Annual Net Absorption (sq m) Annual Net Additions (sq m)

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1 RESEARCH

2 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-19 Jan-2 CBD total vacancy fell from 6.5% to 4.6% in the 12 months to January 218, the lowest level since July 28. The CBD recorded the strongest net absorption figure nationally, totalling 74,829 sq m in the 12 months to January 218. The overall vacancy rate is expected to remain below the long-term average with new supply relatively constrained over the next 12 months. Reflecting the declining vacancy rate, average prime effective rents grew by 7.2% in the 12 months to January 218. The current spread between prime and secondary yields is 5 basis points, the tightest on record. Over the past 12 months, the addition of gross office space has been significantly constrained in the Melbourne CBD. This has led to a supply shortage, notably for larger occupiers, and driven pent-up demand from tenants who are coming to the market to satisfy their requirements. Gross CBD office supply totalled just 27,748 sq m in the 12 months to January 218, the lowest level since 22. Of this amount, only 6, sq m was new construction, coming from the Rialto extension at 525 Collins Street. The supply added to the market over the past six months was well below the long-term average of 62,32 sq m. The next wave of supply is anticipated to come on line from Q2 218, however, it will continue to be relatively constrained over the next two years. New supply additions in 218 are expected to total 17,242 sq m across four developments, all of which are pre-committed. In 219, two developments totalling 88,2 sq m are anticipated to complete, of which 77% is pre-committed. New supply added to the market in 218 and 219 will average 2.3% and 1.9% of the total stock respectively, well below the historical average of 3.6%. during this period will average 6.1% of the total stock. Major office completions in 22 and 221 will include 477 Collins Street (51, sq m), 8 Collins Street (43,sq m), 311 Spencer Street (65, sq m), 13 Lonsdale Street (55, sq m) and 45 Bourke Street (65, sq m). In total, 474,442 sq m across 11 developments currently under construction is expected to be delivered over the next three years. 76% of this upcoming gross supply is precommitted, leaving 115,35 sq m uncommitted. Gross New Supply & Commitment CBD Office ( s sq m) per six month period year average Projection Research Analyst Beyond 219, we anticipate gross supply additions to increase from early 22, through to 221, with 279, sq m currently under construction. New supply UNCOMMITTED TOTAL Melbourne CBD Office Market Indicators as at January 218 Grade Total Stock Vacancy Rate (%) Annual Net Absorption Annual Net Additions Average Net Face Rent ($/sq m) Average Incentive (%) Average Core Market Yield (%) Prime 2,992, ,847 31, Secondary 1,523, ,18-16, Total 4,515, ,829 14,61 2

3 MELBOURNE CBD OFFICE MARCH 218 RESEARCH Collins St - 25,8 sq m [Pitcher Partners/Exxon/AGL/Fujitsu] Mirvac/Morgan Stanley Real Estate - Q % committed One Melbourne Quarter - 26,4 sq m [Lend Lease/Arup/AMP] Lend Lease - Q % committed Collins Sq - 4, sq m [Transurban, NBN] Walker - Q % committed Spring St - 15, sq m [Australian Unity] ISPT - Q % committed 5 Y3, 839 Collins St - 39,2 sq m [ANZ, WeWork] Lendlease - Q % committed Collins St - 49, sq m [King & Wood/HWL/Minter/Gadens] Cbus Property/ISPT - Q % committed Collins St South - 43, sq m [Mckinsey/Macquarie/CenITex] QIC - Q % commited Collins St - 51, sq m [Deloitte/Norton Rose] Mirvac/Suntec REIT - Q % committed Spencer St - 65, sq m [Victoria Police] Keppel REIT/Cbus Property - Q3 22-1% committed Lonsdale St - 55, sq m [Vanguard/CBUS Super/Telstra Super] Charter Hall - Q % committed 45 Bourke St - 65, sq m [NAB] Brookfield/ISPT - Q % committed 14 Lonsdale St - 15, sq m Charter Hall Docklands Dve - 22, sq m MAB Docklands Dve - 1,5 sq m MAB Digital Dve - 1, sq m Digital Harbour Flinders St - 14, sq m [JH Group] DEXUS % committed Melbourne Quarter - 55, sq m [EA] Lendlease % committed Little Lonsdale St - 25, sq m Victoria University Lonsdale St - 2, sq m GPT La Trobe St - 36, sq m Poly Australia Queen St - 6, sq m Cbus Property Queen St - 25, sq m Victoria University Collins St - 32, sq m Abacus Property Group Harbour Town - 1, sq m Ashe Morgan Federation Square East - 6, sq m State Government Melbourne Quarter - 45, sq m Lendlease Source of Map: Knight Frank Research NB. Dates are Knight Frank Research estimates Major tenant precommitment in [brackets] next to NLA Office NLA quoted 4 3

4 Jan-13 Jan-19 Jan-2 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-19 Jan-2 Employment growth creating solid tenant demand Victoria has recorded the strongest total employment growth across Australia in the last five years, with 391,934 new jobs created. In the 12 months to December 217, 94,986 jobs were created. Reflecting strong employment growth, tenant demand in the Melbourne CBD continued to be robust over the past six months, with an overall net absorption of 51,376 sq m. This was 35% above the 1 -year average and the strongest figure nationally. Businesses are increasingly focussed on the attraction and retention of staff and the flight to quality trend continues, with occupiers upgrading their office space. Solid leasing activity was recorded in the prime market with a total of 51,661 sq m absorbed over the past six months. On the other hand, the secondary market recorded negative absorption of 285 sq m and 7,18 sq m over the past six and 12 months respectively. CBD the hotspot for education and co-working The Education sector has been a major driver of leasing activity in the Melbourne CBD over the past 12 months. Significant Melbourne CBD Vacancy Rates Grade (%) Jul-17 (%) (%) Premium A-Grade Prime B-Grade C-Grade D-Grade Secondary Total lease commitments included Monash College committing to 37,5 sq m at 75 Collins Street and a further 6, sq m at 12 Spencer Street, Melbourne University taking up 6,528 sq m at 333 Exhibition Street and La Trobe University taking an additional 3, sq m at 36 Collins Street. Looking ahead, Monash College is seeking a further 15, 2, sq m in the Melbourne CBD. The Co-working sector continues to expand in the Melbourne CBD. The volume of co-working spaces in Melbourne has increased by 63% since the start of 216 to total 95,4 sq m. Significant lease commitments in 217 included WeWork committing to 11, sq m collectively at Bourke Street and 41 Collins Street and Space&Co opening an additional level at its Melbourne Central Tower office. Looking ahead, there is at least 2, sq m of tenant requirements in the CBD market from the co-working sector, including Campfire, We+ and WeWork. Strong demand for small office suites The market continues to benefit from robust demand from smaller occupiers seeking 1-5 sq m. Knight Frank Research shows the number of enquiries in this size range has increased by 45% over 217. Furthermore, the number of tenant enquires within the 5-1, sq m Melbourne CBD Net Absorption per six month period ( s sq m) SECONDARY PRIME Projection Melbourne CBD Vacancy Rate Total Vacancy (%) 12% 1% 8% 6% 4% 2% % Projection cohort has also increased, up by 39%. This has been supported by landlords becoming more flexible through subdividing floors, with fitted out suites becoming increasingly accepted. This has seen some assets achieve rental premiums of over 1% including 36 Collins Street and 36 Elizabeth Street. Vacancy falls to the lowest level since 28 The Melbourne CBD continued to experience landlord-favourable conditions with the overall vacancy rate declining from 5.9% in July 217 to 4.6% in January 218. The current vacancy rate is 2 basis points below the 1-year average, and the lowest vacancy rate since July 28. Prime vacancy fell to 4.%, the lowest level since July 28, while secondary vacancy decreased to 5.8%. Within the CBD, the Docklands market had the tightest vacancy rate of only 1.2%, down from 3.1% 12 months ago. Vacant stock in the Eastern Core precinct continued to decline off the back of strong leasing activity, down from 3.1% in January 217 to 2.1% in January

5 Jan-13 Jan-19 Jan-2 MELBOURNE CBD OFFICE MARCH 218 RESEARCH Vacancy is anticipated to remain below the long-term average in the short term White collar employment growth in the Melbourne CBD office market is forecast to increase by 2.9% per annum between This results in a positive outlook for net absorption, although the lack of supply might be a constraint. With growth in office stock set to remain subdued over the next two years, the overall vacancy rate is expected to remain at historically low levels. Vacancy will rise slightly over the next six months, however, stemming from backfill space coming on line as tenants move into new buildings, before gradually falling until 22 on the back of anticipated strong net absorption. Prime net effective rents reach a historical high Office rents in the Melbourne CBD continued to increase across all grades, supported by lower vacancy rates. Average prime net effective rents increased by 7.2% to $414/sq m, a historic high. The growth of prime effective rents was underpinned by a face rental increase of 4.3% over the year, with average incentive levels ranging between 24% and 26%. Nevertheless, incentive levels continue to be higher for pre-committing tenants. Following the trend in the prime market, secondary net effective rents grew by 7.3% in the 12 months to January 218. Effective growth was underpinned by face rental growth of 7.3%. As at January 218, average secondary effective rents sit at $299/sq m while incentive levels range between 25% to 3%. Looking ahead, with the shortage of supply in the medium term, prime and secondary net face rents are forecast to increase by 7% and 5% respectively, by the end of 218. Prime incentive levels are forecast to trend down towards 24% over the next 12 months, while secondary incentives are forecast to remain stable, at between 25% to 3%. Average Net Effective Rents Melbourne CBD ($/sq m) PRIME SECONDARY Projection Recent Leasing Activity Melbourne CBD Address Precinct NLA Term (yrs) Lease Type Tenant Sector Start Date 45 Bourke Street Civic 43, 12 Precom NAB Finance & Insurance Q Collins Street Docklands 37,5 U/D New Lease Monash University Education Q Collins Street Western 6,415 c.1 Precom Norton Rose Fulbright Legal Q Lonsdale Street North East 9,6 12 Precom Cbus Super Business Services Q Lonsdale Street North East 3,6 U/D Precom Telstra Super Business Services Q Lonsdale Street North East 11,2 1 Precom Vanguard Business Services Q Lonsdale Street Civic 1, New Lease RMIT University Education Q Collins Street Civic 6, U/D New Lease TWE Retail Trade Q4-18 One Melbourne Quarter Docklands 9,72 U/D Precom AMP Finance & Insurance Q3-18 5

6 Sales volumes surge to a record high as offshore investment dominates Investment sales in the Melbourne CBD remained strong in 217, with sales volumes achieving the highest annual level on record. Office sales activity ($1m+) in 217 within the Melbourne CBD totalled $3.36 billion across 21 properties. The total sales volume in 217 was $157 million above the record levels achieved in 214 and 95% higher than the 1-year CBD sales volume average. the volume achieved in 216. Offshore investment in 217 was dominated by Asian-based groups, led by Singaporean investors, albeit Chinese and US investors were also active. Transaction levels were boosted by a number of major sales, with six transactions above $2 million recorded over 217. This is the highest number on record for an individual year. Three of these sales were fund-through transactions, with the acquisition of a 5% stake in 477 Collins Street the largest recorded. Melbourne CBD sales by purchaser $1 million+ sales 217 OFFSHORE UNLISTED FUND/SYNDICATE SUPER FUND PRIVATE INVESTOR 52.3% 21.7% 18.5% 5.4% Cross-border investor interest in the Melbourne CBD has been unprecedented in 217. Offshore groups accounted for 52% of total sales by value, totalling $1.74 billion across eight transactions. This was more than double Investors remained focused on Prime grade stock with Premium and A-grade assets accounting for 63% of sales volume, or $2.11 billion. Prime grade asset sales have surpassed secondary asset sales every year for the past seven years. OTHER 2.2% Recent Sales Activity Melbourne CBD Address Price ($ mil) Core Mkt Yield (%) NLA $/sq m NLA WALE (yrs) Vendor Purchaser Sale Date 5 Franklin Street ,9 8,271 1 Lian Beng Group 5 Franklin St Pty Ltd Dec-17 8 Collins Street * 28,619 1,843 U/D APPF Commercial / Savills Investment Management Manulife Real Estate Nov Collins Street ,337 9,4 5 TrustCapital Advisors PA Realty Nov La Trobe Street ,864 8,8 4.5 TrustCapital Advisors AMP Capital Nov Bourke Street ,148 8, TrustCapital Advisors PA Realty Oct Lonsdale Street * 16,176 7,84 U/D QIC Global Real Estate Deutsche Asset Oct Hardware Lane 6.7 VP 42 16,692 VP U/D Offshore Chinese investor Sep Spencer Street ,162 7, Anton Capital CBRE Global Investors Aug La Trobe Street ,947 8, Motor Accident Commission of South Australia Charter Hall Aug Russell Street 23. VP 2,591 8,877 VP Theosophical Society Local Chinese investor Jul Collins Street^# * 25,8 1,697 1 Mirvac Morgan Stanley Real Estate Jul Collins Street^# 3. U/D 49,8 12,48 1 Cbus Property ISPT Jul Collins Street^# * 58,48 14, Mirvac ARA Asset Management Jul-17 6

7 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 MELBOURNE CBD OFFICE MARCH 218 RESEARCH While prime assets accounted for the majority of investment volume, secondary CBD offices transacted over the year totalled $1.23 billion, the second highest total on record. Within the secondary market, offshore groups were the most active buyers, acquiring $1.74 billion over 217. Spread between prime and secondary yields is the tightest on record Melbourne CBD Sales $1 million+ By grade ($ m) 4, 3,5 3, 2,5 2, 1,5 1, Melbourne CBD Yields & Risk Spread Core Market Yields & Prime vs Secondary Spread (bps) 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% Fewer buying opportunities, combined with strong investor demand, particularly from offshore investors, has resulted in further yield compression on both prime and secondary assets. Average prime office yields have compressed by 5 basis points over the past 12 months, to now range between 4.75% and 5.25%, 154 basis points lower than the 1-year average PRIME Outlook SECONDARY 1.%.% RISK PREMIA (RHS) PRIME YIELD (LHS) SECONDARY YIELD (LHS) In the secondary market, average core market yields compressed at greater levels, by 75 basis points in the 12 months to January 218, and now range between 5.5% and 6.%. The current spread of 75 basis points between prime and secondary yields is the tightest on record. Over the next three years, white collar employment within the Melbourne CBD is forecast to grow by 2.9% per annum. Tenant demand in the CBD is expected to remain strong over the next three years, underpinned by broad based growth encompassing Professional Services, Education, Co-working and Public Administration. New office supply in the Melbourne CBD will be significantly constrained in the next two years, with 76% of new developments pre-committed. The new supply pipeline is expected to expand from 22 onwards with new supply during this period averaging 6.1% of total stock. Major office completions beyond 22 will include 477 Collins Street (51, sq m), 8 Collins Street (43, sq m) and 311 Spencer Street (65, sq m). The overall vacancy rate in the CBD is anticipated to remain low during From 22, we expect the overall vacancy rate to gradually rise as backfill space and new supply restore a more normal level of availability. While tenant demand in the Melbourne CBD remains strong, net absorption is expected to be well below the long term average over the next 12 months due to the lack of available space. With the vacancy forecast to remain below the historical average over the next two years, further increases in rents are projected. Prime and secondary net face rents are forecast to grow by 7% and 5% respectively in 218. Investment volumes are unlikely to match the high level of 217, but this will be due to a scarcity of investment opportunities rather than diminishing investor appetite, with demand remaining very strong for CBD assets. 7

8 RESEARCH & CONSULTING Ben Burston Group Director Ben.Burston@au.knightfrank.com Jane Wong Research Analyst Jane.Wong@au.knightfrank.com CAPITAL MARKETS Martin O Sullivan Senior Director, Institutional Sales Martin.O Sullivan@au.knightfrank.com Paul Henley Head of Commercial Sales, Australia Paul.Henley@au.knightfrank.com Danny Clark Head of Commercial Sales, Victoria Danny.Clark@au.knightfrank.com Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. OFFICE LEASING Hamish Sutherland Senior Director Head of Division Hamish.Sutherland@au.knightfrank.com Michael Nunan Director Office Leasing Michael.Nunan@au.knightfrank.com James Pappas Director Office Leasing James.Pappas@au.knightfrank.com Simon Hale Director Office Leasing Simon.Hale@au.knightfrank.com OCCUPIER SOLUTIONS Gordon Wyllie Director Occupier Solutions Gordon.Wyllie@au.knightfrank.com VALUATIONS & ADVISORY Michael Schuh Joint Managing Director, Victoria Mschuh@vic.knightfrankval.com.au Sydney CBD Office Market Overview March 218 Australian Office Top Sales Transactions CY 217 Student Housing 218 Active Capital 217 VICTORIA James Templeton Managing Director James.Templeton@au.knightfrank.com Knight Frank Research Reports are available at KnightFrank.com.au/Research Important Notice Knight Frank Australia Pty Ltd 218 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank Australia Pty Ltd for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank Australia Pty Ltd in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank Australia Pty Ltd to the form and content within which it appears.