Who will rule our CBDs?

Transcription

1 Research and Forecast report First Half 2015 Australia & New Zealand CBD OFFICE Who will rule our CBDs? Ownership changing the realm of office Accelerating success.

2 2014 Australia and New Zealand Second Half 2014 Australia Second Half 2014 Australia Second Half 2014 Australia and New Zealand Second Half 2014 Australia and New Zealand Colliers International A leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and collaboration, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners. We represent property investors, developers and occupiers in local and global markets. Our expertise spans all property sectors office, industrial, retail, residential, rural & agribusiness, healthcare & retirement living, hotels & leisure. Colliers International is Australia s own global real estate success story. 374 offices in 63 countries on 6 continents United States 140 Canada 44 Latin America 25 Asia Pacific 81 EMEA 84 US$2.1 billion in annual revenue billion square feet under management 15,800 professionals and staff We have 200 research professionals in 90 offices on 6 continents Accurate and objective property research should be the foundation of all good property decisions. Colliers International provides reliable, unbiased and authoritative property research & investment property advice across all property sectors and geographic markets within Australia and across the globe. We share our knowledge and experience to deliver innovative and effective solutions and investment property advice. Our unique approach integrates people, experience, systems, and technology to create meaningful business connections and client outcomes. 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 RURAL & AGRIBUSINESS METRO OFFICE HOTELS INDUSTRIAL RETAIL Discovering value Unlocking hidden potential in retail Greener Pastures Dairy offers new opportunities Competitive rivalry Office versus residential in metro markets Fresh new look Hotel sector gets a make over Supersized stock Industrial floor space reaches record highs Accelerating success. Accelerating success. Accelerating success. Accelerating success. Accelerating success.

3 Metro Office CBD OFFICE Contents Concentration of ownership continues 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. [email protected] 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. [email protected] For more information about Colliers International and working with us visit: CBD Office Research & Forecast Report First Half

4 700 Bourke Street, Docklands Sold on behalf of Cbus Property 4 A Colliers International publication

5 Metro Office CBD OFFICE Concentration of ownership continues Australian CBD office markets have seen significant change over the past decade. Ownership has become increasingly concentrated with the top five owners now controlling 25 per cent of total stock. In comparison, the number of tenants continues to increase as the types of tenants change and their average size declines. By Nerida Conisbee National Director Research Over the next decade, we expect ownership levels to continue to concentrate with Australian institutional owners maintaining their dominance. Building stock will continue to improve as rental levels stabilise and the number of secondary buildings in CBDs declines as a result of residential development. Existing office development sites in Melbourne CBD will be absorbed and Brisbane and Sydney CBDs will start to run out of sites for new office development. Local Governments in these cities will need to have solutions as to how these cities can accommodate more office development. Who owns the city? Ownership of CBD offices is becoming more concentrated. Australian institutions still dominate ownership, now owning almost half of all CBD office buildings. The big increase has been in offshore ownership which increased from 9 per cent in 2009 to 14 per cent now. The largest reductions have been in private and Government ownership, a trend we expect to continue. By CBD, the changes of ownership are more marked. In particular Perth and Brisbane CBDs which have traditionally had very high levels of private and Government ownership have seen rapid rises in institutional ownership (Perth CBD) and offshore ownership (Brisbane CBD). The most significant change was Perth CBD where institutional ownership jumped from 35 per cent of total stock to 54 per cent of stock over a five year time period. In both Sydney and Melbourne CBDs, ownership by institutions declined with offshore ownership largely taking this share. The only city to see an increase in private ownership was Canberra which now has the second highest level of private ownership after Adelaide CBD. Government ownership is declining in all cities. CBD OFFICE OWNERSHIP BY TYPE, 2009 AND 2014 (% OF TOTAL STOCK) Institution Private Offshore Government Other Source: Colliers Edge CBD Office Research & Forecast Report First Half

6 Not only is ownership becoming more concentrated amongst institutional and offshore groups, CBD office assets are also becoming increasingly concentrated amongst fewer owners. Whereas in 2009, the top 10 groups owned 29 per cent of total stock, in 2014, this has increased to 35 per cent. DOMINANT OFFICE OWNERS BY CAPITAL CITY CBD Investa Dexus 2 ISPT The GPT Group 3 AMP Investa 4 The GPT Group ISPT 5 Charter Hall AMP 6 Dexus Charter Hall 7 Brookfield Brookfield 8 Stockland Cbus Property 9 Lend Lease QIC 10 Queensland State Government Lend Lease All of the current top 10 owners have increased their CBD office market share over the past five years however the biggest increases have been Dexus and The GPT Group. This is attributable to organic growth in portfolios, as well as the CPA takeover. These two groups now own 11% of total CBD office stock around Australia. Today ISPT, Lend Lease and AMP have a similar market share to that which they had in By capital city, the group with the greatest market share in 2009 was Queensland State Government which owned 11.6 per cent of total stock in Brisbane CBD in that year, a situation which changed dramatically in 2013 when the Government sold down their portfolio. The GPT Group now has the highest market share in an individual city with an 11.2 per cent share of Melbourne CBD. There are no other groups with more than 10 per cent market share in an individual city. Dexus has the largest share in Sydney CBD, Brookfield Multiplex in Perth CBD, Capital Airport Group in Canberra, QIC in Brisbane CBD and SA Government in Adelaide CBD. Is it possible to control rents with a market share of a CBD at levels greater than 10 per cent? It is unlikely. Broadly, monopolistic pricing is generally considered to be possible at market shares above 25 per cent. This analysis does however suggest that as a group, the top 10 owners now have a greater influence on the market than they have had previously. In particular, the top five owners comprising: Dexus, The GPT Group, Investa, ISPT and AMP; now have almost a 25 per cent share of CBD office markets. Although there does not appear to be a monopoly forming, an oligopoly is possible. The recent announcement of the potential sale of the Investa real estate platform will lead to a significant change in ownership levels in Australian CBDs. Investa currently own just over 5 per cent of CBD office stock, with higher shares in Sydney and Brisbane CBDs. A potential purchase, by either Dexus or The GPT Group will increase these groups market share to above 10 per cent nationally and to potentially above 16 per cent in individual CBDs. Who owns the pipeline? Seven groups dominate the pipeline of CBD office development, accounting for 50 per cent of projects either under construction, or mooted. Lend Lease has the highest share, controlling just over 14 per cent of upcoming development largely attributable to Barangaroo. Mirvac is second with 7.3 per cent of all upcoming development. Mirvac has significant pipeline in Melbourne CBD owning 20 per cent of upcoming development. Once complete this will bring Mirvac into the top ten owners of CBD offices in Australia. PERCENTAGE OF TOTAL DEVELOPMENT PIPELINE IN AUSTRALIAN CBDS (UNDER CONSTRUCTION AND MOOTED) Lend Lease 14.1% Mirvac 7.3% Brookfield 6.9% ACT Government 6.2% Charter Hall 5.8% Cbus 5.1% Walker Corporation 4.6% Unit 1, 60 Hindmarsh Square, Adelaide Sold on behalf of Angas River Contractors ATF MacGillivray Investments Trust By capital city, the dominant owners of developments sites are Charter Hall (Adelaide CBD), ISPT (Brisbane CBD), ACT Government (Canberra), Mirvac (Melbourne CBD), Brookfield (Perth CBD) and Lend Lease (Sydney CBD). 6 A Colliers International publication

7 Metro Office CBD OFFICE Who occupies the city? Not only is ownership consolidating but tenant types are also showing less diversity compared to previous decades. Although the rate of change is far slower than ownership changes with noticeable changes happening over a 20 year time period. AUSTRALIAN CBD OFFICE TENANCY MIX % 17% 2% 2% 8% 5% 14% 5% 19% Agriculture and Mining Manufacturing Wholesale and Retail Trade Transport, Postal and Warehousing Business Services Information Media and Telecommunications Finance and Insurance Government Other Source: Deloite Access Economics and Colliers Edge AUSTRALIAN CBD OFFICE TENANCY MIX % 2% 1% 6% 2% 23% Agriculture and Mining Manufacturing Wholesale and Retail Trade Transport, Postal and Warehousing Business Services 100 Pirie Street, Adelaide Managed on behalf of 100 PS Management Pty Ltd AUSTRALIAN CBD OFFICE AVERAGE NEW TENANCY SIZE, ,400 18% 18% 5% Information Media and Telecommunications Finance and Insurance Government Other Source: Deloite Access Economics and Colliers Edge The main change in our CBDs is the growing importance of business services. In 1995, business services comprised less than 15% of all occupiers but are now edging close to a quarter of all space. This growth has primarily come at the expense of wholesale and retail trade, transport, postal and warehousing and manufacturing. The declines in these sectors have been driven by a number of factors including a movement of these occupiers to metro locations, a decline in employment more generally and a shift of many functions from in-house to out-sourced (e.g. legal, accounting, graphic design). With the move to a higher number of business services, the average size of new tenants has been reducing. The size of the average lease signed in our CBDs over the past three years has been 30 per cent lower than in the preceding three years. Changes in the way that organisations work (e.g. activity based working) is also likely to be a contributing factor here although data on workspace ratios suggests that change in tenant type is having a greater influence. Average Tenancy m² 1,200 1, Source: Colliers Edge The end of metro markets? Being in a central location is consistently the most important factor for office tenants in every Office Tenant Survey that Colliers International has undertaken. In Australia, this generally means being located in a CBD market due to the radial nature of our public transport and road systems. Over the past decade, there has been very little decentralisation in most capital cities with the exception of Sydney CBD and Brisbane CBDs. In Sydney CBD the relatively low availability of new space led to strong growth in Sydney metro markets and affordability issues played out in Brisbane. CBD Office Research & Forecast Report First Half

8 In 2014, centralisation of tenants was a key feature in Sydney and Melbourne CBDs. In total, 21 tenants looked to centralise in Sydney and six in Melbourne. Tenant enquiry also shows a divergence in enquiry levels between metro and CBD locations in NUMBER OF TENANT ENQUIRIES BY LOCATION Although it is not the end of metro markets, the affordable nature of Australian CBDs is likely to lead to improved demand for CBD stock relative to metro in the short term. CBD residential development changing our CBD office markets An unprecedented level of residential development is now occurring in our CBDs. In Melbourne CBD more than 20,000 apartments are either under construction or have planning approval. In Sydney CBD the wave of development has just begun with more than 5,000 apartments expected to come online within the next five years. Number of enquiries One of the major impacts of this is the removal of ageing stock from the market as existing office buildings are either converted or demolished to make way for residential developments. At present, the levels are still relatively low with Sydney CBD Melbourne CBD Melbourne Metro currently the highest with 21 per cent of C and D Grade stock currently being converted. We consider it unlikely that the demand for residential development sites will completely take 50 up all secondary space. There are a number of reasons for this including lack of suitability for many of the buildings and sites, planning restrictions and fragmented ownership SECONDARY OFFICE STOCK CONVERTED TO RESIDENTIAL, 2015 (% OF STOCK) 100% 90% 80% 88% 79% 84% % 60% Number of enquiries % 40% 30% 20% 10% 0% 21% 16% 12% Melbourne Sydney Brisbane Sydney CBD Sydney Metro Source: Colliers Edge Absorbed by Residential Development Remaining C and D Grade Stock Source: Colliers Edge Although the drivers to move into a CBD location are different for every occupier, for many, cost is a major consideration. CBD markets are currently offering many low cost options for occupiers. Other attractive considerations include the cultural change that a CBD move can provide and an uplift in amenity. The other driving factor has been strong demand for residential. The conversion opportunities presented by many metro office buildings have risen as a result of this demand, coupled with favourable land use zonings leading to withdrawl of office stock. In addition many sites previously zoned commercial have been converted to residential sites, also reducing the pipeline. 1 Martin Place, Sydney Project managed on behalf of Charter Hall 8 A Colliers International publication

9 Metro Office CBD OFFICE Level 1, Centreway, Mount Waverley Project managed on behalf of United Energy and Multinet Gas CBD residents typically do the majority of their retail shopping within the CBD and hence more apartment development is a positive for retail demand including both discretionary and non-discretionary retailing. More retail also makes a CBD more attractive for office occupiers. Overwhelmingly therefore we consider that strong resident population growth within our CBDs is a positive for office markets. Beyond Barangaroo and Docklands. Do we have enough sites? REQUIRED AND PLANNED CBD OFFICE SPACE, (SQM) Canberra Adelaide CBD Perth CBD Brisbane CBD Melbourne CBD Sydney CBD 175, , , , , , , , ,444 Planned Required 605, , , , , , , , , , , ,000 1,000,000 m² Source: Colliers Edge At a national level, approximately 2.5 million sqm of office space will be required over the next decade. As there is currently 2.6 million sqm of space either under construction or mooted, this is fairly evenly balanced. The main issue however is that most of the space will be required in Sydney, Melbourne and Brisbane CBDs. In the case of Melbourne CBD, sites are likely to run out in around seven years. Sydney and Brisbane CBDs will be close to capacity within the decade. Capacity issues are far less problematic in Canberra, Adelaide CBD and Perth CBD. Planning has a major influence on capacity in Sydney CBD where changes in planning controls will allow for greater office development. This could include allowing for higher buildings, greater site consolidation and building redevelopment. Another option to address capacity issues is to continue to expand our CBDs. Melbourne s geography allows easily for this and within the next decade, it is likely that sites such as E-Gate, Federation Square East and Fishermans Bend will become destinations for major corporates. For Sydney CBD, the likely direction of development is southwards with a major redevelopment of Central Station considered the best option. An alternative option would be to continue to develop metro office markets and push tenants to decentralise. This is likely to happen in markets such as Sydney and Brisbane CBD if rents reach levels similar to before 2008 however we do not consider that growth will be as strong in these markets as they have historically. Given site availability in the Melbourne CBD, decentralisation will continue to remain low. CBD Office Research & Forecast Report First Half

10 Our perspective CBD OFFICE A GRADE YIELD FORECAST TO COMPRESS AND SOFTEN IN VARIOUS CITIES 2014 ENQUIRY LEVELS BY CAPITAL CITY (f) 8.16% 7.8% PERTH 8.25% 8.28% 7.95% 7.88% 8.3% 8.2% 8.1% 7.9% 7.9% 7.5% 7.0% 7.4% 7.4% 7.6% 7.3% 7.0% BRISBANE 7.0% SYDNEY SYDNEY 855,803 MELBOURNE 627,980 CANBERRA 274,850 ADELAIDE 7.1% CANBERRA 7.5% 7.3% 7.5% 7.3% 7.3% MELBOURNE 7.4% 6.8% 7.1% 6.6% 7.1% LARGEST INVESTMENT TRENDS OF 2014 BRISBANE 164,333 ADELAIDE 141,381 PERTH 61,961 ¹ Includes sales over $100m, where initial yield publically stated ² Excluding CPA and Australand takeover Biggest Sale CBW (181 William Street, Melbourne) $608.1m Lowest Yield¹ 52 Martin Place, Sydney at 5.4% Highest Yield¹ AM-60, Brisbane at 9.1% Most active purchaser² Largest takeover The GPT Group Commonwealth Property Office Fund by CPPIB, DEXUS and The GPT Group Most active seller² Cbus Property Most active offshore purchaser² The Blackstone Group Most active offshore seller² GIC Accelerating success. How else can we help you? Speak to one of our property experts today. [email protected]

11 AUSTRALIA FIRST HALF TOP DRIVERS OF TENANT DEMAND TOP 3 COUNTRIES INVESTING IN AUSTRALIAN CBD OFFICE CHINA SINGAPORE SINGAPORE USA CANADA USA More green spaces Less car parking, more bike spaces Continued evolution of flexible/liquid space SYDNEY CBD TO SHOW STRONGEST GROWTH IN 2015 SYDNEY $361 $ % Data driven design Greater precinct amenity Greater centralisation of tenants MELBOURNE BRISBANE ADELAIDE $298 $291 $261 $316 $297 $262 2% 0.3% 6% PERTH $451 $ % TRENDS TO WATCH IN 2015 CANBERRA $314 $ % 1 Sale of $9 billion Morgan Stanleyowned Investa real estate platform 2 CBD apartment development and sales levels 3 New sources of capital from offshore, particularly Japan and South Korea 4 Changes to US tax law (FIRPTA) 5 Decline in gap between prime and secondary yields A Grade net effective rents 6 Australian investors moving offshore 7 Australian pricing relative to other regions 8 Increased availability and cost of debt For more information about Colliers International and working with us visit:

12 Research and Forecast report First Half 2015 SYDNEY CBD OFFICE Leasing market recovery solidifies The second half of 2014 witnessed the green shoots of leasing market recovery continue. Leasing volumes were up, vacancy improved and incentives stabilised. Demand across the CBD has picked up from a variety of tenants with net positive absorption of over 54,000sqm over the six months to 1 January The highest incentives have been reigned in and in some cases incentives have fallen, particularly for quality B Grade stock and smaller premises, with signs that landlords are beginning to push back on tenant demands. Vacancy in the Midtown precinct tightened in the second half of 2014 assisted in part by recent Colliers International brokered deals in 2 Park Street and 135 King Street, a lack of new supply and pressure for residential conversions of older office stock. The Core remains popular with financial services. Ongoing development in this precinct and large commitments by the likes of Challenger and the Macquarie Group will cement the role of the Core going forward. The Western Corridor is subject to significant public and private capital investment over the next four years and is expected to be the stand out performer in per cent yield reflecting a 33-year WALE and strong covenant to government tenants. GIC sold 175 Liverpool Street to Hong Kong listed developer Shimao Property for $ million on the basis of residential conversion potential at a yield of approximately 7 per cent. These two sales exemplify the two separate investment rationales which underpin the CBD market. The strength of the investment market remains decoupled from leasing fundamentals although improving fortunes in the latter will help to bring the markets more in line over time. Purchasers who intend to hold assets for the long term are less concerned with short-term leasing market fluctuations, but even if yields stabilise improving leasing conditions and associated capital value uplift is good news for landlords. That said we expect the strong investment landscape to endure in 2015 with scope for moderate yield compression over the next six to 12 months. Over the next 12 months we expect to see deepening recovery in the leasing market, particularly for quality A and B Grade space, off the back of stable demand and constrained supply. Centralisation of tenants from metro locations will remain a feature given the value proposition of the CBD to tenants and staff alike. Consultancies, marketing, communications, business services and IT&T tenancies will expand and take more space, leading to a gradual improvement in leasing market conditions over time. Capital markets outperformed in the second half of 2014 with strong demand from domestic and overseas buyers in transactions worth $1.8 billion. The two-tier investment market which emerged in 2013 persists, comprising pure commercial assets on the one hand and those with residential upside on the other. Big ticket transactions in the second half of 2014 comprised 52 Martin Place, selling for $555 million in July, and 175 Liverpool Street which transacted for $ million in November. 52 Martin Place was acquired by REST Industry Super at a low Clarence Street, Sydney Sold on behalf of Sunsuper Pty Ltd for AMP Capital Investors 12 A Colliers International publication

13 Metro Office CBD OFFICE COLLIERS INTERNATIONAL RESEARCH FORECASTS SYDNEY CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade gross face rents $ % A Grade net effective rents $ % A Grade incentives 31% 29% A Grade yields 7.1% 7.0% A Grade capital values $9,007 $9,335 A Grade vacancy rate 8.0% 6.2% Total market vacancy rate 7.4% 7.0% Supply additions (m²) 42, ,854 Leasing market Activity up as incentives plateau Sydney CBD recorded a 1 percentage point fall in vacancy over the six months to 1 January 2015 to reach 7.4 per cent. Leasing fundamentals strengthened with net face rents trending upwards, incentives stabilising or in some cases tightening and anecdotally a pick-up in demand recorded by our leasing team. The Colliers International Office Demand Index shows enquiry for the December 2014 quarter up 75 per cent compared to the December 2013 quarter. The greatest demand was for space of 3,000sqm and above, with this market up a record 173 per cent on the December 2013 quarter. The number of CBD deals brokered by Colliers International and the volume of floorspace taken both increased in the second half of 2014 compared to the first half, by 23 per cent and 32 per cent respectively. That said, the 31 per cent average incentive across the Sydney CBD remains historically high. A slight tightening of incentives for good quality B Grade and smaller tenancies across the CBD, on a case by case basis, has emerged reflecting strong demand, fewer quality options and the depth of the market for sub -300sqm suites. SYDNEY CBD A GRADE INCENTIVES VS VACANCY RATES Average A-grade incentives 35% 14% 30% 12% 25% 10% 20% 8% 15% 6% 10% 4% A-Grade Incenitves A-Grade Vacancy 5% 2% 0% 0% Jan-05 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 Source: PCA OMR/Colliers Edge Average net effective rents pushed upwards to reach $432/sqm for A Grade floorspace in the second half This was due A-grade vacancy rate 5 Martin Place, Sydney Leased on behalf of DEXUS Property Group & Cbus Property to incentives but increasing net face rents representing a solid 6.6 per cent increase over the last year. This growth was not distributed evenly across the CBD with the Core and Midtown recording the strongest rental increase and the Southern precinct remaining broadly static. Smaller business drives demand growth The majority of leasing activity in the second half of 2014 was attributable to consulting, IT&T, business services, marketing and communications related tenancies. These are services that companies typically outsource so their expansion is a positive indicator of economic conditions; however they also tend to be small occupiers of space. Encouragingly the larger local banks such as CBA and Westpac have requirements in the market reflecting their strong domestic performance. To date we have not seen expansions in large investment banks such as UBS and Merrill Lynch which historically were a major source of premium absorption, given that these are aligned with the international markets where there remains some concern. The tenant flight to quality recognised in our previous RFR has started to crystallise. Examples include Holman Fenwick William relocating from 201 Elizabeth Street to 1 Bligh Street; Challenger moving from 255 Pitt Street to 5 Martin Place; and Boardroom relocating from 201 Kent Street to Grosvenor Place. Centralisation of tenants continues to occur due to choice, the attractive deals and amenity on offer in Sydney CBD. Martin Place is enjoying a renaissance. For the first time in a long time large new floorplates are available and savvy tenants are capitalising on this opportunity. One Martin Place is leasing well with the Macquarie Group retaining space and DLA Piper, LinkedIn and the Australian Prudential Regulation Authority committing, although 20 Martin Place is still seeking commitments. CBD Office Research & Forecast Report First Half

14 Western corridor the one to watch A modest tightening of market conditions to benefit landlords is anticipated in 2015 as business confidence improves and consultancy, business services, IT, marketing and communications tenancies expand and take more space. Over the next 12 months slow improvements in incentives should occur on a case by case basis but there will be no dramatic fall given that the market for tenants remains highly competitive and space is spread out between a number of landlords. buyers in the second half of The Colliers International sales database recorded $5 billion worth of deals exchanging in 2014, some 70 per cent greater by value than 2013 and 28 per cent greater than Whilst foreign buyers have been acquiring some high profile assets, most have acquired assets suitable for residential redevelopment whereas our data indicates that the Sydney CBD investment market is still dominated by local players who accounted for 60 per cent of all transactions by value. SYDNEY CBD INVESTMENT SALES BY BUYER TYPE The Western Corridor will be the outperformer in 2015 off the back of significant space occupiers and investment which will underpin Offshore Domestic $4.95 bn improved confidence and sentiment. In December Insurance Australia Group (IAG) committed to 33,000sqm in Darling Park. IAG will be consolidating from three CBD locations, replacing the existing tenant PricewaterhouseCoopers (PwC) who will move to Barangaroo. Other major space occupiers such as Marsh Mercer Value of sales ($bn) $2.62 bn $2.91 bn $3.49 bn $2.86 bn and Suncorp are expected to make commitments to the Western Corridor over the course of The premium market will continue to offer tenants looking for flight to quality options with significant vacancies in Grosvenor Place, Aurora Place and Governor Macquarie Tower. Many of the most attractive A Grade assets are nearing full capacity and the tightly held nature of the market should encourage tenant activity. Demand will be pushed into the Core at the prime end. Investment market Local institutional buyers still dominate The Sydney CBD investment market has gone from strength to strength, with strong interest from domestic and overseas Source: Colliers Edge/RCA Two-tier investment market continues The second half of 2014 saw the continuation of Sydney CBD s two-tier investment market. This comprises both pure commercial assets and properties offering a higher and better use for residential or hotel/ serviced apartment accommodation. Sizeable sales prices are evident for assets with residential upside which far exceed their commercial book value. This is despite the degree of planning risk and often long lease periods to gain vacant possession prior to enabling conversion. Many overseas buyers view such acquisitions as an opportunity to gain a foothold in the Australian market, being less motivated by monetary return relative to value. They are prepared to invest based on a solid rental income, knowing that end residential sales values will be high. 175 Liverpool Street was acquired in November by Shimao Property from GIC for $ million at a circa 7 per cent yield. Telstra recently leased an additional 6,600sqm in this building and State and Federal government tenants are in occupation so it will take some time for conversion to be realised, demonstrating the willingness of investors to play a long term investment game. At the time of writing the Dalian Wanda Group s acquisition of Gold Fields House for $415 million had just exchanged. This is indicative of the persisting appetite for residential conversion opportunities in Sydney CBD from overseas parties. 2 Park Street, Sydney Leased on behalf of Charter Hall & The GPT Group There remains good interest in pure commercial assets from both onshore and offshore groups, particularly if there is some value add available through refurbishment or repositioning. The purchase of 52 Martin Place by REST Industry Super completed in July reflecting a 5.6 per cent yield and a strong capital value of $14,122/sqm. There was strong on and offshore purchaser 14 A Colliers International publication

15 Metro Office CBD OFFICE overseas investors who are prepared to pay a premium to access scale quickly. This includes the Mirvac portfolio of five non-core office assets across three cities, including 210 and 220 George Street in Sydney CBD which Colliers International is marketing. Supply, vacancy and demand Falling vacancy across the board 275 Kent Street, Sydney Valued on behalf of Blackstone demand for this asset attracted by the core location, quality, refurbishment apartments and strong lease covenants with WALE in excess of 30 years. With a sales value of $555 million this represented the greatest value Sydney CBD sale this year and the third greatest ever in the market. Interest in A Grade assets has been strong, including the Colliers International brokered 35 Clarence Street deal. This saw Challenger Life purchase this asset for $137.1 million on a 6.9 per cent yield. Yields were subject to moderate compression over the second half of 2014 bringing premium yields in the Core to 5.9 per cent and A Grade to 6.3 per cent on average, although subject to variability depending on the asset. This equates to a fall of 0.1 and 0.2 percentage points respectively. Demand for B Grade assets has seen a 40 basis point sharpening of yields over the last six months based on sales evidence. Strong investment outlook We expect to see a continuation of strong sales conditions over the next 12 months in both investment market tiers. Colliers International is continuing to register a high level of interest from Asian and European parties for Sydney CBD assets, a mixture of super high net worth individuals, REITs and pension funds. Domestic interest from institutions remains. The main limitation on sales activity is a lack of modern stock for purchase in the CBDs tightly held market. Portfolio and merger and acquisition (M&A) sales featured prominently in 2014 with CPA, Arena, Lend Lease Core Plus and Leightons representing significant ownership transfers will see more sales of this nature due to sheer weight of capital from The latest data from the Property Council of Australia indicates the Sydney CBD vacancy rate declined for the second consecutive six month period to 7.4 per cent across all grades. This is below the 10-year average of 8 per cent. Whilst the scale of residential conversions in the CBD is significant and will undoubtedly impact positively on leasing fundamentals, withdrawals will be staggered over a protracted time. This will water-down the immediate impact on vacancy rates in the context of the usual ebb and flow of withdrawals and absorption. The conversion trend is largely a B Grade phenomenon. Whilst it will force tenants into the market with positive implications for A Grade stock, the premium grade market which is feeling the most pain will be largely unaffected in the short term. Over time however the premium grade buildings stands to benefit from tenants pushing up in quality. Strong supply pipeline A test for Sydney CBD will emerge in the second half of 2015 with the completion of Towers 2 and 3 in Barangaroo and the resultant backfill. Approximately 229,000sqm of new build and refurbished office floorspace is due for completion in 2015 of which 57 per cent is pre-committed. This includes new floorspace at 5 Martin Place, 20 Martin Place, 225 George Street and 10 Shelley Street in addition to the first stages of Barangaroo. There is some concern about the CBD leasing market in 2016 and beyond due to a sizeable development pipeline equivalent to over 611,000sqm of office floorspace. The leasing market will continue to recover over the next two years and it is likely that this new supply will complete in a healthier leasing environment. Sydney CBD office supply remains fairly inelastic, restricted by physical space, the challenge in amalgamating sites and obtaining timely planning approvals. As such the medium to long term outlook for owners is considered positive although vacancy is likely to push upwards as new developments come online prior to growth in demand absorbing the slack. How else can we help you? Speak to one of our property experts today. [email protected] For further information please contact: Tom Duncan Manager Research Tel [email protected] CBD Office Research & Forecast Report First Half

16 Research and Forecast report First Half 2015 MELBOURNE CBD OFFICE Demand for CBD investment stock to continue unabated Once again, Melbourne witnessed a record year of CBD office investment sales, with volumes of just under $3.46 billion recorded, easily surpassing the 2013 figure of $2.36 billion. This is largely due to cyclical factors in not only Australian, but global capital markets, with the greatest ever volume of buy-side capital coinciding with record-low debt funding costs. The past year has cemented Melbourne s position as a focus for international investors. Both macro and microeconomic factors contribute to this, such as strong historic and forecast population growth, as well as reasonable economic conditions despite higher than average unemployment. On the micro side, Melbourne offers a strong total return performance and a yield premium to Sydney that makes Melbourne a focus for active offshore core investors. The flagship offering of 2014 was Cbus Property s dual offering of CBW (550 Bourke Street & 181 William Street) and 700 Bourke Street. These properties represented the largest ever core offering in Australia, and CBW was the largest ever office investment sale in Melbourne ($608.1 million) while 700 Bourke Street was the largest ever single-tenant office transaction in Australia ($433.5 million). Colliers International proudly marketed and sold both properties. On the buy-side, domestic institutions - in particular wholesale funds and direct super funds - acquired 65 per cent (by sales volume) of the property traded in 2014 for a combined total of $1.88 billion. GPT Wholesale Office Fund was the most active purchaser acquiring 655 Collins Street, 750 Collins Street, 2 Southbank Boulevard (50 per cent) and CBW (50 per cent). The largest acquisition by a single entity was AMP Capital Wholesale Office Fund s purchase of 700 Bourke Street for $433.5 million. Listed REITs were the most prolific sell-side class, divesting nine office buildings for a total volume of $1.32 billion. The motivation behind the majority of these sales was the divesting of non-core stock, however some (321 Exhibition Street as an example) were capitalising on favourable off-market buy-side approaches. Asian investors do remain active in Melbourne, however, in 2014 it was predominately developers acquiring secondary major office buildings for conversion of use to residential/hotel. Major examples of this trend were Fragrance Group s acquisition of 555 Collins Street for $78 million and the sale of 350 Queen Street off-market to Chinese investors for $130 million. 2 Riverside Quay, Southbank Sold on behalf of Mirvac Melbourne now boasts a long list of international institutional owners, with a total of approximately $3.5 billion of major CBD office buildings being owned by investors originating from Germany, Switzerland, UK, Sweden, South Africa, US, Canada, Singapore, Korea, Malaysia and China. Asia remains a key portion of their allocations to direct property and Melbourne is a particularly popular city within the Asian and Australian strategy. Whilst all will continue to be net buyers, activity is of course 16 A Colliers International publication

17 Metro Office CBD OFFICE dictated by various political, legal and return factors that regularly change in Australia, other global investment destinations and of course the investors country of origin. COLLIERS INTERNATIONAL RESEARCH FORECASTS MELBOURNE CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents $ % A Grade Net Effective Rents $ % A Grade Incentives 31% 30% A Grade Yields 6.8% 6.5% A Grade Capital Values $6,483 $6,956 A Grade Vacancy Rate 8.5% 10.1% Total Market Vacancy Rate 9.1% 9.2% Supply Additions (m²) 118, ,644 Leasing demand continuing to meet supply One of the largest deals to occur in 2014 was brokered by Colliers International at 700 Collins Street, Docklands. Metro Trains Melbourne, the operator of Melbourne s train network, leased 7,577sqm on space of levels This deal is significant in many ways, as it was the first major backfill deal to be completed in Docklands, and was a strong test of the market. Metro Trains Melbourne saw an opportunity to reuse the existing fitout, as well as take advantage of relatively generous market incentives that are currently on offer. The operator of Melbourne s tram network, Yarra Trams, has also committed to 5,500sqm of space at 555 Bourke Street. have reached their maximum levels, with very few owners willing to offer over 35 per cent, given that IRRs for institutional grade assets are already being stretched in the current investment market. The story is much the same for face rents, with only very moderate growth occurring over the last 6 months of Still, A Grade Face rents are at their highest levels ever, while Premium Grade rents are about $20/sqm below their peak levels in Maintaining Face Rents is of significant importance for many institutional owners, as annual rental growth on any deals brokered is measured off the Face Rent, giving the owners guaranteed future income levels that in some cases make up for the incentive that was required to sign the tenant. Secondary market activity on the rise The secondary office market is seeing a lot of activity at present, driven predominantly by lease expiries which is encouraging tenants to look for alternative options. Colliers International is aware of over 200,000sqm of secondary grade office space that is occupied by tenants whose leases are expiring over the next three years. Many of these tenants are fully aware of leasing market conditions and opportunities that abound to upgrade to newer, higher grade space, given the relative affordability of A Grade space in Melbourne compared to other Capital City CBDs. Some large secondary grade deals have already occurred, with Central Queensland University (CQU) taking around 8,000sqm of space at 120 Spencer Street, and Monash University taking 6,570sqm of space at 271 Collins Street. These two deals are strong positives for net absorption in the Melbourne CBD, as Yarra Trams will mostly be coming out of South Melbourne, while most of the space that Metro Trains Melbourne will be vacating at 1 Spring Street and 80 Collins Street, the latter of which has been committed to by State Government departments. This means that there won t be a large backfill legacy that can occur when a major deal is done in the CBD. Incentives here to stay in the medium term Despite our contention that the vacancy rate will not blow out to double figures in 2015 or beyond, we still expect that incentives for Melbourne CBD office space will remain at current levels for the remainder of the year. While demand continues to be reasonable, supply levels are remaining high which will mean landlords will need to remain competitive with incentives in order to attract major tenants. That being said, we do think incentives 171 Collins Street, Melbourne Leased on behalf of Cbus Property & Charter Hall CBD Office Research & Forecast Report First Half

18 These deals also highlight the growing importance of the education sector to the Melbourne CBD market. The education sector also seems to be expanding further, with the recent announcement of the opening of a new secondary college in the CBD to cater predominately for overseas students. If this venture is successful, it has the potential to create a new base of demand for secondary grade space. MELBOURNE CBD OFFICE LEASE EXPIRIES 350, ,000 well-fuelled both domestically and offshore and as such there are deep buyer markets for products of all types. There has been extensive buy-side capital for core stock for some years now and it is the core-plus markets that are forecast to activate further in 2015 as the improved leasing markets drive investor returns. MELBOURNE CBD OFFICE SALES VOLUMES $4,000 $3,500 $3,000 m 2 250, , ,000 $AUD m $2,500 $2, ,000 $1,500 50,000 $1, Prime Secondary $500 Source: Colliers Edge $ Investment market Whilst cap rates for core office stock appear to be at or near the previous lows of 2007, the conditions of capital markets still demonstrate significant net demand, indicating cap rate compression is not yet at an end. Furthermore, cap rates for secondary CBD office stock and metropolitan markets remain relatively attractive and are still a reasonable distance above previous lows. The ability to reposition, lease up, upgrade or completely change a secondary asset s use to a higher and better use are often the buy side factors that motivate private buyers. Source: Colliers Edge Supply, vacancy and demand New supply met with good take up rates In the first half of 2015, we expect that two new buildings will reach practical completion. The first being 567 Collins Street, the first Premium Grade building to be built in Melbourne since the The above factors combined with slowly improving leasing markets and an ongoing low interest rate environment (including the prospect of further cuts to the Reserve Bank cash rate) point towards another full year of cap rate compression in Investment stock supply is expected to come from similar channels in 2015 as it did in Domestic institutions will inevitably continue to divest non-core stock, and Melbourne s extensive development pipeline will continue to shape both our streets and core transactions and opportunistic owners will no doubt capitalise on aggressive buy-side approaches. Furthermore, Melbourne is blessed with a much higher proportion of A Grade stock than any other CBD market, (49 per cent compared to 37 per cent in Sydney and 40 per cent in Brisbane) and it is this stock which is typically transacted on by institutional owners. While Premium Grade stock is highly sought after, it is also tightly held, particularly in Melbourne. Supply levels are anticipated to be met with a much higher level of demand. Wholesale and retail markets on the buy-side are 700 Bourke Street, Docklands Sold on behalf of Cbus Property 18 A Colliers International publication

19 Metro Office CBD OFFICE early 1990s. 567 Collins Street is almost 80 per cent pre-committed, with two of the major tenants Leightons and Jemena coming from outside the CBD, so contributing positively to net absorption. The upcoming move of law firm Corrs Chambers Westgarth to 567 Collins Street, will leave some backfill at 600 Bourke Street, which will see a further slight rise in the Prime Grade vacancy rate come July The other major completion for the first half of 2015, assuming current timelines remain in place, is AGL s new headquarters at 699 Bourke Street. Charter Hall s new 27,000sqm development at 570 Bourke Street is also due to reach practical completion around mid year. Vacancy rate still moderate, in the face of increasing supply The vacancy rate recorded for January 2015 has seen a minor uptick to 9.1 per cent, from 8.2 per cent in July The completion of 150 Collins Street, 70 per cent occupied by Westpac, has created a major backfill options in the CBD, being 16,000sqm of space at 360 Collins Street. The potential to expand the floors means up to 24,000sqm could be available. The 47,000sqm 720 Bourke Street, new headquarters to Medibank, also reached practical completion in the second half of 2014, with 10,500sqm of remaining space in the building available for lease. Over the six months to January 2015, an additional 87,795sqm of office space was added to total stock, and net absorption was almost 40,000sqm. This has left almost 50,000sqm of additional vacancy on the market, and is a strong indicator that incentives are going to remain at current levels for the remainder of the year. Law firms dominating demand for prime grade space The traditional main driver of demand in the Melbourne CBD has been from the Professional Services sector law firms and accounting firms. In 2015, this trend looks set to continue, with major firms in the legal sector currently on the hunt for the Prime Grade space in the Melbourne CBD. Known briefs out in the market include King & Wood Mallesons, Clayton Utz, Minter Ellison and Norton Rose. At least one of these requirements has the potential to be the major pre-commitment to kick start the next major new building in Melbourne. 818 Bourke Street, Docklands Sold on behalf of The GPT Group government services, and Sydney which is quite exposed to the financial services sector (although Sydney too is becoming more diverse with the emergence of the technology sector as a major occupier). Melbourne has seen an average of 130,000sqm of new supply enter the market each year for the past 10 years, and over this time vacancy has never reached double figures. Strong population growth is expected to be the key contributer to demand remaining solid over the coming supply cycle. MELBOURNE CBD OFFICE MARKET VACANCY & ABSORPTION Six Month Net Absorption (m 2 ) 150, ,000 50,000 0 Forecast 9.2% 15.0% 10.0% 5.0% 0.0% Total Market Vacancy Rate One of the enduring strengths of the Melbourne CBD office market is the depth of demand available. Melbourne is not particularly beholden to any particular sector for office demand, unlike Brisbane and Perth who are heavily reliant on mining and -50,000 Source: PCA OMR/Colliers Edge -5.0% How else can we help you? Speak to one of our property experts today. [email protected] For further information please contact: Anneke Thompson Associate Director Research Tel [email protected] CBD Office Research & Forecast Report First Half

20 Research and Forecast report First Half 2015 BRISBANE CBD OFFICE Investors adopt a longer term approach Throughout the first half of 2014, the Brisbane CBD office leasing environment faced difficult conditions. This was consistent with the state economy s slow growth due to contraction within the resource and energy sector and rationalisation in the public sector leading to withdrawals, and subdued business confidence. As a consequence, high vacancy levels and weak tenant demand defined the office landscape. In the second half of the year, incentives plateaued while rents stagnated and vacancy rates achieved record high levels. Meanwhile, available sublease space reduced notably as a result of tenants taking advantage of the attractive lease terms offered by landlords. Despite these weak market indicators, there are tentative signs of a return to improved market conditions. Leasing activity has gained momentum and while the majority of the activity appears to have been a reflection of business consolidation, some business sectors have undertaken expansionary activity. Notably legal and financial firms have actively sought new and larger space and in some cases doubled their space requirements. However, late 2015 will see the new tranche of supply enter the market putting further upward pressure on vacancy rates and incentives. In particular, tenant movement into new development coupled with potential business consolidation is expected to broaden the sublease market. Australian ten year government bond yields have dropped to record lows as global investors continue to seek low-risk assets amid concerns relating to deflation in Europe and the impact on low oil prices on energy and producer companies. Institutions are being driven to reweight portfolios with increased exposure to suitable property assets. Subsequently REIT s and foreign entities have been driving the renewed activity in the Brisbane market. However, the volume of activity for prime assets has been constrained due to ongoing limited core asset availability. Despite the PCA data showing net absorption to be negative, there are some signs of improvement for office demand in the Brisbane CBD. Employment data indicates that there have been gains in the property and business services sector. The expectation going forward for the Queensland public sector is for a moderate increase in employment with gradual growth projected after According to Deloitte Access Economics, white collar employment growth will peak in as public sector begins to increase workforce particularly following the outcome of the State election. More encouraging news is that the LNG projects underway will delay the impact of the construction cliff with a surge in gas exports forecast from 2016 positively impacting the state s revenue. COLLIERS INTERNATIONAL RESEARCH FORECASTS BRISBANE CBD OFFICE INDICATOR CURRENT 12 MONTHS Average A Grade net face rents $522 $516 Average A Grade net effective rents $456 $451 Average A Grade incentives 33.5% 32.5% Total market vacancy rate 15.6% 14.3% Average A Grade yields 7.00% 7.50% Average A Grade capital values $7,460 $6,880 Supply additions (m²) 0 0 Leasing market Leasing activity gains momentum The bottom of the Brisbane CBD property cycle manifested during the second half of 2013 and first half of Net absorption was at historical lows with contraction in the mining and resources sector, the State Government s accommodation strategy, along with backfill due to new development commitments accounting for negative net absorption. Coupled with this was the high vacancy notably in the B Grade market. During the second half of 2014, the market has been showing tentative signs of a return to improved conditions with the volume of transactions increasing. 20 A Colliers International publication

21 Metro Office CBD OFFICE The quantum of confirmed office space leased during 2014 amounted to 114,161sqm, representing nearly a doubling from the previous year, with the second half of the year accounting for around 45,000sqm of the transaction volume alone. The majority of activity was in the financial services sector within the A Grade market (30 per cent). While many of these transactions were as part of business consolidations, some business industries undertook expansion. Growth has been particularly strong in the legal sector, with CBP Lawyers, HWL Ebsworth and Shine Lawyers increasing their floor areas. Coinciding with this has been the increase in average floor area transacted during 2014, which rose to 880sqm. BRISBANE CBD LEASE VOLUMES YTD 2014 to around 50,000sqm in second half of 2014 representing take-up of new space and also withdrawals. The majority of sublease space on the market is now in the construction and infrastructure sector. However, the imminent completion of 480 Queen Street will result in an additional 32,000sqm pending as tenants will relocate to the new development upon its delivery in Thus, volatility in the sublease market is inevitable. Business contraction and consolidation along with tenant migration into new buildings will continue to contribute to fluctuations in the sublease market in the short term. Investment market 120, , Foreign exposure increases Leasing Volumes (m²) , , , , Leasing volume Average floor area Source: Colliers Edge Rental growth remains subdued Premium and A Grade rents saw little to no uplift in the second half of 2014 with average incentives plateauing. While overall demand is expected to slowly strengthen, rental growth is likely to remain fairly flat for at least the next 12 to 18 months. Average floor area (m²) Australian and offshore institutions dominated the Brisbane CBD office landscape in There was a rising trend in foreign investment representing 41 per cent of the total volume of investment sales for core assets. Investment managers, banking and holding groups from the USA, Malaysia and Singapore defined the offshore buyers. Offshore groups tend to target assets with stable long term income profiles such as 50 Ann Street (State Law Building) fully leased to the State of Queensland with a WALE of 6.41 years. However more recently, there has been an increase in foreign The prime market continues to be highly sought comprising a 70 per cent share of the leasing volume during The ongoing trend of flight to quality has not been as prevalent in Brisbane compared to Sydney or Melbourne, although there is more evidence of this occurring with tenants shifting to better quality premises in light of the competitive lease terms on offer. Tenant migration from Fringe to CBD locations has been a feature with BIS Industries, BVN Donovan Hill and Uniting Care consolidating and relocating to the CBD over the last six months given the affordability of the CBD in the prevailing soft leasing market. In contrast, the secondary market continues to be volatile experiencing high vacancy levels, capital investment pressures for asset refurbishment and competitive parameters to secure tenants. Vacancy rates increase while available sublease stock falls Despite overall vacancy rates increasing, the reduction in available sublease stock provides some indication that the market is beginning to show some correction transitioning away from a resources driven sector. Analysis indicates that available sublease space has reduced markedly from 86,000sqm in the first half of 480 Queen Street, Brisbane Leased on behalf of Grocon & DEXUS Property Group CBD Office Research & Forecast Report First Half

22 transactions for secondary assets offering value proposition for the potential of capital appreciation. At the time of writing, Investa s 363 Adelaide Street tower exchanged hands. The US private equity group, Valparaiso Capital Partners, acquired the secondary asset for $47.5 million and is planning its conversion into high end student accommodation. Further to the acquisition of secondary assets, 2014 saw an increase in foreign investment appetite for sites offering development potential Pent-up underlying demand due to the lack of core investment grade stock on the market has seen investors take indirect approaches of acquiring funds such as development fund through and the portfolio purchase of REITs. LaSalle Investment Management acquired the Lend Lease Core Plus Portfolio comprising six office buildings in Sydney, Brisbane and Melbourne totalling around $285.5 million. This included 414 George Street in the Brisbane CBD along with Valley Metro and Transport House, and Abigroup House. With the continuing fall in the Australian dollar and the accommodative institutional debt markets, this may lead to further acquisitions in the Brisbane CBD, particularly as investors become more asset starved as a result of portfolio acquisition and limited new prime supply. BRISBANE CBD OFFICE INVESTMENT SALES BY BUYER TYPE 100% 90% 80% 70% 60% 50% 40% YTD and yields does not indicate any evidence of yield tightening in Brisbane in the second half of Nevertheless, investor risk appetite continues as the yields on commercial property remain attractive compared to other asset classes. Although there is no compelling catalyst for a rapid rebound in the Australian economy, the low interest rate environment is expected to limit the risk for widespread falls. Institutional investors have been active in the market with the Australian investment manager, Challenger Life, continuing its commercial property acquisition cycle with the purchase of 53 Albert Street. The A Grade asset with a strong lease profile was acquired from private company Hatham Holdings for $211.7 million. The property has a long term lease in place with State Government reflecting its status as long term and a safe investment, trading on an equivalent reversionary yield of 6.75 per cent. Besides the desire to secure high yielding commercial assets particularly ones with longer WALEs or those that provide value proposition in light of their conversion potential, investors have also been on the hunt for commercial assets for business occupation. For example, the Royal Automobile Club of Queensland (RACQ) purchased an office tower at 60 Edward Street for $60 million from AMP Capital. RACQ had been searching the market for 12 months and sought to consolidate their three offices with the asset s upcoming lease expiry suiting their requirements. While the impact of leasing market fundamentals is likely to be initially neutral to yields, as demand improves, occupancy is expected to drive yield compression. Subsequently over time, improvements in the leasing market should translate into rental growth and a new wave of yield compression. 30% 20% 10% 0% Private Foreign Institution Corporate Source: Colliers Edge/RCA Capital flows supported Last year the Brisbane CBD experienced weaker capital inflow for office investment sales. $872 million of office stock changed hands, which was a considerable reduction from the level of activity witnessed in 2013 ($2.5 billion). That said, a significant volume of transactions in the preceding year was due to the State Government s sale of its commercial asset portfolio. Investment markets are reacting to the recent weakness in the occupier market. Capital flows into commercial office has been concentrated into prime assets offering core style returns and reflective of lower risk. Despite the sizeable capital in the market, a lack of core assets and record spreads between bond 175 Eagle Street, Brisbane Valued on behalf of Charter Hall Wholesale Management Limited 22 A Colliers International publication

23 Metro Office CBD OFFICE ONE ONE ONE Eagle Street, Brisbane Leased on behalf of The GPT Group Supply, vacancy and demand Financial terms drive pre-commitment Pre-commitment activity remains strong in 480 Queen Street (55,691sqm) due to the attractive financial terms offered by landlords, with DLA Piper and HWL Ebsworth signing deals for 2,800sqm and 5,161sqm respectively. This brings total pre-commitment levels to around 80 per cent. Daisho s 180 Brisbane Street (59,100sqm) has also secured CBA as its anchor tenant taking on 10,531sqm of space. The speculative development will be the first of the three new developments due for completion in the second half of 2015 meaning that a further 48,600sqm of space will be available. CBA will leave behind approximately 12,000sqm in 240 Queen Street, which is expected to be refurbished and returned to the market. In addition to these developments, ISPT s 155 Queen Street will have a 2,200sqm office component and is planned for delivery in the second half of Beyond these developments, Malaysian developer Shayher Group is transforming the former Supreme Court site at 300 George Street into a mixed-use development. A 47,000sqm commercial tower is proposed and mooted for completion circa 2018 demonstrating the risks taken by foreign investors to get a foothold in the market. Backfill and sublease space threaten The biggest driver that will be pushing vacancy higher over the next 18 months will be refurbished backfill and sublease space coming onto the market particularly with the delivery of 180 Brisbane Street and 480 Queen Street. The outcome is expected to be discounted rents to the effect where tenants may now have the option of taking a sublease in a higher quality building for a shorter term. Consequently flight to quality with movement from Fringe to CBD locations may be a more discerning feature. Accordingly, in order to remain competitive and secure tenants, landlords of secondary assets will be under increased pressure to refurbish and reposition their property. Stock withdrawals to counteract new wave of supply Due to weakened market conditions, the vacancy rate has risen to 15.6 per cent in January 2015 representing the highest recorded level. It is expected to peak in 2016, increasing in the order of up to two per cent as it coincides with the delivery of new developments. The substantial wave of new supply and corresponding high vacancy levels will be offset to some degree by stock withdrawals. As part of the Queen s Wharf precinct, around 70,000sqm of supply is expected to be withdrawn. However, in light of the political uncertainty, its timing is now unknown. Withdrawals coupled with residential and hotel conversions of other CBD office stock will also help to alleviate elevated vacancy levels. How else can we help you? Speak to one of our property experts today. [email protected] For further information please contact: Vivienne Bolla Senior Analyst Research Tel [email protected] CBD Office Research & Forecast Report First Half

24 Research and Forecast report First Half 2015 PERTH CBD OFFICE A tenant s market That the Western Australian economy is experiencing a cyclical downturn should come as no surprise to anyone who has followed economic and market conditions over the past few years. What may be surprising, however, is the velocity and depth of the correction over the past 12 months. Colliers International analysis has stated for some time now that the boom conditions of could not be expected to continue over the longer term. The massive amount of resource sector project investment in WA over this period represented the high watermark for the country as a whole, as well as the State. Deloitte Access Economics numbers indicate that in the five years to the December quarter 2014, total private construction and equipment investment in WA topped $285.2 billion. The projected investment for the subsequent five years to the December quarter 2019 is just over $208 billion, or some 73 per cent of the preceding five year period. Moreover, much of the investment to come is expected to occur in the early part of the next five-year period and to taper towards the back end as the construction phases of major oil and gas projects like Gorgon, Wheatstone and Prelude approach. Probably more than any other state, WA is subject to fluctuations in the resource sector project construction pipeline. The projected annual average expenditure profile for the state out to (according to DAE) sits at around $42.9 billion pa, or slightly above the 10-year average to , but some 23 per cent lower than the peak five-year period to In its October 2014 release, the Bureau of Resources and Energy Economics reported a pipeline of feasibility stage and publicly announced projects valued at approximately $118 billion. This is work that is over and above committed and under construction projects was long expected to be a challenging year for WA, with growth in nominal gross state product stalling to less than 1.5 per cent and final demand going backwards in real terms by about 3.5 per cent. The State s unemployment rate jumped to 6 per cent in December 2014, up from 5.3 per cent in the previous month, and this number is probably reflective of the investment contraction flowing through to other sectors. The unemployment rate is expected to hover around this figure over the next three to four years, although may rise as the current housing construction cycle draws to a close. Even given the moderation in project investment, the populations of Perth and WA continue to grow albeit at a slower rate than the peak achieved at the height of the resources sector boom. 197 St Georges Terrace, Perth Leasing and management by Colliers International Population growth is expected to continue because the primary driver of employment, and hence population growth resource sector investment is still there, and at a rate that remains approximately four times higher than the average. The long run population growth averages, the pipeline of investment that remains and projections of state final demand strongly indicate continued population growth over the medium to longer term. 24 A Colliers International publication

25 Metro Office CBD OFFICE Not surprisingly, given the exposure of the Perth market to the resources sector and its supporting technical and engineering services, the CBD office market is experiencing tougher conditions. The Property Council of Australia has recorded a vacancy rate of 14.8 per cent in its January 2015 office market snapshot, marking a jump of 3 percentage points from the July 2014 result. In terms of available or competing space that is strictly identified vacant space and space that may currently be occupied, but is advertised as available as well as space that Colliers International understands is about to become available, we estimate the actual amount of available CBD office space to be around 17 per cent of the overall market. In the absence of any unanticipated project investment drivers, CBD office market conditions are unlikely to improve in the near to medium term. Colliers International expects the vacancy rate will continue to rise over the next 12 months, with ongoing downward pressure on net face rents and upward movement in incentives. COLLIERS INTERNATIONAL RESEARCH FORECASTS PERTH CBD OFFICE MARKET FORECASTS INDICATOR CURRENT 12 MONTHS A Grade net face rental growth $613 $582 A Grade net effective rental growth $398 $349 A Grade incentives 35.0% 40.0% Total market vacancy rate (PCA) 14.8% 18.5% A Grade yields 7.88% 7.88% A Grade capital values $7,778 $7,391 Total supply additions (m²) 24, ,313 Source: Colliers Edge Leasing market The Perth CBD office market conditions clearly favour tenants, with softening rents and increasing incentives. Increased vacancy and low demand has seen rents contract over quarter four 2014, most notably in Premium and B Grade space. A Grade rents were relatively stable in the December 2014 quarter, following larger corrections earlier in the year. There is still some degree of flight to quality occurring in Perth and this is expected to continue, resulting in B Grade rents in particular coming under further pressure with face rents contracting 1.7 per cent to average $430/sqm over quarter four following a 10.3 per cent contraction over quarter three The increase in Premium vacancy to 8.5 per cent and stronger competition from lower A Grade space meant Premium face rents also moderated over quarter four, down 1.6 per cent to an average of $775/sqm. St Georges Centre, 81 St Georges Terrace, Perth Leased on behalf of North East Equity Pty Ltd Incentives for Premium space are presently ranging between 25 per cent and 30 per cent. A Grade incentives remain more or less stable at an average of approximately 35 per cent, although some deals have exceeded 40 per cent. B Grade space incentives sit marginally higher than A Grade at this stage. PERTH CBD AVERAGE NET FACE RENTS Net Face Rent ($/m 2 ) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Source: Colliers Edge CBD Premium Grade CBD A Grade CBD B Grade Forecast Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 CBD Office Research & Forecast Report First Half

26 Investment market 2014 was a quiet year for investment transactions, with the total value of deals done in the city amounting to approximately $126 million. This figure does not include a fringe CBD transaction at 130 Stirling Street for $90 million, which occurred earlier in In addition, there were two entity level transfers amounting to $504 million. The December quarter of 2014 saw just one transaction the sale of 220 St Georges Terrace for $35 million. Despite a dearth of transactions, yields for Premium and A Grade Assets have either remained static or tightened slightly in quarter four. Yields range between 6.65 per cent and 7.05 per cent for Premium and 7.5 per cent to 8.25 per cent for A Grade assets. B Grade yields softened at the lower end of the range, due to weaker market conditions for lower-grade assets. The low interest rate environment has meant strong demand for yielding assets, with sellers proving reluctant to transact. The market appears to be favouring retention rather than the disposal of good-yielding assets. Despite fairly stable yields, softer rents have resulted in a moderation in capital values over quarter four Secondary grade assets have performed less well over 2014, as many of these require significant capital expenditure to be competitive in the leasing market against the availability and pending supply of new A Grade assets. Capital values for Premium Grade assets are estimated to average $11,335/sqm, down marginally from $11,475/sqm in quarter three A Grade capital values eased by around 4 per cent to an average of $7,780/sqm, while B Grade assets fell to an average of $4,650/sqm. PERTH A GRADE YIELD RANGE 11% 10% 9% 8% 7% 140 St Georges Terrace, Perth Leasing on behalf of AMP Supply, vacancy and demand Western Australia s white collar employment growth, according to Deloitte Access Economics (DAE), has continued to ease. Colliers International believes that increases in vacancy in the 12 months to quarter four 2014 and a higher unemployment rate isuggest no in white collar employment growth in the Perth CBD and West Perth. 6% 5% 4% 3% Jun-10 Dec-10 Source: Colliers Edge Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Iron ore, oil and gas and major infrastructure projects will continue to lead investment spending, providing some white collar employment support. DAE forecast unemployment to edge marginally higher and peak at 6.1 per cent in As a result, there are expectations that white collar employment levels will stabilise and improve from , driven by increasing population and the associated employment growth with less reliance on resource sector capital expenditure. Resource sector job losses may have plateaued, but the extent of non-resource sector white collar employment generation is yet to become apparent. 26 A Colliers International publication

27 Metro Office CBD OFFICE According to the PCA, the second half of 2014 saw 24,097sqm of space added to the CBD market as a result of the delivery of 863 Hay Street and 565 Hay Street. 565 Hay Street is fully committed by the State Government, but 863 Hay Street still has 4,200sqm of uncommitted space with a further floor of committed space now available for sub-lease. Colliers International estimates 203,608sqm of office space is either under construction or refurbishment in the CBD, with 188,713sqm of this being new build. Buildings to be completed and added to stock over the next nine months include: The Old Treasury redevelopment at 28 Barrack Street (30,000sqm building, which is 100 per cent pre-committed), the first of the four Kings Square buildings (KS1, KS2, KS3 and KS4 totalling 65,781sqm) and Brookfield Place Stage 2 (34,000sqm). The total additional space coming into the market over the remainder of the year is expected to result in approximately 53,000sqm of backfill space becoming available, and this will be one of the factors that drives the anticipated spike in vacancy rates by the beginning of According to the PCA, Perth CBD vacancy was 14.8 per cent as at January 2015, up from 11.8 per cent six months earlier. Net absorption over the second half of 2014 was -30,582sqm, bringing the total net absorption over the previous twelve months to -67,270sqm. This would indicate that white collar employment, and hence base office demand, could be weaker than suggested by DAE estimates and forecasts. A significant increase in vacancy was experienced in most grades, with negative absorptions over 2014 in Premium, A and B Grade buildings of 21,057sqm, 11,229sqm and 24,645sqm respectively. PERTH CBD OFFICE SUPPLY, NET ABSORPTION & VACANCY RATE Supply & Net Absorption (m 2 ) 200, , , , , ,000 80,000 60,000 40,000 20, ,000-40,000-60, % Forecast Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Vacancy rate Total Supply 6 mth Net Absorption (m²) Total Vacancy Rate (%) Source: Colliers Edge/PCA PERTH CBD OFFICE SUPPLY 60, Mooted 212,694m² Total office space (m²) 50,000 Completed - 18,592sqm 40,000 30,000 20,000 Under Construction 203,608m² 10,000 0 Source: Colliers Edge Uncommitted Refurbishment Uncommitted New Committed Refurbishment Committed New 256 Adelaide Terrace, Perth Leasing on behalf of Far East Organisation How else can we help you? Speak to one of our property experts today. [email protected] For further information please contact: Michael Knight Manager Research & Economics Tel [email protected] CBD Office Research & Forecast Report First Half

28 Research and Forecast report First Half 2015 ADELAIDE CBD OFFICE Investment activity at all time highs During 2014 investment activity in the Adelaide office market reached an all-time high with just under $700 million of assets changing hands. Institutional purchasers were very prominent with Lend Lease, Charter Hall, Dexus/CPP Investment Board, and Cbus Property all purchasing assets. Many institutional investors are in an acquisition phase and this has driven yield compression in most CBD office markets. Portfolio sales were also prominent during the year with SachsenFonds selling four assets and the national portfolio sale of the Commonwealth Property Fund, which included commercial assets in the Adelaide market. The largest single asset sale during 2014 was the 50 per cent share sale of the ATO building which was sold by Aspen to Charter Hall for $99.5 million. This transaction included a 12,000sqm development site which is the remainder of the City Central development site. per cent. This is around 20 basis points lower than at December With the current high demand for assets and the likelihood of interest rates remaining at low levels in the Adelaide market it is likely to see some further yield compression during 2015 for Prime grade assets. Vacancy in the Adelaide office market has tightened over the last six months to be 13 per cent as at January This is largely due to the withdrawal of 1 King William Street which will undergo a significant refurbishment. If this building remained in stock, vacancy would have remained largely unchanged. There was a significant improvement in tenant enquiry during the third quarter The Adelaide CBD office market however is still offering higher yield assets when compared to other CBD office markets. Current prime grade yields in the Adelaide CBD office market are almost 200 basis points higher than the Sydney CBD and around 150 basis points higher than the Melbourne CBD. Compared to last year the level of enquiry has improved, with a range of institutional and private investors being very active. Private investors are still looking for investment opportunities having purchased several assets during 2014 including 151 Pirie Street, 100 Pirie Street, 22 King William Street and 44 Waymouth Street. Demand for quality CBD investment assets continues to grow, with a diverse range of investors now in the market looking to secure investments. Competition for prime quality assets has strengthened due to demand from institutional investors which have recapitalized, together with a more active private investor market. Small private investors have returned to the market with most chasing higher yielding investments which are showing better returns than the share market or cash. Large domestic and off-shore institutions are also in the market looking for prime quality assets with long lease terms to secure tenants. Evidence of yield compression for prime grade assets in the Adelaide office market has emerged with A Grade yields currently quoted at Franklin Street, Adelaide Leased on behalf of FYD Investments Pty Ltd 28 A Colliers International publication

29 Metro Office CBD OFFICE of 2014, but this was not sustained into the fourth quarter. Although leasing activity remains active, particularly for prime quality space, the amount of space leased has not had positive impact on net absorption. In several cases the amount of space leased is smaller than the space previously occupied as several tenants move towards activity based workplaces. This trend combined with a lack of withdrawal of secondary grade space for alternative uses has resulted in a persistently high vacancy rate in the Adelaide CBD office market. COLLIERS INTERNATIONAL RESEARCH FORECASTS ADELAIDE CBD OFFICE INDICATOR JULY 2014 JANUARY 2015 Grade A Gross Face Rental Growth 0.7% 0.48% A Grade Net Effective Rental Growth 0.2% 0.4% Prime Incentives 25% 30% Total Market Vacancy Rate 13.8% 13.5% Prime Grade Yields 7.90% 7.80% Prime Grade Capital Values (per m 2 ) $4,800 $4,900 New Supply Additions (m 2 ) 0 19,883 Leasing market Activity based work model impacts on net absorption Although there were several significant lease deals signed during 2014, there was limited impact on net absorption over the last six months. This is due to several major tenant moves which have resulted in less space being occupied in their new accommodation compared to their previous accommodation. The largest of these was Origin Energy which relocated from 1 King William Street to 100 Waymouth Street. With this lease, Origin will be occupying around 2,000sqm less space than in their previous accommodation. This is one example of several larger lease deals over the last 12 months which has seen a contraction in space occupied. This combined with sluggish growth in white collar employment has resulted in well below average net absorption and a therefore a higher vacancy rate. Some of this can be attributed to the adoption of the activity based working (ABW) model by some major tenants, which requires much lower occupation ratios than traditional work space environments. There is also less reliance on a paper filing system which improves the amount of space which needs to be occupied. The ABW model has been widely adopted by tenants in the eastern seaboard, with parts of this model adopted in the Adelaide market over the last two years. New construction cycle starts to slow On the plus side there is a very limited new supply pipeline in the Adelaide CBD over the next two to three years. The only building currently under construction is 50 Flinders Street, which will be 80 per cent occupied by People s Choice Credit Union and Santos on completion. Although there are several projects in the pipeline it is unlikely that they will commence without a significant pre-commitment. The mostly likely project in the pipeline is the development of the Courts Precinct, which would see the Courts and some other government departments relocate to the new development. This project is still in the tender process and notably the timelines regarding the awarding of the contract initially proposed have not been met. This means that the construction time lines will need to be altered and may not be in line with key lease expiries for tenants which are earmarked to move. The most significant refurbishment in the Adelaide market will see most of 1 King William Street removed from supply to undergo a significant refurbishment given Origin Energy have now vacated. It is likely that this space will be returned to stock in mid When will growth occur? White collar employment is expected to improve during 2015, but forecasts suggest that this improvement is unlikely to see significant falls in vacancy over the year. Vacancy is expected to remain above 11 per cent for at least the next two years, although Prime grade vacancy is expected to fall far faster than secondary grade vacancy. The elevated vacancy rate will result in restrained rental growth over the next 12 months, with incentives forecast to remain at current levels during Franklin Street, Adelaide Sold on behalf of Hui Ma Property Development Pty Ltd CBD Office Research & Forecast Report First Half

30 ADELAIDE CBD OFFICE MARKET AVERAGE GROSS FACE RENTS $600 Forecast $500 ($ per m²) $400 $300 $0 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Source: Colliers Edge Premium A Grade B Grade Investment market Sales volumes hit an all time high Transactional activity in the Adelaide CBD office market hit an all-time high during 2014 with $ million of assets changing hands during the year. This will surpassed the last high in 2011 of $520 million. Transaction value was boosted by two major portfolio sales including the Commonwealth Property Fund national portfolio sale and the Sachsenfonds sale of all of their Adelaide assets. Institutional purchasers have been an active purchaser for prime grade assets and major portfolios with Charter Hall, Dexus/CPP Investment Board and Lend Lease all purchasing properties during the year. This increase in activity has resulted in a tightening in A Grade yields which are currently quoted at 7.9 per cent. Secondary grade yields have also tightened on the previous year and are currently quoted at 8.5 per cent, which is significantly tighter than in the 9.35 per cent quoted in December It is expected that there is scope for further tightening of yields for prime grade assets during SachsenFonds sells their Adelaide portfolio The SachsenFonds portfolio of four properties was offered to the market last year three of which were sold to Lend Lease with the remaining asset sold to Primewest. Lend Lease acquired a portfolio which included two office buildings including 60 Flinders Street, 80 Flinders Street and a carpark at Wyatt Street. This portfolio was sold for $153 million to Lend Lease. Equivalent yields for each property were as follows: 60 Flinders Street 8.51 per cent; 80 Flinders Street 8.02 per cent; and Wyatt Street 7.47 per cent. The asset acquired by Primewest at 60 Light Square was sold for $22 million with and equivalent yield of 8.34 per cent. 100 King William Street, Adelaide Selling on behalf of a private investor Prime quality assets still in demand The depth of the buyer pool for Prime Grade assets appears to continue to improve through This is mainly due to the return of institutional investors in the Adelaide market which accounted for 79 per cent of the purchasers during This however is a smaller share than in 2013 when institutional purchasers accounted for 85 per cent of the total transactions in the year. Private investors have also remained active during 2014 with this purchaser group tending to look for higher returns than in the share or cash markets. TOTAL INVESTMENT ADELAIDE CBD OFFICE Millions $800 $700 $600 $500 $400 $300 $200 $100 $0 Source: Colliers Edge A Colliers International publication

31 Metro Office CBD OFFICE ADELAIDE CBD OFFICE MARKET AVERAGE YIELDS (Average equiv. rev. yield %) 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% Jun-10 Source: Colliers Edge Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Premium A Grade B Grade Supply, vacancy and demand The construction cycle in the Adelaide market is slowing with only one new building to complete this year, and limited new supply on the short to medium term. Total vacancy has fallen to 13.5 per cent in January 2015 compared to 13.8 per cent in July This fall in vacancy is mainly due to stock withdrawal for refurbishment rather than an improvement in demand. Net absorption of the six months to January 2015 was recorded at -5,697sqm, which brought annual net absorption to -18,703sqm. Despite forecast improvements in white collar employment during 2015, vacancy is expected to remain high over the medium term. Prime grade vacancy increased to 11.5 per cent in January 2015 and is expected to rise further when the refurbishment of 1 King William Street is completed and added back into stock. Vacancy forecast to remain high Although white collar employment is expected to improve during 2015, the rate of growth is unlikely to see vacancy fall below 13 per cent. Prime Grade vacancy is likely to remain tighter than secondary grade vacancy with a forecast prime vacancy rate of 11.9 per cent by the end of It is worth noting that the Adelaide market has the highest percentage of secondary grade space when compared to other CBD capital city office market. This is because there was a lack of new stock delivered in the 2000s and there has not been a withdrawal of secondary space for alternative uses. Secondary grade vacancy is also consistently significantly higher than prime vacancy with some of this space vacant for significant periods. This means that the Adelaide market tends to have a higher vacancy rate mostly as a result of higher vacancy in secondary grade space than other CBD markets. Prime vacancy is therefore a better comparison and when Adelaide is compared to other CBD markets the vacancy rate is slightly higher, but not as high when compared to the total vacancy rate. Vacancy tightens due to withdrawals The fall in the vacancy rate in January 2015 to 13.5 per cent is not expected to be sustained. An increase is expected in July 2015 due to the return of 1 King William Street into stock after this space has undergone a significant refurbishment. If this building remained in stock the total vacancy rate would have remained largely unchanged. Vacancy is therefore forecast to remain above 13 per cent during 2015 despite an improvement in white collar employment. ADELAIDE CBD 6 MONTH NET ABSORPTION & VACANCY Thousands m² Forecast 25% 20% 15% 10% 5% Vacancy (%) -20 0% 431 King William Street, Adelaide Selling on behalf of a private investor 6 mth Net Absorption (m²) Secondary Grade (C&D grade) Prime Grade (premium A&B grade) Source: Colliers Edge How else can we help you? Speak to one of our property experts today. [email protected] For further information please contact: Kate Gray Associate Director Research Tel [email protected] CBD Office Research & Forecast Report First Half

32 Research and Forecast report First Half 2015 CANBERRA CBD OFFICE Opportunity despite public sector jobs losses The Canberra region provided nearly 2,394,000sqm of office floorspace at 1 January 2015 and is a crucial employment powerhouse for Australia. Given its dependency on the public sector, there has been concern about the health of the office market given the current focus on austerity and stubbornly high vacancy which was sitting at 15.4 per cent at 1 January 2015, and is up 1.8 percentage points on the previous six months. Examining employment numbers, it is clear that Canberra has been feeling the pinch from tightening public sector spending. Australian Bureau of Statistics (ABS) data indicates that between 2013 and 2014 the ACT lost 7,200 Federal Government jobs and 300 Territory Government jobs, representing a decline of 8.7 per cent and 1.2 per cent respectively over the year. More pain is in the pipeline for government employees with a further 16,500 Commonwealth Government job losses anticipated nationally. Canberra will presumably have to absorb a significant number of these given that it sustained 31 per cent of all Commonwealth Government employees in Canberra will also be subject to job relocations to regional areas where the requirement for employment and investment is deemed to be greater. This includes 250 jobs at the ABS which will be relocated to Geelong in 2016 to provide survey functions in a new centre for excellence ; and 300 jobs at the ATO to be moved to the Central Coast. ABS data indicates that unemployment in the ACT increased between June and December 2014 to reach 3.9 per cent. The number of employed persons fell by 1,500 (0.7 per cent) over the six month period with total employment at 215,500. However, this was attributable to a decline in part-time workers with full-time employment growing by 800 jobs or 0.4 per cent between June and December. It is our understanding that despite shrinking public sector employment the private sector is growing to absorb some of the slack, undertaking work that was previously handled in house by government departments. This employment shift has rebalanced the market providing Canberra with a more diversified employment base. The latest Deliotte employment forecast offers more light at the end of the tunnel. Whilst a reduction in white collar jobs in Civic and Barton is forecast, by 2.6 per cent to 2015 and 1.3 per cent to 2016, overall the Canberra Region will accommodate modest employment growth of 0.1 per cent and 0.9 per cent to 2015 and 2016 respectively. The volume of leasing deals grew over the second half of 2014 comparative to the first half, although activity remains relatively subdued. In view of the high vacancy rate the market will remain in favour of the tenant for the next six to nine months. However in the context of a lack of new supply, growing demand from the public and private sector and some large lease expires, leasing activity and fundamentals should improve from a landlord perspective towards the latter end of 2015 and beyond. National Archives of Australia, Canberra Managed on behalf of Abacus Craft 1 Pty Ltd The investment market performed comparatively well over the second half of 2014 with good interest in office assets which 32 A Colliers International publication

33 Metro Office CBD OFFICE came to market and multiple buyers vying for stock. The yields available for prime stock in Canberra CBD remain very attractive to investors. We expect A Grade commercial buildings to remain in demand with investors over the next six to 12 months. Secondary grade assets will be more prone to volatility in the context of the soft leasing market which prevails. COLLIERS INTERNATIONAL RESEARCH FORECASTS CANBERRA CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade gross face rents $433 0% A Grade net effective rents $290 0% A Grade incentives 15% 15% A Grade yields 7.25% 7.25% A Grade capital values $6,066 $6,066 A Grade vacancy rate 11.1% 9.1% Total CBD rate 14.7% 13.5% Supply Additions (m 2 ) 20,000 20,000 Leasing market Squeeze on secondary stock The CBD is Canberra s largest and most robust commercial office market. Vacancy increased by 3.2 percentage points in the second half of 2014 to reach 14.7 per cent at 1 January 2015, double the long term average of 7.1 per cent. Sublease vacancy remains prevalent as government departments and some private tenants seek to downsize and reduce occupancy costs. The quality of accommodation in the CBD has improved over the last 10 years. It contained 44 per cent A Grade floorspace in January 2015 compared to only 28 per cent in January A Grade stock has also been more resilient as tenants migrate from old to new, which has placed greater pressure on secondary stock. The January 2015 PCA survey showed over 17,000sqm of A Grade space became vacant in the second half of 2014 and this caused a noticeable increase in the A Grade vacancy level from 5.7 per cent to 11.1 per cent. The increase in vacancy is largely entirely attributable to the completion of 24,000sqm 1 Canberra Avenue which has yet to be leased, although we understand this is under offer from the Finance Department. Subdued leasing activity The second half of 2014 saw increased volumes of leasing deals in the Canberra Region compared to the first half, with Colliers International leasing over 14,800sqm of office floorspace. However deals remain significantly down on 2013 which saw over 178,000sqm of floorspace leased. Of the 15 leases negotiated in the second half of 2014, eight (53 per cent) were for premises of 350sqm or under and six (40 per cent) were for premises situated in Canberra CBD. Overall, the leasing market remains soft due to a high level of supply, vacancy and steady demand. Key deals include 216 Northbourne Avenue in Braddon and 44 Sydney Avenue in Forrest. The Department of Foreign Affairs and Trade was secured in October for 3,000sqm at 44 Sydney Avenue on a 10 year lease. The 216 Northbourne Avenue deal saw Colliers International secure Northrop Grumman M5 Network Security to 1,200sqm on behalf of lessor UNSW in December. Colliers International also secured the Office of Parliamentary Services for 2,777sqm at 28 Sydney Avenue in November. The Colliers International Office Demand Index indicates that the quantum of floorspace enquired about was greater in 2014 than in Demand in the first half of 2014 was soft but the rate of enquiry improved in the second half of 2014 and particularly in November and December, largely attributable to private sector enquiry. 28 Sydney Avenue, Canberra Leased and valued by Colliers International CBD Office Research & Forecast Report First Half

34 CANBERRA CBD ENQUIRIES NUMBER AND TOTAL AREA BY SIZE RANGE Number of enquiries , , , ,000 80,000 60,000 40,000 20,000 Total enquiry size (m²) Average market yields for Canberra CBD are approximately 7.25 per cent for A Grade assets and 9.5 per cent for B Grade assets. Average yields have remained stable over the last six months. For the broader Canberra Region yields compressed over Canberra is competing for investment with metro markets in Sydney and Melbourne, offering attractive yields in a CBD location which are unobtainable elsewhere. For a comparable yield to metro markets investors can access quality stock in Canberra CBD and the market therefore remains very affordable. An example of this is 10 Moore Street, a CBD asset anchored by Optus which sold for $23 million on an 11.5 per cent yield in May. 0 H H H H Mixed transaction profile Source: Colliers Edge (No.) 1,000-2,999 (No.) >3,000 (No.) (sqm) 1,000-2,999 (sqm) >3,000 (sqm) Improving outlook later in 2015 The high incentive levels and weak rental growth which prevails in Canberra is expected to continue for the next six to nine months before market conditions become more favourable to landlords. Demand will continue to improve over the course of 2015 with growing private sector activity and a number of large public sector lease expires. Not all of these public sector tenants will move but in the current tenant market, it would be an opportune time for those who wish to seek alternative accommodation to do so. Our outlook for the Parliamentary Precinct is therefore for improving growth and diminishing incentives from late Over the last 10 years PCA data indicates that, on average, the Canberra Region absorbed circa 59,000sqm net per annum. No significant new supply is currently under development. On this basis, with demand improving and supply restricted downwards pressure will be placed on the vacancy rate which will gravitate toward the long term average. By 2016 and 2017 we are optimistic that significant activity in the leasing sector will be witnessed given the employment growth outlook and the expiry profile of government tenants. Investment market The Canberra investment market offers two distinct types of assets. On the one hand it offers assets with long term covenants to government tenants. These passive assets are appealing to institutional and overseas investors seeking a secure investment. An example of this was 10 Moore Street as outlined above and the Australia Defence College, Weston, which was purchased by a private investor in August. It exhibited a yield of 9.5 per cent on a $30.5 million price tag. On the other hand Canberra has active investment opportunities for purchasers prepared to take on some risk for a greater return. Colliers International brokered the sale of 219 Northbourne Avenue in October. This sale reflected the confidence developers have in the long-term visions for this area which is seeing a greater residential focus given the proposed new light rail route in the vicinity. Positive Investment Outlook Looking forward, we expect to see the buoyant investment market continue into In the context of the on-going yield hunt Canberra offers opportunity if investors have the confidence that any vacancies which may occur can be filled. The market is already being scrutinised closely by institutional investors eyeing yield and also by institutions looking to recycle property which will stimulate activity. Improving investment indicators Canberra experienced a strong level of investor interest throughout The Colliers International Sales Database recorded five major sales of greater than $5 million since July totalling $255 million. Over the full year some $0.5 billion of deals were undertaken in Canberra. Whilst down from the dizzy heights of the pre-gfc days with $1.2 billion of transactions recorded in 2007, it is more than double the $227 million worth of transactions in The extent of demand recorded by Colliers International was significant with multiple domestic and overseas purchasers vying for some listings. New Acton East, Marcus Clarke Street, Canberra Sold on behalf of Molonglo Group 34 A Colliers International publication

35 Metro Office CBD OFFICE Portfolio and merger and acquisition (M&A) sales featured prominently in These sales included the DEXUS takeover of the Commonwealth Property Office Fund which saw the transfer of ownership of the Finlay Crisp Centre, 5-11 Constitution Avenue in Canberra. We expect more portfolios to be brought to market in 2015 as a result of the weight of capital looking to be placed into office assets and the desire for scale by investors. This will impact on the Canberra. Colliers International is currently marketing the Mirvac portfolio of five non-core assets across three cities which include two assets in Canberra; 54 and 60 Marcus Clarke Street. Vacancy, absorption and demand Pipeline office supply 1 Canberra Avenue, Forrest completed in the second half of This delivered 24,000sqm of A Grade stock to the market. This building remained untenanted at the time of the latest PCA Office Market Report and contributed towards pushing the Canberra vacancy upwards between 1 July 2014 and 1 January At the time of writing it was expected that 1 Canberra Avenue would be leased to Finance Department who would consolidate from a number of different locations across Canberra. Canberra has a sizeable development pipeline equivalent to over 176,000sqm of floor space, the majority of which has yet to begin construction. This pipeline is not subject to pre-commitment and in the current environment of weak leasing conditions and high vacancy, it may be some time before it comes to fruition. Sublease vacancy impacting the market The latest PCA data determines that the vacancy rate in Canberra Region was sitting at 15.4 per cent in 1 January 2015, representing a 1.8 percentage point increase over the last six months. The increase vacancy reflects soft leasing conditions caused by weak demand and the hangover of an unprecedented surge in supply. Sublease vacancy has risen over 2014 as government departments downsize and demonstrate their intention to sublease surplus accommodation. CANBERRA SUBLEASE VACANCY 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 sqm Source: Colliers Edge/PCA OMR A Grade stock now accounts for 43.5 per cent of total stock with 15.5 per cent vacant. The highest vacancy levels are for secondary C and D Grade stock with 17.3 per cent and 18.5 per cent vacancy respectively. Section 63 City, Canberra Leased on behalf of City West Property Holdings How else can we help you? Speak to one of our property experts today. [email protected] For further information please contact: Tom Duncan Manager Research Tel [email protected] CBD Office Research & Forecast Report First Half

36 Research and Forecast report First Half 2015 AUCKLAND CBD OFFICE Full steam ahead Economic growth and business confidence are providing the perfect storm for the next cyclical upswing in Auckland s CBD office sector. While demand is high, supply has not yet caught up to alleviate the pressure. This has boosted landlord confidence, with rises in rents forecast. Investor expectations of higher returns are driving competition across all sectors. Leasing Market Positive economic outlook boosts demand for office space Economic conditions in New Zealand are strong. This was recently highlighted in the Quarterly Survey of Business Opinion (QSBO) which highlighted pressure on capacity and positive labour conditions. The strength in these underlying fundamentals is creating demand for office space that was prevalent in the early to medium stages of the last cyclical upswing between 2002 and The squeeze is on The latest Colliers International workplace survey shows there has been a significant increase in occupational density among most New Zealand CBD workplaces in the last two years, putting the squeeze on workspace allocations. The survey covers leases entered into between August 2012 and July 2014 and covers more than 186,000sqm and 11,370 employees. While overall, office density in Auckland CBD reduced from 16.6sqm per workstation in 2012, to 16.8sqm, this masks an underlying trend. There were a number of high profile leases predominantly in A Grade buildings to legal firms. These typically have a higher number of private offices, which can influence the overall density results. If we exclude the legal sector, there has been a drop of more than 10 per cent in space per person over a two year period, bringing density to just 14.8sqm per workstation. This is one of the largest increases in density recorded since our survey began in Buildings, and by default, landlords, which have catered for this increase in occupational density, will have superior or upgraded facilities and services. In order to capture the tenants looking for these efficiencies, landlords have to consider the services of these buildings as much as their physical attributes and appearances. AUCKLAND CBD OFFICE DENSITY VERSUS TOTAL OCCUPANCY COST Office Density (m²/workstation) Office Density Total Occupancy Cost per Workstation 21.0 $9,500 $9, $8, $8, $7, $7, $6,500 $6,000 $5,500 $5, (excl. legal sector) Source: Colliers International Research NZ Rental rises entrenched in landlord s minds The imbalance between demand and supply in Auckland s office market has enabled landlords to increase rents and lower incentives. Annual Prime CBD office net face rental growth was 4.2 per cent in the 12 months to December The annual decline in average prime incentives from 13.4 per cent to 10 per cent lifted net effective rental growth to just below 9 per cent. While forecast rental growth remains, the rate of growth will temper slightly, but consistent rental growth will be evident over the next five years at least. Some of the major listed property companies have a high proportion of fixed rental growth contracts, which has stunted their ability to keep pace with the overall market, for now. The secondary sector is showing similar positive signs of activity, with rental growth and incentives declining. CBD tenants who can t find prime space have to settle for lower grade space, stay in their current premises or move outside of the CBD. Total Occupancy Cost per Workstation 36 A Colliers International publication

37 Metro Office CBD OFFICE Investment market Investors rally for the little amount of quality stock on offer The outlook for investors is positive given the demand and the rental growth forecasts. Our latest investor confidence survey for Auckland s office sector is at a net positive (optimists minus pessimists) 70 per cent, a record high since the survey started in early Low interest rates are spurring investors and this is likely to be a feature of the market for the rest of Yields will be pushed lower as competition for the limited supply of stock available for purchase is chased by domestic and offshore purchasers. With rents increasing and yields firming, this will see capital values appreciate over the next five years. AUCKLAND OFFICE INVESTOR CONFIDENCE Net positive office investor confidence 80% 60% 40% 20% 0% -20% -40% -60% -80% Dec-08 Jun-09 Auckland Wellington Christchurch Dec-09 Source: Colliers International Research NZ Jun-10 Supply, vacancy and demand Dec-10 Available prime space at record low, again Jun-11 The increase in demand for office space in late 2014 as businesses expanded and new businesses were formed has pushed the overall vacancy rate to 7.8 per cent in the Auckland CBD. This is the lowest since the peak in the last cycle and the subsequent decline in market indicators during the GFC. Auckland CBD office prime vacancy is less than one per cent, the lowest in our 20-year historical time series of data. There is only 820sqm of premium office space available and less than 3,215sqm of Auckland CBD A Grade office space. The limited amount of prime supply in the CBD is also a feature in metropolitan Auckland with only 16,800sqm of prime vacant space available. While there is a sizeable amount of secondary space available, 100,000sqm in the CBD and 106,000sqm in metropolitan Auckland, both are on the decline. Dec-11 Jun-12 How else can we help you? Speak to one of our property experts today. [email protected] Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 AUCKLAND CBD OFFICE VACANCY RATE Vacancy Rate 20% 15% 10% 5% 0% Dec-10 Prime Secondary Overall Dec-11 Dec-12 Dec-13 Source: Colliers International Research NZ Dec-14 Dec-15 Forecast More supply on the way, but will it satisfy demand? The availability of new office space is getting closer. Speculative builds by Manson TCLM and Goodman in the Victoria Quarter and Wynyard Quarter respectively are expected to complete at the end of this year and early next year respectively. This will bring much needed space, but pre-commitment for a large proportion of the space is getting closer. The completion of the refurbishment of the former BNZ Tower at 125 Queen Street will assist tenants searching for quality office accommodation in the heart of the CBD. However, given the high levels of demand, it is likely that this space will be quickly absorbed. It is not until late 2019, with the expected completion of Precinct Properties high-rise office tower at Downtown Shopping Centre, will there be a sizeable provision of new office space available that will alleviate some of the pressure on accommodation availability. Outlook looking positive The demand environment and the limited new supply constructed since the GFC has significantly shifted the balance of power from the tenant to the landlord over the last 24 months. Landlords are now in a commanding position, with new supply expected in late 2015 to early While further space will be available in 2019, vacancy will start increasing from a low base which will assist in creating a positive market outlook for at least the next five years. This will be an attractive feature for investors, who are already showing high levels of optimism about the sector s performance. This will spur further competition, especially for prime stock. Dec-16 For further information please contact: Chris Dibble Manager Research Tel [email protected] Dec-17 Dec-18 Dec-19 CBD Office Research & Forecast Report First Half

38 Our experience CBD OFFICE leased St Georges Centre 81 St Georges Terrace Perth, WA 11,000m² On behalf of North East Equity Pty Ltd 100 Waymouth Street Adelaide, SA 9,136m² On behalf of Cromwell Property Group Citigroup Centre 2 Park Street Sydney, NSW 7,947m² On behalf of Charter Hall & The GPT Group managed Arts Portfolio NSW, NSW 47,835m² On Behalf of Trade & Investment Arts NSW 52 Martin Place Sydney, NSW 39,317m² On behalf of REST National Archives of Australia Canberra, ACT 12,850m² On behalf of Abacus Craft 1 Pty Ltd sold 550 Bourke Street & 181 William Street Melbourne, VIC $608.1 million On behalf of Cbus Property 35 Clarence Street Sydney, NSW $140 million On behalf of Sunsuper Pty Ltd for AMP Capital Investors 2 Riverside Quay Southbank, VIC $106 million On behalf of Mirvac valued 1 Farrer Place Sydney, NSW 86,455m² On behalf of Lend Lease Real Estate Investments Limited as Responsible Entity of the APPF Commercial 1WS 1 William Street Brisbane, QLD 76,022m² On behalf of CBUS & ISPT 530 Collins Street Melbourne, VIC 67,330m² On behalf of GPT designed and project managed Level 10, 44 Market Street Sydney, NSW 5,000m² On behalf of ABS 1 Margaret Street Sydney, NSW 4,409m² On behalf of Cuscal IT Consultancy Head Office 1 Martin Place Sydney, NSW 2,720m² On behalf of Charter Hall Accelerating success. How else can we help you? Speak to one of our property experts today. [email protected]

39 AUSTRALIA AND NEW ZEALAND IN THE LAST 18 MONTHS 878,257 square metres of CBD office space 700 Collins Street Melbourne, VIC 7,577m² On behalf of Cromwell Property Group ONE ONE ONE Eagle Street Brisbane, QLD 5,904m² On behalf of The GPT Group 28 Sydney Avenue Canberra, ACT 2,777m² On behalf of Amalgamated Property Group 103 CBD office assets achieving a 82.84% occupancy rate 63 Pirie Street Adelaide, SA 11,520m² On behalf of Raptis Investments Pty Ltd NAB House 22 King William Street Adelaide, SA 9,646m² On behalf of Southern Cross Equity Group 100 Pirie Street Adelaide, SA 9,032m² On behalf of 100 PS Management Pty Ltd $3.5 billion of CBD office assets 60 Edward Street Brisbane, QLD $60 million On behalf of AMP Capital New Acton East Marcus Clarke Street Canberra, ACT $45 million On behalf of Molonglo Group 192 Pitt Street Sydney, NSW $32.8 million On behalf of Lee Tai Enterprises (Aust) Pty Ltd (Lixa Li) 5.1 million square metres totalling over $28.4 billion worth in value 52 Martin Place Sydney, NSW 39,300.51m² On behalf of REST Santos Centre 60 Flinders Street Adelaide, SA 15,732m² On behalf of Lend Lease Investment Management Zurich House 21 Queen Street Auckland 14,446m² On behalf of Precinct Properties Projects delivered by our award winning team Corporate Head Office Melbourne, VIC 2,600m² On behalf of United Energy and Multinet Gas 1 York Street Sydney, NSW 1,350m² On behalf of De Lage Landen Pty Limited Level 5, MCA Building 140 George Street Sydney, NSW 900m² On behalf of AT Kearney For more information about Colliers International and working with us visit:

40 How else can we help you? We offer a full range of property solutions... Agency Sales & Leasing Landlord Representation Tenant Representation Capital Markets Consultancy Corporate Solutions Design Development Facilities Management Financial Management Investment Services Insolvency Property Services Lease Administration Portfolio Management Portfolio Marketing Project Leasing Project Management Project Marketing Property Management Research Technology Solutions Transaction Management Valuation Workplace Strategy Across every property type... Office Industrial Retail Residential Rural & Agribusiness Hotels Healthcare & Retirement Everywhere 374 offices worldwide throughout 63 countries 43 offices throughout Australia and New Zealand Speak to one of our property experts today. 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 Accelerating success.