Positive economic outlook for South Australia

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1 RESEARCH

2 The Adelaide CBD vacancy rate declined from 15.% to 1.7% in the six months to July 1. This tightening of the vacancy rate is expected to continue due to the increase in the level of tenant enquiries and the limitations associated with existing supply. Year to date transactions currently stand at $7.5 million for assets greater than $1 million, which is a historically strong result. This trend is expected to continue due to stamp duty recently being abolished. Leasing activity has improved over the previous six months to July 1 with tenant expansions driving much of this change. Adelaide remains on the radar for investors, particularly new investors, as approximately 75% of the transactions over $1 million came from investors new to South Australia. Positive economic outlook for South Australia Ten Gigabit Adelaide, a high-speed fibre optic data network, has positively impacted Adelaide CBD sales and leasing enquiries. Agents have reported that Ten Gigabit Adelaide has attracted notable interest from investors, particularly those offshore and interstate, and has helped increase appeal for tenants relocating or establishing a presence in the Adelaide CBD. This trend is expected to continue throughout the project s duration, which is expected to reach completion within two years. Over the past decade, approximately $3 billion has been invested in the north- Employment Growth South Australia and Adelaide % changes y-o-y basis.% 1.5% western sector of the Adelaide CBD. Developments such as the new Royal Adelaide Hospital, South Australian Health and Medical Research Institute (SAHMRI) Building, University of Adelaide Health and Medical Sciences Building, and the University of South Australia Health Innovation Building, have transformed the north-western portion of the Adelaide CBD into a health and biomedical precinct. In addition, it was recently announced that the new $3 million SAHMRI development is to proceed, with construction expected to be completed in 1. Unemployment rate is expected to decline The South Australian unemployment rate (seasonally adjusted) has increased by.3% to 5.7% in July 1, however this is an improvement on the 7.3% recorded in April 17. Moving forward, this downward trend is expected to continue as a number of major projects in the defence, engineering and energy sectors come online. Research Analyst SA 1.%.5%.% SOUTH AUSTRALIA ADELAIDE Oxford Economics has forecast steady employment growth of approximately 1.% to 1.5% up until in South Australia. The increase in employment is expected to ramp up after due to a number of major projects, such as defence projects, commencing circa. Adelaide CBD Office Market Indicators as at July 1 Grade Total Stock (m²)^ Vacancy Rate (%)^ Annual Net Absorption (m²)^ Annual Net Additions (m²)^ Average Gross Face Rent ($/m²) Average Incentive (%) Average Core Market Yield (%)* Prime 59, , Secondary 9,5 15.3, Total 1,, ,11 71

3 Jul- Jul-9 Jul-1 Jul-1 Jul- Jul-9 Jul-1 Jul-1 ADELAIDE CBD OFFICE SEPTEMBER 1 RESEARCH Tenant expansions have driven improvement in leasing activity For several years, building owners have relied on tenant relocations rather than tenant growth to fill vacancies. However, in the last six months there has been an increase in demand stemming from tenants expanding their activities rather than from tenants relocating their offices, and this bodes well for business growth. The public announcement of the submarine & frigate contracts has improved the outlook for leasing activity. A number of new tenants have landed in Adelaide s CBD, and anecdotal evidence suggests a number of these new tenants such as BAE Systems, Boeing, Naval Group, Raytheon and Babcock were lured to the CBD or fringe due to these defence projects. Ten Gigabit Adelaide has also played a role in tenants relocating to the CBD. Businesses such as Datacom an information technology consulting company recently relocated from Findon to Adelaide CBD (Franklin Street) to take advantage of the city s highspeed fibre-optic data network. This trend is likely to continue once the Ten Gigabit Adelaide project has been fully rolled out. Fringe Net Absorption ( m²) and % vacancy per month period NET ABSORPTION MTHS TO ('m²) LHS FRINGE TOTAL VACANCY - RHS (%) 1 1 Prime Net Absorption & Outlook FY1 1,sqm Secondary FY1,13sqm Source: Knight Frank Research/PCA Secondary market was the main contributor to positive net absorption In the six months to July 1, Adelaide CBD recorded positive net absorption for all grades (between,357m² and,91m²) except for A grade which recorded negative net absorption of 73m². Total net absorption in the six months to July 1 was 1,115m² and for the 1 month period the figure is 19,11m². Both of these figures are the highest recorded since 9. Positive net absorption was primarily driven by tenant expansions, with much of this coming from the secondary market. The Adelaide Fringe recorded a positive net absorption of 9m² in the six months to July 1. However, over the last 1 months, it has recorded a negative net absorption of 73m². The Fringe market contains a notable proportion of ageing C grade office space, accounting for 7.% of total stock. This has resulted in growing impetus for landlords to refurbish in order to remain attractive and relevant to prospective tenants. The outlook for Adelaide CBD net absorption is positive with the majority of leasing activity focused on A grade stock. Furthermore, there has also been a number of leases already pre-committed which will positively impact net absorption figures over the next to 1 months. This includes BAE systems ( Flinders Street), Beach Energy ( Flinders Street), SA Attorney General (- 1 Franklin Street) and BHP (-1 Franklin Street) which will absorb close to 3,m² over this time. There are also a number of businesses associated with the defence sector that are currently seeking office space. This is likely to enhance net absorption figures over the next six to twelve months assuming new space is secured for these users. The outlook for the Fringe market is positive with anecdotal evidence suggesting that approximately,m² - 7,m² of stock will be secured based on leasing deals currently in progress. This activity represents the bulk of office vacancy in the A & B grades. Adelaide CBD Net Absorption ( m²) and % vacancy per month period NET ABSORPTION MTHS TO ('m²) LHS CBD TOTAL VACANCY - RHS (%)

4 Jul- Jul-9 Jul-1 Jul-1 Jul- Jul-9 Jul-1 Jul-1 Supply is below the longterm average and will remain limited until 19 In the six months to July 1, Adelaide CBD recorded a net supply increase of 71m² which is below the 5 year - month average of,17m². The supply increase was entirely due to the refurbishment completed at 1 King William Street. The withdrawal of,5m² was from 9-1 North Terrace resulting from plans to build a new Quest apartment building and 1-5 Pulteney Street being partially refurbished. Over the next six months, Adelaide CBD is predicted to have a gross supply addition of 5,1m². The Adelaide Fringe did not record any supply in the six months to July 1. However, in the next six months there is a projected supply of 1,m² which is higher than the 5 year average supply of 1,15m². The supply projection is attributed to the full refurbishment of 1 Greenhill Road, Unley. GPO Exchange development expected to boost supply in late 19 Adelaide CBD supply will remain limited until late 19 with approximately,7m² of new space to be created during this period. The main contribution to new supply additions in 19 will come from the GPO Tower development. Located at -1 Franklin Street, the development is scheduled for completion in Q3 19. The GPO Tower will be a new office tower comprising ground level retail, levels 1 & car parking, levels 3-19 office, and a rooftop plant room spanning over levels. The property is currently under construction and will have a total NLA of,5m², with 7.7% of the NLA pre-committed by the SA Attorney General s Department and BHP. Development pipeline is largely subject to precommitment Office developments proposed in Adelaide CBD are subject to tenant precommitment. Developments such as 73-5 Pirie Street (Cbus Property Planet Nightclub ), North Terrace (Le Cordon Bleu and Commercial & General) and Festival Plaza total approximately 9,m² office space if all were to proceed. Adelaide CBD Vacancy is forecast to continue to decrease In the six months to July 1, the Adelaide CBD vacancy rate declined from 15.% to 1.7%. The market is expected to continue to tighten over the next six Adelaide Gross Supply Additions % total vacancy Prime Vacancy Rate & Outlook Secondary 1.% bps y-o-y 15.3% -5bps y-o-y Source: Knight Frank Research/PCA months as there is currently a climate of positive tenant demand with no significant short term increase in supply anticipated. Business expansions, coupled with new tenants in the defense, engineering and non-profit sectors entering the CBD will likely place downward pressure on the vacancy rate over the next twelve months. The Adelaide Fringe vacancy rate declined marginally by.% in the six months to July 1 and currently stands at 11.%. This decrease was due to the positive tenant demand witnessed for prime stock with 1,1m² of stock taken up. It is important to note, however that the Adelaide Fringe represents a comparatively small market when compared to the CBD, and therefore large fluctuations in the vacancy rate can result from small changes to vacant space. Adelaide CBD Vacancy % total vacancy Adelaide CBD Vacancy Rates 5.% Precinct July 17 July % 1.% Premium 1.%.% 35 1.% A Grade 1.1% 1.% Prime 13.% 1.% % 1.%.% B Grade 1.7% 1.5% C Grade 1.% 15.7% %.%.% D Grade 19.5% 1.7%.% Secondary 17.% 15.3% Totals 1.1% 1.7% CBD GROSS SUPPLY MONTHS TO... ('m²) 5 YEAR AVERAGE PRIME PRIME 1 YR AVERAGE SECONDARY SECONDARY 1 YR AVERAGE

5 ADELAIDE CBD OFFICE SEPTEMBER 1 RESEARCH Riverbank Precinct 3 11 Worldpark, Keswick Pirie Street # - 1,5m² 7 Pirie Street # - 1,5m² Maras Group - Q3 1 Pitt Street* -,m² Uniting Communities - Q3 1 - % owner occupied GPO Exchange, -1 Franklin Street -,5m² [SA Govt & BHP] Charter Hall - Q % (approximately) committed Festival Plaza / Riverbank Precinct^ -,m² Walker Corp / SA Government - Adelaide Casino, North Terrace Local Private Developer % committed SAHMRI, North Terrace - 31,m² Commercial & General 73-5 Pirie Street - 3,m² Cbus Property North Terrace -,m² (office),m² retail [Le Cordon Bleu] Commercial & General - H - N/A Gawler Chambers, 1-19 North Terrace - 5,5m² Adelaide Development Company Wakefield Street - 1,5m² Kyren Group Franklin Street - 1,m² Kyren Group Pirie Street -,m² Palumbo Wyatt Street -,1m² Private - + Worldpark (Stage B & C) - Richmond Road, Keswick -,m² Axiom - + Under Construction / Complete DA Approved / Confirmed / Site Works Development Application/ Mooted / Early Feasibility Source of Map: PCA NB. Dates are Knight Frank Research estimates. Major tenant pre-commitment in [brackets] next to NLA # Refurbishment * Mixed use development comprising retirement living, respite accommodation, retail and office ^ Festival Plaza is under construction (Car Parking). Office component is subject to precommitment. 5

6 Jul- Jul-9 Jul-1 Jul-1 Rents, Incentives & Outlook Prime Rents (g) Secondary Rents (g) Incentives $517/sqm face.79% y-o-y $339/sqm eff 3.% y-o-y $37/sqm face 1.91% y-o-y $5/sqm eff.% y-o-y P:3.5% S:35.3% Increase in prime gross face rents Average face rents for prime Adelaide CBD office buildings increased by.79% over the 1 month period to July 1. This is a result of positive tenant demand and a drop in vacancy for prime stock. Moving forward, face rents are likely to continue to show growth in prime markets whilst there is no increase expected in the supply of new stock in the short term. Secondary rents remain largely unchanged in Adelaide s CBD. Rents in the Fringe market have remained unchanged for prime office buildings. However, the secondary market recorded an increase of.3% in the twelve months to July 1. Average incentive levels for the Adelaide CBD prime market have decreased from 35.1% to 3.5% in the six months to July 1. This decline is largely due to a decrease in the vacancy rate, especially among premium assets. Over the same period, average secondary incentives have remained unchanged. Business expansions have boosted leasing activity Notable leasing transactions include BHP, who have significantly increased their footprint in their pre-commitment of approximately % (NLA 1,m²) of the GPO Tower Development. Elsewhere, Sealink have relocated from King William Street, leasing 1,m² of Flinders Street which reflects a rate of $5/m² p.a. gross. Recent Leasing Activity Adelaide CBD Address NLA m² Face Rent $/m² Term yrs Incentive (%)` Tenant Start Date -1 Franklin St 1,* # 1 # BHP Oct Frome St 1, 39n 7 35 Allscripts Oct 1 7 Greenhill Road 1,5 395g 7 # FMG Engineering Sep 1 11 Franklin St 1,531 1g 5 # Datacom Aug 1 91 King William St 1,117 53g 5 # ASG Aug-1 Flinders St 1, 5sg 7 # Sealink Ltd Jul 1 7 Franklin St 1 5sg # Babcock International Apr 1 91 King William St 1,11 55g 1 3 Commonwealth Jan 1 Adelaide CBD Rents $/m² p.a average gross effective rent PRIME SECONDARY Recent Sales Activity Adelaide CBD Address Grenfell Street, Adelaide Flinders Street, Adelaide Light Square, Adelaide 19 O G Road, Felixstow 1-9 Waymouth Street, Adelaide Grade Price $ mil Core Market Yield % NLA m² $/m² NLA WALE yrs Vendor A 1.. 3,7 7,75 7. Blackstone Purchaser Centuria Capital Group & Lederer Group Sale Date B ,91 3,9 3. Local Private Investor Corval A 35..,95 5,7. Primewest N/A 35. #, 5,5 7. Centennial Property Group Harmony Property Syndication Elanor Investor Group May-1 May-1 A ,,53.3 Dexus & CPPIB Mapletree Mar-1

7 Jul-7 Jul- Jul-9 Jul-1 Jul-1 ADELAIDE CBD OFFICE SEPTEMBER 1 RESEARCH High investment activity is expected to continue Year to date sale transactions for properties over $1 million currently stand at $7.5 million, which is above the 17 Calendar Year figure of $1.7 million. The notable increase in transaction volumes shows there is a growing level of investor interest in Adelaide and this trend is expected to continue in the short term. The most significant recent transaction was the sale of Grenfell Street by Blackstone to Centuria and Lederer Group in July 1. The building transacted for $1. million with a W.A.L.E of approximately 7. years and reflected a core market yield of.%. Other notable transactions include the sale of 11 Waymouth Street, Adelaide, an A grade multi-storey office building with ground floor retail, sold with a W.A.L.E of. years. The building was purchased for $.5 million by Mapletree Investment, a Singaporean real estate development, investment and capital management company. We also note the sale of the Santos Building ( Flinders Street) has recently settled for $11.35 million to an interstate private investor. Adelaide CBD Sales $1 million + By Purchaser Type ($m) $1, $1, $1, $ $ Prime Current Yields & Outlook Secondary.5% - 7.5% -bps y-o-y.% -.75% -1bps y-o-y Furthermore, 1- North Terrace was recently contracted for $1.75 million and is also expected to settle in October 1. The increase in sale activity for properties over $1 million is expected to continue and investment activity will be enhanced by the full abolishment of stamp duty on commercial real estate transactions from 1 July 1. Adelaide remains appealing for investors, with approximately 75% of transactions over $1 million involving new investors buying in South Australia. Moreover, the recent abolition of stamp duty has further positioned South Australia as an attractive value proposition for both local and interstate capital. South Australia is the only state or territory in Australia to eliminate this type of tax, and South Australia s CBD should remain attractive to investors in the wake of yields remaining firm in the eastern seaboard of Australia. Adelaide CBD vs East Coast Yields Prime Core Market Yields 9.%.5%.% 7.5% 7.%.5%.% Yields continue to firm Yields for prime assets across the CBD markets continue to firm. In the six months to July 1, CBD average prime yields firmed by basis points from an average of 7.1% to.93%. In the CBD secondary market, average yields firmed 13 basis points from an average of.9% to.35%. In the Fringe market, average prime and secondary yields have also continued to firm. In the six months to July 1, Fringe prime yields compressed by basis points from an average of 7.53% to 7.33%. Over the same period, Fringe secondary yields compressed 3 basis points from.15% to 7.5%. This tightening of yields in the Fringe market is mainly due to the market transitioning as the quality of stock continues to improve which in turn attracts better quality tenants. The Fringe market has also benefited from the growth in land values brought upon by rezoning to support a greater intensity of development. Compared to the east coast, Adelaide yields are still presenting 1- basis points softer, on average. Although Adelaide is showing a higher vacancy rate compared to east coast cities, investors are willing to take on this risk believing lower purchase prices will produce higher returns. $ $ $ 5.5% 5.%.5%.% A lens on the future suggests Adelaide yields will continue to show a firming bias in the short term. AREIT DEVELOPER OFFSHORE OWNER OCCUPIER PRIVATE INVESTOR UNLISTED/SYNDICATE SYDNEY MELBOURNE BRISBANE ADELAIDE 7

8 RESEARCH Yee Ng Research Analyst - SA Yee.Ng@sa.knightfrankval.com.au Ben Burston Head of Research & Consulting Ben.Burston@au.knightfrank.com SOUTH AUSTRALIA Guy Bennett Head of Institutional Sales, VIC & SA Guy.Bennett@au.knightfrank.com Bobbette Scott Head of South Australia Bobbette.Scott@au.knightfrank.com CAPITAL MARKETS Lukas Weeks Director, Head of Agency Lukas.Weeks@au.knightfrank.com Tony Ricketts Director Tony.Ricketts@au.knightfrank.com Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. OFFICE LEASING Martin Potter Head of Office Leasing Martin.Potter@au.knightfrank.com Andrew Ingleton Associate Director Andrew.Ingleton@au.knightfrank.com VALUATIONS & ADVISORY James Pledge Head of Valuation & Advisory, SA James.Pledge@sa.knightfrankval.com. au Nick Bell Valuation & Advisory, SA Nick.Bell@sa.knightfrankval.com.au Adelaide Industrial Market Overview July 1 Brisbane CBD Office Overview September 1 Multihousing Tenant & Investor Survey Australia 1 Active Capital 1 Knight Frank Research Reports are available at KnightFrank.com.au/Research Important Notice Knight Frank Australia Pty Ltd 1 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank Australia Pty Ltd for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank Australia Pty Ltd in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank Australia Pty Ltd to the form and content within which it appears.