Office Investment Market Review and Outlook. February 2013, Australia

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Office Investment Market Review and Outlook. February 2013, Australia"

Transcription

1 Office Investment Market Review and Outlook February 2013, Australia

2 Contents Introduction Office investment market in 2012 Economic and demand outlook The physical market The investment market Appendix: All office transactions

3 Introduction Markets remained volatile in Australian Government expects that commercial property will deliver an excess return The A-REIT discount to NTA narrowed significantly in Throughout the report, we consider the following investment yields traded in a 169 basis points range in 2012, touching above the historical benchmark of 350 basis points over the Furthermore, the cost of debt, as illustrated by a questions: the lowest level in more than 60 years in late-july (2.70%) after peaking at 4.39% in March. The gyrations in bond market pricing were evident in equity markets. The benchmark S&P ASX 200 recorded a 686 point trading range in Despite the volatility, the S&P/ASX 200 index delivered an impressive 15.6% return in The Jones Lang LaSalle total return index for the five main CBD office markets and Canberra delivered a result of 10.05% in The short-term outlook is for a moderation in investment performance. In a low growth world, commercial next 3-5 years. In 2012, Jones Lang LaSalle recorded 125 major office transactions over AUD 5 million, totalling AUD 9.38 billion (Figure 1). This figure is the highest level since detailed monitoring commenced in It is important to note that the numbers were inflated by the inclusion of corporate and entity-level transactions. Excluding the de-listing of CQO and the AUD 2.0 billion capital commitment to the International Towers at the Barangaroo South commercial precinct, transaction volumes were AUD 5.63 billion. 175 basis point reduction in the BBB-rated corporate bond yield, reduced in A-REITs were active participants in the corporate bond market. In 2012, Australian property companies raised AUD 4.1 billion in the corporate bond market the highest figure since Bloomberg data began in A-REITs acquired approximately AUD 1.2 billion worth of office assets in 2012 the first time volumes were above the AUD 1.0 billion mark since The disconnection between the physical and investment markets is likely to remain in The global economy will Economic growth is expected to be below trend in What will be the drivers of leasing activity and what strategy should owners adopt for lease renewals? In a low growth environment, vacancy movements are more sensitive to development activity. What are the supply-side risks across Australian office markets? The capital markets drivers are supportive of yield compression for prime-grade assets in Australia. How will the yield conundrum play out over the next months? property will struggle to deliver returns comparable to the long-term benchmark of 9.50%. Nevertheless, property will look attractive relative to other asset classes in The excess return for commercial property over Australian Government Bonds, historically, is 350 basis points. The AMP projects that Australian Government Bonds will deliver a return of 3.5% in Offshore investors continue to be active participants in Australian commercial property markets. In 2012, offshore groups accounted for 42.9% of total office transactions an all-time record. The relative stickiness of Australian property yields has resulted in wide spreads between prime-grade assets in Australia and other office markets. As an illustration, the spread between Sydney and New York sits at 230 grow below trend, and employment generation in Australia will be muted. As a result, there is the potential that vacancy rates will rise further in some markets. Nevertheless, the demand for commercial property will remain relatively firm. Investors still value yield, however we expect to see some moderate capital appreciation for commercial property in Australia. Leveraged returns are often the real driver of market pricing. How much of an impact will lower debt costs have on return on equity calculations? What is the depth of the investment market and who will be the key buyer groups in 2013? While domestic investors focus on the nominal unleveraged basis points with a 290 basis points spread to London. The return from property, the excess return that property can long-term average spreads are: 125 basis points (New York) generate is a more important benchmark. Jones Lang LaSalle and 210 basis points (London). Figure 1: Total Office Transactions Value of Transactions (AUD, million) Number of Transactions 10, , , , , Value Number 1 AMP Capital, Review of 2012, outlook for Office Investment Market Review and Outlook Jones Lang LaSalle 5

4 Office investment market in 2012 Offshore investors were active participants Offshore investors are active participants in the Australian office markets. In 2012, offshore investors accounted for 42.9% of transactions by value the highest percentage share of transactions on record. Australian prime-grade A-REITs Active buyers of office assets The S&P/ASX200 A-REIT index rallied in The first part of the rally was fuelled by share buy-back programmes from large cap REITs. The global hunt for yield was also evident in the listed space. JP Morgan 2 reported that the market capitalisation average earnings yield on A-REITs in their While a number of the mid-to-large cap A-REITs were net buyers in 2012, portfolio restructuring and disposal of non-core assets drove divestment programmes. SGP disposed of five commercial buildings totalling AUD million in 2012 as they reduce their portfolio weighting to the office sector. office yields are high relative to other mature markets and in a low-growth world, the security of cash flow provided by prime-grade assets in CBD office markets has proved attractive to a number of passive offshore investors. Furthermore, investors are re-weighting their portfolios to sectors and markets that can deliver superior risk-adjusted returns. The volatility of returns in Australia has been lower than the UK and US over the past 15 years. A number of large pension funds have looked to deploy significant amounts of capital to achieve scale in the Australian office markets. Two Canadian pension funds Canadian Pension Plan Investment Board (CPPIB) and Public Sector Pension Investment Board (PSP) have pursued divergent strategies. CPPIB made an AUD 1 billion commitment to the first two stages of the International Towers at the Barangaroo South commercial precinct in Sydney. Meanwhile, PSP partnered with GIC Real Estate and CHC (AUD 1.7 billion) to de-list CQO. The PSP share was approximately AUD 731 million. The new unlisted fund (CHOT) has a diversified portfolio of office assets across major CBD and suburban office markets. Occupancy rates for Australian assets, while deteriorating over 2012, are amongst the highest in the world. With limited development activity occurring in most markets, there is some evidence of offshore investors moving up the risk curve and acquiring assets with shorter WALEs and potential vacancy risks. Secondary-grade assets can be considered the high beta sector of the office market and tend to outperform prime-grade assets in market upturns. In 2012, MGPA acquired its first Australian asset at 6 O Connell Street, Sydney for AUD million, while Aviva Investors increased its exposure to Australia with the acquisition of 477 coverage universe was 5.78%, significantly higher than the US (3.63%), UK (3.63%) and Japan (5.09%). The discount to NTA for the two solely office-exposed A-REITs narrowed from 11.3% (CPA) and 16.4% (IOF) in December 2011 to 9.5% (CPA) and 5.7% (IOF) in December The narrowing of the discount to NTA, coupled with lower debt costs, resulted in A-REITs acquiring AUD 1.20 billion worth of commercial property in A-REITs were the third largest buyer cohort (13.0%) after offshore investors (42.9%) and unlisted funds (16.2%). Approximately 58% of the acquisitions made by A-REITs were in Sydney, the bulk of which were located in the CBD. The largest transactions were both for part shares (25%). DXS acquired a stake in Grosvenor Place at 225 George Street for AUD million and IOF purchased a share in 126 Phillip Street for AUD million. A number of A-REITs have a strategy to diversify their office portfolios, making acquisitions in Brisbane and Perth. The resource-dependent markets have seen their share of capital stock by value across the CBD office markets rise from 16% in 2002 to 26% in Major transactions included the acquisition of 10 Eagle Street, Brisbane (AUD 195 million) by CPA, 12 Creek Street, Brisbane (AUD million) by DXS (50% by the trust and 50% by DWPF) and 66 St Georges Terrace, Perth (AUD 82.4 million) by IOF. A-REIT investment activity was largely concentrated in the four main CBD office markets. GOZ was an exception with the acquisitions of Gore Hill Technology Park (Building C) at Pacific Highway, Artarmon (AUD 82.7 million) and Mort Street, Canberra (AUD 55.8 million). Unlisted funds deploying capital after successful raisings Unlisted funds were active on both slides of the ledger in The net balance between acquisitions and disposals was (minus) AUD million. A number of large wholesale funds deployed the capital that was successfully raised over the past 24 months. GWOF completed the acquisition of 150 Collins Street, Melbourne for AUD 182 million. The sale price showed an equivalent yield of 6.50%, providing support to the tighter end of the Melbourne prime yield range (6.50% to 8.00%). Jones Lang LaSalle classifies this acquisition as a domestic purchase. The GPT Interim Result Datapack (2012), however, highlighted that 23% of the units in GWOF were held by offshore pension funds and sovereign funds. Offshore investment into Australia, when measured as solely through direct transactions, is therefore under-stated. A number of closed-end funds have reached maturity and are in the process of being wound up. The Direct Property Investment Fund (DPIF), a wholesale office fund, managed by the property division of Colonial First State Global Asset Management disposed of three assets 225 George Street, Sydney (25%), 2 and 4 Dawn Fraser Avenue, Sydney Olympic Park (50%) and 39 Martin Place, Sydney. The assets were acquired by the DEXUS Property Group for a total of AUD million. Capital partnerships are the favoured development model Developers with a strong balance sheet and delivery track record were able to secure debt finance, but lending criteria in terms of pre-commitment and loan-to-cost ratios are stringent. To overcome the equity shortfall in the capital structure, developers are looking to bring in capital partners. Mirvac further strengthened its strategic alliance with K-REIT. A second capital partnership was announced for the Old Treasury development in Perth. The sale price of AUD million is based on a pre-agreed capitalisation rate of 7.25%, with an adjustment to take place upon sub-lease commencement on the net operating income of the property. With a cyclical slowdown in asset creation in a number of CBD office markets, passive investors were willing to compromise on location and place significant amounts of capital in non-cbd office markets. The assets acquired, however, had the latest sustainability credentials, strong covenants, long lease terms (with options) and fixed increases over the term of the lease. Collins Street, Melbourne for AUD 67.0 million. 2 The Bricks and Mortar Report, Dec-12, Abundant liquidity favouring the APAC property sector 6 Jones Lang LaSalle Office Investment Market Review and Outlook 7

5 The Retail Employees Superannuation Trust (REST) acquired Eclipse at 60 Station Street, Parramatta from the Leighton / Grosvenor joint venture. The sale price was AUD million, reflecting an equivalent yield of 7.28%. The last time we reported the upper end of the Parramatta prime equivalent range in the 7.25% territory was in early Grocon secured the Cromwell Property Group for the fund through acquisition of a new development for the ATO at 913 Whitehorse Road, Box Hill (19,000 sqm). The development, due for completion in 2013, was purchased for AUD million, reflecting a fully leased initial yield of 7.18%. The sale price reflected a rate per sqm of AUD 6,089 comparable to the rate per sqm achieved for a number of Docklands assets. Cromwell will create an unlisted single property syndicate the Cromwell Box Hill Trust for the asset. Private investors were active in non-cbd office markets Private investors were net buyers of commercial property in Private companies and investors accounted for 7.3% of the transactions by value in The median price for investment was AUD 21.0 million. Private companies and investors remain the largest buyer cohort outside the CBD office markets. Excluding the non-cbd transactions that formed the de-listing of CQO, private companies and investors accounted for 22% of the transactions by value in non-cbd office markets. Product Investors were generally risk adverse in The focus, therefore, was on core real estate and income return. In asset pricing models, investors were allowing generous capital expenditure requirements, higher letting up periods and increased incentive allowances. Risk aversion had a detrimental impact on assets with shorter WALEs. As a result, we recorded a widening of the prime / secondary yield spread in a number of markets. New South Wales recorded the highest proportion of transactions by value (56.5%) in 2012 (Figure 3). The NSW number was inflated by the International Towers at Barangaroo and the proportion of Sydney assets in the CQO portfolio. These transactions represented 59% of the overall activity in NSW. The second highest proportion was recorded in Queensland (15.3%), followed by Victoria (15.0%), Western Australia (7.2%), the Australian Capital Territory (4.3%) and South Australia (1.7%). The previous analysis does not account for the relative size of the investable universe across the Australian office markets. Jones Lang LaSalle estimates that the market value of the six CBD and 13 monitored non-cbd office markets is AUD million. Figure 4 shows an adjusted view of transaction volumes, accounting for the size of the market. Given the lumpy nature of transactions, we have looked at transaction volumes between 2010 and The net balance is calculated by taking the share of transaction volumes divided by the share of the investable universe. A positive figure indicates that a market is receiving a disproportionate share of transaction activity relative to its size. The Brisbane office markets (CBD and Fringe) recorded the largest positive net balance. The high figure was partly a result of developers selling down completed product in the CBD and Fringe. It also reflected the under-weight position held by a number of domestic fund managers, as well as the acceptance of Queensland as an investment destination by offshore investors. While the total value of transactions was at a record high in 2012, there was a divergence between transaction volumes in CBD and non-cbd office markets (Figure 5). The share of transactions occurring in non-cbd office markets peaked at 37.1% in 4Q07 and was 20.3% in 4Q12. However, the median transaction size remained consistent at around AUD million in Offshore investors, large unlisted funds and superannuation funds are the price-setters in the Australian commercial property markets. However, there has been limited interest from these buyer cohorts in the non-cbd office markets. Private companies and investors are the dominant purchaser group for the non-cbd office markets. Figure 2: Buyer and Seller Types in 2012 Figure 3: Office transactions by State Figure 4: Net Balance (Transactions Volumes & Investable Universe), 2010 to 2012 Figure 5: Total transaction volumes, 2007 to 2012 Others* Syndicates 2% 4% 7% NSW A-REIT Developers and Property Companies 15% Superannuation Funds VIC QLD Private Investors and Companies Unlisted Funds Offshore Investors 15% 57% WA SA 0% 10% 20% 30% 40% 50% ACT s s Net Balance 5% 4% 3% 2% 1% 0% -1% -2% -3% Sydney Melbourne Brisbane Perth Adelaide Canberra Millions $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 Percent 40 CBD Non-CBD Non-CBD Share of Transactions (12 Month Rolling Average) * Others includes Corporates, Government, Insurance Companies, Not for Profit Organisations & Receiver / Managers 8 Jones Lang LaSalle Office Investment Market Review and Outlook 9

6 Major transactions throughout 2012 Blue Tower, 12 Creek Street, Brisbane Jul-2012 NLA (sqm) 32,000 Rate (AUD/sqm) 7,450 Initial Yield (Passing Income) 7.92% IRR 9.63% AUD million Australian Property Growth Fund Dexus Wholesale Property Fund (50%) /Dexus Property Group (50%) A 34 level office tower located in the heart of Brisbane CBD s financial district. The building comprises four levels of basement parking for 308 cars, ground, plus 31 levels of office space and four levels of plant. The property also includes a two storey building to Elizabeth Street, renovated in The foyer was refurbished in 2003 including the creation of a small retail tenancy for a coffee shop. In September 2005 the two storey building to Elizabeth Street was refurbished. In 2010 a services upgrade was completed, which included the refurbishment of the ground floor foyer and the upgrade of the buildings lifts and air conditioning. 215 Adelaide Street, Brisbane and 235 Edward Street, Brisbane Mar-2012 NLA (sqm) 24,750 Rate (AUD/sqm) 5,434 Initial Yield (Passing Income) 8.05% IRR 10.04% AUD million Government of Singapore Investment Corporation Pramerica Real Estate Investors The property incorporates an L-shaped allotment that slopes gently toward Edward Street and Rowes Lane. The property comprises three components; 215 Adelaide Street Tower (office tower), Rowes Arcade and Rowes Building. The Office Tower comprises a 28-level commercial office tower above a two-level retail podium and three levels of basement car parking. Rowes Arcade is the retail component and provides an effective pedestrian link between Post Office Square and Edward Street. Additionally, older-style office accommodation is situated above Rowes Arcade within the Rowes Building. The property comprises car parking for a total of 141 vehicles. AMP Place, 10 Eagle Street, Brisbane Jun-2012 NLA (sqm) 28,210 Rate (AUD/sqm) 6,912 Initial Yield (Passing Income) 7.38% IRR 9.25% AUD million Brookfield Australia Funds Management Commonwealth Property Office Fund A 33 level commercial office building located within Brisbane s prime commercial office precinct. The property comprises a single, triangular-shaped allotment with a total site area of 3,477 square metres. Completed circa 1978, the building contains three basement Levels, ground floor foyer, retail space, and 32 upper floors. The property also incorporates a two level annex, providing 374 square metres of commercial office accommodation. The property has car parking for 204 vehicles. International Towers Sydney (Towers 2 and 3), Hickson Road, Sydney Jul-2012 AUD 2.0 billion NLA (sqm) 175,683 Rate (AUD/sqm) 11,384 s Canada Pension Plan Investment Board/Lend Lease Group/ Australian Prime Property Fund/ Telstra Super/First State Super Construction of three new commercial office towers located in the southern precinct of Barangaroo, the redevelopment of a 22 hectare former container port, west of Sydney CBD s financial district. Recently named International Towers Sydney, Tower 3 (82,168 sqm) is to become Westpac Bank s new headquarters, while Tower 2 (93,515 sqm) is to be occupied by KPMG and Lend Lease. The largest of the three towers, Tower 1 (109,748 sqm) is currently fully available for lease. Towers 2 and 3 are expected to complete in 2015, followed by Tower 1 in Jones Lang LaSalle Office Investment Market Review and Outlook 11

7 Major transactions throughout 2012 Deutsche Bank Place, 126 Phillip Street, Sydney Mar O Connell Street, Sydney Sep-2012 AUD million AUD million NLA (sqm) 42,500 Rate (AUD/sqm) 16,588 Initial Yield (Passing Income) 6.17% NLA (sqm) 18,780 Rate (AUD/sqm) 5,596 Initial Yield (Passing Income) 8.10% IRR 8.71% Private Property Syndicate Investa Property Group MGPA Investa Commercial Property Fund/ Investa Office Fund A 34-storey office tower comprising 31 levels of office space, ground retail space plus two basement levels with parking for 78 cars, completed in September The ground level features a 15 metre high enclosed public square known as the Assembly, containing a large, flowing water feature bordered by cafes, retail outlets and a glazed retail podium located to the south of the site at Phillip Street level. The retail podium was refurbished mid The building has Sydney s first remote core and the tallest atrium in Australia, rising the full 160 metre height of the tower. The core, featuring transparent glass lifts, is set to the west and separated from the building plates by the atrium. Bridges link the building plates and core. The building has a distinctive profile from the outside, with stepped floor plates above level 24 and twin masts on the top. A 29-level office building including two levels of basement parking for 120 cars, completed Refurbishment and the creation of a new facade and extensions to the ground and first floors were completed in 1988/89. This area to Bligh Street was further refurbished in February Building area 16,689 sqm; comprising lettable office area 15,057 sqm and lettable retail area 1,632 sqm. Typical floor plate 630 sqm. Savings Bank Building, Martin Place, Sydney CBD Mar-2012 Scot s Church Office Tower Development, 150 Collins Street, Melbourne Jul-2012 AUD million AUD million NLA (sqm) 19,000 Rate (AUD/sqm) 7,053 NLA (sqm) 20,000 Rate (AUD/sqm) 9,100 Commonwealth Bank of Australia Equivalent Yield 6.50% Macquarie Group Limited Grocon/APN Funds Management A 12-storey building built under the administration of the Commissioners of the Government Savings Bank of NSW in Major refurbishment was carried out during by Australian Construction Services, who was awarded the Greenway award for conservation in 1991 and the Lachlan Macquarie Award at the 1991 RAIA awards. The building was also awarded a 1991 BOMA refurbished building s merit award. Others involved in the refurbishment were Leighton Contractors, Devine Erby Mazlin and Inscan Design. Levels 6 & 8 were refurbished in late GPT Wholesale Office Fund The Continuing Presbyterian Church of Australia s Scots Church, built in 1874; a stone church on the site of an earlier church of Part of the stonework was restored in 1979; the remainder was restored and the steeple repaired between the late 1980s and early Repairs to the spire included restoration of the 1.5 tonne stone finial, returning the spire to its original height of 64.3m. 12 Jones Lang LaSalle Office Investment Market Review and Outlook 13

8 Major transactions throughout 2012 Old Treasury Building, Barrack Street, Perth Sep-2012 Eclipse Tower, 60 Station Street Dec-2012 AUD million (50% share) AUD million NLA (sqm) 30,219 Rate (AUD/sqm) 10,920 NLA (sqm) 25,660 Rate (AUD/sqm) 6,518 Initial Yield (Passing Income) 7.15% Initial Yield (Passing Income) 7.28% equivalent Mirvac K-REIT Asia The Treasury building is a proposed office development of a 35 level office building having a net lettable area of 30,219 square metres plus a ground floor foyer and retail tenancies together with car parking for 203 vehicles in the basement level. The development is scheduled for completion in late It will be developed on a 99 year leasehold site. The WA government has committed to a 25 year lease on 98% of the building area (30,184 square metres). This building is centrally located near the corner of Barrack and Hay Streets. Leighton Properties/Grosvenor Fund Management REST Industry Super Eclipse Tower, A-grade, 20-storey building comprising of 19 levels commercial office space over ground floor retail and two levels of basement parking for 144 cars and 193 bicycles. Net lettable area 25,660 sqm comprising 25,080 sqm commercial space and 580 sqm retail space. The elliptical shaped building has been achieved a 5-Star Green Star rating from the Green Building Council and a 5 Star NABERS Energy rating. The $170 million project was completed in September Previously on the site were a house and two single-storey warehouses demolished in late 1995 and a three storey block of flats demolished in late Marcus Clarke Street, Canberra 913 Whitehorse Road, Box Hill Feb-2012 Dec-2012 AUD million AUD million NLA (sqm) 40,201 Rate (AUD/sqm) 5,622 NLA (sqm) 19,728 Rate (AUD/sqm) 5,917 Initial Yield (Passing Income) 7.28% IRR 9.36% Initial Yield (Passing Income) 7.18% (fully leased) Grocon Walker Corporation Cromwell Box Hill Trust CIMB TrustCapital Australian Office Fund No. 1 A 12-storey office building including a three level basement carpark. The development completed mid-2010 at the site of Queen Elizabeth II former residence, which was demolished in Developers were Land Development Agency and Walker Corporation. The building has been designed to achieve a 6-star Green Star Office Design v2 rating and a NABERS 5.5-star rating. A new 20-storey office building in the Melbourne suburb of Box Hill under development by Grocon. When complete, the building will be 97% leased to the Commonwealth of Australia, on behalf of the Australian Taxation Office (ATO), for 15 years. The building is currently under construction with a target date for completion of 31 March On completion the building will contain 13 levels of office space, ground floor retail and 300 carspaces over six levels above ground. 14 Jones Lang LaSalle Office Investment Market Review and Outlook 15

9 Major transactions throughout 2012 Worley Parsons House, 1 Adelaide Terrace, Perth CBD Nov-2012 NLA (sqm) 19,600 Rate (AUD/sqm) 5,232 Initial Yield (Passing Income) IRR 10.91% AUD million 9.75% equivalent yield Fortius Funds Management GDI No. 36 Perth CBD Office Trust Worley Parsons House, also known as 1 Adelaide Terrace, an office building of seven levels above lower ground and basement parking for 176 cars. The building is semi-circular in shape. Construction of the building, on the site of the old Ozone Hotel completed in November 1987 with Woodside Petroleum pre-committed to the whole building on a 20 year lease. The building won the 1988 Australian Institute of Architects Corporate and Office Design Award and the 1990 WA BOMA Award. Architect, Forbes & Fitzhardinge. Direct Property Investment Fund NLA (sqm) Rate (AUD/sqm) Dec-2012 Grosvenor Place 225 George Street, Sydney AUD million (25% share) Colonial Building Martin Place, Sydney AUD million 2 and 4 Dawn Fraser Avenue Sydney Olympic Park AUD 82.7 million (50% share) Grosvenor Place 80,144 sqm Colonial Building 20,730 sqm Dawn Fraser Avenue 33,493 sqm Grosvenor Place AUD 13,538 per sqm Colonial Building AUD 7,224 per sqm Dawn Fraser Avenue AUD 4,938 per sqm Charter Hall Office REIT Apr-2012 NLA (sqm) 400,562 Rate (AUD/sqm) 4,613 Capitalisation Rate AUD 1.8 billion (total book value as at Dec-2011 across 18 assets) 7.79% cap rate as at Dec-2011 Initial Yield (Passing Income) IRR Grosvenor Place 5.4% Colonial Building 5.7% Dawn Fraser Avenue 7.8% Grosvenor Place 8.9% Colonial Building 9.4% Dawn Fraser Avenue 8.9% Charter Hall Office REIT Direct Property Investment Fund Government of Singapore Investment Corporation (42.5%)/ Public Sector Pension Investment Board (42.5%)/ Charter Hall Group (15.0%) s DEXUS Property Group and DEXUS Wholesale Property Fund 16 Jones Lang LaSalle Office Investment Market Review and Outlook 17

10 Economic and demand outlook The global economy is expected to grow below trend in 2013 The global economy stuttered throughout 2012, expanding by a below-trend rate of 2.5%. Global Insights projects a further 12 months of below trend growth in 2013 (2.6%) before a moderate upswing in 2014 (3.4%). The risks to global growth, however, remain skewed towards the downside. The growth outlook in 2013, and over the medium-term, is largely dependent on a recovery in the Chinese economy. The Chinese government appears to have successfully engineered a moderation in growth in late 2011 and 2012 with recent indicators pointing towards a sustainable recovery in The PMI indicator moved back above 50 (a reading above the 50 mark indicates growth) in late 2012, while exports, industrial production, retail sales and fixed asset investment a key gauge of infrastructure spending have all shown improvement. Global Insights estimates that China will post economic growth of 8.0% in The global economic outlook in suggest that China will be responsible for almost 38% of growth over the year (Figure 6). The US fiscal cliff agreement averted most of the tax increases that would have started in early The most significant tax increase comes from the loss of the payroll tax cut that Global Insights estimates will knock about Figure 6: Contribution to GDP Growth by Region Percent Share China Asia-Pacific (ex-china) North America Western Europe Latin America Emerging Europe Middle East & Africa 0.4 percentage points off the 2013 growth rate. The next challenge for policy makers will be a negotiation of the debt ceiling. On a positive note, US households are more optimistic with consumer sentiment at a four-year high, discretionary spending picking up and some signs of recovery in housing markets. Overall, Global Insights sees the US economy growing by 1.7% in 2013 and 2.7% in Downward revisions to global growth projections partly reflect an extension of the Eurozone s economic woes. The Eurozone posted a contraction of -0.4% in 2012 and is expected to contract further in 2013 (-0.2%). The southern periphery of Europe will remain weak. A number of governments missed austerity targets for 2012, placing greater pressure on fiscal budgets in One of the few pillars of strength Germany is slowing. The German economy is projected to grow by 0.9% in 2013 and 1.1% in Australia Looking for support from the non-mining sectors of the economy growth expectations for the domestic economy over The non-mining sectors of the economy remain weak. Capital expenditure surveys in the non-mining sector of the economy suggest there will be negligible growth in the 2012/13 financial year. The RBA has moved to stimulate the broader economy with four cuts to the official cash rate, totalling 125 basis points in The official cash rate now stands at 3.00% the same rate as the middle of the financial crisis (April-2009). The RBA retains an easing bias, and there is the potential for a further basis points reduction in the official cash rate over the first half of Compounding the weakness in the non-mining sector of the economy is the fiscal consolidation at the federal and state level. The RBA now expects the domestic economy to grow at a below-trend rate of between 2.0% and 3.0% in The medium-term upturn in the domestic economy is predicated on a broad-based recovery in the residential construction sector. Forward-looking indicators of residential construction improved over the latter part of Rental vacancy rates are tight in most metropolitan areas and is heavily dependent on China. Global Insights projections for Source: Global Insights, Jones Lang LaSalle The Reserve Bank of Australia (RBA) has revised down there has been a modest recovery in building approvals. 18 Jones Lang LaSalle Office Investment Market Review and Outlook Jones Lang LaSalle 19

11 The latest population statistics released by the Australian strongest performers over the medium-term. While the base confidence. When we took the temperature in 2012, Bureau of Statistics showed Australia s population expanded by 359,600 people, at a rate of 1.61%, over the year to June Australia s population now stands at a record high of million people. Strong population growth and a shortage of dwellings is expected to see private sector housing investment increase by 6.5% in 2013 before accelerating to 8.5% in A large proportion of Australian businesses have underinvested in capital expenditure over the past five years. In real terms, business investment in machinery and equipment in 2012 is only marginally higher than Corporate Australia is looking to have a renewed push towards productivity growth. A reactivation of capital expenditure is required to provide a platform for productivity growth, and capital expenditure on plant and machinery is projected to grow by 8.9% in 2013 and a further 7.0% in A rebound in capital expenditure in the non-mining sector will be positive for white-collar employment growth in the professional, scientific and technical services industry sector. Lower growth, but the themes remain the same State economic growth projections have been revised down in Nevertheless, the themes remain unchanged. Queensland and Western Australia are forecast to be the case is for Queensland and Western Australia to outperform, the downside risks are more pronounced. Mining sector investment spending is at the peak, and the future investment plans of iron ore and coal miners are sensitive to the price outlook. Deloitte Access Economics base case projects that the Queensland economy will grow by 4.5% per annum between 2012 and 2015, while Western Australia will grow by 3.7% per annum over the same period. The service-orientated states of New South Wales and Victoria are expected to record below trend growth in Nevertheless, over the next three years, New South Wales and Victoria will be in the middle lane of Australia s multi-speed economy. The New South Wales economy is projected to grow at 2.7% per annum and Victoria at 2.6% per annum between 2012 and The demand environment will be challenging in 2013 The Australian CBD office markets recorded 55,900 sqm of net absorption in 2012 approximately one-fifth of the ten year average (294,000 sqm). While the headline net absorption result was positive, three of the six monitored CBD office markets recorded negative net absorption. Melbourne (-40,400 sqm), Sydney (-15,400 sqm) and Adelaide (-1,750 sqm) all recorded negative results in On the positive side of the ledger, Canberra (68,900 sqm), sub-lease availability had increased by 61,900 sqm over 2012 to 1.14% of total CBD stock. The demand environment will be challenging in Corporate Australia is looking to rationalise its cost base to maintain margins. As a result, there will be limited organic growth in the market. Deloitte Access Economics projects base-office demand growth of 0.7% in 2013 across the modelled CBD office markets. Net absorption is expected to be well below trend at 57,000 sqm in Centralisation activity, however, has the potential to support net absorption projections in Centralisation is not real demand, but displacement of demand. The A-Grade vacancy rate in non-cbd office markets is 7.3%, and the spread between gross effective rents in the CBD and the non-cbd office markets has narrowed significantly. For example, average prime gross effective rents in North Sydney are only 24% below the level of the Sydney CBD compared with almost 40% lower in Economic growth drives white collar employment and the demand for office space. With the economy projected to return to trend growth in 2014, the medium-term prognosis is for base-office demand to increase. There is, however, a lag between economic and employment growth. Base office demand is projected to grow by 1.8% in 2014, before recovering to 2.6% in The low-low world of 2013 The leasing environment will be challenging over the next 12 months. Lead indicators such as business confidence and job advertisement surveys point towards limited organic growth across Corporate Australia in Tenant expansion, however, is only one driver of leasing activity. We continue to engage with corporates who are looking to consolidate multiple tenancies to make efficiency gains or to improve occupational densities. Activity Based Working (ABW) is promoted by corporate real estate professionals as a way of implementing a cultural change within an organisation. A fully integrated ABW fit-out, however, is not appropriate for all organisations. As a result, we believe the ABW-lite model in which occupiers take elements that work for their business without embracing all aspects of the ABW concept, will become more prevalent. While there will be limited growth in the market over the next 12 months, the weight of lease expiry Sydney, in particular points towards increased activity. We estimate that 1.4 million sqm worth of lease expiries will occur in the Sydney CBD between 2012 and Stay-put is the main competition for owners with direct vacancy. However, even when applying conservative conversion ratios to the lease expiry diary, the weight of expiry supports an increase in leasing activity over the next three years. Figure 7: Real GSP Y/Y % Change 6.0% Perth (29,800 sqm) and Brisbane (14,800 sqm) recorded the strongest net absorption across the CBD office markets. Demand conditions, however, deteriorated over the second Figure 8: CBD Base Office Demand Y/Y % Change 8.0% Tim O Connor Head of Leasing, NSW 5.0% 4.0% 3.0% 2.0% 1.0% half of Capital expenditure expectations were scaled back in the resource sector and space was relinquished by a number of small to mid-cap miners and engineering services firms. As an illustration of the turnaround, Perth and Brisbane recorded 84,750 sqm of net absorption in 1H12, and then 40,200 sqm in 2H12. Corporate Australia is nervous. Business surveys 6.0% 4.0% 2.0% 0.0% 0.0% NSW VIC QLD WA SA ACT highlight a reduction in confidence, while forward-looking indicators, such as the ANZ Job Advertisement Series, confirm that Corporate Australia is scaling back expansion -2.0% Sydney Melbourne Brisbane Perth Adelaide Canberra* Source: Deloitte Access Economics, Jones Lang LaSalle plans. Sub-lease availability is the barometer of business * The data is for the whole of the ACT Source: Deloitte Access Economics, Jones Lang LaSalle 20 Jones Lang LaSalle Office Investment Market Review and Outlook 21

12 The physical market Vacancy pushed to the upper end of equilibrium in 2012 The national CBD office market vacancy rate increased by 1.6 percentage points to 8.8% over Vacancy is now at the upper end of equilibrium, which is assumed to be between 7.0% and 9.0% for office markets. Only two of the monitored markets, however, are recording vacancy within the equilibrium range Sydney (8.4%) and Melbourne (8.1%). Adelaide (11.4%), Canberra (11.1%) and Brisbane (9.9%) are all above equilibrium, while Perth (5.6%) remains the tightest CBD office market in Australia. The downsizing of corporate Australia was a significant contributor to the rising vacancy rate. Over 2012, sub-lease space increased by 61,900 sqm to 188,100 sqm or 1.14% of total stock. A higher proportion of the excess capacity in CBD office markets, however, sits in secondary-grade stock. The prime-grade vacancy is 7.2% percentage points tighter than secondary-grade (10.7%). Most office markets are recording a vacancy rate around the ten year average (Figure 9). Vacancy movements in CBD office markets are more sensitive to demand than supply. In a global context, however, the vacancy rate for CBD office markets is low. The vacancy rate in the Americas (16.0%), Figure 9: Office Markets Vacancy Rates Vacancy Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% Sydney CBD North Sydney Parramatta Chatswood St Leonards Macquarie Park Sydney Fringe* Melbourne CBD Melbourne Fringe Melbourne Suburban Brisbane CBD Brisbane Fringe Perth CBD West Perth* Adelaide CBD Canberra Vacancy Rate 10-Year Average * The time series for this market is less than 10 years Figure 10: Office Markets Development Pipeline* Brisbane Fringe Melbourne CBD Macquarie Park Adelaide CBD West Perth* Canberra Sydney CBD Melbourne Suburban Chatswood Brisbane CBD Melbourne Fringe Sydney Fringe* Parramatta Perth CBD St Leonards North Sydney 0% 2% 4% 6% 8% % of Total Stock * The development pipeline is defined as projects under construction Europe (9.6%) and the Asia-Pacific (10.1%) are all higher than Australia. Limited development activity and positive net absorption have resulted in the majority of the 13 non-cbd office markets recording a vacancy rate below their ten year average. Net absorption in nominal terms (66,900 sqm versus 55,900 sqm), and as a percentage of total stock (0.75% versus 0.34%), was higher in the non-cbd office markets than in CBDs in Below trend supply over the next two years There were relatively few project commencements across Australian office markets between 2009 and With a construction lead time of between 24 and 36 months for office developments, supply additions will be below trend in 2013 and Figure 10 shows the medium-term outlook across monitored CBD and non-cbd office markets. There is 394,000 sqm of space under construction scheduled to complete in 2013 and a further 78,300 sqm in 2014 across CBD office markets. The development pipeline over the next 24 months equates to 2.9% of total stock with 70% pre-committed. 22 Jones Lang LaSalle Office Investment Market Review and Outlook 23

13 There is a misconception that completions equal supply. Approximately 41% of the stock in Australian CBD office markets is in excess of 30 years old. These assets reflect the design and characteristics of previous generations. In order to meet the requirements of modern corporate occupiers, a high proportion of backfill space will be withdrawn in 2013 and There is also the potential for permanent withdrawals as older-style buildings are converted to residential to accommodate the growth in the residential population in a number of CBD locations. remain tough and financiers are providing debt finance on lower loan-to-cost ratios. Increasingly, tenants have to assess the strength of a developer s balance sheet and the ability to attract capital partners to the project or to source a fund-through investor. timeframe, our weighted-average prime gross effective rent series is projected to grow by 1.7% per annum. Figure 11 shows the three-year average outlook by market. Jones Lang LaSalle has identified around 200,000 sqm of potential withdrawals over 2013 and 2014 across CBD office markets. As a result, net supply additions will be 263,300 sqm in 2013 and 48,800 sqm in 2014 well below the figure recorded in 2012 (352,500 sqm) and the 35-year average of 250,000 sqm. Options for large space users remain limited in most office markets, and there will be pre-commitment activity over the next 12 months. Nevertheless, new development activity is expected to be below trend, further extending the moderate supply outlook through 2015 and The due diligence process for corporates looking to pre-commit is more complex now, than pre In a normal short-listing process, a tenant would consider the suitability of the scheme, location and price-point. However, the lending criteria for development Rents to grind higher across a number of markets The rental recovery stalled in Face rents moved marginally higher, but increased competition for tenants saw incentives ease in a number of markets. Nevertheless, NLA-weighted prime gross effective for CBD office markets increased by 1.2% over The resource-dependent markets of Perth and Brisbane recorded the strongest growth over Prime gross effective rents increased by 5.6% in Brisbane and by 4.1% in Perth. It is worth highlighting that all of the growth in Perth and Brisbane occurred in the first half of Brisbane rents were flat in 2H12, while Perth contracted by 1.9%. In Sydney and Melbourne, leasing activity was below trend and tenants were reluctant to relocate. Higher incentives were required to facilitate movement. However, in a number of instances, owners were able to offset through face rental growth. Jones Lang LaSalle Research forecasts a moderate growth outlook between 2012 and 2015 (Figure 11). Over this Face rents are relatively inelastic in Australian office markets. Projected growth in prime gross face rents are expected to under-write effective growth assumptions in 2013 and There is, however, upside potential to the growth outlook. Leasing incentives are above historical averages across a number of markets. A recovery in leasing activity could see a reduction in incentives. Figure 11: Office Markets Prime Gross Effective Rents Canberra Adelaide CBD West Perth* Perth CBD Brisbane Fringe Brisbane CBD Melbourne Suburban Melbourne Fringe Melbourne CBD Sydney Fringe* Macquarie Park* St Leonards* Chatswood* Parramatta North Sydney Sydney CBD -6% -3% 0% 3% 6% 9% 12% 15% 2012 Average Growth (2012 to 2015), p.a. A strategy for renewals It is important for owners with potential vacancy in their portfolio to stay close to the market. Leasing incentives for new deals remain stubbornly high in most markets and are expected to remain above historical norms in 2013 and The relocation of a major tenant can have a significant impact on cash flow and asset valuation. Tenants and their representatives are actively using potential downtime in lease renewal negotiations. Increasingly, tenants are benchmarking market incentives against their renewal option and seeking to secure an incentive on renewal that is close to what is available in the relocation option. However, the uncertain outlook for revenue and profit has resulted in a high proportion of occupiers remaining in their current premises upon lease expiry. There remains a cost benefit to staying put and owners require a strategy for each renewal. Importantly, owners need to understand the available options and the financial health of the tenant including its long-term growth/consolidation plans. Ultimately, the owner has to discover whether relocation is a genuine option for the tenant in the current market. In an environment of high-leasing incentives, any work that can be undertaken to minimise renewal incentives will generate a positive outcome for the owner. * Jones Lang LaSalle does not produce rent forecasts for this market Richard Fennell Head of Property and Asset Management Australia 24 Jones Lang LaSalle Office Investment Market Review and Outlook 25

14 The investment market Yields were flat in 2012 In 2012, prime equivalent yields across CBD office markets were broadly unchanged. The area-weighted average prime equivalent yield was unchanged at 7.46%. While the aggregate figure showed little movement, there was greater discrimination within the prime sector, and between prime and secondary grade assets. Assets with income risk and higher capital expenditure requirements were more heavily discounted by potential investors. In the Melbourne CBD, for example, the spread between the lower and the upper end of the prime range increased by 25 basis points to 150 basis points. The spread between 2004 and 2008 averaged 100 basis points. The prime/secondary yield spread increased across a number of markets. The Brisbane CBD recorded compression for prime-grade assets and decompression for secondary-grade assets. As a result, the prime/secondary Table 1: Office Markets Prime Equivalent Yields Market Current (%) 10-Year Average (%) Spread (bp) Sydney CBD North Sydney Parramatta Chatswood St Leonards Macquarie Park Sydney Fringe* Melbourne CBD Melbourne Fringe Melbourne Suburban Brisbane CBD Brisbane Fringe Perth CBD West Perth* Adelaide CBD Canberra * The time series for this market is less than ten years yield spread increased by 25 basis points over 2012 to 163 basis points. The prime/secondary yield spread in Brisbane is currently 57 basis points wider than the ten year average. Table 1 and Table 2 shows the current prime and secondary equivalent yield ranges for office markets, as well as the mid-point range over the past ten years. While there was some moderate yield compression recorded between 2010 and 2012, a positive spread highlights that prime equivalent yields are above the long-term average in most markets. The yield conundrum in Australian CBD office markets Property yields have followed treasury yields down in the US, UK and Europe. Prime yields were 260 basis points (New York) and 150 basis points (London) tighter in late 2012 than in mid In contrast, the Sydney CBD recorded 25 basis points of yield compression over the same period. Table 2: Office Markets Secondary Equivalent Yields Market Current (%) 10-Year Average (%) Spread (bp) Sydney CBD North Sydney Parramatta Chatswood St Leonards Macquarie Park N/A Sydney Fringe* Melbourne CBD Melbourne Fringe Melbourne Suburban Brisbane CBD Brisbane Fringe Perth CBD West Perth* Adelaide CBD Canberra * The time series for this market is less than ten years The benchmark reference rate for commercial property the inflation-indexed bond rate has compressed by 215 basis points from mid-2009 to end The relatively stickiness of domestic property yields and a significant compression of the real risk-free rate to multi-generational lows have resulted in the spread between the CBD office yields and the real risk-free rate at the widest rate on record (Figure 12). Figure 12: Office Markets Prime Equivalent Yield and Inflation Indexed Bond Rate Spread Basis Points Sydney Melbourne Brisbane Perth Adelaide Canberra The spread between the average prime equivalent yield in the Sydney CBD and the inflation-indexed bond rate was 570 basis points in 4Q12. This spread is 195 basis points higher than the historical hurdle rate of 375 basis points and wider than the early 1990s when the vacancy rate peaked at 22.5%. While historical valuation benchmarks indicate that prime-grade assets are very much the cheap side of fair value, investors have retained a degree of caution with their asset pricing models. In a low treasury yield environment, it is more challenging to identify attractive valuations. Over the long-term, the benchmark risk premium for prime-grade assets in the Sydney CBD is 375 basis points above the real risk-free rate. The long-term average for the inflation-indexed bond rate is 2.85%, implying that fair value for prime-grade assets in the Sydney CBD is 6.60%, with a 100 basis point spread around the mid-point (6.10% to 7.10%) reflecting the individual characteristics and location of the asset. Nevertheless, when investors mean revert the reference inflation-indexed bond rate back to the long-term average (2.85%), there is still a positive spread of 30 basis points between the risk premium and the benchmark risk premium. The situation in the Sydney CBD is replicated across CBD office markets. The widest spread we have recorded over the benchmark risk premium is in the Melbourne CBD. The historical risk premium for the Melbourne CBD above the real risk-free rate is 400 basis points the current spread is 246 basis points higher at 646 basis points. The physical market is implying that prime equivalent yields should be around the long-term average. As highlighted in Table 1 and Table 2, yields are marginally higher than the long-term average. The conditions in the physical market are not supportive of significant yield compression. Indeed, the short-term outlook supports a flat yield profile over the next 24 months. The physical market is only one part of the story. A number of other factors support the case for yield compression. Australian property yields are high in a global context, spreads to inflation-indexed bond rates are the widest on record and the cost of debt for well-rated groups has fallen by around 185 basis points over Jones Lang LaSalle is not a subscriber to the argument that property yields in Australia will follow treasury yields down to the extent recorded in a number of offshore markets. Nevertheless, the increased depth of investor demand for the highest quality prime-grade assets, the relative shortage of these assets and the support from the capital markets drivers of yield compression could see yield tightening for the better quality assets of between 25 and 50 basis points over the next 2-3 years. 26 Jones Lang LaSalle Office Investment Market Review and Outlook 27

15 Assessing the investable universe for opportunities The number of buy mandates is rising. Competition for good quality assets will be strong among offshore investors, A-REITs, unlisted funds and superannuation funds. One of the hurdles to investment activity will be a lack of investment-grade product. Jones Lang LaSalle assessed the market value of the five major CBD office markets and Canberra at AUD billion at the end of If we break the CBD investable universe into number of assets, however, there are only 137 prime-grade assets in excess of 25,000 sqm. Furthermore, the uncertain outlook for corporate Australia will see fewer pre-commitments and a cyclical slowdown in asset creation over the next 24 months. As a result, there will be relatively few opportunities to acquire stabilised assets with longdated leases. The capital market drivers of yield compression are evident in Australia. High yields in a global context, wide spreads to the risk-free rate and a reduction in the cost of debt that boosts leveraged returns all support firmer pricing for commercial property. Nevertheless, the potential for yield compression is greatest for stabilised assets with long-dated leases. There are wider spreads within the prime-grade yield ranges and between prime and secondarygrade assets. A fringe of core strategy provides an opportunity to acquire risk assets, undertake the capital expenditure, improve the lease profile and WALE repositioning the asset to core product. John Talbot Managing Director Investment and Advisory Group, Australia Asset values to grind higher The Jones Lang LaSalle Capital Value Indicator (CVI), which tracks prime-grade office values, increased by 2.7% in 2012 and has now risen by 15.4% since the cyclical low was recorded in values (4Q09). While the headline rate of capital value growth was below-trend for office markets, there was a divergent market-by-market performance. The Adelaide CBD recorded the strongest capital value growth, increasing by 5.9% in 2012, while Perth (4.7%) and Brisbane (4.2%) also recorded above-trend growth. Sydney (2.6%) and Melbourne (2.5%) recorded growth marginally below trend, while asset values increased in Canberra by 1.3%. Capital values are projected to rise by an average of 2.9% per annum between 2012 and Figure 13 shows the capital value growth in 2012, as well as the three-year average outlook for capital value growth across CBD office markets and select non-cbd office markets. Over the forecast period, North Sydney (4.3% per annum) and Sydney (4.1% per annum) are forecast to record above-trend capital value growth. Lower debt costs boosting leveraged returns A number of factors are placing upward pressure on the domestic banking sectors cost of capital. A reliance on offshore term funding markets, the regulatory changes to be imposed by Basel III and the elevated rates offered to attract retail deposit holders are all factors keeping bank funding Figure 13: Office Markets Capital Value Indicator Canberra Adelaide CBD Perth CBD costs higher. Bank margins are estimated to be between 225 basis points and 275 basis points above the five year swap rate for the highest quality investment grade assets. The five year swap rate is at 3.40%, implying a cost of debt between 5.65% and 6.15%. A-REITs and unlisted funds, however, have diversified their sources of funding and are less reliant on the domestic banking sector. The corporate bond market has enabled well-rated groups to cut borrowing costs and extend maturities. In 2012, Australian property companies raised AUD 4.1 billion in the corporate bond market the highest figure since Bloomberg data began in Figure 14 shows the recent movement in corporate bond yields, as published by the RBA. In December 2012, the BBB corporate bond yield, with a 1-5 year maturity, was 5.16%, compared with 7.34% in April 2011 (Figure 14). Spreads have narrowed as well. The current spread between Australian government backed bonds and corporate bond yields (BBB) is 248 basis points (Figure 15). A reduction in the cost of debt has reduced the weighted average cost of capital (WACC) and made commercial property investment more attractive. An investment is typically funded by a combination of equity and debt, assuming an investor has a cost of equity of 9.50% and is using 30% leverage (priced at the BBB corporate bond rate); the WACC has fallen by 55 basis points to 8.20% over the past 18 months. Figure 14: Corporate Bond Yields 10.00% 9.00% 8.00% Lower debt costs boost leveraged returns and have a positive impact on the return on equity calculation. Leveraged returns are often the real driver of market pricing. The area-weighted Jones Lang LaSalle Total Return Index (TRI), which tracks the return for prime-grade office markets, projects an unleveraged return of 9.00% for CBD office markets between 2012 and Utilising this projection, and assuming a fixed-term debt cost of 5.16%, implies a return on equity of 10.65% 80 basis points higher than the July-2011 projection. Who are the likely buyer groups in 2013? A-REITs acquired approximately AUD 1.2 billion worth of commercial office buildings in This represented the first year since 2007 that A-REIT acquisitions surpassed the AUD 1.0 billion mark. A-REITs are trading close to NTA, while lower debt costs are making it accretive to acquire good-quality office buildings Single asset acquisitions will not be the only investment strategy adopted by A-REITs. The difficulty in acquiring scale will see the potential for increased corporate activity in The initial offer by GPT for ALZ, which was rejected by the latter, may be a precursor for increased M&A activity in the listed space over There is currently limited diversification in A-REIT portfolios. Figure 16 shows the office portfolio weightings of seven major A-REITs*. The allocation to Sydney office markets is typically 59% of the overall portfolio. Figure 17 shows the Figure 15: Corporate Bond Spreads (Relative to Australian Government Bonds, 1 5-year maturity) Basis Points Brisbane Fringe Brisbane CBD Melbourne Suburban Melbourne CBD North Sydney Sydney CBD -1% 0% 1% 2% 3% 4% 5% 6% 2012 Average Growth (2012 to 2015), p.a. 7.00% 6.00% 5.00% 4.00% 3.00% AA A BBB AA A BBB Source: Reserve Bank of Australia, Jones Lang LaSalle Source: Reserve Bank of Australia, Jones Lang LaSalle 28 Jones Lang LaSalle Office Investment Market Review and Outlook 29

16 market weights based on Jones Lang LaSalle s calculation of the investable universe. An investor adopting a strictly value-weighted asset allocation would have a 45% allocation to Sydney office markets 14 percentage points lower than typical A-REIT allocations. While some A-REITs may look to recycle assets in the Sydney markets, most A-REITs are looking to grow funds under management. In 2013, a number of A-REITs will look to diversify their portfolios and increase their exposure to markets, such as Perth, where they hold under-weight positions. With gearing at very conservative levels, a number of A-REITs can acquire assets without raising fresh equity. JP Morgan estimates that the 12 major A-REITs have an additional AUD 12.4 billion of debt capacity if they increased gearing to 35%. Offshore investors have been net purchasers of commercial property in Australia since Jones Lang LaSalle has recorded AUD billion worth of acquisitions by offshore groups between 2007 and At the same, disposals were only AUD 2.39 billion. Offshore groups will remain active participants in the Australian commercial property market in There are a number of offshore participants currently invested into Australia looking to increase the scale of their portfolio. Furthermore, a number of sovereign wealth funds and global pension funds, without an allocation to Australia, Figure 16: A-REIT* Office Portfolios by Market 1% 3% 4% are preparing strategy papers for investment committees to make investment into the direct real estate market. The outlook for values in Australia is viewed positively by offshore investors. A survey (January 2013) by the Association of Foreign Investors into Real Estate (AFIRE) revealed that Australia ranks fourth globally as the country providing the most stable and secure real estate investments. Superannuation assets, outside life offices, rose by an impressive 11.5% over the 12 months to September 2012 according to the ABS. Superannuation fund allocation to land and buildings, or what can be categorised as direct property, has been relatively consistent between 6% and 7% over the past five years (Figure 18). On the other hand, the allocation cash and deposits increased to 17.2% of total assets. Historically, Australian superannuation funds have had higher allocations to cash and deposits than global peers, but the current allocation is currently 8.0 percentage points higher than The reduction in short-term interest rates will see a movement out of cash and into other asset classes. We have yet to see evidence of Australian superannuation funds following the global trend of increased allocations to real assets, including real estate. However, the volatility in global equity markets, coupled with a relatively full allocation of 45% to equity markets by Australian superannuation funds, and Figure 17: Office Investable Universe 3% 5% with treasury bonds appearing expensive on most valuation models, property, as a mid-risk asset, could be a beneficiary of the movement out of cash. A number of domestic wholesale funds successfully completed capital raisings in It is likely that a number of superannuation funds will have been involved in the capital raising process. Wholesale funds that can value on a total return basis and take advantage of the lower all in cost of debt in the corporate bond market to reduce their average cost of debt will be completive buyers for prime-grade assets in Private investors and boutique fund managers will continue to seek out counter-cyclical opportunities. The spread between prime and secondary yields are above the long-term average in most office markets. This is in part a reflection of shorter WALEs and the application of lower loan-to-value ratios by financiers towards secondary assets. For the active private investor or boutique fund manager, there is an opportunity to move up the risk curve and acquire secondary or non-cbd assets and undertake innovative strategies to maximise both capital and income returns. Figure 18: Superannuation Funds (Outside Life Offices) AUD, Billion Percent Share 1, , The re-rating of real estate supports capital flows to Australia There are two key trends under-writing the attractiveness of Australian commercial property over the medium to long-term. Real estate and other real assets are being re-rated as an asset class. Furthermore, allocations to the sector are rising. As an illustration of this trend, the Canadian Pension Plan Investment Board has increased its allocation to real estate from 4.3% in March 2007 to 10.6% in September Another significant offshore investor into Australia the National Pension Service of Korea (NPS) expects alternatives to account for more than 10% of its total portfolio by In 2007, NPS allocation to alternative investments was 2.5%. The second observation relates to the Asia Pacific region. Over the next 20 years, Pramerica Real Estate Investors projects that Asia Pacific s share of the global real estate universe will increase by 22 percentage points to 49%. Growth in the Asia Pacific investable universe will influence investors geographical weightings to real estate. Australia plays an important role in the Asia Pacific for investors looking for global diversification in their real estate portfolios. Australia is highly transparent and a low beta real estate market in the Asia Pacific context. The combination of higher allocations to real assets and increased weighting towards the Asia Pacific region will support capital flows into Australian commercial real estate over the medium-term. Simon Storry Director, International Investments; Head of Office Investments Australia 21% 11% 59% Sydney Melbourne Brisbane Perth Adelaide Canberra 11% 13% 45% Sydney Melbourne Brisbane Perth Adelaide Canberra 1, % Total Assets Allocation to Land and Buildings * A-REITs includes GPT, DXS, CPA, IOF, MGR, SGP, ALZ Source: JP Morgan, Jones Lang LaSalle Source: Reserve Bank of Australia, Jones Lang LaSalle 30 Jones Lang LaSalle Office Investment Market Review and Outlook 31

17 Appendix: All office transactions Property Name Address Suburb Month Share Initial Yield NLA (sqm) Rate ($ per sqm) New South Wales Grosvenor Place 225 George Street Sydney Dec $271,250, % 80,144 $13,538 Direct Property Investment Fund DEXUS Property Group Eclipse 60 Station Street Parramatta Dec $167,500, % 25,700 $6,518 Leighton Properties / Grosvenor JV REST 2 and 4 Dawn Fraser Homebush Dec $82,700, % 33,493 $4,938 Direct Property Investment Fund DEXUS Property Group Avenue Prudential Building Martin Place Sydney Dec $149,750, % 20,730 $7,224 Direct Property Investment Fund DEXUS Property Group 10 Barrack Street Sydney Dec $62,250, % 9,259 $6,750 BlackRock Bright Ruby 80 Alfred Street South Milsons Point Dec $49,000, N/A 10,475 $4,678 Australand Chinese Developer John Hunter 9 Hunter Street Sydney Dec $80,000, ,800 $5,063 Direct Property Investment Fund / CorVal Commonwealth Bank Officers Superannuation Fund Clemenger Building Pacific Highway St Leonards Dec $24,200, ,051 $4,791 Stockland Private Investor 107 Pitt Street Sydney Dec $23,600, % 2,700 $8,741 BlackRock IOOF 37 Epping Road North Ryde Dec $17,350, ,752 $2,097 Ferrier Hogson (Receiver / Manager) Abacus Property Group 6 O Connell Street Sydney Sep $105,100, % 18,780 $5,596 Colonial First State MGPA Carrington House 50 Carrington Street Sydney Aug $58,500, % 10,417 $5,616 REST DEXUS Property Group Station House Wentworth Street Parramatta Aug $18,000, % 6,673 $2,697 Trinity Property Trust Chandru Property Investments Barangaroo C4 & C5 Hickson Road Sydney Jul $2,000,000, % 179,425 $10,576 Lend Lease International Towers Sydney Trust* Siemens Building 160 Herring Road Macquarie Park Jul $35,250, % 8,500 $4,147 Siemens Australia Ltd Macquarie University Wharf Pirrama Road Pyrmont Jul $31,800, % 4,500 $7,067 Charter Hall Abacus Funds Management / Hietman JV 7 Murray Rose Avenue Homebush Bay Jun $29,250, % 5,250 $5,571 SOP 8B Pty Ltd Folkestone Funds Management Combined Insurance House 154 Pacific Highway St Leonards Jun $25,500, % 6,263 $4,072 Charter Hall Security Capital Corporation / Property Bank Berry Street North Sydney Jun $15,600, % 3,530 $4,419 Henroth Pty Ltd Property Bank Australia Pty Ltd Pacific Highway North Sydney May $27,000, ,487 $6,017 Australian Institute of Management Crown International Holdings Group Norwest C3 3 Columbia Court Baulkham Hills May $21,000, N/A 16,768 $1,252 SPV No1 Pty Ltd The Hills Council 7 Macquarie Place Sydney Apr $55,000, % 13,437 $8,099 Stockland UniSuper Deutsche Bank Place 126 Phillip Street Sydney Mar $176,250, % 42,500 $16,588 Investa Property Group Investa Commercial Property Fund Deutsche Bank Place 126 Phillip Street Sydney Mar $176,250, % 42,500 $16,588 Investa Property Group Investa Office Fund Commonwealth Bank Building Martin Place Sydney Mar $134,000, N/A 19,000 $7,053 Commonwealth Bank of Australia Macquarie Group Ltd 333 Kent Street Sydney Mar $47,750, % 10,055 $4,749 AMB Property Maville Group 149 Castlereagh Street Sydney Mar $40,600, N/A 11,947 $3,398 Record Realty Trust Blackstone 161 Clarence Street Sydney Mar $28,000, ,825 $9,912 Brookfield Crown International Holdings Group Talavera Road North Ryde Mar $40,500, % 13,000 $3,115 Challenger Macquarie University Engadine Chambers 9-19 Elizabeth Street Sydney Mar $16,000, N/A 4,344 $3,683 Commonwealth Bank of Australia Macquarie Group Ltd 116 Miller Street North Sydney Feb $52,131, % 9,072 $5,746 AMP Rifici Group / Property Bank 32 Jones Lang LaSalle

18 Appendix: All office transactions Property Name Address Suburb Month Share Initial Yield NLA (sqm) Rate ($ per sqm) Welles Thomas Plaza Corner Thomas Street & Albert Avenue Chatswood Feb $55,000, N/A N/A N/A Welles Thomas Pty Lyd Meriton Group 10 Help Street Chatswood Jan $23,000, ,221 $3,185 Oakland Property Holdings Ltd Ray Shine Property Investments Pty Ltd * CPPIB (50%); Lend Lease (25%); APPF (12.5%); Telstra Super (6.25%); First State Super (6.25%) Victoria ATO 913 Whitehorse Road Melbourne Dec $116,735, % 19,728 $5,917 Grocon Cromwell Property Group 417 St Kilda Road Melbourne Dec $81,000, % 20,441 $3,963 Challenger Newmark Marsh Centre 555 Lonsdale Street Melbourne Dec $57,500, % 14,991 $3,836 BlackRock LaSalle Investment Management 40 Market Street Melbourne Dec $46,700, % 12,333 $3, Market Street Trust DEXUS Property Group 601 Bourke Street Melbourne Dec $29,100, % 7,800 $3,731 Centuria Funds Management Private Investor Dominion Building 533 Little Lonsdale Street Melbourne Dec $18,500, % 6,599 $2,803 APGF Vantage Fawkner Centre 499 St Kilda Road Melbourne Nov $55,000, ,199 $2,478 Schwartz Family Las Group 370 Docklands Drive Melbourne Nov $38,500, % 7,200 $5,347 YarraCity Pty Ltd Private Investor Exhibition Street Melbourne Nov $22,000, % 6,000 $3,667 Quintessential Equity Peter Ding Horizons 570 St Kilda Road Melbourne Sep $23,800, % 7,688 $3,746 Jacky Mulani Terraplex Pty Ltd 51 Queen Street Melbourne Sep $16,388, % 4,723 $3,470 Quintessential Equity Malaysian Private Investor Building 3 - Country Road 658 Church Street Richmond Aug $29,000, % 5,000 $5,800 Australian Property Growth Fund Private Investor RACGP House 100 Wellington Parade East Melbourne Aug $23,000, N/A 6,500 $3,538 Melbourne Water The Royal Australian College of General Practitioners 150 Collins Street Melbourne Jul $182,000, % 20,000 $9,100 APN Funds Management / Grocon JV GPT 437 St Kilda Road Melbourne Jul $27,000, % 6,107 $4,421 Opus Capital Group Private Investor Pelham Street Carlton Jul $20,600, % 3,509 $5,871 McMullin Investments Forza Capital 108 Power Street Hawthorn Jun $17,500, % 4,000 $4,375 Private Investor IOOF Investment Management 501 Swanston Street Melbourne May $56,000, % 17,034 $3,288 PDG Corporation & Salvo Property Group JV PDG Corporation Northbank Place Flinders Street Melbourne May $55,000, % 10,000 $5,500 Uniting Church AFIAA St Kilda Road Melbourne Apr $28,541, % 7,460 $3,826 Centuria Direct Property Fund Private Investor 441 St Kilda Road Melbourne Mar $58,000, ,175 $3,586 AXA Wholesale Australian Property Fund Centuria Property Funds The Olderfleet 477 Collins Street Melbourne Feb $67,000, % 12,181 $5,500 Australian Unity Aviva Investors Queensland 443 Queen Street Brisbane Nov $40,000, % 5,560 $7,194 Bramley Properties Pty Ltd Brice Family 252 St Pauls Terrace Fortitude Valley Nov $17,370, ,800 $6,204 Offshore Private Investor Andrew Clifton 160 Ann Street Brisbane Aug $74,920, % 16,060 $4,665 Investa Corval Partners Collection House Queen Street Brisbane Aug $20,000, ,382 $4,564 BACV Pty Ltd Mineral Resources Lihir Capital Ltd Blue Tower 12 Creek Street Brisbane Jul $241,600, % 32,200 $7,503 Australian Property Growth Fund DEXUS Property Group 40 Creek Street Brisbane Jul $84,500, % 12,353 $6,840 Charter Hall PGA Group 35 Boundary Road South Brisbane Jul $40,250, % 8,120 $4,957 White Property Group Abacus Funds Management / Hietman JV Office Investment Market Review and Outlook 33

19 Appendix: All office transactions Property Name Address Suburb Month Share Initial Yield NLA (sqm) Rate ($ per sqm) Gold Tower 10 Eagle Street Brisbane Jun $195,000, % 28,098 $6,940 Brookfield Commonwealth Property Office Fund 100 Brookes Street Fortitude Valley Jun $66,500, % 9,814 $6,776 The Light Street Corporation Pty Ltd Hines 150 Charlotte Street Brisbane Jun $56,000, ,615 $5,276 Walker Corporation CIMB Trust Capital Advisors Adecco 243 Edward Street Brisbane May $37,250, ,751 $5,887 Chun Kau Pty Ltd Drivas Group 500 Queen Street Brisbane May $31,000, ,980 $4,441 BACV Pty Ltd Great Western Corporation 33 Park Road Milton May $31,000, % 7,067 $4,387 DDH Graham 33 Park Road Pty Ltd 215 Adelaide Street Brisbane Mar $134,500, % 29,780 $4,516 GIC Real Estate Pramerica Real Estate Investors ANL House 379 Queen Street Brisbane Feb $21,000, % 5,464 $3,843 Girdis Group of Companies Private Investor Western Australia 25 Montpellier Road Bowen Hills Feb $37,816, % 7,570 $4,996 Opus Capital Great Western Corporation 144 Montague Road South Brisbane Jan $88,050, % 14,742 $5,973 Montague Property Trust (Empirica) Hines 1 Adelaide Terrace Perth Oct $102,550, % 19,600 $5,232 Fortius Funds Management GDI Old Treasury Building Barrack Street Perth Sep $165,000, % 30,219 $10,920 Mirvac K-REIT 66 St Georges Terrace St Georges Terrace Perth Aug $82,375, % 11,660 $7,065 AMP Investa Office Fund Reserve Bank Building 45 St Georges Terrace Perth Aug $55,250, % 9,200 $6,005 Stockland Credit Suisse Legal & General House 267 St Georges Terrace Perth Aug $23,423, % 3,600 $6,507 Stockland Primewest AFG 22 Delhi Street West Perth Jul $20,000, % 3,193 $6,264 Private Investor Kingslane Property St Georges Square 225 St Georges Terrace Perth Jun $96,000, % 21,536 $8,915 Wyllie Group Charter Hall South Australia 1110 Hay Street West Perth May $29,900, % 4,390 $6,713 Gucce Group Castilo Pty Lyd St Georges Terrace Perth Jan $16,450, N/A 2,992 $5,498 Conisborough Pty Ltd Wakefield Properties Pty Ltd 400 King William Street Adelaide Oct $97,900, % 19,935 $4,527 Kyren Pty Ltd Real I.S. Adelaide Bank Building 169 Pirie Street Adelaide Sep $22,100, ,778 $2,841 Undisclosed Private Syndicate Lifeplan House Gawler Place Adelaide Jan $15,600, % 5,320 $2,740 Campana Pty Ltd Undisclosed Australia Capital Territory Mort Street City Jun $55,800, % 15,398 $3,624 GPT Growthpoint Properties Australia 50 Marcus Clarke Street City Feb $226,000, % 40,201 $5,622 Walker Corporation CIMB Trust Capital Advisors Caroline Chisholm Centre 57 Athllon Drive Greenway Feb $83,000, % 40,000 $4,150 Record Realty Trust Frasers Commercial Trust 34 Jones Lang LaSalle

20 Author Andrew Ballantyne Head of Capital Markets Research Australia Andrew is the Head of Capital Markets Research at Jones Lang LaSalle. He has over 12 years experience in industry research in the commercial and residential property, as well as the transportation and logistics sectors. A well-respected industry commentator, Andrew is regularly quoted in the national press and property journals. He is responsible for the production of thought leadership papers, the office market research portfolio and management of the overall Strategic Research team. Andrew holds an MA in Applied Research and BA (Hons) in Business Economics. Contributors John Talbot Managing Director Investment and Advisory Group Australia Rob Sewell Head of Office Investments Australia Simon Storry Head of International Investments Australia Tae Kim Senior Market Research Analyst Australia No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor. 35