Withdrawals dominated the Brisbane Fringe during 2017

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1 RESEARCH

2 Total vacancy has remained elevated at 14.1%. The vacancy rate is expected to rise again in mid-2018 to 14.8%, before beginning to ease. Prime effective rents remain stagnant. Increases to face rents have been off-set by further incentive growth. Improvement in effective rents is expected from late Tenant requirements which are considering the Fringe have lifted with IT, media and engineering tenants active. Investor demand has remained strong with prime median yields firming 48bps over the past year. A surge in offshore investor activity took 2017 turnover to record levels. Senior Director Research QLD Withdrawals dominated the Brisbane Fringe during 2017 A total of 27,976sqm of secondary stock was withdrawn from the Brisbane Fringe market during Permanent withdrawals for demolition or change of use accounted for 16,212sqm of this, dominated by 25 Donkin St, South Brisbane (8,074sqm) and 312 Brunswick St, (3,921sqm). The remainder was temporary withdrawal for refurbishment. The largest was 324 Wickham St,, where LaSalle Investment Management will commence the refurbishment of Transport House in H as part of wider works on the retail and Fortitude Valley train station interface. There are two new buildings which will provide new supply to the market during The first of these, recently completed, is 900 Ann St, Fortitude Valley. The 18,791sqm building was fully pre-committed by Aurizon, however Aurizon since offered c7,100m² of this for long term sub-lease. Four of the five floors of this space are now understood to be under offer. The Lend Lease development, K5 at Showground Hill, Bowen Hills, is under construction with completion anticipated late The 14,429m² building is 43% committed to Aurecon and features cross laminated timber construction. Market intel also suggests there is a further significant commitment imminent in this building. Many projects are proposed, but only a few are expected to move to construction Beyond the two buildings which will be completed during 2018 there are no further projects under construction. However, as shown in Table 2, there are a number of projects which have recently sought or received development approval. While initially responding to the Suncorp brief (which did not shortlist any Fringe options) subsequent briefs from the ATO (up to 24,000sqm) and Technology One (15,000sqm) further brought development into the spotlight. Subsequently it is understood that neither ATO or Technology One have shortlisted Fringe developments for their potential relocation. It is considered that none of the development proposals would proceed without significant pre-commitment. Given the size of many projects, this would require pre-commitment from more than one tenant or downsizing of the project. This will result in staggered delivery of new product from 2020/21. Supply in 2019 will be dominated by refurbished accommodation with 151 Property understood to be finalising plans to upgrade the 13,171sqm, 339 Coronation Dr, Milton, following Origin s relocation. Additionally the refurbishment at 324 Wickham St, will complete Q Brisbane Fringe Office Market Indicators as at April 2018 Grade Total Stock (m²)^ Vacancy Rate (%)^ Annual Net Absorption (m²)^ Annual Net Additions (m²)^ Average Gross Face Rent ($/m²)* Average Incentive (%) Average Core Market Yield (%)# Prime 659, , ~ Secondary 543, ,037-27, Total 1,203, ,900-27,976 2

3 BRISBANE FRINGE OFFICE MAY 2018 RESEARCH Major Additions and Withdrawals Brisbane Fringe Additions Address Precinct NLA (m²) % Leased Major Tenant/s Developer Status Date 315 Brunswick St, Urban Renewal 10,908 60% State Government Ashe Morgan Investments Refurbishment Complete Oct Ann St, Urban Renewal 18, % Aurizon (sublease c7,100m²) Consolidated Properties onsold to Charter Hall Construction Apr 18 K5, Showground Hill, 25 King St, Bowen Hills Urban Renewal 14,429 43% Aurecon Lend Lease Construction Late Wickham St, 339 Coronation Dr, Milton 11 Breakfast Creek Rd, Newstead Alfred St, 301 Wickham St, Urban Renewal 8, LaSalle Asia Opportunity Fund IV Refurbishment Mar 19 Milton 13, Valad/Blackstone Refurbishment Oct 19 Urban Renewal 29,725 GFA^ 12% John Holland Urban Renewal 32, Charter Hall Office Trust/ John Holland# LaSalle Asia Opportunity Fund IV Approved Approved Urban Renewal 35,000^ - - Cornerstone Properties Approved STP STP STP Jubilee Hotel, 470 St Paul s Tce, Urban Renewal 18,800 GFA - - JGL Properties Approved STP 152 Wharf St, Spring Hill Spring Hill 30, Wharf Investment Corporation Approved STP 801 Ann St, 358 Wickham St, Urban Renewal 44, Walker Corporation Approved STP Urban Renewal 22, Prime Space/Grocon Approved STP CDOP 7, Milton Milton 19, AMP/Sunsuper Mooted STP K3, Showground Hill Bowen Hills 895 Ann St, Urban Renewal c25, Lend Lease Mooted STP Urban Renewal c25, Consolidated Properties Mooted STP Major Withdrawals (1,500m²+) Address Precinct NLA (m²) Owner Reason for Withdrawal Date 611 Coronation Drive, Milton Milton 1,756 Private Investors Withdrawal for redevelopment (student accommodation) 25 Donkin St, West End Inner South 8,074 R&F Properties Withdrawal for redevelopment (residential) 312 Brunswick St, Urban Renewal 3,921 Private Investors (assoc Hutchinson Builders) Withdrawal for change of use (retail/entertainment) Landcentre Building Woolloongabba Inner South 16,000 State Government Withdrawal for demolition (Cross River Rail Station/construction) Jun Wickham St, Urban Renewal 2,512 Cornerstone Properties Potential withdrawal for redevelopment (office) tba 895 Ann St, Urban Renewal 2,824 Private Investor Potential withdrawal for redevelopment (office) tba 207 Wharf St, Spring Hill Spring Hill 4,695 Land & Homes Group Potential withdrawal for redevelopment (residential or hotel) Mooted 3

4 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Vacancy remains elevated due to negative net absorption The total vacancy rate for the Brisbane Fringe market decreased over the six months to January 2018, reducing from 14.6% to 14.1%, but remaining above the levels of a year earlier. In the absence of significant new supply this elevated vacancy was a result of negative net absorption across the market, with total occupied space -37,900sqm lower over the course of Brisbane Fringe Vacancy Rates Precinct Jan 17 (%) Jan 18 (%) A Grade Prime B Grade C Grade D Grade Secondary Milton Urban Renewal Spring Hill Toowong Inner South Total Net Absorption will remain negative in the short term Net absorption was negative for the whole of 2017 and this is expected to remain the case in the first half of Despite significant tenant moves into the Fringe market ie Aurizon (11,691sqm), the overall tenant movement will be out of the Fringe market in H Departures from the Fringe in the first half of 2018 will be dominated by Origin Energy s relocation in to the CBD, leaving at least 25,000sqm of backfill space in Milton. Additionally the proposed July 2018 demolition of the Landcentre at Woolloongabba will see c16,000sqm of State Government tenancies relocate into the CBD. From H onward the net absorption is expected to return to positive as the Fringe regains some of its competitive rental advantage against the CBD. Additionally, the Fringe will gain traction in drawing tenants from suburban markets, given the space available and rental levels. Confidence is being enhanced by the recent strong population growth in Greater Brisbane (2.0%), a significant pipeline of major construction and infrastructure, indications that QLD economic growth is heading back towards trend levels and green shoots in the resources and energy sectors. Vacancy peak will be mid The impact of the large tenant relocations outlined above, along with 7,000sqm of new supply which may be physically vacant on completion, will see the total Fringe vacancy rate increase to mid The majority of this will be felt in the Milton and Urban Renewal markets with the remaining precincts relatively less affected. With the assumed temporary withdrawal of 339 Coronation Dr, Milton for refurbishment, the impact of Origin s departure from Milton will be lessened, with the total vacancy lift only into the low 20%s. Total vacancy in the Fringe is expected to show sustained recovery from late Improved tenant activity will return to the market in an environment of no additional short term supply. While there are a number of contiguous spaces, or whole buildings, currently vacant many of these are not prime space. With demand expected to pick up more strongly for prime space the prime vacancy is expected to show greater short term improvement than secondary. With only a handful of top-tier prime buildings, the level of competition can quickly build for these assets. Unlike the CBD, where there is a marked diversion between the vacancy rate for prime and secondary, the Fringe prime and secondary vacancy rate is relatively close. Recent deterioration in the prime market has taken the vacancy to 13.4%. In part this was due to two Fringe buildings, previously with significant sublease space and partially occupied, transferring to direct vacancy at lease end, with a resultant gap in occupation. Brisbane Fringe Net Absorption ( 000m²) per 6 month period forecast Brisbane Fringe Vacancy % total vacancy 16% 14% 12% 10% 8% 6% forecast The secondary market vacancy has been assisted by the withdrawal of obsolete stock. However market traction is limited, particularly in the C and D grade properties (although D grade market only represents 11,018sqm of space) six months to 4% 2% 0% 4

5 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 BRISBANE FRINGE OFFICE MAY 2018 RESEARCH A number of IT, media and engineering companies are actively seeking space Over the past 18 months the Fringe was struggling to attract and retain both smaller and large tenants, with many opting for the CBD due to the relatively attractive rental terms that were on offer. The only notable exception has been for newly developed space, where these Fringe buildings have drawn tenants (Aurizon, Aurecon, plus a rumoured further two imminent commitments). Demand is showing sustained improvement in the CBD, and Fringe effective rents remain plateaued as incentives reach new heights. Therefore, the competitive tension between the two markets is on the verge of changing. In line with more tenants across both markets showing a greater inclination to relocate, there is an encouraging number of tenants currently in the market for Fringe space. These are dominated by IT users, however media and engineering tenants are also prominent. Aside from the 15,000sqm Technology One requirement, IT tenants understood to be active in the Fringe market include DXC Technology (3,500sqm), Melbourne IT (2,500sqm), Honeywell (3,000sqm) and Recent Leasing Activity Brisbane Fringe Address NLA m² 147 Coronation Dr, Milton 99 Melbourne St, South Brisbane 520 Wickham St, 5 King St, Bowen Hills 100 Brookes St, 900 Ann St, 154 Melbourne St, South Brisbane 10 Browning St, South Brisbane Face Rent Term yrs Brisbane Fringe Rents $/m² p.a average gross effective rent Incentive (%)` Tenant Start Date 1, g QTAC Sep 18 1, g Publicis Mojo Sep 18 2, g RPS Group Jul 18 6,489 c590 n 10 undis Aurecon^ Jul 18 3, g Aurizon Jun 18 18,791# 545 n 12 undis Aurizon^ Apr 18 1, g PRIME Klohn Crippen Berger SECONDARY forecast Mar 18 1, g Shortcut Software Sep 17 Genie Solutions (1,500sqm). Other larger tenants include WSP (5,500sqm). Goodstart Early Learning (4,500sqm), Downer (4,000sqm), AECOM (8,000sqm), Austereo (2,000sqm), WPP (1,500sqm) and APN (1,500sqm). While not all of these tenants will relocate, or may choose a location other than the Fringe, this represents an increase in the level of activity. The current market conditions are likely to encourage relocation. Prime rents will remain accommodative during 2018 The Fringe market was slower to adopt elevated incentives than the CBD, however after being out-competed owners have since responded. Average prime incentives in the Fringe have now reached 38%, higher than the CBD, and expected to form the upper range for incentives this cycle. While incentives have increased from 37% to 38% over the past year, the impact on average effective rents has been mitigated by increases to face rents. Gross face rents average $558/m² as at April 2018, growth of 1.5% p.a. Effective prime rents are presently $346/m² gross, down by 0.2% over the past year, but effectively stagnant since early This is expected to remain the case through the majority of 2018 with increased tenant activity anticipated to spur some growth in prime rents from Q Forecasts for prime effective gross rents are 3.3% and 3.4% over the next two years. This is indicative of a sustained, but relatively modest, improvement to market conditions. Despite improving demand there is likely to continue to be relatively large tranches of available space to limit overall market improvement in the short term. The removal of obsolete stock and capital investment from owners has seen secondary face rents increase, from $448/m² in April 2017 to $465/m² as at April However incentives increased over the same period, reaching 38.5% on average, equating to secondary rental effective growth of 2.1%. This has returned the market to 2014 levels, as the dip of 2015 & 2016 unwinds. Forecasts are for secondary effective rental growth of 2.0% - 3.0% p.a in the next two years. 5

6 AREIT Private Investor Owner Occupier Offshore Unlisted/ Syndicate Super Fund Developer Record transaction levels The increased investor interest in the Brisbane Fringe market translated to a record high level of transactions during In 2017 $1.098 billion in transactions (above $10 million) were recorded, well ahead of $597.9 million in 2017 and exceeding the previous record of $799.6 million during Brisbane Fringe Transactions $ million transactions $10m+ 1,100 1, Offshore investors accounted for 51% of transactions by value during This was dominated by M&G (520 Wickham St, $ million), Ascendas Business Park Trust (100 & 108 Wickham Sts $ million) and Korean Teachers Fund/AXA (505 St Pauls Tce $205.5 million). This indicates offshore investors are comfortable to take on significant assets in the Fringe. Particularly in the second half of 2017 and into 2018, there was greater investment from domestic buyers into the Fringe market. The unlisted AMP Capital Wholesale Australia Fund purchased two assets 76 Skyring Tce, Newstead and 199 Grey St, South Brisbane. Additionally Charter Hall Long WALE REIT purchased the Virgin Headquarters at Bowen Hills and the Cromwell Direct Property Fund purchased a fully leased building at 433 Boundary St in Spring Hill. Despite increased activity from domestic institutions AREITs were the only domestic net buyers in the past year, with the Unlisted Funds/Syndicates remaining net sellers. Offshore buyers remained the strongest net buyers, given their increasing presence in the market. Brisbane Fringe Purchaser/Vendor $ million sales ($10m+) 12 mths to May PURCHASER VENDOR NET PURCHASE/SELL After a strong end to 2017, there have been only two confirmed Fringe sales to date in These are 76 Skyring Tce ($72.50 million), and 130 Commercial Rd ($20.35 million), both in Newstead. While not an office asset, Dexus has recently purchased 586 Wickham St, Fortitude Valley for $91.20 million on a yield of 5.75%. The property has a new eight year lease to Autosports Group. Recent Sales Activity Brisbane Fringe Address Grade Price $ mil Core Market Yield % NLA m² $/m² NLA WALE yrs Vendor Purchaser Sale Date 76 Skyring Tce, Newstead ^ A ,994 8, Aveo Properties AMP Capital Wholesale Australia Property Fund Jan Boundary St, Spring Hill B * , Alceon Properties Cromwell Direct Property Fund 108 Wickham St, ~ A ,913 8, Centennial Property Group Ascendas Business Park Trust 56 Edmonstone St, Bowen Hills A ,427 7, Charter Hall VA Trust (single asset fund) Charter Hall Long WALE REIT 199 Grey St, South Brisbane A ,845 7, Tribune Properties AMP Capital Wholesale Australia Property Fund Oct Wickham St, ~ B ,131 6, Keystone Private Ascendas Business Park Trust Sep Commercial Rd, Newstead# 520 Wickham St, A ,558 7, Cambooya Pty Ltd Cape Bouvard Properties Sep 17 A ,672 8, AFIAA M&G Real Estate Aug 17 ^purchased in tandem with major retail centre, allocated price for office component *passing yield ~together these two properties cover an island site # includes the retail, pub and Liqourland component 6

7 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 BRISBANE FRINGE OFFICE MAY 2018 RESEARCH Yield compression has remained in force The sustained investor interest and activity in the Fringe market has supported further yield compression over the past year. As at April 2018 the prime core market yield ranges between 5.75% and 7.00% with a median of 6.38%. This represents a tightening of 48 basis points over the prior 12 months and 225 basis points over this market cycle. After falling to a low of 38 basis points in mid-late 2017, the spread to Brisbane CBD prime yields has increased slightly to 43 basis points, but still remains closely aligned with the CBD. With a core of assets constructed within the past 10 years, generally having good tenant covenants, the Fringe prime market has been well accepted by investors with only a limited risk premium applied compared to CBD investments. It is noticeable that South Brisbane and the Urban Renewal precinct remain favoured, both due to stock available and current leasing market sentiment. In contrast Milton, Toowong and Spring Hill are not currently receiving the same level of core investment market demand. In line with the wider investment market, secondary yields have also recorded further compression. The current yield range of 7.25% % represents tightening of 35 basis points over the year to April There is steady demand for stabilised secondary assets, or those which are of a scale and built form which make them attractive for a major refurbishment and re-leasing programme. While the Fringe was the subject of record levels of investment during 2017, as investors seeking to place capital in Australia looked beyond Sydney and Melbourne, the leasing market is still lagging the CBD. As this improvement in sentiment and activity extends from the CBD market and into the Fringe, the level of investment demand is also expected to grow further, attracting new investors and placing further downward pressure on yields. Brisbane Fringe Core Market Yields % Yield (LHS )Prime v Secondary & BPS (RHS) 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% SPREAD PRIME V SECONDARY (RHS) PRIME YIELDS (LHS) SECONDARY YIELD (LHS) Outlook There will be 33,220sqm of new supply completed in the Fringe during 2018, the first new supply since the completion of the Flight Centre Building in With direct and sub-lease space available in these projects, this is attracting strong interest from tenants With no additional projects under construction, supply in 2019 will arise from refurbishments. While there are a number of potential future office developments across the Fringe, none are expected to commence without significant precommitment. Given the size of many projects this will require more than one tenant to precommit and this is expected to see new supply delivery remain sporadic from 2020/21+. Fringe tenants moving into the CBD (Origin, State Govt, Allianz) will outweigh moves in the opposite direction (Aurizon, Aurecon) taking the vacancy rate to its peak in mid From late 2018 the lack of new supply will support steady erosion of the vacancy rate in 2019 & Tenant briefs which are considering Fringe space have appeared to increase recently with IT, media and engineering tenants prominent. While competition from the CBD will remain high, the sustained plateau in Fringe prime effective rents and incentives at peak levels of 38% may be beginning to change the competition dynamics between the two markets. The majority of 2018 will see no material improvement in effective prime rents, however growth will emerge late 2018 and into 2019, driven by increased tenant activity and limited supply. Average effective prime rental growth is to average 3.5% over the next three years. Yields remain on a firming trend, and this will continue, particularly in the prime market. With the Fringe, in tandem with the CBD, being well regarded by investors seeking exposure to the upside present in Brisbane, the market will continue to see high investment inflows, particularly from offshore. 7

8 RESEARCH Jennelle Wilson Senior Director Jennelle.Wilson@au.knightfrank.com Ben Burston Group Director Ben.Burston@au.knightfrank.com Definitions: Core Market Yield: The percentage return/yield analysed when the assessed fully leased net market income is divided by the adopted value/price which has been adjusted to account for property specific issues (i.e. rental reversions, rental downtime for imminent expiries, capital expenditure, current vacancies, incentives, etc). WALE: Weighted Average Lease Expiry Precincts: Milton Includes the suburbs of Milton and Petrie Terrace Urban Renewal Includes the suburbs of, Newstead and Bowen Hills Spring Hill Spring Hill Toowong Toowong Inner South Includes the suburbs of South Brisbane, West End, Kangaroo Point, East Brisbane and Woolloongabba 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. CAPITAL MARKETS Ben McGrath Managing Director QLD Ben.McGrath@au.knightfrank.com Justin Bond Senior Director Institutional Sales Justin.Bond@au.knightfrank.com Christian Sandstrom Senior Director, Head of Commercial Sales Christian.Sandstrom@au.knightfrank.com Matthew Barker Senior Executive Commercial Sales Matthew.Barker@au.knightfrank.com OFFICE LEASING Andrew Carlton Senior Director Office Leasing Andrew.Carlton@au.knightfrank.com Shane Van Beest Director Office Leasing Shane.VanBeest@au.knightfrank.com OCCUPIER SOLUTIONS Matt Martin Senior Director, Head of Occupier Solutions QLD Matt.Martin@au.knightfrank.com VALUATIONS Peter Zischke Director Peter.Zischke@qld.knightfrankval.com.au Brisbane CBD Office Market Overview April 2018 Gold Coast Office Market Overview March 2018 Brisbane Investment Environment March 2018 The Wealth Report 2018 Knight Frank Research Reports are available at KnightFrank.com.au/Research Important Notice Knight Frank Australia Pty Ltd 2018 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.