LMW Link. Brisbane CBD Office ~ August For more information. Brisbane CBD Office Indicators

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1 ~ August 216 Indicators Indicator Jul 214 Jan 215 Jul 215 Jan 216 Jul 216 Total Stock 2,199,1 2,193,83 2,158,29 2,157,34 2,261,878 Vacancy Rate 14.7% 15.5% 14.9% 14.9% 16.9% Annual Net Absorption (sq m) -44,314-29,836-38,125-17,896 41,419 Annual Net Supply (sq m) -4,675-4,436-4,81-36,463 13,588 Avg A Grade Gross Face Rent $66 $67 $68 $685 $68 Avg A Grade Incentive 33% 35% 36% 36% 38% Avg A Grade Initial Yield 7.5% 7.4% 7.25% 7.2% 7.15% Source: Property Council of Australia (PCA) & LMW Research For more information Helen Swanson Queensland Research Director helen.swanson@lmw.com.au Paul Robbins Managing Director - Brisbane paul.robbins@lmw.com.au

2 ~ August 216 Market Characteristics The Property Council of Australia (PCA) office market report (OMR) for July 216 shows the Brisbane CBD comprising 2,261,878 square metre of office stock. The graph below show the changing composition of Brisbane s CBD office market as at July 29 versus July 216. The introduction of 48 Queen Street (Premium Grade) and 18 Brisbane Street (A Grade) has pushed the premium grade stock composition to 11% and A grade to 41%. Stock withdrawals and conversions along with the emergence of new prime grade office stock has led B grade to contract from 43% to 36% of the total stock over the relevant period. The influx of new prime grade stock is an essential driver for attracting national and international based companies to choose Brisbane CBD as their base headquarters. Source: PCA OMR, Jul % Stock Composition by Grade Jul-9 Vs Jul-16 4.% 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% Premium A Grade B Grade C Grade D Grade Jul-9 Jul-16 Supply & Development Brisbane is now past the peak of the current supply cycle. Limited new supply, combined with withdrawals, is expected to lead to a tightening in the vacancy rate from mid 217 through to 218. In the twelve months to July 216 the Property Council of Australia (PCA) reported that the Brisbane CBD office market added 115,134 square metres of new supply and removed 1,596 square metres. 8, 7, New Office Supply Under Construction The adjacent graph shows those new office projects currently under construction in 6, Brisbane s CBD with an anticipated 5, completion date of 216 out to Both 48 Queen Street, and 18 Ann Street are now complete. As at July Queen Street is fully leased and 18 Ann Street more than 5% leased. This now only leaves 1 William Street, which is pre-committed to 4, 3, 2, 1, the State Government, anticipated for completion in 217 and Shayer Group s 1WS Brisbane Quarter Brisbane Quarter, at 3 George Street, with completion likely in 218/19. The only other Source: LMR Research, 216 Vacant Precom project planned but not yet under construction is the superannuation fund backed ISPT s Regent Tower, a proposed 4 storey office tower to be located in Queen Street. 2

3 ~ August 216 A number of permanent and temporary withdrawals from the market which have, and or, will occur by 216/17 include: 443 Queen Street George Street 72-8 George Street 75 William Street 1 George Street The above will see circa 1, square metres withdrawn from the market. Demand According to the Property Council of Australia, the 12 months to July 216 saw annual net absorption of 41,419 square metres significantly above the 1 year historical average of 19,18 square metres. The result was a momentous turnaround for Brisbane s CBD, where just six months prior the annual net absorption rate was negative 17,896 square metres. All grades apart from C and D recorded positive absorption for the 6 and 12 month period to July 216. Strongest was A grade, which recorded 6 month absorprtion of 24,493 square metres and 33,25 square metres. In addition, there has been a slight upward movement in space taken, represented Source: PCA OMR July 216 Premium A Grade B Grade mostly by serviced based sectors. The largest takers of net office space in Brisbane s CBD over the last year has been from the government, business services, education and health sectors. Some examples of this include Department of Housing at 6 Albert Street, Department of Education and Department of Transport and Main Roads at 14 Creek Street. Education, health and business services representation included; Australian Business School at 293 Queen Street, Goodstart Early Learning at 133 Adelaide Street, Pitcher Partners at 345 Queen Street and Sonic Health Plus at 293 Queen Street. In addition, there are also a number of significant briefs currently in the market, including: Origin 18, sq m circa QIC 8, sq m circa Cooper Grace Ward 4, sq m circa 15, 1, 5, -5, -1, Annual Net Absorption by Grade Jul-5 to Jul-16 In saying the above, despite a pick up in leasing activity, new supply and quality backfill space has seen incentives and vacancy rates remain in the double digit range throughout the first half of

4 LMW Link ~ August 216 Deloitte Access Economics predicts white collar employment in Brisbane s CBD to remain sluggish next financial year with a mere 1.13% growth for the 216/17 financial year. A slowing of companies looking to hire in the real estate, professional/technical and public administration sectors is expected to contirbute to the slowdown. White collar employment growth isn t anticipated to show any real progress until 217/218 when it is predicted to record 2.82%. Driving growth of white collar employees during this period is anticpated to include the public administration and the professional, scientific and technical sectors. Rents A grade rents have declined slightly over the last quarter to record $68/sq m gross face as at June Quarter 216. Incentives for A grade office are now at a record high of 38%, reducing the gross effective rental rate to $421/sq m. Company consolidation has seen gross face rents for B grade product in the CBD fall from $56/sq m in late 212 to $537/sq m gross face today. Incentives for B grade product have increased from 22% in late 212 to 43% resulting in a gross effective rental rate of $36/sq m. 1, 8, 6, 4, 2, -2, -4, -6, -8, Source: PCA & Deloitte Access Economics, 216 Source: LMW Research, 216 $6 $5 $4 $3 $2 $1 White Collar Growth (%) Vs Annual Net Absorption 1998/99 to 224/25 Annual Net Absorption LHS Gross Effective Rents ($/sq m) Q1 21 to Q2 216 White Collar Growth (%) RHS In order to draw tenants away from the many B grade assets offering competitive rates, A grade $ landlords have responded by offering flexible leasing terms and floor plate design, fit out options and competitive incentives to the effect that tenants both within, and outside of Brisbane A Grade Office Brisbane B Grade Office the CBD are taking notice. Furthermore, tenants whose office renewal is soon approaching in the fringe markets of Spring Hill, Fortitude Valley, Milton, Toowong and Taringa where quality buildings with large floor plate options are minimal are weighing up the pros and cons of relocating to an A grade asset in Brisbane s CBD. 6.% 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% 4

5 ~ August 216 The table below shows a list of recent leasing deals occurring in Brisbane s CBD. ~ Recent Leasing Deals Date Address Tenant NLA (sq m) Gross Face Term Rent $/sq m Jun Queen St NAB 6, Jun Creek St Dept of Transport & Main Roads 6,132 UD 7 Jun Ann St Federation University~ 2,556 UD 7.7 Jun Queen St Hanrick Curran 1, Jun-16 6 Albert St Dept of Housing 1, UD Jun Ann St Superloop Limited ~ 867 UD 4.1 Jun Queen St Little Lawyers 1,243 UD 4 Jun-16 3 Makerston St QinetIQ Apr-16 2 Mary St IIX Australia May Adelaide St Ceberal Palsy League 1,3 555 UD May-16 3 Queen St Kern Group May Eagle St Costs Lawyers May Adelaide St Car Finance Australia Apr Queen St Pitcher Partners 2, UD Apr Queen St SMS Management Technology 1,23 73 UD Apr George St Australian Receivables Limited Apr-16 2 Mary St IIX Australia Apr Creek St Weatherford 144 UD 3 Source: LMW Research. UD - undisclosed. pre-commitment. ~Q4 start date. Vacancy As can be seen from the graph below, the CBD office vacancy rate rose from 14.9% in January 216 to 16.9% in July 216. Sub-lease vacancy comprised a significant component of the increase, rising from 1.6% to 3.1% over the relevant period. Premium grade vacancy rose 9.6% to 22.1%. The premium grade vacancy increase was led almost entirely from a rise in sub-lease space over the last six months as a result of tenant movements into 48 Queen Street. It must also be noted that the size of this market at 259,617 square metres (11% of the total market) can also magnify the change in vacancy. The A grade vacancy remained relatively resilient rising only 2.6 basis points to record 13.9% in July 216. Looking forward, we anticipate the vacancy rate should begin to show signs of improvement from mid-217 as time is allowed to absorb current back-fill space and as no new supply is anticipated for release until mid-218 onwards. 25. Vacancy Rate by Grade (%) Jan- to Jul Vacancy by Grade (%) Jul-2 to Jul Source: PCA OMR, July 216 Premium A Grade B Grade Source: PCA OMR, July 216 Vacancy 5

6 ~ August 216 Investment & Yields LMW recorded $1.75 billion office sales (>$5 million) in Brisbane s CBD in 215. This figure is the highest recorded since 213 and is 34% higher than that recorded in 214. More recently, 216 has seen $464 million office sales occur within Brisbane s CBD. Overall the Brisbane capital market is strong with yield compression throughout 216 for quality assets with a strong WALE. Whilst the cash rate remains low, further compression (albeit at a slower pace than over the previous 6 months) for quality assets with a strong WALE is likely over the coming six months. One of the more significant transactions to take place this year was 3 Queen Street which was offered for sale via expression of interest campaign and sold as part of divestment of the Seymour group s portfolio of inner city assets. The asset was purchased by Singaporean based ARA Asset management for $188 million at an initial yield of 7.54%. The sale to ARA indicates the confidence offshore buyers continue to have in Brisbane s office market. This sale follows another purchase by an off shore buyer with AEP Investment Management buying Mineral House, 41 George St from QIC Global Real Estate for $159.8 million. Recent Brisbane CBD Investment Office Sales Date Address Price ($M) NLA (sq m) $/sq m Initial Yield Jul Adelaide St ,576 2,191 na Jun-16 3 Queen St ,364 9,79 7.4% Jun Queen St & 88 Creek St ,612 8,11 8.% Mar Roma St* ,435 2,127 na Mar George St ,96 5, % Source: LMW Research 216. *GPT Wholesale Office Fund sale of half interest in Brisbane Transit Centre. na not available at this time. Despite soft leasing conditions, investment demand is expected to remain solid over the coming year as investors seek secure yields. Forecasted prime cap rates are anticipated to tighten a further 1 to 25 basis points over the coming six months. Premium grade cap rates at present are positioned at 6.2% to 6.45%. Pricing of office assets over the coming six months should continue to be supported by low interest rate yields. The current cap rate to bond spread on average for A grade office in Brisbane s CBD is 51 basis points (see below graph). Overall investment strength for Brisbane s CBD office assets offering a strong WALE should be retained as investors seek the defensive nature of property. Source: LMW Research, Avg. Initial Yields (%) Q1 26 to Q Premium A Grade Long Term Bond Rate (%) 6

7 ~ August 216 For Further Information please contact the Brisbane office. LMW Level 12, 241 Adelaide Street Brisbane CBD QLD 4 T: (7) E: helen.swanson@lmw.com.au No part of this research report or any reference to it may be included in any other document or reproduced or published in any way without the written approval of the form and context in which it is to appear. No liability is accepted for any loss or damage (including consequential or economic loss) suffered as a consequence of fluctuations in the property market subsequent to the date of the report. The opinion herein is relevant as at the date of survey only and no warranty can be given to the accuracy of the opinion at any point during the date of the report. The research report is current as at the 15 th of August 216 only. The opinions herein may change significantly and unexpectedly over a relatively short period including as a result of general market movements or factors specific to the survey area and property classes, the opinions expressed in this research report are that of the researcher and is authorised by LMW. Liability limited by a scheme approved under Professional Standards Legislation. 7