Outer East and South East regions lead gross new supply. Gross new supply in 2018 to stem from the North & West region

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1 RESEARCH

2 Melbourne metropolitan office vacancy rate fell from 7.0% to 5.2% in the 12 months to March 2018, sitting below the historical average of 5.9%. Average prime net rents increased by 5.8% in the 12 months to March 2018, led by strong rental growth in the City Fringe region. Transaction volumes ($10 million+) in 2017 totalled $564.4 million across 18 transactions, dominated by Outer region sales. Strong capital inflow for metropolitan assets resulted in prime yields compressing by 42 basis points to average 6.00% in the 12 months to March Research Analyst Outer and South regions lead gross new supply In 2017, gross new supply added to the Melbourne metropolitan office market totalled 30,208 sq m, down by 28.6% from the previous year. The Outer region accounted for 66.2% of gross new supply, following the completion of Stage 2, Caribbean Park, Scoresby (16,000 sq m) and GPC Asia Pacific s purpose-built facility at Stamford Business Estate, Rowville (4,000 sq m). Caribbean Park s Stage 2 was built speculatively and is now fully leased. The South region accounted for the remainder, following the completion of 66 Victor Crescent, Narre Warren (5,498 sq m) and 19 Corporate Drive, Moorabbin (4,710 sq m). Both of these developments were built speculatively. Gross new supply in 2018 to stem from the North & West region A total of 27,693 sq m is expected to be added to the Melbourne metropolitan office market in 2018, with the North & West region forming the bulk of new developments. The new Target Head Office at 2 Kendall Street, Williams Landing (12,919 sq m) and 1-3 Janefield Drive, Bundoora (4,774 sq m) are expected to reach completion by the end of This comes after the North & West region had no new developments completed in However, the 2016 completion of 6 English Street, Essendon Fields (5,000 sq m), which is now fully occupied by tenants including Wilson Security, Bostik and Commonwealth Bank, has reinforced the demand for quality office space in the North & West region. Limited speculative space in 2018 Of the 26,919 sq m to come on line in 2018, 52% is speculative space, with 10 Nexus Court, Mulgrave (10,000 sq m) accounting for most of the space. The amount of speculative space in 2018 is 46.6% lower compared to the previous year and is anticipated to remain low in The Outer region will account for the majority of speculative space over these two years. Gross Supply Pipeline by Region Metropolitan office (000 s sq m excl. refurbishments) Historical average Projection CITY FRINGE INNER EAST OUTER EAST SOUTH EAST NORTH/WEST Melbourne Metropolitan Office Market^ Indicators as at March 2018 Grade Total Stock (sq m) Vacancy Rate (%) 12 Month Net Absorption (sq m) Average Prime Net Face Rent ($/sq m) Average Prime Incentive (%) Average Secondary Net Face Rent ($/sq m) Average Prime Core Market Yield (%) Average Secondary Core Market Yield (%) City Fringe 1,026, , Inner 553, , Outer 889, , South 348, , North & West 238, , Total* 3,056, ,

3 MELBOURNE METROPOLITAN OFFICE APRIL 2018 RESEARCH Major Office Supply Melbourne Metropolitan Office Address Suburb Region Area (sq m) Developer/Owner Stage Est. Date of Compl. Stamford Business Estate Rowville Outer 4,000 Frasers Complete Complete 66 Victor Crescent Narre Warren South 5,498 Lettieri Group Complete Complete Stage 2, Caribbean Park Scoresby Outer 16,000 Spooner Family Complete Complete 19 Corporate Drive Moorabbin South 4,710 Pellicano Complete Complete 1-3 Janefield Drive Bundoora North & West 4,774 Noordenne U/C Q Nexus Court Mulgrave Outer 10,000 Salta U/C Q Kendall Street Williams Landing North & West 12,919 Cedar Woods U/C Q Swan Street Richmond City Fringe 7,173 GARDA U/C Q Camberwell Road Hawthorn Inner 7,000^ Blueprint Projects U/C Q Stage 3, Caribbean Park Scoresby Outer 16,000 Spooner Family U/C Q Cube 2, Victor Crescent Narre Warren South 4,000 MAB DA Approved Larkin Boulevard Essendon Fields North & West 6,000 Essendon Fields DA Applied Church Street Cremorne City Fringe 20,000 Alfasi Property DA Applied Dandenong Road Clayton Outer 17,425 Saraceno/Schiavello DA Approved Cremorne Street# Cremorne City Fringe 27,653 Cremorne Properties DA Applied Harcourt Parade Cremorne City Fringe 10,000 Caydon DA Approved Chapel Street South Yarra City Fringe 20,864 Newmark Capital DA Applied Metropolitan Office Regions 3

4 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Strong tenant demand was recorded in the Melbourne metropolitan office market over 2017, as overall net absorption measured 73,781 sq m, a 36.8% increase from the previous year. Richmond emerges as Melbourne s creative and tech hub Over recent years, Richmond has taken shape to be Melbourne s creative and tech hub. This can be attributed to many young workers, who account for a large proportion of creative and tech employees, residing in inner suburbs and preferring to live and work in the same area. Creative and tech-focused businesses already established in Richmond include REA Group, Carsales, Tesla, DDB and Bauer Media. The number is expected to increase, with recent pre-commitments from Seek (19,300 sq m) and MYOB (8,800 sq m). On the back of the growing creative and tech industry, the number of co-working spaces in Richmond and other City Fringe suburbs is on the rise. Over the past 12 months, The Commons leased 3,000 sq m at 37 Cubitt Street, Cremorne and Hub Australia leased 2,700 sq m at 1 Nicholson Street, Melbourne. South region records strongest tenant demand Tenant demand in the South region was the strongest out of all regions in 2017, with net absorption levels increasing by 302% in the 12 months to Metropolitan Vacancy Rates by Grade Grade Jan-16 Jan-17 Mar-18 Prime B-Grade C-Grade Secondary Total March 2018 to measure 16,231 sq m. The largest transactions were made by tenants in the Retail Trade sector, with Mitre 10 occupying space at 19 Corporate Drive, Moorabbin (3,235 sq m) and Cotton On Group occupying Level 6, Chadstone Tower 1, Chadstone (1,700 sq m). In the Outer region, tenant demand was the highest, measuring 46,721 sq m in This was supported by tenants upgrading to higher quality space, including 211 Wellington Road in Mulgrave and Caribbean Park s recently completed Stage 2 in Scoresby. Both regions will continue to receive high levels of tenant demand, especially from tenants who are after large quality spaces or campus-style buildings with business park addresses and tenants looking for a cheaper alternative to the City Fringe region. Vacancy declines across all regions The overall vacancy rate in the Melbourne metropolitan office market decreased for the second consecutive year, falling from 7.0% to 5.2% in the 12 months to March All five regions recorded a decline in vacancy, underpinned by strong employment growth and CBD vacancy tightening, causing tenant demand to spill further into the metropolitan office market. Metropolitan Office Net Absorption Per calendar year (000 s sq m) Metropolitan Vacancy Rate by Region Total vacancy (%) 14% 12% 10% 8% 6% 4% 2% 0% CITY FRINGE OUTER EAST TOTAL INNER EAST SOUTH EAST NORTH & WEST Large leasing options (3,000 sq m+) are limited across all regions, with only 11 options currently available. This is a major constraint for large tenants wanting to move into existing buildings, with many opting for pre-commitments and purpose -built facilities instead. The majority of available options, at 64% or 91 options, are sub-1,000 sq m in size. The Outer region recorded the largest fall in vacancy, from 10.9% to 8.8%. This was followed by the Inner region, which fell from 6.2% to 4.0% and the South, which fell from 10.9% to 8.8%. Vacancy in the North & West region fell from 6.8% to 5.9%. City Fringe region records the tightest vacancy The City Fringe region is currently the tightest Melbourne metropolitan office market, with vacancy measuring 2.5% as at March 2018, down from 3.1% in the preceding 12 months. Much of the fall was underpinned by tenants relocating to the City Fringe region, where its easy connectivity to the CBD, close proximity to public transport and abundance of amenities have become key determinants for the attraction and retention of staff. Tenants who relocated from the CBD office market and other regions of the metropolitan office market into the City 4

5 City Fringe Inner Total Outer South North & West City Fringe Inner Total Outer South North & West MELBOURNE METROPOLITAN OFFICE APRIL 2018 RESEARCH Fringe region in 2017 included Roy Morgan Research from the CBD to Richmond and the Australian Childhood Foundation from Ringwood to Abbotsford. Reece Group recently precommitted to a seven-storey building in Richmond and will relocate from their current headquarters in Burwood upon its 2020 completion. As quality space becomes scarce and rents steadily increase, the City Fringe region is set to undergo a new development cycle over the next few years. At current, buildings with either approved or applied development applications total in excess of 300,000 sq m. City Fringe region leads surging rental growth With the overall metropolitan office vacancy falling, average prime net face rents increased by 5.8% in the 12 months to March 2018 to reach $356/sq m. This was underpinned by prime net face rents growing by 15.2% in the City Fringe region to reach $475/sq m, largely driven by the strong demand from the Creative and Tech industry for limited available space. Incentives declined from 10%-15% to 8%-12% over the same period, resulting in net effective rents growing by 10.5% to reach $418/sq m. The Inner region recorded prime rental growth of 6.8%, with prime net face rents reaching $395, as tenants relocate into inner suburbs to appeal to staff. In the North & West region, prime Net Face Rental Growth Year-on-year by region as at March 2018 (%) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% net face rents grew by 3.1% to reach $330/sq m, as leasing activity improves on the back of businesses becoming increasingly attracted to the region. Prime Outer ern and South ern net face rents remained steady at $315/sq m and $265/sq m respectively. Prime Net Rents and Incentives By region as at March 2018 ($/sq m) NET EFFECTIVE INCENTIVE Recent Leasing Activity Melbourne Metropolitan Office Market Address Precinct NLA (sq m) Term (yrs) Lease Type Tenant Start Date Cremorne Street, Richmond City Fringe 19,300 U/D Precom Seek Q Balmain Street, Cremorne City Fringe 7,800 U/D Precom Reece Group Q Northumberland Street, Collingwood City Fringe 6,750 U/D Precom Aesop Q Nicholson Street, Melbourne City Fringe 2,700 U/D New Hub Australia Q Cubitt Street, Cremorne City Fringe 3,000 U/D New The Commons Q Gwynne Street, Cremorne City Fringe 1,500 7 New Ratio Consulting Q2-18 1B Oxley Road, Hawthorn Inner 1, New Creative Cubes Q1-18 Stage 2, Caribbean Park, Scoresby Outer 2, New Toyota Finance Q1-18 Stage 2, Caribbean Park, Scoresby Outer 8, New Waterman Q Church Street, North Richmond City Fringe 4,000 U/D New ern Health Q Corporate Drive, Moorabbin South 3, New Mitre 10 Q Flintoff Street, Greensborough South 1,320 5 New Dept of Education and Training Q Whitehorse Road, Box Hill Outer 1, New Robinson Gill Q4-17 Bld 1, 658 Church Street, Richmond City Fringe New Roger David Q Burwood Road, Hawthorn Inner 1,280 7 New Scope Australia Q High Street, Prahran Inner 1,471 4 New Catapult Sports Q3-17 Bld 10, 658 Church Street, Richmond City Fringe 2,657 5 New Disney Q Blackburn Road, Mount Waverley Outer 2,083 7 New General Mills Q2-17 5

6 Limited available stock drive investment levels down Transaction volumes ($10 million+) in the Melbourne metropolitan office market in 2017 totalled $564.4 million across 18 transactions, compared with the record $1.02 billion in The fall in investment levels was driven by a lack of available stock rather than a lack of investor appetite, in the face of a tightly held office market. Nevertheless, Melbourne metropolitan office investment activity remained steady year -on-year, accounting for 12.8% of investment activity across all of Melbourne s office markets in Investors flock to the Outer region The Outer region accounted for the majority of total sales volumes in 2017 at 32.6%, or $184.1 million, up from 19.6% in the previous year. The largest transaction was Fife Capital acquiring Blackburn Road, Mount Waverley for $76.3 million. Strong tenant demand and quality available stock were the drivers for increased investment activity in the Outer region. Investors continued to be active in the City Fringe region, with office sales totalling $118.1 million, 21% of total sales volumes. Regional sales accounted for 20.4% of total sales volumes, following the sale of the Transport Accident Commission (TAC) building at 60 Brougham Street, Geelong, which sold for $115 million to single-asset Centuria Geelong Office Fund, a subsidiary of Centuria Capital Group. The sale represented the largest single asset sale over the year. Large quality sales bring A-REIT investment to a record high By purchaser type, A-REITs were the most active buyers in 2017, accounting for 38.4% of total sales volumes. Totalling $216.7 million across three transactions, A-REIT investment levels reached a Metropolitan Office Sales by Purchaser $10 million+ sales 2017 A-REIT OFFSHORE PRIVATE INVESTOR UNLISTED/SYNDICATE 38.4% 11.7% 22.4% 27.5% record high, as A-REITs progressively invested in metropolitan assets with strong capital growth potential. To demonstrate, Centuria Metropolitan REIT acquired the Target Head Office in Williams Landing for $58.2 million, while Centuria Geelong Office Fund acquired the TAC building in Geelong for $115 Recent Sales Activity Melbourne Suburbs Address Price ($ mil) Core Mkt Yield (%) NLA (sq m) $/sq m NLA Vendor Purchaser Sale Date 60 Brougham Street, Geelong U/D 16,098 7,144 Impact Investment Centuria Geelong# Dec Janefield Drive, Bundoora ,961 6,799 MAB IOOF Dec Toorak Road, Hawthorn ,007 6,152 IOOF Local syndicate Nov Todd Road, Port Melbourne ,213 4,722 Terraplex Abacus Property Group Oct Camberwell Road, Camberwell * 5,420 5,074 Bricktop Group Peak Equities Sep-17 8 Lakeside Drive, Burwood * 4,552 3,972 Kador Group Tong Eng Group Sep Blackburn Road, Mount Waverley * 23,724 3,372 EG Funds Management Fife Capital Aug Prospect Street, Box Hill^ U/D U/D U/D U/D Offshore private inv Jul Prospect Street, Box Hill^ * 2,121 5,747 South Haven Group Offshore private inv Jul-17 2 Kendall Street, Williams Landing * 12,919 4,507 Cedar Woods Centuria Metro REIT Jun Victoria Crescent, Abbotsford U/D U/D U/D Spotless Group Cadence Property Jun Hardner Road, Mount Waverley ,412 3,197 United Asset Mgmt Local private inv Jun Compark Circuit, Mulgrave ,851 3,675 Private investor Stronghold Investment May Burwood Hwy, Burwood ^ U/D U/D U/D ARRB Hong Se International May-17 6

7 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 MELBOURNE METROPOLITAN OFFICE APRIL 2018 RESEARCH Metropolitan Office Sales $10 Million+ By region ($m) 1,200 1, CITY FRINGE INNER EAST OUTER EAST SOUTH EAST NORTH/WEST REGIONAL million. Both of these assets are located in Melbourne s west, where strong population and jobs growth in Victoria are seeing outer suburbs and regional cities play an important role in the social and economic future of the state. In the City Fringe region, Abacus Property Group acquired 187 Todd Road, Port Melbourne for $43.3 million. The asset stands to benefit from the Fishermans Bend Urban Renewal project. Domestic unlisted funds were the second most active buyers, accounting for 27.5% of total sales volumes and totalling $155.4 million. Investment activity from offshore purchasers fell by 10.9% from the previous year to total $65.8 million in This was underpinned by the limited stock on offer as well as China s imposed restrictions on outbound investment. Of the four transactions made by offshore purchasers, three were located in the Outer region as Opportunistic/Development transactions. The Outer region will continue to garner strong interest from local and offshore developers, particularly in Box Hill as it undergoes transformation to be a major employment hub. Yield compression continues With prime yields in the CBD office market currently ranging between 4.75% and 5.25%, investors are increasingly seeking investment opportunities in higher returning office markets, such as the metropolitan office market. Competition for limited prime grade assets caused average prime yields in the Melbourne metropolitan office market to compress by 42 basis points to 6.00% in 2017, with yields now ranging between 5.70% and 6.30%. Similar to the trend being observed in the prime market, average secondary yields compressed by 41 basis points to 6.93%, with yields now ranging between 6.65% and 7.20%. Yield compression was the tightest in the North & West region, having compressed by 88 basis points to range between 6.50% to 7.50%. The sale of the Target Head Office in Williams Landing struck on an initial market yield of 6.50%, Outlook With Victoria forecast to receive an additional 70,000 white collar jobs in the 12 months to December 2018 and Melbourne CBD office vacancy anticipated to remain at historically low levels over the next two years, tenant demand will continue to pour into the metropolitan office market. This is already occurring in the City Fringe and Inner regions, where CBD tenants have started reviewing options to relocate to Richmond and Hawthorn, and their immediate surrounds. Limited large quality leasing options in the traditional metropolitan office market will see tenants expand their search into non-traditional metropolitan office markets, such as Uni Hill, Essendon Fields and Williams Landing in the North & West region and Scoresby in the Outer region. Gross new supply over the next 12 months will be focussed in the Outer and North & West regions. Metropolitan Yields & Risk Spread Core market yields & prime vs secondary spread (bps) 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% RISK SPREAD (RHS) SECONDARY YIELD (LHS) PRIME YIELD (LHS) Speculative development in the metropolitan office market will be relatively constrained over the next two years, with the City Fringe region accounting for most of the speculative space under construction. Average prime net face rents are expected to continue increasing over the next 12 months, as quality leasing options become limited. Prime net face rents in the City Fringe and Inner regions are expected to reach the high $400s/sq m. For new developments in the City Fringe, prime net face rents are expected to reach up to $550/sq m. As CBD office asset prices continue to rise amidst the lack of investment opportunities, investors are more likely to target metropolitan assets. Metropolitan prime yields are expected to continue trending downwards over the next 12 months, although the compression rate is expected to slow down

8 RESEARCH & CONSULTING Ben Burston Group Director Ben.burston@au.knightfrank.com Jane Wong Research Analyst Jane.wong@au.knightfrank.com CAPITAL MARKETS Paul Henley Head of Commercial Sales, Australia Paul.henley@au.knightfrank.com Danny Clark Head of Commercial Sales, Victoria Danny.clark@au.knightfrank.com Tim Grant Director In Charge, ern Office Tim.grant@au.knightfrank.com Metropolitan Stock Definition: Includes office stock in the Melbourne metropolitan area above 1,000 sq m in size. It excludes stock in the CBD and the major office markets of St Kilda Road and Southbank. Major suburbs for each region are as follows: City Fringe: Carlton, Richmond, Melbourne, Port Melbourne Inner : Hawthorn, Camberwell, Kew, Malvern, South Yarra Outer : Box Hill, Mount Waverley, Mulgrave, Burwood South : Cheltenham, Moorabbin, Dandenong North & West: Footscray, Moonee Ponds, Essendon Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. OFFICE LEASING Hamish Sutherland Senior Director, Head of Division Hamish.sutherland@au.knightfrank.com James Treloar Director, Head of Metropolitan Leasing James.treloar@au.knightfrank.com Adam Jones Director, Office Leasing Adam.jones@au.knightfrank.com VALUATIONS & ADVISORY Michael Schuh Joint Managing Director Mschuh@vic.knightfrankval.com.au Melbourne CBD Office Overview March 2018 Gold Coast Office Overview March 2018 Brisbane Investment Environment March 2018 Active Capital 2017 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.