New breed of tenants

Transcription

1 Research and Forecast report Second Half 2015 Australia & New Zealand CBD OFFICE New breed of tenants Strategic owners adapt to change Accelerating success.

2 First Half 2015 Australia First Half 2015 Australia First Half 2015 Australia and New Zealand First Half 2015 Australia and New Zealand 2015 Australia Want real time data that matters most to your business? Colliers Edge is a subscription service developed by our in-house property research specialists, drawing on the expertise of our national network of operators. We provide clients with a quarterly series of real estate data, collected in a consistent and timely manner to ensure the highest standard of quality. Colliers Edge has the longest data time series for office, industrial and retail markets across all major Australian cities. Updated quarterly, Colliers Edge is an all-encompassing data analytics tool that can help your business make informed decisions. Want better insights, faster? Talk to a Colliers Edge expert today. Nerida Conisbee National Director Research nerida.conisbee@colliers.com Luke Dixon Associate Director Research luke.dixon@colliers.com colliers.com.au/colliersedge Improve your perspective. We have. Property Research worth talking about. Research and Forecast Report Research and Forecast Report Research and Forecast Report Research and Forecast Report Research and Forecast report METRO OFFICE HOTELS INDUSTRIAL RETAIL HEALTHCARE AND RETIREMENT LIVING Dial for demand Size does matter Large format retail outperforms Enquiry for metro assets on the rise Hungry for prosperity? Hotel capital flows break new ground Building scale Investors expand collections Changing of the guard Boutique to corporate - a shift in ownership Accelerating success. Accelerating success. Accelerating success. Accelerating success. Accelerating success.

3 Metro Office CBD OFFICE Contents The new tenant: how building owners are adapting to change 5 Our perspective CBD office 10 CBD office market snapshots 1. Sydney Melbourne Brisbane Perth Adelaide Canberra Auckland 36 Our experience CBD office 38 How else can we help you? Speak to one of our property experts today. au.office@colliers.com Partner with our Research and Consultancy team Our highly experienced team of professionals can partner with you to ensure your next project has a positive outcome. We deliver strategic advice across a full range of property sectors, ensuring that your decisions are fully informed. au.consultancy@colliers.com For more information about Colliers International And working with us visit: CBD Office Research & Forecast Report Second Half

4 5 Martin Place, Sydney Leased on behalf of Cbus Property and DEXUS Property Group 4 A Colliers International publication

5 Metro Office CBD OFFICE The new tenant: how building owners are adapting to change CBD office tenants are changing. In Australia they are getting smaller, less likely to be in finance or government and currently taking advantage of market conditions. As competition for the best people becomes a major issue, particularly in the competitive technology sector, there is a greater focus on using real estate to attract and retain staff. New Zealand is experiencing its own unique changes. Although finance and insurance remains a stalwart of CBD occupiers, the number of architects and engineers setting up business in the CBD has increased rapidly. Owners are responding to these changes with the way that they lease space, develop and plan for the future of their buildings. Nerida Conisbee National Director Research, Australia nerida.conisbee@colliers.com Chris Dibble Associate Director Research and Consultancy, New Zealand chris.dibble@colliers.com Who is the new tenant? The new tenant is getting smaller. The decline in average tenancy size is being driven in part by an absence of really large deals taking place which is more a cyclical element given the long leases that large corporations typically take. However there are a number of structural issues also occurring. The first is that there has been significant growth in small to medium size enterprises looking for space. Average lease enquiry levels in the sub 1,000sqm category in Australia have grown as a percentage of total leases. In 2009, it amounted to 71 per cent of total deals. This has grown consistently to currently account for 83 per cent. AVERAGE LEASE ENQUIRY SIZE, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 10% 6% 7% 5% 5% 5% 16% 14% 12% 12% 20% 19% 79% 81% 83% 83% 71% 74% sqm 1,000-2,999sqm >3,000sqm New Zealand s percentage of tenants occupying less than 1,000sqm has remained relatively stable at around 70 per cent over the last five years. However, the number of employees growing within these smaller businesses is increasing. This increase in density rather than leased space is a signal to owners on efficiency as a primary tool for leasing campaigns. CBD Office Research & Forecast Report Second Half

6 The second structural change is that we expect to see a wave of part floor occupiers enter the Australian and New Zealand CBD markets over the next two years as a large number of these leases expire. The number is expected to be much higher than single floor and multi floor users over the next two years. It is therefore expected that it will not just be new tenants entering the market that are after smaller tenancies, but also existing users looking for new space. NUMBER OF LEASE EXPIRIES BY SIZE, Multi Floor User Single Floor User Part Floor Premium A B In New Zealand, tight market conditions have led to a rise in tenants searching for more efficient space. Examples include Fonterra and Meredith Connell. The tenant moves will see a gradual lift in vacated space that will be highly favoured by part floor occupiers. The third is that as more tenants move to more flexible ways of working, the space per employee reduces. Workspace ratios continue to decline however the decline is gradual with some sectors being impacted more than others. Technology groups in particular have far lower workspace ratios than other groups. These groups are expected to be a major contributor to office demand and hence this will be a major driver downwards of these ratios. New Zealand s example is the listed company Precinct Properties Innovation Centre in the Wynyard Quarter. The more than 40,000sqm of staged development, which is adopting a technology and innovation focus for its tenants, will provide collaboration hubs and shared working spaces for a range of tenants including start-ups. Taking advantage of market conditions In Australia, tenants are receiving record levels of incentives as owners actively compete for their occupancy. Perth CBD currently has the highest A Grade incentives in Australia at 38 per cent, closely followed by Brisbane CBD at 34 per cent. We have never recorded incentives this high in Perth CBD while all other cities are now at levels not seen since the early 1990s. It is not just incentives that tenants are typically expecting with other conditions also in strong demand including more flexible lease terms when setting up a lease, or lease tail coverage if leaving an existing tenancy early. It is rare for incentives to hit zero in Australian CBD markets. The few exceptions have been when there was no vacancy as was the case in Perth and Brisbane CBDs in The lowest Sydney CBD has ever reached was in mid 2000 when vacancy hit 4.5 per cent and incentives declined to four per cent. We consider it likely that incentives will continue to remain historically high, even as the vacancy rate declines, primarily because tenants now have expectations of some form of abatement, generally as a fitout being included as part of the lease. Sydney CBD vacancy rate is currently 6.3 per cent and is expected to continue to decline over the next two years. This is similar to 1997 when the vacancy rate was roughly similar and a similar market dynamic was occurring. At this time, incentives were just 15 per cent, half of what they are currently. Across the Tasman, incentives in New Zealand are reducing as landlords become more confident in their ability to increase rents. In Auckland, the major supply and demand imbalance has kept incentives low. Auckland s CBD employment grew by 20 per cent between 2010 and 2014, with 2015 shaping up to be another bumper year. Wellington has always had low incentives and 2015 is no different. Currently, Auckland and Wellington have the lowest prime vacancy rates in the Asia Pacific. Bias to business services and technology 151 Macquarie Street, Sydney Managed on behalf of CorVal Partners Limited A recovery in tenant demand in Australian CBD office markets has historically been led by a recovery in finance and insurance 6 A Colliers International publication

7 Metro Office CBD OFFICE 8 Mahuhu Crescent, Auckland Sold on behalf of Harbour 5 Limited employment in the Sydney CBD. As a legacy of the Global Financial Crisis, the recovery this time is still being led by the Sydney CBD but right now finance and insurance are not dominating growth, with technology and business services sectors instead leading. Financial year to date, business services accounts for 23 per cent of CBD office enquiry, followed by IT&T with 18 per cent of enquiry. It isn t quite the end of finance and insurance and we are starting to see the early stages of demand in this sector. At present, it appears that growth is dominated by boutique occupiers however it is likely to move to larger occupiers over the next two years. Greater focus on location There are many reasons why a tenant may prefer either a CBD location or metro location. This can include access to employees, close proximity to retail or ease of access by car or train. In both Sydney and Melbourne CBDs, there is a current centralisation of tenants taking place. In the case of Melbourne, there are strong financial reasons to make the move into the CBD. Historically, Melbourne CBD has not had much movement of tenants between CBD and metro locations with most tenants preferring to stay in either location. This has changed over the past 12 months where the cost of being in the Melbourne CBD has dropped significantly when compared to metro markets. In 2010, to be in the inner-east office precinct of Melbourne, it was $47/sqm cheaper when compared to the CBD. In 2015, this differential has dropped to just $9/sqm. In Sydney CBD, the differential is not as significant; however, we are seeing even greater movement of tenants from metro markets. It is likely part of this is affordability driven given the high incentives being offered; however, close proximity to public transport, vibrancy retail amenity are also considered important. In other Australian cities, the trend is not as pronounced, even though markets like Brisbane and Perth CBDs are very affordable at present. A greater dependence on car travel is considered to be a major factor here, as is the ability to purpose build an office building in the metro markets, a factor which appears to be important in these markets. In Auckland, tenants starved of choice in the CBD are moving to the CBD Fringe. Some are benefiting from lower total occupancy costs together with comparable amenity and facilities. A workplace that is easy to get to is important for occupiers and ease of access by public transport and bicycle is seen as particularly important. Car access is also important but the importance of this is declining over time. Wanting to make a good impression on employees, clients, service providers and stakeholders The ability to attract and retain staff is critical for employers. As employment markets continue to improve, particularly in NSW and the technology sector, using property in the battle to attract talent is gaining strength. Because of the high levels of amenity that CBDs provide, as well as the radial nature of Australia s public transport systems, having a CBD location is frequently a talent attraction tool. Auckland s City Rail Link (CRL) if undertaken within local government, rather than central government timeframes, could provide a signifcant impetus to CBD growth in the current cycle. A greater amount of green space is also emerging as an important factor for many tenants. This space can be located within the building, or can be public space around the building. These areas are typically used by employees during breaks, as well as to hold more formal meetings. CBD Office Research & Forecast Report Second Half

8 A CBD location is also important for many occupiers in order to be close to clients and to a lesser extent, service providers. This is particularly true for business services occupiers who rely on other major CBD occupiers for business. Although most occupiers typically want the best locations within a CBD (e.g. Martin Place, Sydney or Collins Street, Melbourne), some firms with a large shareholder base will look to lower cost options as a way to show they are financially cautious. How are things changing? Owners putting up with high incentives... for now Incentives have been particularly high in all Australian CBD markets for some time now. However, we consider that these tenant friendly conditions will start to unwind over the next two years. Incentives typically take some time to come down, even when market conditions are improving. Sydney CBD incentives have started to decline, while we consider Melbourne, Brisbane and Adelaide CBD levels at peak. INCENTIVE LEVELS FOR A-GRADE CBD OFFICE BUILDINGS (%), JUNE 2015 & JUNE 2016 A sense of place is seen as desirable by many occupiers, not just technology tenants. This can mean different things for each tenant but can include the provision of outdoor space (e.g. balcony or rooftop garden) to being in a heritage style building. This is generally a challenge in a CBD market where the outdoor space is not readily available and a heritage building typically lacks the base level services required. The ideal building configuration Based on our discussion with tenants, side core configuration is now the most popular option for tenants and many are particular about the size of the floorplate. Most tenants are now typically demanding between 1,200 and 2,000sqm. In Australia, demand for large floorplate campus style buildings is not currently seen as the preferred option. Most tenants typically prefer a vertical campus. This is likely to be partly driven by availability of sites, particularly in CBD locations. In New Zealand, the expansion of the CBD office market will be in both high rise and campus style premises over the next five years. Precinct Properties and Manson TCLM announcing high rise office towers, subject to pre-commitment levels. The opening up of Wynyard Quarter has provided a number of businesses the opportunity to occupy campus style buildings. Goodman are currently building three major office premises of approximately 40,000sqm on adjoining sites with a central open space in Wynyard Quarter. Incentives (%) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jun-15 Jun-16 Technology tenants are they different? There is currently strong demand from technology tenants for space in the CBD and the type of space they are after is somewhat different from the other dominant office user categories of finance and insurance, business services and government. Similarly to these organisations, they are trying to find the right environment to attract staff. For technology companies, this involves creating an environment that is more aligned to the creative people they are trying to attract. Within their tenancies they like to customise their environments; hence, includes ceiling finishes and carpet is not typically desired. There is a strong preference for a central location, partly because employees will often work non-standard hours and need close proximity to services at all times. 201 Kent Street, Sydney Designed and Project managed on behalf of De Lage Landen 8 A Colliers International publication

9 Metro Office CBD OFFICE 818 Bourke Street, Melbourne Sold on behalf of GPT Group Accommodating small tenancies The growth in demand for small tenancies is expected to remain strong and this provides a challenge for both these occupiers, as well as owners of buildings. For companies in the early stages of growth, a 10 year lease can be difficult to commit to. Many of them are growing at a fast pace and have difficulty determining their requirements in 12 months, let alone 10 years. Similarly, it can be difficult for owners to accommodate small suites within an office building. To develop a new building, it is difficult to coordinate a large number of small tenants to enable sufficient pre-commitment. Most major owners of Australian buildings are currently developing some form of co-working space in their buildings. This is still embryonic in New Zealand, albeit growth in this sector is enivatable. This type of work accommodation provides a solution to the demand for small tenancies, but also provides new leasing opportunities in low demand markets. These co-working spaces are offered in different ways including providing existing tenancies in the building with overflow space to new tenancies wanting access to space for short term purposes, or to allow them to work in an environment that allows for knowledge sharing with other organisations. In the US, organisations such as WeWork do not own buildings but instead lease office space and then provide space to individuals or companies under a membership structure. WeWork is the now the fastest growing lessee of new office space in New York City and has recently pre-committed an entire building in Brooklyn. Regus, an established operator that operates globally, including Australia, now partners with major owners to provide overflow or flexible space for tenants in a co-branded format. Somewhere to store bikes and have a shower Having a place for employees to store their bicycles and associated end of trip facilities is particularly important and has been considered more important than car parking for some time now. There are a lot of reasons for this including lower levels of car ownership amongst younger generations, the increasing cost of car parking and difficulties with traffic congestion. Continued popularity of cycling is another factor driving this. As is the number of people who exercise during breaks and need a place to change and shower. Taking advantage of strong residential conversion opportunities Strong demand for residential development sites is now giving owners of secondary office building an alternative option for use. This is having the impact of increasing prices of secondary office buildings but is also leading to a decline of secondary space. As yet it is not having a strong impact on rental levels for lower grade space however this is likely to occur, particularly in a market like Sydney where we are starting to see a decline in the vacancy rate. The other challenge to the market is availability of space for smaller occupiers, as well as start-ups, a market that is generally well catered for with secondary buildings. It is likely that this will also lead to increased demand for co-working environments that are now being offered. CBD Office Research & Forecast Report Second Half

10 Our perspective CBD OFFICE HOW WILL VACANCY RATES LOOK IN 2016? JUN-15 JUN-16 SYDNEY AND MELBOURNE FIRMLY IN RECOVERY MODE FOR NET EFFECTIVE RENTS SYDNEY PERTH 16.6% 8.1% 17.1% 13.5% % 4.3% % -19.5% 15.3% 6.3% 5.5% 15.6% MELBOURNE % 2.4% BRISBANE % -0.4% 13.5% 15.0% 7.7% 19.8% ADELAIDE CANBERRA SYDNEY BRISBANE PERTH % 1.6% % 0.2% MELBOURNE ADELAIDE CANBERRA TOP 7 INVESTMENT TRENDS FOR 2015 Yield compression of 50-75bp anticipated to occur over second half 2015 Greater level of capital sourced from equity markets, rather than debt Private investors hit a record high first half of the year, purchasing more than $1 billion of CBD office buildings Fund through developments continue to be sought after Tenant demand in Sydney and Melbourne firmly in recovery mode, providing confidence for the investment market China dominates CBD office investment Influx of capital set to continue Accelerating success. How else can we help you? Speak to one of our property experts today. au.office@colliers.com

11 AUSTRALIA SECOND HALF 2015 SYDNEY EXPECTED TO LEAD OFFICE SUPPLY OVER NEXT 12 MONTHS SYDNEY 204,100 PERTH 99,303 MELBOURNE 71,768 BRISBANE 61,300 ADELAIDE 24,197 CANBERRA 7,972 Sydney CBD expected to have the most new development enter the market with the completion of Barangaroo T2 & T3 and 200 George Street. Sydney CBD new supply will be supported by the market due to a strong recovery in white collar employment growth over the next 12 months Perth and Brisbane CBDs expected to have high levels of new supply; vacancy will increase due to soft leasing markets. LEASING TRENDS TO WATCH IN 2015 Co-working spaces continue to develop as smaller tenants grow and occupiers look for flexible options Incentives expected to remain historically high, with slight reduction as markets begins to recover Sydney and Melbourne CBDs see a strong trend of re-centralisation of tenants Office building conversions expected to lead to a reduction in secondary space availability IT&T and business services tenants dominate enquiry levels, while finance and insurance sectors see modest recovery For more information about Colliers International and working with us visit:

12 Research and Forecast report Second Half 2015 SYDNEY CBD OFFICE Office remains hot property High levels of tenant activity are evident within the Sydney CBD from a very busy six months to 1 July Office vacancy declined to 6.3 per cent. Whilst withdrawal of office stock for conversion has assisted the leasing market, the vacancy decrease was primarily the result of strong floorspace uptake from new tenants locating into the CBD and texisting tenants expanding. A number of large CBD backfill vacancies are expected to be leased soon, including 255 Elizabeth Street and 10 Shelley Street expected to be fully leased. As vacancy falls further we expect protracted tightening and lowering incentives as landlords are more bullish. There remains a distinct lack of quality smaller tenancies, particularly for sub-300sqm floorspace, therefore the subdivision trend will persist for longer-term vacancies. The investment sales market recorded a quieter six months. This was due to a lack of investment stock available, not a decrease in investment demand. Pricing continues to improve with capital values rising and yields compressing in the deals which occurred. Demand from offshore capital to invest in Sydney CBD was apparent with 77 per cent of total sales by value being to overseas buyers. The major market talking point has been the sale of the Investa Office Portfolio to China Investment Corporation (CIC) for a reported $2.45 billion. This represents the largest direct property deal in Australian history. The strong pricing achieved for the portfolio is being carefully analysed by all major owners to understand the impact on valuations, with the transaction considered to include a component for a portfolio premium given the scale and quality of assets included in the transaction. Sales activity in the Sydney CBD is expected to increase in the second half of 2015 now that the Investa portfolio has transacted. Vendors have a guide on current pricing and purchasers can hunt for other opportunities. Given strong capital values and the low interest rate environment vendors may however continue to question how to deploy capital liberated from sales prompting quieter investment conditions for the remainder of COLLIERS INTERNATIONAL RESEARCH FORECASTS SYDNEY CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents* $665 $683 A Grade Net Effective Rents* $418 $435 A Grade Incentives* 30% 30% A Grade Yields* 6.7% 6.5% A Grade Capital Values* $9,900 $10,402 A Grade Vacancy Rate 6.7% 4.6% Total Market Vacancy Rate 6.3% 5% Supply Additions (m²) 23, ,900 1 Macquarie Place, Sydney Designed and Project Managed on behalf of Pacific Life Re 12 A Colliers International publication

13 Metro Office CBD OFFICE The renaissance of Martin Place as a focus for tech firms and financial services continues. Significant deals over the last six months include Challenger committing to 9,200sqm at 5 Martin Place; Apple reportedly taking 6,200sqm at 20 Martin Place; and Commonwealth Bank of Australia taking space at 1 Market Street, 2 Market Street and 420 George Street. Colliers International secured two new whole-floor tenants for nearly 3,000sqm of floorspace at A Grade 60 Margaret Street within six months of the previous tenant, Thompson- Reuters, relocating their back-office operations to 19 Harris Street. One floor was leased to Serco who consolidated from various locations in the CBD, with a second floor leased to Injury Treatment, who has expanded from metropolitan Sydney to open a new CBD office. They were attracted by the favourable commercial terms and increased level of staff amenity available in the city Core precinct. The speed of these transactions demonstrates the level of tenant activity in the prevailing market. SYDNEY CBD OFFICE: AVERAGE NET EFFECTIVE RENTS ($/SQM) $1,200 $1,000 $1,069 Jun-15 Jan-15 Jun-14 $800 $600 $814 $673 1 Market Street, Sydney Leased on behalf of Investa Property Group Leasing market Affordable stock outperforms The first half of 2015 saw the leasing turnaround which first emerged in 2014 gather pace, leading to a busy six months. Vacancy is down due to both stock conversion and strong floorspace uptake from a range of occupier types. Well located, affordable B Grade office stock is performing strongly. With the availability of secondary stock reducing landlords are now able to capitalise on this. B Grade incentives have tightened, especially for fitted out floorspace. Such floorspace has demonstrated good tenant retention. A Grade demand is solid, driven by business growth and tenant flight to quality. Premium incentives remain flat but are expected to be subject to downwards pressure going forwards as a result of positive absorption and small tenancy suites offering tenants a plug and play style of solution. The Western Corridor remains extremely tight with an A Grade vacancy of 3.6 per cent. Midtown is also tight, particularly low and mid-rise space without term restrictions, as stock is removed for conversion. As predicted by Colliers International 12 months ago, this had the effect of pushing tenants north in a flight to quality. $400 $200 $- Premium A-Grade B-Grade Small tenancies are king Tenant activity is focused on smaller occupiers of sub-300sqm resulting from business services and tech occupiers, distinct from the large space demanding banks and lawyers who have traditionally driven Sydney CBD take-up. Landlords now recognise this dynamic, being willing to sub-divide larger vacancies. Landlords gain a rental premium to offset the subdivision costs and consequential lower net lettable area. The benefits of speculative subdivision and fit-outs have been demonstrated by: Chifley Tower, MLC Centre, 45 Clarence Street, 6-10 O Connell Street, 25 Bligh Street, 10 Spring Street, and 55 Clarence Street. Based on the Colliers International Demand Index, 55 per cent of the companies wanting office space this year have sought less than 500sqm and this is being experienced across the board for Premium, A and B Grade tenancies. In 2012, this figure was 39 per cent. Smaller tenants offer a number of advantages over larger tenants by being capable of letting up quicker, paying higher face rents and accepting lower incentives. CBD Office Research & Forecast Report Second Half

14 Premium market expected to turn Up until now, the weak point of the leasing market has been premium floorspace in the north east city core with large vacancy persisting in Aurora Place, Governor Macquarie Tower and Chifley Tower. Chifley Tower has made significant in-roads with its whole floor vacancies and is likely to be down to having just one whole floor vacant by quarter four 2015 and we are optimistic Aurora Place will see a reduction in vacancy over the next six months. Tech occupiers remain the CBD powerhouse, with new entrants taking up vacant office floorspace and existing occupants expanding, being attracted by the transport and amenity that the CBD offers their staff. There are multiple occupiers in the 3,000sqm to 10,000sqm bracket chasing limited opportunities particularly in the value market. Landlords are gaining confidence in market fundamentals and have shown a desire to push back on incentives. Tenants still however, expect a strong offer with a mismatch in expectations relative to landlords. The market may see an impasse between larger landlords and tenants until the expectations of both parties becomes more aligned. Investment market Rising prices for falling sales volumes The first half of 2015 has been characterised by much talk but little transactional action in the Sydney CBD. Some $2.1 billion of office property sold during the six months to 1 July 2015 compared to $2.9 billion over the same period last year. Notwithstanding this, the sales which have occurred exhibited strong cap rate compression and high capital values. Despite unsatisfied pent up investor demand the market is constrained by the tightly held nature of stock. Owners recognise that with prices such as they are and in the low interest rate environment, reinvestment of capital from sales is problematic. Another difference is that the residential developers who were aggressively acquiring stock last year are finding it harder to secure such assets this year. The reluctance of owners to sell has stimulated off market negotiations. Demand is strong from buyers at every level of the market: strata, leasehold, freehold, small and large buildings. The strongest demand remains focused on office assets with long WALE of five plus years or for properties with redevelopment potential. New entrants from overseas are apparent in the buyer profile including the Dalian Wanda Group, Shanghai Shenglong Investment Group Co Ltd and the Qatar Investment Authority. SYDNEY CBD INVESTMENT SALES BY BUYER TYPE Value of Sales ($bn) 3.5 Domestic Offshore 3.0 $2.89 bn 2.5 $2.20 bn $2.05 bn 2.0 $1.54 bn H H H H Strong pricing evident Investment trends remain distinguished between the pure investment market and properties purchased for change of use. Pure investment opportunities are still attractive to investors due to returns with higher yields than other major international office markets. Market fundamentals remain sound particularly in view of improving leasing conditions. The speed with which the market is moving is evident from the recent deals pertaining to Lend Leases Barangaroo Towers. The most recent deal in June related to Tower 1. It saw an open ended fund set up which included equity injections by the Qatar Investment Authority (QIA) and Lend Lease as investors at 37.5 per cent each and APPF Commercial at 25 per cent. The QIA contributed $525 million for this deal which was the highest value office investment in the first half of 2015 and equivalent to a sub-six percent yield. By comparison part shares in the first two Barangaroo Towers sold to APG Asset Management/Abu Dhabi Investment Authority on a 6.5 per cent yield in the first half of 2014, demonstrating compression of 0.5 percentage points over a year. 179 Elizabeth Street, Sydney Selling on behalf of La Salle Investments Other major sales in the first half of 2015 included: Gold Fields House, which was purchased by Dalian Wanda Group for $415 million in January for a mixed use residential/hotel redevelopment; a 25 per cent stake in 161 Castlereagh Street, which was acquired by Blackstone on behalf of Ivanhoe Cambridge for $240 million on 14 A Colliers International publication

15 Metro Office CBD OFFICE a 5.7 per cent reversionary yield in April; and Elizabeth Street, which was acquired from Cbus by Hong Kong based Evoce JV Aoyuan Property for $120.7 million in March. This last asset was originally purchased by Cbus Property for $57 million in July 2013, demonstrating significant capital uplift over the period due to residential development approval having been obtained and the market improving over that period. Benchmark expected to be reset further Over the next six months the commercial investment market is expected to see more capital value increases and lower yields resulting from the Investa Property Group portfolio sale and other hotly contested opportunities such as 420 George Street, which is expected to come to market later this year. With yields already tight it remains to be seen whether the leasing market turnaround will trigger further yield compression or whether this improving demand has already been factored in by purchasers. Yield compression will eventuate for any trophy assets which reach the market particularly in light of the metrics displayed by the sale of the Investa Property Trust assets. Supply, vacancy and demand Vacancy to fall further The six months to 1 July 2015 witnessed strong floorspace uptake of 60,405sqm. Further pre-commitments to Barangaroo Tower 1 have been announced with Marsh and McLennan Companies and Servcorp signing, taking pre-commitment of this building to 48 per cent. This bring total pre-commitments at Barangaroo to 66 per cent. New supply to hit market Approximately 591,000sqm of office floorspace that is under construction, approved or proposed over the next two years in Sydney CBD. Of this around 264,000sqm is pre-committed, equivalent to 45 per cent of the total pipeline. Based on our projections vacancy will fall further despite the sizeable pipeline as a result of strong floorspace uptake and stock withdrawal for conversion. Anticipated stock withdrawal is equivalent to 137,000sqm over the next two years. Tech occupiers to drive demand Tenant uptake of floorspace over the next two years will remain strong. Tech occupiers will remain the CBD s growth engine. A number of tech occupiers have active requirements including: Atlassian, Google, DropBox, Amazon, Service Now and Expedia. There remain several large enquires in the market from financial services including: Suncorp, CBA and ING. Resolution on a number of these requirements is believed to be imminent and the impact of this tenant quest for floorspace can only be positive for both the leasing and sales market. The latest Property Council of Australia (PCA) data shows continued vacancy decline and strong floorspace uptake in the Sydney CBD. A Grade vacancy fell from eight per cent to 6.7 per cent in the six months to 1 July SYDNEY CBD A GRADE INCENTIVES VS VACANCY RATES 35% 12% A-Grade Incenitves A-Grade Vacancy 30% 10% Average A-Grade Incentives 25% 20% 15% 10% 8% 6% 4% A-Grade Vacancy Rate 5% 2% 0% 0% 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 Jul-15 1 Margaret Street, Sydney Designed and Project Managed on behalf of Cuscal Limited How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Tom Duncan Associate Director Research Tel tom.duncan@colliers.com CBD Office Research & Forecast Report Second Half

16 Research and Forecast report Second Half 2015 MELBOURNE CBD OFFICE The future is... smaller The Melbourne CBD office leasing market is in the midst of a demand revival, with healthy enquiry data being reported by our agents. Enquiry has increased from 166,904sqm to 287,069sqm between July 2014 to July This represents a 72 per cent increase. The major industries driving enquiry demand in the Melbourne CBD are IT&T firms at the smaller end of the market, and for larger enquiries, the government sector is very active. Looking at our historical enquiry data over a longer time period, it is the emergence of the smaller tenant that is of most interest to owners. In 2009, nine per cent of all enquiries were for space over 3,000sqm, and 71 per cent were for space under 1,000sqm. In 2014, only five per cent of enquiries were for the larger size requirement, while sub-1,000sqm enquires now account for 82 per cent of the market. There are multiple reasons for the 180 Lonsdale Street, Melbourne Leased on behalf of DEXUS Property Group and QV Investments increase in enquiry from smaller tenants. No doubt the historically high incentives are playing an important role. Incentives in the CBD have now been around the 30 per cent mark for two years. This has made CBD office space relatively affordable for smaller firms and start-ups, which may have previously looked at metro markets when considering office space. The closing of the gap between net effective rents in the metro and CBD markets demonstrates this. In 2010, a tenant in the city fringe could expect to (effectively) pay 27 per cent less in rent than the CBD, and 40 per cent less in the outer east. In 2015, an inner east tenant is only paying 16 per cent less in the Inner East and 21 per cent less in the outer east. Over the first six months of 2015, a number of tenants in fringe locations have committed to moving into the CBD, continuing the trend of centralisation in this city. VECCI, Australian Red Cross Society, Caydon Property, Victoria Police, Leightons and Engineering Australia are all examples of tenants who have moved, or will be moving, from city fringe locations, into the CBD. Jemena and NEC will also be making the move from the outer east into the CBD. The net result of the increasing demand from smaller size tenants has been the gradual reduction in average office lease sizes in the Melbourne CBD. In 2010, the average lease signed was 1,353sqm, but by 2014, this had reduced to 848sqm a reduction of just over one third. CBD landlords are starting to respond to this trend. We first saw the trend of floors being speculatively split up in order to attract smaller tenants occurring in secondary grade buildings. Now, owners of Prime Grade buildings including Investa Property Group at 120 Collins Street and The GPT Group at 360 Elizabeth Street have split vacant floors into smaller tenancies. Owners like Investa Property Group and The GPT Group are recognising where the largest pool of potential tenants lie, and are being proactive in meeting the market. Investa have been successful in recently leasing a whole floor at 120 Collins Street in this manner, and are capitalising on this success by splitting a further floor in this prestigious Melbourne building. 16 A Colliers International publication

17 Metro Office CBD OFFICE COLLIERS INTERNATIONAL RESEARCH FORECASTS MELBOURNE CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents $ % A Grade Net Effective Rents $ % A Grade Incentives 33% 28% A Grade Yields 6.6% 6.1% A Grade Capital Values $6,935 $7,350 A Grade Vacancy Rate 7.7% 6.4% Total Market Vacancy Rate 8.1% 6.8% Supply Additions (m²) Leasing market Demand revival continues 168,550 m²* *year to July ,768 m²** **year to July 2016 increased across all grades in the Melbourne CBD, albeit only moderately for the A and B Grade markets, at 0.3 per cent and 0.9 per cent, respectively. Secondary tenants looking for creative space options As discussed earlier in the report, the improvement in demand in the Melbourne CBD is being led by the smaller end of the market i.e. tenants looking for 500sqm or less for space. This is having a positive effect on the secondary grade market, as the vast majority of upcoming lease expiries in this category of the market are currently located in secondary grade space. One of the noticeable trends in this end of the market is that a growing proportion of smaller tenants are now demanding more creative space options, and are increasingly moving away from the traditional office fitouts. Landlords that have long term vacant floors that are view or light impaired are now beginning to respond to this demand, by refurbishing these floors to attract The leasing market continues to experience solid demand. Demand from the smaller end of the market is being led by IT&T firms. Linkeo, Software One and Message Media are all examples of IT and Communications firms that have recently committed to space in the Melbourne CBD. Message Media have taken a whole floor of 1,115sqm at 367 Collins Street, while Linkeo and Software One have taken smaller suites at 120 Collins Street. In a major deal signed by a tenant in the technology sector, NEC has taken two sublease floors from Medibank at 720 Bourke Street. NEC will occupy approximately 5,600sqm of space, and are moving into the CBD from their long term location in Springvale Road, Mulgrave, which they recently sold. Colliers International represented NEC and helped secure the space, and also sold the Springvale Road site for them in early A Grade incentives to be maintained Our outlook for incentives remains the same as earlier in the year that is that they will continue to average 33 per cent for A Grade space. Incentives for Premium Grade space may see a slight move downwards towards the end of the year, as sought after space in these buildings is taken up. The strong demand from the smaller tenant segment means that incentives for B Grade space should also begin a downward descent from 34 per cent currently to an average of 33 per cent by year s end. Net face rents continue to increase however, with the Premium Grade market recording the biggest increase over the second quarter of 2015, increasing from an average of $553/sqm in March 2015 to $563/sqm in June This resulted in 2.9 per cent growth in Premium Grade net effective rents over the quarter. In another pleasing sign for the market, the growth in face rents and steady incentives meant that net effective rents 222 Exhibition Street, Melbourne Sold on behalf of AMP Wholesale Office Fund CBD Office Research & Forecast Report Second Half

18 these tenants. The refurbishment often involves exposing the ceilings, adding de-cals to walls, polishing concrete floors and generally adding a more urban atmosphere to the space. EXPIRIES BY SIZE Multi Floor Users Single Floor Users Suite Users A Grade Premium Grade B Investment market Unprecedented deman for quality Melbourne CBD investments Australia is currently experiencing unprecedented demand for core office investment from both domestic and offshore investors. There is the largest ever pool of buyers targeting assets coupled with the lowest cost of debt in history. Investors of all types have huge capacity and due to Melbourne being Australia s second largest core market, it is on all buyers lists. On the supply side of investments, as most investors are underweight to Melbourne and are net buyers, there is a lack of core supply. The significant net demand is in turn continuing to compress market yields and total returns, which are now nearing the lows of previous cycles. We expect the supply landscape will change in quarter three and quarter four of calendar 2015 as institutional owners capitalise on sale premiums driven by pricing from the Investa asset sales and overwhelming buyer demand. Due to the compression of cap rates for CBD office towers with favourable lease profiles, many investors are now turning their attention to well-located buildings with value-add characteristics. Investor appetite for core real estate has continued throughout 2014 into 2015 with 575 Bourke Street the first asset to transact, selling for approximately $90 million. 222 Exhibition Street and 114 William Street were both hotly contested marketing campaigns, with 114 William Street selling for $125 million and 222 Exhibition Street in due diligence with an offshore party. There is some further activity in the $80 million - $150 million market, with Colliers International currently marketing 460 Lonsdale Street, which is anticipated to trade for over $90 million. We continue to see major domestic and offshore core investors scour the Melbourne market for acquisition opportunities, knowing that metrics will be in favour of the sell-side. Prior to 2014, core investors had the luxury of being able to achieve total returns above 8.5 per cent. However, the pool and motivation of buyers have deepened and accelerated rapidly in the past 12 months, to the point where core buyers are having to accept total returns under 8.5 per cent, or compromise on the quality of the assets they are pursuing. For the highest quality core assets it is difficult to achieve eight per cent in the current environment. Improving leasing conditions in Melbourne are anticipated to assist active investors to pay the low cap rates necessary and achieve required total returns. The buy-side capacity of domestic and offshore investors for core office investment in Melbourne are equally as deep, although domestic investors have been more successful in their buying recently. In 2014, we witnessed 12 core transactions over $100 million for a total of approximately $2.4 billion. Of this amount approximately $1.8 billion or 75 per cent was acquired by domestic investors, with The GPT Group and GPT Wholesale Office Food (GWOF) accounting for $1.2 billion across four transactions was the first year since 2010 that an Asian institutional investor did not acquire in Melbourne. Their activity was replaced with that of investors from the US and UK, with acquisitions Invesco (321 Exhibition Street - $208 million); TIAA Henderson (699 Bourke Street - $73 million); Hines (818 Bourke Street - $152.5 million); and M&G (628 Bourke Street - $129.6 million). 367 Collins Street, Melbourne Leased on behalf of Mirvac 18 A Colliers International publication

19 Metro Office CBD OFFICE MELBOURNE CBD OFFICE SALES $4,000 $3,500 $3,000 Millions $AUD $2,500 $2,000 $1,500 $1,000 $500 $ (Year to June) Supply, vacancy and demand End of mini supply cycle has been reached The Melbourne CBD has witnessed the completion of three new buildings over the first half of 2015, totalling just over 70,000sqm of space. In the Docklands precinct, both 699 Bourke Street (19,000sqm) and 313 Spencer Street (27,000sqm) have reached practical completion and are fully committed, by AGL and Victoria Police, respectively. The third building to reach completion was Charter Hall s 570 Bourke Street (27,000sqm). Investa s 567 Collins Street also reached completion in July 2015, however this completion will be recognised in the PCA s January 2016 vacancy figures. This building was almost 80 per cent committed to at practical completion. The completion of the abovementioned developments marks the end of the current mini-cycle. The Melbourne CBD won t see any further completions until very late in 2016, when two of Walker Corporation s Collins Square towers should reach completion. This means the market has the remainder of 2015 as well as virtually all of 2016 to absorb current space in the market. It is for this reason that we see 2016 as the year when incentives start their descent. Vacancy has peaked Despite the increase supply in the Melbourne CBD, the vacancy rate in the Melbourne CBD decreased to 8.1 per cent over the first half of 2015, a significant change from the January 2015 figure of 9.1 per cent. The reason for the decrease was a combination of factors namely the movement of a major tenant into the CBD (Victoria Police), increasing demand, as well as some major withdrawal activity. 414 La Trobe Street, Melbourne Leased on behalf of The Juilliard Group Over the past 10 years, Melbourne has averaged just over 19,000sqm of withdrawals every six months. In the first half of 2015 we saw almost 47,000sqm of office space withdrawn from the market. The major withdrawal from the market was 555 Collins Street (36,000sqm), which has recently been sold to the Fragrance Group and is expected to be converted to a residential site. Further withdrawals of space occurred at 360 Collins Street (16,768sqm), where space is being refurbished. Given the increase in demand that we have seen over the past six to 12 months, our outlook for vacancy has changed quite significantly. We now see that vacancy peaked in January 2015, and we now see vacancy hovering between 7.5 and eight per cent through to January Of course, there are a number of developers with projects waiting for pre-commitments before they are confirmed, any announcement of these (and the associated backfill they could potentially leave in the market) will have implications for the forecast vacancy rate. Our vacancy forecast does; however, assume that a number of these projects will go ahead, with around 50 per cent pre-commitment rate. MELBOURNE CBD OFFICE MARKET VACANCY & ABSORPTION Net Absorption m² 120, ,000 80,000 60,000 40,000 20, ,000 Jan-08 Jul-08 Jan-09 Net Absorption Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Vacancy Rate Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Forecast Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 12% 10% 8% 6% 4% 2% 0% How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Anneke Thompson Associate Director Research Tel anneke.thompson@colliers.com CBD Office Research & Forecast Report Second Half

20 Research and Forecast report Second Half 2015 BRISBANE CBD OFFICE Tenants expect more for less The Brisbane CBD is witnessing an unprecedented level of residential development activity along with accommodation establishments. At present, there are seven applications for hotels in the planning, development approval or construction phase collectively proposing over 1,500 rooms. Further to this raft of development applications, Queens Wharf will also deliver multiple hotels, including Brisbane s first six-star hotel. Brisbane City Council s implementation of the infrastructure charges subsidy for developers of student accommodation has also contributed to an exponential unfolding in development applications for student accommodation, with over 8,000 student beds in the pipeline for the CBD and Southbank. The government incentive has generated a wave of economic activity and with players such as Macquarie Capital, GIC and Scape looking to invest; this combined with strong underlying drivers is set to position student accommodation as a major property sector. This news comes as welcome to Brisbane CBDs office market, which continues to experience subdued conditions as the economy transitions from the mining and resources sector into more broader based economic growth. Brisbane s low levels of occupancy, particularly in B Grade are fuelling the focus for conversion. Already, some older and obsolete stock has been converted although refurbishments continue to be the preferred option. As an example, the owners of 310 Ann Street will now refurbish and reposition the asset due to financial viability over a residential conversion. Turning to the capital market, after a period of muted investment activity, a handful of assets have exchanged hands over the past few months, with one trophy asset of record value. Waterfront Place transacted at $635 million and is due for settlement in October. The vendors achieved a 46 per cent gain in the value of the office tower and the adjoining Eagle Street Pier retail precinct. The Brisbane Polo Club, a three-level 1,425sqm heritage listed building located at the foot of the Waterfront Place office tower also transacted and was purchased by a Singaporean investor behind listed developer Fragrance Group for $10 million. While its future use is uncertain, it is an indication of the significant appetite of investors, both foreign and domestic in Brisbane s commercial market. Brisbane s underperformance in the last year was driven largely by job losses in public administration and the finance and insurance sectors as companies and government responded to the downturn in the resources sector. While the prospects for the office market are weak, a return to jobs growth shows that recovery is underway. The low interest rates will fuel Brisbane s housing market and activity in the property and finance and insurance services sectors. Subsequently, a lift in these employment sectors in the CBD is anticipated. The return of labour to government is also expected to see some expansion in public sector jobs. Low interest rates are supporting borrowing and spending. Despite some increases in bond rates recently, the cost of debt for sovereigns and creditworthy private borrowers remain remarkably low and this will propel further investment activity in Brisbane s office market. 20 A Colliers International publication 363 Adelaide Street, Brisbane Sold on behalf of Investa Property Group

21 Metro Office CBD OFFICE COLLIERS INTERNATIONAL RESEARCH FORECASTS BRISBANE CBD OFFICE INDICATOR CURRENT PREVIOUS 12 MONTHS Average A Grade gross face rents $695 $670 Average A Grade net effective rents $309 $304 Average A Grade incentives 34.0% 32.5% Total market vacancy rate 15.0% 14.7% Average A Grade yields 7% 7.25% Average A Grade capital values $7,857 $7,172 Supply additions (m²) 0 0 Leasing market IT&T and education sectors dominating demand The IT&T and education and training sectors have been the largest generators of tenant demand in Brisbane CBD. Overall, businesses are continuing to employ cost-mitigating measures to reduce overheads. With an overall contraction in space from 74,000sqm down to 63,000sqm, this mainly reflects consolidation of tenants moving into new developments and gaining natural efficiencies through better workspace design and also the growth of these larger corporations in Sydney and Melbourne. In some cases, businesses have been leasing additional space as part of their long-term plans for growth indicating signs of improving business confidence. In addition, it is understood that part of the 80 Ann Street development will be demolished and redeveloped to provide up to 50,000sqm of office space. Dynamic workplaces are the way forward As businesses are no longer confined to traditional workplaces, they are investing extensive time and money into creating dynamic formats. Demographic changes, the economy, seamless intuitive technology, health and lifestyle, and the growing importance of our CBDs are all influencing the evolution of workplaces. As small and medium-sized enterprises (SMEs) have less capital available than larger corporations, many hybrids are operating adopting various elements. Most new business workplaces are now incorporating collaboration hubs, function rooms, café-style kitchens and flexible workspaces with videoconferencing capabilities. From a lifestyle perspective, more weight is being placed on the requirement for end of trip facilities, activated spaces and precinct amenity. To illustrate the importance of employee amenity, Grocon s 480 Queen Street will deliver an innovative premium office tower incorporating an extensive retail hub spanning over three precincts. The development will provide unique urban retail spaces featuring dual connectivity, dynamic rooftop spaces with panoramic views and its town centre will comprise 1,600sqm of retail floorspace across a mix of cafes, food and service retail opportunities. It will also feature the first high-rise public park in Brisbane catering for both businesses and the public. Flight to quality Larger corporations have generated some enquiry activity in the market including: Aurizon, NAB and Aurecon. It is understood that Aurizon will relocate to a purpose-built facility in the fringe leaving behind 21,200sqm of space in 175 Eagle Street and 192 Ann Street upon expiration of its leases in The growing trend of flight to quality among tenants is evident as they benefit from the slow market conditions and attractive lease terms on offer. Consequently, the secondary market remains challenged, with concerns now also for the premium market. While vacancies in Premium Grade have been historically low, 480 Queen Street will contribute to substantial backfill in 2016 with nearly 30,000sqm of space becoming available across Waterfront Place, Riverside Centre and Riparian Plaza. Due to the exhaustion of future expiries of major leases, the next swell of major lease expiries is not expected until around 2020, adding further pressure to the market. In response to the large wave of office supply due for delivery beginning with 180 Ann Street in the second half of 2015, more institutional owners have begun injecting capital expenditure into existing assets. The GPT Group has committed to an extensive upgrade of Riverside Centre with the creation of Helix, including end of trip facilities, lobby enhancements, lift modernisation, and an upgrade to the plaza to retain its asset as Premium Grade. 192 Ann Street, Brisbane Managed on behalf of Daisho Co. Limited CBD Office Research & Forecast Report Second Half

22 Co-working environments becoming a burgeoning trend Co-working environments are becoming a burgeoning trend for small businesses, creativists, soloists, and corporate innovators. Gravity (140 Creek Street); Space & Co (111 Eagle Street); Regus (200 Mary Street); and the Hive (295 Ann Street) are the first to accommodate shared working environments in the Brisbane CBD, which are designed to promote the establishment of connections, network building, and expanding without the overheads that come with traditional office space. Different types of membership levels are offered depending on frequency of use. These coworking environments could have ramifications on the floorspace provisions among SMEs. For example, some businesses may perceive the cost-effectiveness in conducting their ad-hoc business meetings and seminars off-site consequently reducing their floorspace provisions. On the contrary, it is beneficial to have these amenities in a building to provide flexibility and a point of difference. Investment market Weight of capital and attractive yields drive investment activity Investment activity has increased significantly in terms of transaction value with four sales worth $885 million materialising over the past six months. The value of transactions has lifted from previous six month periods, with DEXUS Property Group and the Dexus Wholesale Property Fund (DWPF) jointly acquiring Waterfront Place. Both parties agreed to a 50 per cent interest in Waterfront Place and Eagle Street Pier providing DEXUS Property Group the largest office portfolio in Brisbane. The 40-storey office tower leased to Commonwealth departments and major legal firms with 90 per cent occupancy reflected a capital value of $9,644/sqm. The purchase is part of their strategy to down-weigh their exposure to office in the property cycle and recycles capital through other accretive acquisitions. Challenger Life acquired the 215 Adelaide Street office tower for $224 million reflecting a reversionary yield of seven per cent at $7,708/sqm. The vendor, Pramerica Real Estate Investors, attracted long term retail leases and undertook significant capital works, consequently achieving a 60 per cent uplift in value over three years. Melbourne-based syndicator, Forza Capital, also made a $20 million purchase of a near-empty office building vacated as part of Queensland Government s change in its office strategy. Investors, owner occupiers and developers have also been active in the sub $10 million market. Accounting firm SV Partners purchased a heritage property at Market Street for $6.5 million as part of their new headquarters. It is understood that 26 Market Street has also been brought to the market. The appetite for Brisbane assets in this sub category has been increasing, 180 Brisbane, Brisbane Managed on behalf of Daisho Co. Limited particularly those offering upside given the greater value in this market compared to Melbourne and Sydney, where yields are becoming increasingly sharp. Vendors are also capitalising on the strength of the market and current competitive nature of purchasers. Demand and enquiry from investors looking for high quality assets with secure cash flows and long WALEs is expected to continue to remain strong through The weight of capital chasing quality assets will lead to further tightening in Premium and A Grade yields over the next 12 months aided by the attractiveness of the available returns relative to other forms of investment and the continuing lack of available stock. As the global hunt for yield continues, more investors will seek to capitalise on the widening yield spreads between Brisbane and the eastern seaboard cities. Despite the patchy nature of the Brisbane office leasing market, the tightening bias is predicted to continue. BRISBANE CBD PRIME YIELD VS 10 YEAR GOVERNMENT BOND RATE Yield and Rate (%) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Spread CBD prime yield 10 year government bond Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar Spread (BP) 22 A Colliers International publication

23 Metro Office CBD OFFICE Supply, vacancy and demand Drought in supply pipeline welcomed by market The pipeline of commercial space in Brisbane CBD is relatively modest when compared to other asset classes. With Daisho Co. Limited s 180 Brisbane Street (59,100sqm) the first of the three new CBD office buildings expected to reach practical completion in late 2015, and 480 Queen Street (55,691sqm) and 1WS (74,853sqm) due to enter the market in 2016, there will be a drought of development activity after their completion until at least At this stage, 180 Brisbane Street has only secured CBA as its anchor tenant (10,531sqm) while pre-commitment activity in 480 Queen is strong (above 80 per cent). With vacancy levels currently at 15 per cent according to the latest data from the Property Council of Australia (PCA), the waning of new supply is positive news for the Brisbane market. Colliers International predicts vacancy levels to peak at a near 20 per cent in By this stage, the vacancy in the prime market will exceed that of the secondary market. In light of these conditions, developers have been adapting their proposals to suit the current economic climate with private Taiwanese company, Shayher Group proposing mixed use concepts encompassing office, residential, hotel and retail uses. The first of these developments is not due for completion until around BRISBANE CBD OFFICE VACANCY FORECAST Vacant Space (m²) 500, , , , , , , , ,000 50, H H H H H H H H H H H H H H H H H H H2 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Premium A Grade B Grade C Grade Total Vacancy Rate (RHS) Major projects to act as catalyst While the market indicators are still relatively weak, Brisbane s recovery is underway. Major projects including the Queens Wharf redevelopment and Howard Smith Wharves revitalisation will act as catalyst developments for Brisbane s growth into an Total Vacancy Rate (%) 480 Queen Street, Brisbane Leased on behalf of DEXUS Property Group and Grocon iconic new world city. The Queens Wharf redevelopment will see the withdrawal of around 56,000sqm of secondary office stock across three buildings. With Labour elected into government, the BaT tunnel will no longer proceed although there is scope for a new transport system incorporating elements from both the original Cross-River Rail and Bus and Train (BaT) tunnel proposal, which could see the removal of further office space. Both the Queens Wharf and Howard Smith Wharves projects will reactive and re-energise culturally important precincts and provide high-quality public realm and connectivity. Tourism and construction, representing two of the four pillars of Queensland s economy, will be delivered through these projects, and most importantly, they are likely to generate flow-on effects and attract new businesses into the CBD. How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Vivienne Bolla Manager Research Tel vivienne.bolla@colliers.com CBD Office Research & Forecast Report Second Half

24 Research and Forecast report Second Half 2015 PERTH CBD OFFICE A cycle of opportunity The reduction in the price of commodities and the progression through the tail end of a decade-long resources investment spending boom have delivered some challenges to the Western Australian economy, particularly Perth s CBD office market. However, every part of the commercial property market cycle offers opportunities and this weak market is no exception. For tenants, it is the time to seek out better value premises, and a window for bold investors to negotiate a good deal with the potential for strong yields in the long term. In its June 2015 quarter Business Outlook, Deloitte Access Economics revised its forecast of capital investment spend in Western Australia, predicting it would hit bottom in and average $38.7 billion per annum through to This is considerably down from the annual average of $43.5 billion per annum Deloitte forecast in its March 2015 Business Outlook report. This contraction in spending, now below the previous ten year average of $42.06 billion per annum and well below the peak of $68.6 billion, caused a reduction in the labour requirement for resources and related-service sectors. This has led to population growth slowing. The Australian Bureau of Statistics (ABS) reported an annual growth rate of 1.58 per cent in the December 2014 quarter, with a change in the major source of growth, natural increase is now the main driver rather than overseas migration, a situation unseen for a decade. The previous strong investment spending, in response to demand for natural resources, increased production capacity and generated increased export volumes, which contributed to gross state product growth. However, with moderating investment spending, domestic demand has generally contracted, decreasing the need for white collar professionals. This has been the main driver of the reduction in demand for office space. The Perth CBD office vacancy is now 16.6 per cent according to the Property Council of Australia (PCA) July 2015 office market snapshot, marking a jump of 4.8 percentage points from the July 2014 result of 11.8 per cent. According to the PCA, net absorption in the six months to July 2015 was 19,875sqm, with 42 per cent of this negative net absorption coming from the emptying of B Grade tenancies, as some businesses reduced their footprint and others migrated to higher quality space in a market that favours tenants. Perth office rents continued to moderate over the first half of Just 15,045sqm of space was added to the Perth CBD supply in the first half of the year. This was arguably a good outcome given persistently soft demand levels. However, a significant volume of supply is due for completion in the second half of 2015 and this will have an impact on vacancy going into Mill Green, Perth Leased on behalf of GDI Property Group The current market correction is generating good opportunities for tenants, particularly for businesses located outside the CBD and those currently in lower grade space within the CBD. The reduction in market rents and favourable incentive levels also means Perth s CBD is once again becoming a competitive alternative to eastern 24 A Colliers International publication

25 Metro Office CBD OFFICE state capitals, particularly for those businesses with an Asian market focus, given Perth s proximity to the region and shared time zone. COLLIERS INTERNATIONAL RESEARCH FORECASTS PERTH CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents $580 $552 A Grade Net Effective Rents $363 $303 A Grade Incentives 37.5% 45% A Grade Yields 7.75% 8% A Grade Capital Values $7,484 $6,894 Total Market Vacancy Rate 16.6% 19.8% Supply Additions (m²) 15,327 30,219 Leasing market There have been some major deals completed in the first half of Ashurst and Wesfarmers have pre-committed and will be relocating to Brookfield Place 2, which is scheduled to be completed in the December 2015 quarter. Slater & Gordon have moved to 32 St Georges Terrace, which was recently completed in quarter two Rio Tinto also extended their lease on space in Central Park at 152 St Georges Terrace, which was due to expire in 2018, putting on ice hopes of them anchoring a new building. Notwithstanding these major deals, net tenant demand is soft, but many tenants are taking advantage of incentives to relocate to higher quality premises and obtain better value. Face rents have contracted over all grades in the June 2015 quarter. Premium Grade rents contracted 2.9 per cent; A Grade fell 5.3 per cent; and B Grade assets moderated 2.3 per cent. Average net face rents in Premium Grade space now average $745/sqm in the June A Grade space averages $580/sqm, down from $612.5/sqm in the March 2015 quarter. Similarly, average B Grade rents declined to $420/sqm. Incentives for Premium space have increased and are now generally on par with A and B Grade incentive levels, which range between 35 per cent and 40 per cent. PERTH CBD OFFICE MARKET AVERAGE NET FACE RENTS Net Face Rent ($/m²) $1,000 Forecast $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 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 Premium A Grade B Grade 81 St Georges Terrace, Perth Leased on behalf of Corporate Administrators Pty Ltd Investment market The calendar year 2014 saw $640.4 million in assets change hands in the Perth CBD. Two of the five assets that changed hands were entity-level transfers amounting to $504 million. Note that this figure does not include city fringe transaction 130 Stirling Street for $90 million, which occurred in early In addition to this, a city fringe asset at 52 Albany Highway sold for $72.8 million in February There were no CBD sales reported in the first half of 2015, though we note that a 50 per cent interest in Exchange Tower was offered to the market during the June 2015 quarter, with speculation suggesting various institutional investors were submitting offers. Other major CBD assets listed but not yet sold include 1 Adelaide Terrace and three Insurance Commission (WA) buildings Forrest Centre, Westralia Plaza and Westralia Square. The expectation is that the second half of 2015 will likely see these transactions occur. The global hunt for yield is continuing, with the Perth CBD assets also emerging on the radar. As such, yields for Premium and well leased A Grade stock are anticipated to remain stable or tighten marginally over the June quarter, despite increasing vacancy within the market. However, a lack of transactional evidence is hindering confirmation of this trend. CBD Office Research & Forecast Report Second Half

26 Generally, any tightening in yield is expected to occur in prime and institutional-grade assets, and to some degree, in lower graded assets with over four year WALEs. Despite tightening yields, weaker market rents have resulted in softer market capital values particularly in assets with short WALEs and/or significant vacancies. Due to the ageing nature of this stock, secondary grade assets continue to be most affected by capital value correction, as significant capital expenditure requirements are likely needed in a highly competitive leasing market. PERTH CBD A GRADE YIELD (%) 11% 10% 9% 8% 7% 6% 5% 4% 3% Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Supply, vacancy and demand CBD white collar employment has been contracting over the past 24 months according to Deloitte Access Economics (DAE) and evidenced by the increasing office vacancy rate. Demand for office space is currently very low, and there are both sublease and direct offerings that have been unable to attract tenants despite attractive rental rates. Current economic conditions have seen reduced demand for labour and shedding of excess staff (capacity) mainly in Mining and related service industries. Conversely, employment base expansion in construction, health and social services, public administration and safety; and administration and support services has sustained reasonable levels of new job formation. However these increases have not translated to increased CBD office space absorption to date. The first half of 2015 saw delivery of 15,045sqm of space added to the Perth CBD market mostly from the return of 32 St Georges Terrace into stock. 140 William Street, Perth Leased on behalf of Cbus Property 26 A Colliers International publication

27 Metro Office CBD OFFICE Campbell House, 383 Hay Street, Perth Sold on behalf of a private investor Colliers International estimates that 188,281sqm of office space is currently under construction within the CBD, all of which comprise of new construction. These include: the Old Treasury redevelopment at 28 Barrack Street (30,000sqm building, which is 100 per cent pre-committed); 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 onto the market over the remainder of the year is expected to result in approximately 63,000sqm of backfill space becoming available, and will likely cause vacancy rates to rise to around 20 per cent by mid The PCA reported a Perth CBD vacancy rate of 16.6 per cent as at July 2015, up from 14.8 per cent six months earlier in January Net absorption over the first half of 2015 was 19,875sqm, bringing the total net absorption over the previous twelve months to 50,457sqm. On a grade by grade basis, vacancy increased across the board. The largest volume vacant was in A and B Grade space with 98,045sqm and 102,974sqm vacant, respectively. However, the largest increase in vacancy volume came from B Grade and C Grade stock with an additional 13,619sqm added. B Grade vacancy increased 8,374sqm while C Grade vacancy increased 5,245sqm to 34,928sqm. PERTH CBD SUPPLY, NET ABSORPTION & VACANCY RATE Supply & Net Absorption (sqm) 240, , , , , , , ,000 80,000 60,000 40,000 20, ,000-40,000-60, % Forecast 19.8% Jan-04 Jul-04 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 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Total Supply 6 mth Net Absorption (sqm) Total Vacancy Rate (%) PERTH CBD SUPPLY, NET ABSORPTION & VACANCY RATE Total office space (sqm) 60,000 50,000 40,000 30,000 20,000 10, Completed - 33,919sqm Under Construction - 188,281sqm Mooted - 212,694sqm 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Vacancy Rate How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Quyen Quach Senior Research Analyst Research & Urban Economic Tel quyen.quach@colliers.com CBD Office Research & Forecast Report Second Half

28 Research and Forecast report Second Half 2015 ADELAIDE CBD OFFICE Investment activity at all time highs Sales activity in the Adelaide CBD office market has remained buoyant with over $173 million of assets changing hands during the first half of This is down on the previous half sales of $290 million, but this result was a record for the Adelaide office market and therefore the current half sales value is in line with average volumes. Institutional investors continue to drive the investment volumes into the Adelaide CBD market and accounted for approximately 85 per cent of the total sales activity during the first half. This has increased from last year where 70 per cent of the purchasers were institutional investors. The source of capital for all of the transactions this year has been from domestic institutional investors, with no off shore capital being invested in the Adelaide office market this year. Institutions that have purchased assets in the Adelaide market over the last 18 months include Lend Lease, Charter Hall, DEXUS Property Group/CPP Investment Board, and Cbus Property. Many institutional investors are in the position to acquire new assets and this has driven yield compression in most CBD office markets. remain at low levels, the Adelaide market it is likely to see further yield compression during 2015 for prime grade assets. Vacancy in the Adelaide market has remained stable at 13.5 per cent in the July 2015 survey by the Property Council of Australia (PCA). This result was forecast, and it is expected that vacancy will increase to a forecast high of 14.6 per cent by the end of the year. From this point it is expected that vacancy will to start to fall as any improvements in demand will impact positively on the vacancy rate. There are several factors which have driven vacancy to these high levels. Supply has increased by just under 150,000sqm since the beginning of 2012, and although much of Demand for quality CBD investment assets has remained strong, with a diverse range of investors in the market looking to secure investments. Competition for prime quality assets has strengthened due to demand from institutional investors who are in acquisition phase, together with a more active private investor market. Small private investors are more active in the below $5 million price point and are looking to invest in commercial property which shows better returns than the share market or cash. Institutional investors tend to be more specific in the type of asset they are purchasing and are looking for prime quality assets with long lease terms to secure tenants. Yield compression has occurred across all asset grades in the last 12 months in the Adelaide office market. A Grade yields are currently quoted between seven per cent to 8.5 per cent with an average of 7.6 per cent. The average yield has tightened between basis points over the last 12 months. With the strengthening of the investment market, and improved depth of the buyers in the market coupled with interest rates likely to 100 Pirie Street, Adelaide Leased on behalf of 100 PS Management Pty Ltd 28 A Colliers International publication

29 Metro Office CBD OFFICE this space was pre-committed, growth in while collar employment was not high enough to take up the back-fill space left from vacating tenants. There are still some properties which were vacated early in this construction cycle which still remain vacant. Adelaide also has the highest percentage of C and D Grade space compared to other capital CBD office markets, which shows much higher vacancy than prime grade space. Most other office markets see this stock removed and either converted to another use or demolished and new office developments built. In Adelaide, there are still a significant number of vacant development sites and these sites are more likely to be developed in preference to converting an existing building. All of these issues combined have resulted in the current high vacancy rate. COLLIERS INTERNATIONAL RESEARCH FORECASTS ADELAIDE CBD OFFICE INDICATOR JULY 2015 JANUARY 2016 Grade A Gross Face Rental Growth 1.4% 0.9% Grade A Incentives 30% 30% Total Market Vacancy Rate 13.7% 14.6% A Grade Yields 7.6% 7.5% A Grade Capital Values (per m 2 ) $4,550 $4,560 New Supply Additions (m 2 ) 0 21,883 Leasing market landlords with large contiguous space, which are competing for a limited pool of tenants. Gross face rentals across most grades have grown modestly in the last year, but have remained stable during the last half. New construction cycle starts to slow New construction in the Adelaide office market has slowed significantly, with only one project currently under construction and one building likely to commence in the second half. This follows a strong construction pipeline which has seen the Adelaide CBD grow by 11 per cent over the last three years. The completion of 50 Flinders Street which is due in the second half of the year, will see a further 21,183sqm added to the Adelaide office market. This building will be 80 per cent occupied by People s Choice Credit Union and Santos on completion. The project due to commence construction next half is Frome+Flinders, located on the corner of Frome and Flinders Street. This four level building has ground floor commercial retail space, a carpark on the second level and the upper two floors being office space. Grant Thorton, a current fringe office market tenant, is understood to have pre-committed to one of the floors in this development. This building has commenced demolition of the current site and construction is expected to commence in the second half. Demand remains weak Net absorption in the Adelaide market has also remained below the long term average with only 4,333sqm of space absorbed over the last six months. Demand in the Adelaide market has remained subdued over the first half of 2015, which follows below average net absorption results over the last three years. This was combined with a reasonably significant new supply being delivered to the market which has resulted in the currently high vacancy rate of 13.5 per cent recorded in July Some of the weaker demand can be attributed to several large occupiers signing new leases are either downsizing or have a similar space requirement that they are currently occupying. Most of these tenants are looking for more efficient use of the workspaces they occupy, with many opting for more open plan and paperless offices. The significant jump in vacancy over the last couple of years has resulted in large jumps in incentives as land lords endeavour to secure tenants. Whereas most other capital city office markets have seen incentives around the 30 per cent mark for several years this has been a relatively recent trend in the Adelaide market. Incentives are currently quoted at around 30 per cent, but it is rumoured that there are some lease deals, which have incentives higher than this. This is particularly the case for 169 Pirie Street, Adelaide Valued on behalf of Bank SA CBD Office Research & Forecast Report Second Half

30 as far out as the beginning of Even at this point white collar employment is modest with 0.8 per cent growth forecast for It is therefore likely that vacancy will increase further this year and then start to fall from the beginning of Vacancy is expected to remain at elevated levels in the medium term with current forecasts showing vacancy above 10 per cent until the end of 2018, 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 of around 30 per cent in the short term. WHITE COLLAR EMPLOYMENT GROWTH 3.0% 2.5% Forecast 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Investment market 19 Grenfell Street, Adelaide Selling on behalf of Grenfell Street Nominees Pty Ltd The project which was reported last half as the most likely to proceed has been abandoned by the State Government. This project was the Courts Precinct and if it had proceeded would have delivered new courts and would have seen several of justice related State Government departments relocate to this new precinct. The State Government was in negotiations for construction of the Courts Precinct, but determined that the project did not offer value for money. It is, however, likely that the current courts will need to undergo significant renovations, although there have been no plans announced at this stage. Although there are other several projects which have been mooted it is unlikely that they will commence without a significant pre-commitment. When will growth occur? The forecasts for white collar employment showed an improvement during the first 2015, but the current unemployment rate of 8.2 per cent was the worst result during the last 15 years and therefore it is likely that growth is generally weaker than previously forecast. Business confidence has also fallen in South Australia in recent months. All of these factors suggest a delay in the improvement in white collar employment growth, which is a key driver to positive net absorption. Forecasts from Deloitte Access Economics (DAE) suggest that this improvement could be Sales volumes remain strong Transactional activity in the Adelaide CBD office market was average in the first half of 2015 with $173 million of assets changing hands during the first half of the year. The largest transaction this year was the acquisition of a 50 per cent share in Westpac House, King William Street by Abacus. This sale has been reported as a $74 million transaction, which would value the total asset at $148 million. Abacus already owned a 50 per cent stake in this building and they acquired the remaining share from the Arena so they now own the entire asset. Arena are disposing of several assets and as part of the agreement Abacus had first right of refusal on the half share sale. Other major sales include 60 Wakefield Street ($37.75 million) and 81 Flinders Street ($41.3 million). Prime quality assets still in demand With the tightening in yields expected to continue for prime grade assets it is likely to drive further sales during the second half. The depth of the buyer pool for prime grade assets continues to improve and with limited assets available this is also likely to support yield compression. Institutional investors are likely to remain a very strong buyer type over the next 12 months. Private investors will continue to look for opportunities, in particular for higher yielding assets and value-add opportunities. They are most active in the below $5 million price bracket. 30 A Colliers International publication

31 Metro Office CBD OFFICE Supply, vacancy and demand 431 King William Street, Adelaide Leased on behalf of Longreef Manager Pty Ltd ADELAIDE CBD OFFICE SALES VOLUMES $ Millions ADELAIDE CBD OFFICE MARKET AVERAGE YIELDS The current CBD office construction cycle is slowing with only one new building under construction and limited new supply forecast in the short to medium term. The largest mooted project which was likely to begin construction this year has been abandoned by the State Government. The courts precinct was expected to deliver around 30,000sqm of space with an estimated construction cost of $500 million. The abandonment of the project was announced in March with the reasons cited that it did not offer value for money for the tax payer. There are still several mooted projects in the pipeline, but it is unlikely that any will proceed without a significant pre-commitment. For occupiers there are still several options for larger high quality contiguous space with significant incentives being offered to fill this space. Total vacancy has remained stable at 13.5 per cent as at July Net absorption of the six months to July 2015 was recorded at 4,333sqm which brought annual net absorption to sub-1,254sqm. With limited growth in white collar employment forecast during 2015, vacancy is expected to remain high over the medium term. ADELAIDE CBD SIX MONTH NET ABSORPTION & VACANCY Thousands m² % Forecast 20% 15% 10% 5% 0% 6 mth Net Absorption (m²) Secondary Grade (C&D grade) Prime Grade (premium A&B grade) Vacancy (%) 11% 10% Enquiry focus on smaller space (Average Equiv. Rev. Yield %) 9% 8% 7% 6% 5% 4% 3% Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Premium A Grade B Grade Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Colliers International enquiry data give some insight into the dynamics of the Adelaide office market. Over 70 per cent of the enquiry for new space this year has fallen in the below 500sqm bracket with limited enquires in the larger size ranges. The majority of enquires are coming from business services which tend to be small to medium size businesses. Government, construction, medial and IT&T services are also significant tenant types looking to relocate to new space. How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Kate Gray Associate Director Research Tel kate.gray@colliers.com CBD Office Research & Forecast Report Second Half

32 Research and Forecast report Second Half 2015 CANBERRA CBD OFFICE Office market continues to provide a safe bet The Canberra office market has demonstrated resilience during the first half of Market activity has occurred at a steady pace with new leasing deals and tenants exercising their favourable bargaining position in lease negotiations. A Grade accommodation remains the preference for tenants. Investors have shown a willingness to pay lower yields for assets with good cash flow profiles, sales activity being limited only be a lack of acquisition stock. There have been five major sales completed so far in The ACT office market is strongly influenced by government policy given its reliance on the public sector for employment. Public sector employment has reduced over the last 12 months. However, lower employment in the public sector has stimulated greater levels of employment in the private sector, which has grown to capture additional demand from the outsourcing of services formerly performed by the public sector. Overall, the unemployment rate in Canberra has been on an upward swing since 2009 due to lower public sector employment and post-global Financial Crisis (GFC) efficiency dividends. However, the impact of lower public sector employment has been gradual rather than dramatic as the unemployment rate is still below the long term average. As at June 2015, Australia Bureau of Statistics (ABS) data indicates that the unemployment rate in the ACT was 3.5 per cent compared to a national average of six percent. The ACT still has the lowest unemployment rate of all the States and Territories. We anticipate this trend will continue with the lifting of the government hiring freeze in recent weeks. Overall, the ACT economy has become more diversified and resilient over the last two decades with education services, private health and information technology becoming more prominent contributors to economic activity. The unemployment rate may still trend upwards in the short term but is unlikely to spike as it did in the 1980 s and 1990 s. The six month trend to 1 July 2015 is a good news story for Canberra. In the context of strengthening tenant demand, low volumes of new office supply and attractive investment yields on offer, favourable leasing and sales conditions will endure over the next 12 months. COLLIERS INTERNATIONAL RESEARCH FORECASTS CANBERRA CBD OFFICE INDICATOR CURRENT 12 MONTHS A Grade Net Face Rents $380 $370 A Grade Net Effective Rents $263 $265 A Grade Incentives 25% 22.5% A Grade Yields 7% 6.8% A Grade Capital Values $5,400 $5,450 A Grade Vacancy Rate 8% 5% Total Market Vacancy Rate 14% 15.5% Supply Additions (m²) Allara Street, Canberra Managed on behalf of Allara Nominees 32 A Colliers International publication

33 Metro Office CBD OFFICE Leasing market CANBERRA CBD ENQUIRIES - NUMBER & TOTAL AREA (SQM) ,000 Escalating demand for space Despite reports from some quarters suggesting market conditions in Canberra are subdued, Colliers International saw a considerable amount of activity in the first half of the year. The most demand was witnessed in the sub-1,000sqm leasing market with more than 8,000sqm of leasing deals transacting under this threshold over the six months to 1 July Leasing activity has picked up with new tenants for the parliamentary precinct and the CBD. Number of Enquiries , , ,000 80,000 60,000 40,000 20,000 Total Enquiry Size (sqm) Diversified tenant profile Demand for space in Canberra is not limited to only one segment or category with a variety of industry types coming to market, each with varying property requirements. These sectors all seem to have exposure to the inevitable Commonwealth Government growth, which will occur. One commonality between the deals brokered over the first half of 2015 has been the landlord s ability to respond quickly to tenants requests and offer flexibility in accommodation options, which helped meet the tenant s business needs. Colliers International does not expect the current hive of activity to dissipate in the near term. Indications suggest the second half of 2015 will see continued improvement in the volume of deals. 0 0 H H H H (No.) 1,000-2,999 (No.) >3,000 (No.) (sqm) 1,000-2,999 (sqm) >3,000 (sqm) Tenants seek to capitalise on current conditions Tenant demand is focused on A Grade stock which has been made even more attractive by record level incentives. The A Grade vacancy level is expected to decrease over the short to medium term as there will be moderate demand and no new supply. Despite the record high vacancy within the Canberra office market, which sat at 15.3 per cent at 1 July Tenants have been prepared to commit to new floorspace after being tempted into the market by prevailing leasing and incentive metrics. Tenants recognise that market conditions are favourable but will not be around forever. The next two years will see more employment growth, limited supply completions and the continued conversion of secondary stock for alternate uses. This should see vacancy decrease and could prompt upwards pressure on net effective rents. To capitalise on existing conditions, tenants are seeking to lock-in generous A Grade deals now whilst they still can. In this context, the challenge for landlords is to provide a quality product for a good price in order to attract and retain tenants. It is worth mentioning that despite the high headline vacancy figure, there is currently a shortage of contiguous space for A Grade buildings in the CBD. This has meant that larger tenants have not had the bargaining power they may have expected, leaving rental rates relatively stable. Secondary grade product has greater cash flow risk with an expectation of longer letting up periods and little or no effective rental growth predicted over the medium term. Many owners are assessing the potential for adaptive re-use for other uses such as student accommodation which are deemed lower risk. Investment market Five major sales this year 14 Moore Street, Canberra Leased on behalf of Quintessential Equity Five major office investment sales (of greater than $5 million) were completed in Canberra so far in The total value of office stock sold in the five completed deals was $ million. CBD Office Research & Forecast Report Second Half

34 This compares to $245.6 million for the first six months in This year has thus been slower than the last so far, although the activity slowdown relates to a lack of buying opportunities rather than a lack of demand. Analysis of the recent sales evidence reflects further yield compression during 2015 as investment appetite for Canberra assets has increased. Buyers are now more mixed with AREITs, private syndicators and foreign investors all active. Colliers International Research is aware of one commercial office transaction that has already taken place in the second half of CANBERRA REGION TOTAL OFFICE SALES VOLUMES Total Sales Volume ($m) $450 $416.2 $400 $350 $300 $255.4 $245.6 $250 $200 $162.0 $150 $132.1 $117.3 $100 $52.7 $50.5 $50 $23.5 $- $ H H H H H H H H H H1 Long-WALE highly prised Canberra is subject to a two tier investment market, comprising both secure investment opportunities on long-term leases and core plus options. Properties with long-term WALE of 10 years plus are highly sought after albeit few of these opportunities are available. All five of the deals completed so far in 2015 were for WALEs of four years or less and these were highly sought after by core-plus investors. Colliers International facilitated the sale of a national portfolio of five assets on behalf of Mirvac in the first half of Two of the assets at 54 and 60 Marcus Clarke Street, were purchased by Centuria. 60 Marcus Clarke Street sold for $49 million on an 8.23 per cent reversionary market yield and 54 Marcus Clarke Street sold for $14.2 million on a 9.7 per cent yield. Bidders were a mix of local privates and smaller institutions. Centuria was attracted to the deal by the high yield and the good track record of the assets in attracting tenants. 44 Sydney Avenue, Forrest is a four-storey A Grade office building situated within the parliamentary precinct and within close proximity to Parliament House. The property sold to Quintessential Equity for $32 million in March after an EOI campaign. The deal reflected a market yield of 9.15 per cent and a capital value rate of $3,207/sqm. 20 Allara Street, Canberra offered a 0.5 year WALE and was acquired for $20.5 million by Morris Property Group, a local private investor in May. JLL was responsible for the other sale this year the ACT selling 64 Allara Street, for $16.8 million. The property was purchased by Cromwell and is currently at 100 per cent occupancy with anchor tenants being Jacobs Australia and CIC. The property has a WALE of 3.43 years. The sale represented an initial yield of 8.05 per cent. Positive investment outlook Confidence in the commercial property market is growing and Colliers International expects greater investment sales activity in the latter half of The strong sales results achieved so far this year are rerating pricing which is encouraging vendors. With a shortage of investment opportunities along the eastern seaboard we expect conditions to remain buoyant. 44 Sydney Avenue, Canberra Sold on behalf of 360 Capital 34 A Colliers International publication

35 Metro Office CBD OFFICE 54 & 60 Marcus Clarke Street, Canberra Sold on behalf of Mirvac Supply, vacancy and demand Vacancy remains at historic highs The vacancy level for the Canberra region reached a record high of 15.4 per cent at 1 January 2015 although it has tapered downwards marginally over the last six months to reach 0.1 per cent at 1 July Supply has been strong over the last decade and the size of the Canberra office market is now over 2.4 million sqm. CANBERRA REGION OFFICE FLOORSPACE Floorspace (sqm) 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Occupied Stock Vacancy 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 Jul-15 The latest PCA data showed overall market vacancy at 15.3 per cent at 1 July 2015 with A and B Grade vacancy both having fallen and C and D Grade vacancy having risen. Some 8,800sqm of net absorption was recorded over the six months to 1 July 2015, after negative 22,400sqm occurring in the preceding six month period. High volumes of supply have coincided with weaker than expected demand over the last four years. This has reflected greater work place efficiencies sought by the government in addition to the general economic slowdown as commodity exports and investment in the mining sector has moderated; placing downward pressure on the tax receipts the government need to fund programs. Limited short-term supply Following the recent completions of 1 Canberra Avenue and the refurbished 2 Constitution Avenue, there will be no major office completions in Canberra in the short-term. This lack of new supply coupled with growing demand is likely to place downwards pressure on vacancy levels over the next two years, providing relief for landlords. Notwithstanding this, given their elevated levels vacancy rates will remain higher than average for the next decade. Demand focused on A Grade stock Given the significant amount of stock available, flight to quality from tenants persists with A Grade stock the most sought after. Over the six months to 1 July 2015 A Grade vacancy fell by 1.6 percentage points to reach 14.1 per cent. Canberra is currently running low on contiguous options in the CBD which will ensure rents remain static in the short term. The amount of B, C and D Grade stock all decreased during the first half of This trend has been consistent over the last 12 years and is likely to continue given government has a strong preference for A grade stock and older stock is withdrawn for refurbishment or adaptation to an alternative use. How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Tom Duncan Associate Director Research Tel tom.duncan@colliers.com CBD Office Research & Forecast Report Second Half

36 Research and Forecast report Second Half 2015 AUCKLAND CBD OFFICE A landlord s market Economic strength has benefited Auckland s CBD office market considerably over the last few years. CBD office employment has increased by more than 20 per cent in the last five years. The result of such rapid growth is the absorption of space which has limited tenant choices. The demand has impacted both prime and secondary rents, now increasing at a steady pace. Developers are reacting to the situation, but the time lag will create strained occupier conditions for the next few years. Leasing market Leasing activity hampered by lack of space suitably leaseable space in the CBD. Colliers International s projections of supply, particularly between 2018 and 2020, if all proceed, will alleviate some of the pressure on rising rents for tenants. However, that will be a long wait for some tenants. Colliers International s expect that some leakage of CBD tenants to the city fringe will be inevitable. Investment market Investors searching for stock One of the most recent Auckland CBD office building sales, Datacom, which is currently being built in the Wynyard Quarter. In the last four years, vacant space has halved and net supply has reduced by almost 30,000sqm. The longevity of the high levels of tenant demand has resulted in capacity constraints that have seen the pace of leasing activity of existing space slow considerably in the last 12 months. The completion of 10 new office buildings of approximately 108,000sqm by the end of 2017 will lead to some large scale tenants moving upon their completion. This includes Fonterra moving to new headquarters in Wynyard Quarter, NZME and Meredith Connell moving to 151 Victoria Street West in Victoria Quarter and Datacom consolidating into new premises, also in Wynyard Quarter. These four tenants alone will occupy nearly 45,000sqm of new space in the CBDs emerging western precincts. The refurbished vacated space, which is spread through the CBD, and primarily of secondary quality, is likely to receive significant interest from a growing number of small to mid-size businesses. Landlords raise rents Strong and sustained tenant demand has led to prime and secondary net face rents rising by 5.2 per cent and 3.6 per cent respectively over the past year. Prime rents are forecast to continue rising at this level for at least the next three years. Secondary rents have only recently started to show stronger rental growth due to the pressure applied on tenants to find 151 Queen Street, Auckland Sold on behalf of Precinct Properties New Zealand Limited 36 A Colliers International publication

37 Metro Office CBD OFFICE Fletcher Construction will build Datacom and sell it to Wynyard Precinct Holdings - the joint venture between Goodman Property Trust and Singaporean sovereign wealth fund GIC. The Datacom building was sold for $86.2 million at a yield close to 8.5 per cent. There have also been some CBD sales of smaller mixed use premises in the CBD at between $5 million and $6 million for yields between eight per cent and 8.5 per cent. The premises will likely be converted into residential apartments. As at mid-2015, only a limited number of existing CBD office buildings have been converted into residential accommodation. The primary reasons include the significant demand for all grades of office space and the preference for apartments in the city fringe where amenity, facilities, car parking, access, layout, configuration and a wealthier demographic reside. Supply, vacancy and demand Tenant demand has never been stronger The first half of 2015 showcases how capacity constraints affect market dynamics. Auckland CBDs 6.2 per cent office vacancy rate is the lowest on record in two decades. Prime vacancy continues to bounce around at next to nothing and remains the lowest in the Asia Pacific. More than 20,000sqm of CBD secondary space was leased in the last six months, according to our latest survey. There is now approximately 90,000sqm of office space available in the CBD. Colliers International s flagship workplace research shows an average CBD workstation requires 16.8sqm - leaving enough office space for an additional 5,400 workers. This is around seven per cent of the current workforce, indicating supply will struggle to keep up with demand. AUCKLAND CBD OFFICE RENTS BY GRADE $/sqm pa Prime Secondary Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Source: Colliers International Research New Zealand Developers start to build Developers are reacting, and there is currently 224,000sqm of office supply planned to be constructed over the next five years, some with pre-commitment requirements. Office space ready to market before 2017, such as 125 Queen Street and 22 Fanshawe Street, along with the opening up of secondary space in Shortland Street, will assist in alleviating some of the pent-up demand. It is unlikely to be enough to create an oversupply. Two major office high rise towers currently mooted include listed sector Precinct Properties redevelopment of the Downtown Shopping Centre. This will include approximately 37,000sqm of office space, but still requires a 50 per cent pre-commitment rate. Current indications are for the tower to be completed by late The other major high rise office tower currently planned is for early 2019 at 1 Mills Lane. Private firm Manson TCLM have indicated they will redevelop the site for approximately 40,000sqm of office space. Pre-commitment of 30 per cent has not yet been attained. AUCKLAND CBD DEVELOPMENT PIPELINE 26% 39% 2% 9% 24% Source: Colliers International Research New Zealand Outlook looking positive, for now Completed (Refurbishment - 7,300m²) Under Construction (Refurbishment -26,500m²) Under Construction (New Building -73,000m²) Proposed (Estimated Floor Areas Subject to Change - 117,500m²) On Hold (Estimated Floor Areas Subject to Change - 79,000m²) Sustained business confidence and employment growth are key fundamentals over the next few years that will keep tenant demand strong. The completion of new developments will assist in alleviating some of the pent-up demand, but it is not until 2019 that a sizeable amount of mooted supply is forecast to be completed. This leaves little choice for tenants to choose over the next few years, in a market already struggling with limited options. At this stage, not all developments in the pipeline have met pre-commitment targets. Any reduction in the supply pipeline will keep conditions tight and in favour of the landlord for longer. Landlords will be in the driving seat until this time, which will see rents continue to rise. How else can we help you? Speak to one of our property experts today. au.office@colliers.com For further information please contact: Chris Dibble Associate Director Research and Consultancy Tel chris.dibble@colliers.com CBD Office Research & Forecast Report Second Half

38 Our experience CBD OFFICE leased 255 Elizabeth Street Sydney, NSW 24,026m² On behalf of Investa Property Group 140 St Georges Terrace Perth, WA 11,400m² On behalf of AMP Capital Waymouth Street Adelaide, SA 9,221m² On behalf of KTS Properties managed 180 Ann Street Brisbane, Qld 57,465m² On behalf of Daisho Co. Limited 192 Ann Street Brisbane, Qld 24,086m² On behalf of Daisho Co. Limited Iron Road House 30 Currie Street Adelaide, SA 9,184m² On behalf of Rivers Corporation Pty Ltd sold 35 Clarence Street Sydney, NSW $137.1 million On behalf of AMP Capital 114 William Street Melbourne, Vic $125 million On behalf of Kyko Group 210 & 220 George Street Sydney, NSW $99.15 million On behalf of Mirvac Group valued Mirvac portfolio acquisition NSW, Qld, ACT & Vic 242,131m² On behalf of Blackstone Grosvenor Place 225 George Street Sydney, NSW 85,478m² On behalf of Arcadia Managed Investments Pty Ltd 530 Collins Street Melbourne, Vic 67,598m² On behalf of GPT Funds Management Limited designed and project managed National Retail Roll Out (56 new sites) Qld, NSW & Vic 10,000m² On behalf of Sarina Russo Job Access 171 Collins Street Melbourne, Vic 6,800m² On behalf of Wood Group PSN Colliers International Sydney NSW, Melbourne Vic & Brisbane Qld 6,500m² On behalf of Colliers International Accelerating success. How else can we help you? Speak to one of our property experts today.