Australian Capital Markets Q Accelerating success. THE HUNT FOR YIELD. Australian Capital Markets Q The Hunt For Yield

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1 Australian Capital Markets Q Accelerating success. THE HUNT FOR YIELD Australian Capital Markets Q The Hunt For Yield

2 Global unease position Australia favourably as an investment destination The Australian office market continues to benefit from favourable global conditions, which are driving an increase in demand from all capital sources. A secure Australian economy driving investment The hunt for yield has further intensified in global capital markets in 2016, with tough economic conditions. In light of this, the Australian economy continues to prosper with the most recent quarter of positive GDP growth delivering Australia 100 quarters without a recession. Low unemployment, a transparent legal system, low sovereign risk, AAA credit rating and a lower AUD continue to drive offshore capital into Australian real estate. On top of these fundamentals, Australia is still offering attractive effective yields when compared to their global counterparts, which will only increase the global perception of Australia as a safe destination to deploy capital. Monetary policy remains favourable Monetary policy since the Global Financial Crisis has been the key stimulus tool for the majority of Central Banks throughout the world. The US, U.K, Japan and Euro Zone - just to name a few - have adopted record low interest rates in an attempt to stimulate economic growth. The strength of Australia s resources sector allowed Australia to delay dramatic rate-cutting, and even though the current cash rate is at an Australian record low of 1.5 per cent, it is still relatively high when compared to other developed economies. The lower for longer theme echoed around the market along with the spread between government bonds and property yields is expected to continue to compress yields on commercial properties. Funds positioned well Financial Year reporting season yielded strong results for many A-REITS, benefiting from historically low interest rates, driving yield compression and subsequently an increase in book valuations. With capital markets potentially surpassing pre-gfc levels there are questions regarding property funds position should interest rates rise. However, groups have leveraged off the current monetary policy adopted by the RBA by lowering borrowing costs, reducing gearing and pushing out debt maturities. The current environment has also given funds the opportunity to review their portfolios and sell-down their non-core assets which don t fit future objectives. 2 Australian Capital Markets Q The Hunt For Yield

3 Long WALE demand intensifies Demand for long WALE assets with secure bond-like income streams is at an all-time high. The scarcity of these annuity style assets has forced the hand of Vendors nationally with a number of transactions re-rating their respective markets. Record low interest rates and government bond yields have amplified the hunt Major Central Bank Rates for yield and security with significant weight of capital from offshore groups in particular Korean and German investors. Domestically, Charter Hall s impending launch of their Long WALE REIT highlights Australian managers response to this trend, with the IPO set to be the largest in Australian real estate history. 28 O Connell St, Sydney Sold by on behalf of ACE Insurance for $91 million Source: Colliers Edge 3

4 SYDNEY Fundamentals continue to drive the Sydney market The Sydney market continues to perform against a backdrop of strong fundamentals and lower transaction volumes. Demand rises as transaction volumes drop 2016 appears set to see significantly lower levels of office transaction activity, as institutional owners feeling the weight of capital in their existing investor bases. While Sydney s status as the preferred destination for office capital has intensified buy-side demand, existing investors are increasingly comfortable with holding core positions at record levels of pricing. Transaction volumes for the first half of 2016 of $0.97 billion were materially lower than the $2.5 billion recorded in the first half of With the majority of office A-REITs trading at premiums to NTA and wholesale funds finding strong demand in equity markets, Sydney s core status appears to be holding back the deep pools of capital queuing to get direct exposure. Leasing market imbalance Competition in Sydney s B grade leasing market continues to intensify, driven by a wave of imminent stock withdrawal and increasing tenant requirements. B grade rental growth has exceeded all other grades during 2016, posting a 26.9 per cent increase for the year from June 2015, with B grade vacancy forecast to drop below 2 per cent. The bullish Sydney CBD Net Effective Rental Growth Rates Source: Colliers Edge 4 Australian Capital Markets Q The Hunt For Yield

5 B grade outlook has the potential to affect the Prime part of the Sydney CBD market, as effective B grade rents begin to intersect Prime deals. Currently, a B grade deal in Sydney with an incentive of 15 per cent may prove more expensive on an effective basis than a Premium deal with a 35 per cent incentive. 55 Clarence Street, Sydney Currently being marketed for sale by on behalf of Eureka Funds Management National portfolio sales provide investment volume While transaction volumes in Sydney have trended lower, the momentum of national portfolio sales has continued throughout The sale of Denison Funds Management s portfolio of 14 assets to Propertylink in August for $ million provided another example of the appetite of investors seeking immediate scale and diversification. The typically secondary nature of diversified national portfolios provides a significant yield premium to core assets, creating an attractive yield arbitrage. The market looks set to be tested again before the end of 2016, with Blackstone announcing the sale of their 10 asset non-core office portfolio with hopes for in excess of $700 million. Investors seeking immediate scale and diversification. 5

6 MELBOURNE Strong depth in buyside capital underpins Melbourne investment market Greatest ever depth of buy-side capital, with continued growth of capital from offshore. Melbourne remains a desirable destination for offshore capital Melbourne s status as Australia s second largest office market and a gateway city continues to fuel buy-side demand. Assets with the best combination of location and building quality are drawing the greatest demand from offshore capital. In 2016, Melbourne Capital Markets team has received over $10 billion in bids for Melbourne office towers. 66 per cent of the volume of bids received has come from offshore parties and more recently 100 per cent of bids were received from offshore parties for the sales campaigns for 380 La Trobe Street and Twenty8 Freshwater Place, with the most prevalent origin of offshore capital on these campaigns emanating from USA & Singapore. Demand from offshore groups is expected to deepen further in the new year, particularly as a result of Brexit which has increased weightings to and focus on Asia Pacific, in which Melbourne is a stand-out market. Offshore groups trading out of assets following strong period of acquisition Following a strong period of acquisition from 2010 to 2015, offshore investors are capitalising on strong current market % Volume ($) of bids by origin of capital 2016 Melbourne campaigns Total Volume of all Bids - $11.82 Billion Total Volume of Offshore Bids - $7.86 Billion Source: Colliers Edge 6 Australian Capital Markets Q The Hunt For Yield

7 conditions and divesting out of their investments. In 2013, 380 La Trobe Street was purchased by Invesco Real Estate for $113.6 million and following significant capital upgrades and new recent leasing deals boosting the WALE to 9 years, the property sold for $176.5 million. Other examples of offshore groups trading in and out of assets more recently include Deka (South Wharf), SachsenFonds (161 Collins Street & 75 Dorcas Street), Deutsche bank (575 Bourke Street) and LaSalle Investment Management (55 King Street). Lack of on market core CBD office opportunities in 2016 will drive investor demand moving forward Only three major office investments have traded thus far in the Melbourne CBD in The lack of on market core CBD office opportunities has seen investors turn their attention to quality large scale assets outside the traditional CBD grid. A total of $1.2 billion in total sales volume has occurred or is currently being marketed in Southbank alone in 5 Queens Road, Melbourne Currently being marketed by Colliers International on behalf of Charter Hall Office Trust 2016 with the sales of 75 Dorcas Street, Twenty8 Freshwater Place, Southgate complex and pending sale of 12 Riverside Quay. Currently, in Melbourne there is approximately $900 million worth of property either being marketed or in due diligence. Although, the strongest pricing metrics seen in Melbourne were reflected from Blackstone s acquisition of a 50 per cent share in Southern Cross Towers last year, anticipates market yields to breach 5 per cent over the course of the next 6-12 months. 380 La Trobe Street, Melbourne Sold by Colliers International on behalf of Invesco Real Estate OBO separate German account for $176.5 million 7

8 BRISBANE Brisbane s evolution and value driving investment The Brisbane office market continues to benefit from buy-side global conditions, which are driving an increase in demand from all capital sources. The Flight to Quality Practical completions of 480 Queen Street, 180 Ann Street and 1 William Street has added 186,684m²** or 14.9 per cent* to the prime office stock in Brisbane s CBD skyline, resulting in a vacancy uplift to a record high 16.9 per cent*. Lease tails from tenants relocating to 480 Queen Street has increased the CBD s sub-lease vacancy to a historically high 30.1 per cent* of total prime vacancy. Premium grade sub-lease space is being offered at attractive rental terms which has resulted in many tenants upgrading to Brisbane s premium grade buildings from secondary buildings. Relief for the secondary market will come from 85,058m²** of withdrawals resulting from the Queens Wharf Redevelopment and student accommodation projects. Recently announced infrastructure concessions for the untested vertical aged care use will provide further reconversion / withdrawal opportunities. Brisbane s Two Speed Market Record high vacancy rates in Brisbane has resulted in a two-tiered leasing and capital market, as tenants and owners continue to be focused on the prime end of the market. However, opportunities will emerge for buyers willing to go up the risk curve and make counter cyclical 505 St Paul s Terrace, Fortitude Valley Marketed by and in exclusive Due Diligence on behalf of ISPT 8 Australian Capital Markets Q The Hunt For Yield

9 plays. This year in the Brisbane CBD, we have seen buildings with significant vacancy transact at average initial yields of 9.4 per cent and capital values of $2,969/m². In comparison, the only prime grade transaction of 300 Queen Street sold at an initial yield of 7.04 per cent and capital value of $9,709/ m². This illustrates the lack of prime stock available in the Brisbane market and the attractive returns on offer when compared globally - fuelling competition and driving down yields toward pre-gfc levels. *Source PCA (Jul 2016) **Source: Colliers Edge Brisbane CBD Vacancy By Building Age Brisbane CBD s changing landscape Brisbane s pre-eminent commercial precinct the Golden Triangle has been the CBD s prime business address. However, recent activity has shifted focus towards the George Street end of the CBD as underutilised areas become redeveloped. The George Street evolution consists of $6 billion worth of investment from four projects, the largest being the $3 billion Queens Wharf Integrated Resort and Casino Precinct. Buildings along and near George Street will capitalise further from proposed infrastructure projects with either the $1.54 billion City Council s Brisbane Metro Subway System or Queensland State Government s $5.4 billion Cross River Rail project. All projects are at different stages of planning / funding capability, however highlights the change of the CBD s landscape with a raft of projects and investment being drawn to the opposite end of the Golden Triangle. 316 Adelaide Street, Brisbane Currently being marketed by on behalf of MRL Investments Source: Colliers Edge 9

10 Office Capital Markets experts Australia John Marasco Managing Director Sydney Adam Woodward James Barber James Girvan Director Vince Kernahan Tom Green Associate Director Melbourne Nick Rathgeber Leigh Melbourne Michael Long Senior Analyst Brisbane Tom Barr Don MacKenzie Jason Lynch Jonathan Williams Executive Adelaide Canberra Perth Ian Thomas Tim Mutton Ian Mickle Director Australian Capital Markets Q The Hunt For Yield