionary yield of 8.44%. PENSION FUNDS INCREASE INVESTMENT 2011 saw an increase in offshore pension funds investing in Australian property markets, accounting for a number of direct and indirect property acquisitions during this period. The includes the likes of the Canada Pension Plan Investment Board (CPP) and Public Sector Pension Investment Board of Canada. The basis for investment by pension funds are yield driven, low risk, Prime grade assets with secure, long term tenants providing return certainty for their investment. REOC S CONTINUE TO INVEST Offshore Real Estate Operating Companies (REOC) have increased their investments over the past 12 months making up 20% of foreign capital inflows into the Australian property market. The most active being Brookfield Asset Management who has invested approximately $530 million over the past 12 months. Growthpoint Properties has also been active in the purchase of industrial portfolios and assets within Australia over the past year. These companies are driven by value add and capital growth investment opportunities, seeking to buy opportunistically to capitalise on short to medium term capital returns. INVESTMENT MANAGERS LaSalle and Heitman were two of the most active offshore Investment Managers in the Australian market over the past 12 months acquiring circa $375 million worth of property for their respective funds and investors. Foreign investment managers made up 11% of capital inflows into Australian property in 2011, an increase of 8% on The basis for investment from these buyers varies depending on their purchase mandate and the return criteria of the individual funds they manage. For example, currently, European managers such as RREEF are driven by long term, secure, yield driven investments for their open ended funds. The second half of 2011 also saw the private equity fund Blackstone acquire Valad Property Group. The acquisition consisted of more than 27 properties valued at circa $570 million. DEVELOPERS AND OWNER OPERATORS Foreign capital has also entered Australia via developer and owner operators during the past 12 months making up 6% of capital, worth circa $295 million. The majority of this capital has been directed to the hotel and residential development sectors with such owner/developers as HNA Group and Kirsh Group. CAPITAL FLOWS INTO AUSTRALIA BY CAPITAL TYPE Equity Fund Private Investor 5% 1% Bank/Finance 6% Pension Fund 23% Develop/Owner/ Operator 6% Sovereign Wealth Fund 7% Corporate/ Insurance 10% REOC 20% REIT 11% Investment Manager 11% Pension Fun REOC Investment Manager REIT Corporate/ Insurance Source: RCA/Colliers International Research COLLIERS INTERNATIONAL P. 7

8 Recent Market Transaction Activity INVESTMENT SALES Office Address Suburb Sale Date* Sale Price ($AUS) Yield** Capital Value ($/m 2 ) Purchaser 259 George St Sydney Aug-11 $395,000, % $8,847 Memocorp Australia 111 Bourke St Melbourne Jul Mount St North Sydney Aug-11 $120,000,000 (50% Sale) $113,500,000 (50% Sale) 7.48% $5, % $7,960 Brookfield Office Properties Pramerica Real Estate International 20 Bridge St Sydney Dec-11 $185,000, % $9,345 RREEF Real Estate 512 offices in 61 countries on 6 continents United States: 135 Canada: 36 Latin America: 18 Asia Pacific: 194 EMEA: 117 $1.5 billion in annual revenue billion square feet under management Over 12,500 professionals 661 Bourke St Melbourne Nov-11 $100,000, % $5,256 Real I.S AG Industrial Hoxton Distribution Park Hoxton Park Sep-11 iseek Data Centre Brisbane Jul-11 $97,400,000 (50% Sale) Circa $62,000,000 (70% Sale) Pacific Hwy Artarmon Nov-11 $60,000, % $5, % N/A Aviva Investors N/A N/A Securus Data Property Fund Securus Data Property Fund JV Keppel T&T COLLIERS INTERNATIONAL Level 12, Grosvenor Place 225 George Street Sydney, NSW, 2000 TEL FAX Retail Nerang Mall 52 Price St Hotel Citigate Perth 707 Wellington St Nerang Oct-11 $24,300, % $2,796 Perth Dec-11 $60,250,000 N/A $217,000 LaSalle Australia Core Plus Fund GIC JV Host Hotels & Resorts RESEARCHER Mathew Tiller Manager Research TEL FAX Flinders St Melbourne Sep-11 $31,000,000 N/A $173,184 Michael Kum * Sale Date is exchange date **Yields quoted are equivalent reversionary yields Source: Colliers International Research Outlook As offshore investors look for higher yielding investments outside the low growth economies of Europe and the US, Colliers International expects both direct and indirect foreign capital investment in Australia s property markets will increase over the course of Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. Colliers International Tightening vacancy levels, the 100% occupancy of a number of buildings and the short to medium term growth prospects of the Brisbane and Perth CBD office markets is expected to see Australian owners begin to place properties on the market, in order to maximise the sale price of their fully leased assets. This will provide opportunities for offshore buyers who are seeking Prime grade office properties with secure income returns. The start of 2012 has seen an increase in enquiry levels from foreign buyers, outside the highly favoured CBD office markets, with interest in both the Retail and Industrial sectors on the rise due to the strong and secure return profiles of the Prime grade assets within these sectors. Colliers International also expects that both foreign and local banks will begin to increase the sale of non-performing loan portfolios and distressed assets over the course of 2012, as they look to free up capital as credit and debt markets remain tight while the acquisition and recapitalisation of existing properties companies will also continue over the course of the year. Accelerating success.