Market Commentary Canberra Office

Market Commentary Canberra Office November 2015 Executive Summary A further strengthening in the Canberra office market has been recorded over 3Q15 with a total of 9,300 sqm of positive net absorption. The take-up of sub-lease space by government departments resulted in sub-lease availability tightening from 0.9% to 0.7% of total stock. Prime gross effective rents were flat in 3Q15, averaging AUD 302 per sqm p.a. Average secondary gross effective rents recorded a slight increase of 1.2% to AUD 243 per sqm p.a. Prime equivalent yields have remained unchanged since the end of 2012, ranging between 7.00% and 9.50%. Canberra: Key Indicators Total Stock (millions sqm) New Supply (sqm) (last 12 months) Net Absorption (sqm) (last 12 months) End-Sep 2015 2.19 39.8 14,862 Vacancy 15.1% Rents ($ per sqm p.a)* Prime Gross Effective 302 Secondary Gross Effective 243 Yields* Prime 7.00% - 9.50% Secondary 9.25% - 12.50% 12-Month Outlook Canberra Office Market Commentary November 2015 1

Economic Overview Economic indicators continue to be mixed for the Australian economy. There was a partial recovery in business confidence in September as corporate Australia responded positively to the resolution of the uncertainty over the leadership of the Liberal Party. However, confidence was negatively impacted by financial market volatility over 3Q15. Nevertheless, the NAB Business Survey September revealed that business confidence increased by 4 points, to +5. Economic growth came in well below market expectations for the July quarter with the slowest growth since 1Q13. GDP grew by 0.2% over the quarter or 2.0% year-on-year (y-y). However, significant one off events adversely impacted the quarter s growth statistics suggesting that 3Q may record an improvement. The largest contributions to growth this quarter came from government and household spending. Net exports detracted from growth in the quarter but still recorded strong growth over the year. The unemployment rate was recorded at 6.2% in September. This is on par with the average unemployment rate for Australia over the last twenty years (6.2%). The labour force participation rate moved up to 65.1% in July before edging back down to 64.9% in September. The ANZ job ads series, a leading indicator of employment growth, jumped 3.9% in September in seasonally adjusted terms after rising by a solid 1.3% in August. The unemployment rate in Canberra has risen over 3Q15 from sitting at 4.5% in June to now sit 5.1% in September. Business investment nationally is expected to remain weak throughout the remainder of 2015 and into 2016. However, further depreciation of the AUD should help to support exports. DAE forecast that Australian GDP will grow by 2.2% in 2015 before picking up to 2.4% in 2016. There continues to be a large number of development projects with plans approved (240,000 sqm). However, many of these planned office projects will not commence construction until a significant level of pre-commitment is achieved. Project Review: 2 Constitution Avenue Total NLA: 19,990 sqm Major tenant: DIBP ISPT has recently completed its major refurbishment of the east building within 2 Constitution Avenue, Civic. The floors provide an exceptional outlook over the surrounding area. 2 Constitution Avenue will provide an additional 10,000 sqm of fully refurbished office accommodation, with large floor plates, upgraded staff facilities and amenities, centrally located in the administrative heart of the City. A large focus has been placed on environmental sustainability targeting 4.5-star NABERS Energy rating. Market Balance: Canberra Supply Three projects completed over 3Q15, two new builds and one refurbishment. The largest development to complete was the refurbishment of the Lionel Murphy Building, 50 Blackall Street, Barton which contributed 4,727 sqm of office space to the market. The Englobo Group developed Promenade Kingston Foreshore also completed this quarter. The project consists of two residential buildings of four storeys each. The commercial component will comprise 2,000 sqm of office space and a retail component. Lastly, the Creswell development on 65-67 Constitution Avenue completed in 3Q15. The project consisted of a new seven storey mixed use building consisting of 3,777 sqm of residential space and 954 sqm of office space fully committed to Hindmarsh. Demand A further strengthening in the Canberra office market has been recorded over 3Q15 with a total of 9,300 sqm of positive net absorption. This was mainly driven by the prime cohort of the market (10,000 sqm), while secondary space recorded a reduction (-800 sqm). A two tier market exists as government tenants focus Canberra Office Market Commentary November 2015 2

their occupier needs on buildings with 4.5 NABERS energy rating or above, which are generally prime grade buildings. While secondary assets mainly in non-core locations continue to record limited demand from occupiers. The impact of Project Tetris continues to work favourably for the Canberra office market. The government initiative has been one of the main catalysts for activity over the first nine months of 2015. In 3Q15, the execution of Project Tetris was evident with two government agencies consolidating into existing government space. Those two tenants were: Australian Crime Commission consolidating their operations and taking 4,138 sqm of space in 4 National Circuit, Civic. Safe Work Australia relocated from 220 Nortbourne Avenue taking space in the Nishi Building on Edinburgh Avenue (1,885 sqm). Net Absorption: Canberra Square Metres 80,000 60,000 40,000 20,000 0-20,000-40,000-60,000 * as at Q3/2015 09 10 11 12 13 14 15* The take-up of sub-lease space by government departments resulted in sub-lease availability tightening from 0.9% to 0.7% of total stock. Sub-lease space has pulled back strongly over the last 12 months with a total of 23,900 sqm being absorbed or retracted from the market. Vacancy results by precinct were mixed over 3Q15. The centrally located precincts of Civic and Barton recorded a tightening in vacancy as tenant appetite for prime locations continues to be a focus for both government and private tenants. Reductions in Barton (12.9% to 12.1%), Civic (12.8% to 11.7%) and Outer North (11.8% to 11.4%) were recorded. On the other side of the ledger, a large increase was again recorded in the Fringe (29.0% to 33.8%) which was due to three significant occupier movements out of the market into the CBD. Secondary vacancy pushed higher over the quarter reaching 21.5% (from 20.9% in 2Q15). Prime Grade Vacancy: Canberra Percentage of Stock Vacant 25% 20% 15% 10% 5% Rents 0% Q3/06 Q3/07 Q3/08 Q3/09 Q3/10 Q3/11 Q3/12 Q3/13 Q3/14 Q3/15 Prime Secondary Net prime face rents recorded a slight reduction over the quarter (-0.4%) while secondary rents recorded a lift (1.5%). The lift in secondary face rents was mainly driven from assets that were situated in desirable locations. As a result of physical markets conditions stabilising, incentive levels have recorded their first reduction since 4Q08. Incentives are now sitting at 21% (25 months rent free on a 10-year lease in 3Q15). Although average incentives have steadied, they still remain at elevated levels. Prime gross effective rents were flat in 3Q15, averaging AUD 302 per sqm p.a. Since the most recent peak in 3Q08, prime gross effective rents in Canberra have declined by 20.8%. Average secondary gross effective rents recorded a slight increase of 1.2% to AUD 243 per sqm p.a. Prime Gross Effective Rents: Canberra $/Square Metre p.a. $400 $380 $360 $340 $320 $300 $280 $260 $240 $220 $200 Q3/06 Q3/07 Q3/08 Q3/09 Q3/10 Q3/11 Q3/12 Q3/13 Q3/14 Q3/15 Yields & Sales Prime Gross Effective Secondary Gross Effective Investment volumes in the Canberra office market were tracking in line with last year s sales volumes at the end of 2Q15. However, the third quarter of the year has slowed with one major asset trading. 64 Allara Street, Civic transacted in July 2015 reflecting an initial yield of 8.15%. Australian Ethical Property Trust sold the property to Cromwell Allara Street Trust. The Cromwell acquisition is the seventh for the group in Canberra, increasing its allocation to Canberra Office Market Commentary November 2015 3

the ACT to 19.2%. The property is well positioned to take advantage of any future development in the area and particularly the ACT Government's City to Lake Project which includes Canberra Olympic Pool and the Convention Centre. Major Sale Transaction: 64 Allara Street Civic Prime Yield Range: Canberra 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% Q3/08 Q3/09 Q3/10 Q3/11 Q3/12 Q3/13 Q3/14 Q3/15 Outlook Transaction Details: NLA: 3,374 sqm 64 Allara Street, Civic comprises of a 7-level commercial building with ground-level retail and two levels of basement parking for 98 cars. The building completed in 2008 and achieved a 5-star NABERS energy rating. The building is currently fully occupied with the largest tenant being Jacobs Australia Pty Ltd and CIC Australia. Sale Details: Price: $16.8 million Price per sqm NLA: $5,325 Vendor: Australian Ethical Property Trust Purchaser: Cromwell Allara Street Trust Date: July 2015 Prime equivalent yields have remained unchanged since the end of 2012, ranging between 7.00% and 9.50%. Last quarter the secondary investment yield range compressed by 25 basis points at the tighter end to range between 9.25% and 12.50%. However, secondary yields remained stagnant over 3Q15 with no transactional evidence to suggest any movement from our current yield range. Occupier sentiment continues to show a gradual improvement in Canberra with net absorption for the first three quarters of 2015 (20,000 sqm) above expectation. The small tenant market (<500 sqm) remains active especially from private occupiers. This activity, in tandem with the positive impact of Project Tetris, is likely to aid the market over the final quarter of the year. Supply additions are projected to be below trend over 2015. One project is currently under construction and will add 4,900 sqm of new supply upon completion over the next 12 months. The medium term development pipeline is also below historical levels with one development currently under construction. The TOP Greenway development, which is fully pre-committed to Department of Human Services (30,000 sqm), is expected to complete in the second quarter 2017. Rental levels are forecast to be relatively flat over the remainder of 2015, with prime gross effective rents forecast to record growth of 0.2% (previous 2.6%). However, rental growth is expected to recover over 2016 (6.2%) as vacancy tightens towards 13%. Sales for the first three quarters of 2015 are now sitting at AUD 138.9 million compared to the AUD 233.1 million recorded for full year 2014. Over the final quarter of 2015, transaction evidence from 255 London Circuit, Civic and Eclipse House, 197 London Circuit is likely. Not only will these transactions provide fresh insight into yield expectations for the Canberra market, but transaction volumes could pass 2014 levels if these assets trade at a premium to book value. Canberra Office Market Commentary November 2015 4

For further information, please contact: Andrew Balzanelli Managing Director ACT +61 2 6274 9818 andrew.balzanelli@ap.jll.com Jonathon Bayer Canberra Analyst Strategic Research +61 2 9220 8589 jonathon.bayer@ap.jll.com JLL Canberra This document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from Jones Lang LaSalle. This document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. Jones Lang LaSalle accepts no liability for damages suffered by any party resulting from their use of this document. Level 7 121 Marcus Clarke Street Canberra ACT 2601 Tel: +61 2 6274 9888 Fax: +61 2 6248 7501 www.jll.com.au