MARCH 2018 CHARTER PACK

Transcription

1 MARCH 218 CHARTER PACK Image: Truganina Distribution Facility, 485 Dohertys Road, Truganina Vic.

2 FEATURE ARTICLE Will Melbourne s west be Australia s Inland Empire? THE ONCE UNASSUMING, HUMBLE SHEDS OF INDUSTRIAL REAL ESTATE HAVE BEEN REAPPRAISED BY INVESTORS. ONCE SEEN AS A LESS ATTRACTIVE INVESTMENT THAN RETAIL REAL ESTATE, ECOMMERCE AND THE CORRESPONDING GROWTH IN LOGISTICS NETWORKS HAS SEEN THESE TWO ASSET CLASSES REASSESSED. While concerns proliferate about the long-term impacts of ecommerce on retail real estate, industrial looks like the beneficiary of these changes. Traditionally located on city fringes, industrial also offers alternative use options with the passage of time. Taken together, the structural changes of ecommerce and alternative use have seen investors re-rate the humble shed. With some commentators of the view that Australia is behind the curve when it comes to the growth and uptake of ecommerce, it is worth studying a market at a more advanced point as a potential model for market progression. An industrial market that has transformed and benefitted immensely from the growth of ecommerce over the past two decades, and considered a leading global industrial market is the Inland Empire in California. 2 Charter Hall Image: Gepps Cross Distribution Centre, SA

3 INLAND EMPIRE THE RISE OF AN EMPIRE MARKET OVERVIEW INLAND EMPIRE The rise of the Inland Empire industrial precinct has been something of an anomaly on the global stage. The unprecedented demand for industrial space in the sector is a sign of the changing nature of industrial and investor perception of the asset class. As companies have realised the value of the enormous warehouses and distribution centres in the region, demand for industrial assets from both tenants and investors has soared. Traditionally known for its agricultural land, the Inland Empire is a large region of Southern California to the east of Los Angeles encapsulating the San Bernardino and Riverside Counties. With no universally defined borders, the name in a property context most commonly refers to the combination of the Riverside-San Bernardino-Ontario metropolitan areas. Over the last 2 years, the region has rapidly emerged as one of the most significant industrial markets in North America. The industrial stock in Inland Empire spans approximately 4,87 hectares (48.7 million square metres), representing 3% of the total industrial space in the Los Angeles basin. To put this scale in context, the area of stock in the Inland Empire is approximately 1.5 times the size of all industrial property in Australia, and growing almost twice as fast as the Australian market. The boom in demand in the Inland Empire since the GFC has led to the region topping Cushman & Wakefield s North American industrial forecasts for tenant demand and running a close second for new supply. INLAND EMPIRE, CALIFORNIA Amazon Fulfillment Center ALDI Distribution Center Quiksilver Distribution Center FedEx Office Ship Center LG Electronics PepsiCo Industrial area Airport Port Lancaster INLAND EMPIRE CALIFORNIA LA/Ontario Airport Los Angeles Anaheim Long Beach San Bernardino Airport Joshua Tree National Park Source: Charter Hall Research 4 Charter Hall Charter Pack 5

4 MARKET OVERVIEW WHAT S DRIVING TENANT DEMAND IN THE INLAND EMPIRE? The Inland Empire has historically tracked well below the national average for vacancy, falling from a peak vacancy rate of 12.7% mid-29 to a record low of 3.9% as at March 218, whilst total stock has grown 24.5% to 4,87 hectares over the course of the past 5 years. New development appears to be showing no signs of slowing, with 238 hectares under construction as at March 218, or approximately the same area as the entire Perth industrial market. Net absorption in the region has remained above 15 hectares per year over the past three years with consumer goods, e-commerce and third-party logistics accounting for most of the absorption in recent years. Overall asking rents also hit record highs in the first quarter of 218. Tenants continue to be attracted to the market, with large state-of-the-art developments, in particular logistics centres, in high demand. Among the many companies to have established facilities in the Inland Empire are names such as ALDI, UPS, PepsiCo, Quiksilver and Amazon. Amazon, significantly, opened their first facility in the Inland Empire in 212 and now occupies nearly 93 hectares across ten facilities and is the region s largest private sector employer. INLAND EMPIRE OVERALL VACANCY 12% 1% 8% 6% 4% 2% % Q18 As at 1Q18 Source: Cushman Wakefield, Charter Hall Research Overall Vacancy Historical Average = 6.2% OVERALL NET ABSORPTION / OVERALL ASKING RENT (Million sqm) (USD psm p.a.) $8. $7. $6. $5. There are four significant factors that are driving tenant demand in the Inland Empire. LARGER, MORE EFFICIENT SPACE ecommerce has accelerated demand for more efficient space, enabling faster movement of goods to consumers. This has increased the scale of warehouses being demanded by tenants. Between 212 and 217, the average new warehouse completed in the Inland Empire increased in area by 222% to 31,445 sqm, whilst the average height of warehouses grew by 1.1 metres to just under 1 metres. The large tracts of developable land in the Inland Empire have offered the opportunity to build these larger facilities for tenants. Additionally, land supply in the Inland Empire has ensured that the pricing has remained cheaper than in neighbouring Los Angeles and Orange counties. RENT AFFORDABILITY Rents in the Inland Empire are significantly cheaper than in neighbouring counties. The average asking lease rate in the Inland Empire for the first quarter of 218 was USD $6.89 per sqm, per month as compared with $8.5 USD per sqm per month for the Los Angeles market. The lack of space restrictions in the Inland Empire has allowed speculative development to be undertaken which has also kept rents down, while servicing the growing demand for industrial space in the region. ACCESS TO TRANSPORT INFRASTRUCTURE Perhaps most important is the Inland Empire s location relative to transport infrastructure. The region is located just 1km from the ports of Los Angeles and Long Beach. Collectively these ports handle over a third of all cargo imported to the United States by ship. In addition, the Inland Empire contains two international airports within its boundaries (Ontario and San Bernardino) with significant air freight passing through them. Rail is also important, with significant freight rail lines and an intermodal terminal located in San Bernardino. Finally, the Inland Empire contains a dense network of highways, state routes and interstates that enable tenants to service much of California and neighbouring states with same day turnaround. PROXIMITY TO POPULATION CENTRES Sharing a border with Greater Los Angeles, the second largest city in North America, the Inland Empire also serves as a freight gateway to many of the surrounding states. The aforementioned transport infrastructure makes it a vital link in the transportation of goods to the major surrounding population centres $4. $3. $2. $1. $ Q18 As at 1Q18 Net absorption Asking Rent Source: Cushman Wakefield, Charter Hall Research 6 Charter Hall Charter Pack 7

5 WHAT PARALLELS EXIST BETWEEN THE INLAND EMPIRE AND MELBOURNE WEST? Avalon Melton Sunbury Hoppers Crossing Ravenhall Sunshine West Tullamarine Port Melbourne Somerton West Melbourne Epping Coburg North Preston Moorabbin Airport Greensborough Research Box Hill Camberwell Glen Waverley Springvale Keysborough Bayswater Knoxfield West North City Fringe South East Precinct boundary Central Business District Major Airport Major Seaport NET EXISTING NOMINAL RENTS BY PRECINCT (AUD psm p.a.) As at 1Q18 South-East Forecast West Rents in the precinct have remained level over the past four years at $73 per sqm, increasing to $75 per sqm in 217 whilst sitting persistently lower than rents in the other industrial precincts. The demand for area in the west is evident with land values increasing 63.6 percent over the past three years, far in excess of other regions over the same period. This growth reflects the steady buildout of available land and expectations of future rental growth. Rents are expected to rise across the board in coming years with ongoing tenant demand and the western precinct s ability to deliver larger scale facilities. The region is well positioned as a hub for freight reception and distribution with the majority of Melbourne s interstate rail and road network connections in, or nearby the region, and a number of infrastructure improvement projects currently being undertaken. Overall, the location is strategic for several large surrounding occupiers including Coles, Woolworths, Murray Goulburn, Toll Holdings, DHL, Linfox, DB Schenker, ABInBev, CEVA, Isuzu, Kathmandu and Kubota Tractors. Located on the city fringe, Melbourne s western industrial precinct is strategically positioned close to Australia s fastest growing CBD, the nation s second largest container port, two international airports and several major regional centres. The dominant industrial market in Melbourne for some years, demand in the west continues to swell. Importantly, the tenancy profile in the region is changing to reflect the growth of ecommerce and global logistics companies. Tenant demand in Melbourne s western industrial region has grown consistently over recent years, and in 217 accounted for almost half of industrial leasing activity in Melbourne. Like the Inland Empire, tenant demand has grown markedly in the region due to affordability relative to alternative markets, proximity to transport infrastructure and an ability to deliver the larger distribution and fulfilment centres required for ecommerce needs. The precinct accounted for the majority of new development activity across Melbourne over the 12 months to December 217. The ecommerce focus is apparent given 63 percent of the 354,25 sqm of industrial space leased in the west was by tenants operating in the transport and logistics sectors. Transaction volumes have come off since a peak in 216 largely due to a lack of assets for sale with strong investor interest persisting and the scale of development in the region is currently only restricted by zoning. LAND VALUES BY PRECINCT (2 5 HA LOTS) (AUD psm) 2 1 As at 1Q18 Q1214 Q1215 Q1216 Q1217 Q1218 Epping (North) Campbellfield (North) Derrimut (West) Truganina (West) 8 Charter Hall Charter Pack 9

6 WHAT S DRIVING TENANT DEMAND IN MELBOURNE S WEST? Demand in Melbourne s Western industrial region has grown strongly over recent years, with the precinct accounting for 46% of all leasing activity in Melbourne. DEMAND FOR LARGER, MORE EFFICIENT SPACE Logistics and distributions tenants are looking to lease larger, more efficient spaces to cater to the changing demands of ecommerce. This has been reflected in the west of Melbourne with the efficiency and scale benefits of prime stock drawing attention from tenants occupying secondary stock in the north and east districts over the past few years. A prime example being global logistics company, CEVA, who took up occupancy in Australia s largest shed of 166, sqm in Truganina in Melbourne s west in early 217. RENT AFFORDABILITY The industrial suburbs in Melbourne s west have historically had the lowest rental rates as compared with other regions in the city. As at March 218 the prime net rent in Melbourne s West was $75 per sqm according to JLL Research, as compared with $125 on the City Fringe, $88 in the South East and $79 in the North. With the additional space demands of ecommerce, logistics and warehousing tenants are looking to areas with greater affordability without sacrificing location value. ACCESS TO TRANSPORT INFRASTRUCTURE The western precinct of Melbourne is arguably the most connected industrial region in Melbourne in terms of transport infrastructure. The Victorian Government and VicRoads have recognised the growing importance of the western precinct and exponential residential growth, and have committed to a $1.8 billion program of road upgrades and maintenance to nearly 7km of arterial roads throughout the area. Together with the $5.5 billion West Gate Tunnel project that will be completed in late 22, the programs will significantly improve access to this precinct from the Port of Melbourne and the CBD. The region currently has excellent access to the Port of Melbourne, which jostles with Port Botany for largest container port in the country. This connection is set to improve when the West Gate Tunnel project is completed. Additionally, the precinct is located at the mid-point between Tullamarine and Avalon international airports, both offering curfew-free domestic and international freight options, as well as regional Ballarat and Essendon airports. PROXIMITY TO POPULATION CENTRES Melbourne is the fastest growing and second largest city in Australia, on track to surpass 5 million residents this year and exceed Sydney s population in 219. Melbourne s population grew 125,4 people in the year to June 217, with 8, international migrants and the remainder from interstate. There are several by-products of this: importantly, it has meant a significant uptick in public infrastructure expenditure on many industrial-enabling projects; it has also underpinned on-going retail consumption growth, and consequently tenant demand for industrial assets. Additionally, the west of Melbourne is best positioned to service the surrounding cities of Geelong to the Southwest, and inland cities of Bendigo and Ballarat to the Northwest. The foundations of growth While no two markets are identical, there are some clear parallels between the West Melbourne industrial region and the Inland Empire in Los Angeles. As ecommerce continues to take share in the Australian retail landscape, the Inland Empire points to the path that Australian industrial markets may develop along. The characteristics of the West Melbourne market suggest a sound foundation for future growth. 1 Charter Hall Image: Melbourne CBD

7 Image: Western Sydney University, 1 Parramatta Square, Parramatta NSW ECONOMIC UPDATE

8 ECONOMIC DRIVERS The Australian economy is gathering pace faster than many have anticipated, growing.4% in the December 217 quarter... Growth in the global economy continues to show robust momentum across all the major economies, with Europe and Japan remaining key drivers. Recent tariffs announced by the United States, prompting retaliatory action from China and the potential for a trade war, are expected to produce some turbulence for the near term. Ultimately though, this is not expected to destabilise the uplift in growth being experienced internationally. World growth is now projected to increase to 3.2% in 218, slightly down on previous quarters predictions. The Australian economy is gathering pace faster than many have anticipated, growing.4% in the December 217 quarter, equating to 2.4% annual growth. The growth is being underpinned by a pick-up in investment in the non-mining sector which is gathering momentum on the back of higher Australian company profits. Company profits grew 2.2% in the quarter to December 217, and whilst mining investment continues to languish, the rate of decline has slowed. Increased business confidence levels and the boost in non-mining investment suggests that 218 may be the first year that growth in business investment will be seen since 213. Whilst mining, engineering and construction is still set to decline, the worst of the blow is assumed to have landed and replacement capital expenditure and exploration activity are beginning to pick up. The Australian dollar continues to decline against other global currencies, which should improve Australia s terms of trade on the world stage. Going forward, the forecast for growth in the Australian economy is now 2.7% for 218, carried by the improving global environment and improving terms of trade which should underpin demand for Australian exports over the coming years. All Australian states, other than the Northern Territory, recorded domestic growth in state final demand over the year to December 217. The ACT recorded the greatest annual growth of 5.%, followed closely by South Australia at 4.9% and Victoria with 4.4%. Western Australia seems to have levelled out, recording a 1.3% annual growth for the December quarter driven by a steadying of the decline in private investment over the last year. Employment growth slowed considerably over the first quarter with March s labour force figures yielding a slowdown greater than expected by most market commentators given the ongoing strength in vacancies. Only 4,9 jobs were added in March, far short of the 2, predicted by the market, and 36, for the quarter to March. The weak result was underscored by the ABS rebalancing of the seasonal adjustment which saw both January and February Employment growth slowed considerably over the first quarter with March s labour force figures yielding a slowdown greater than expected by most market commentators... employment fall from their initially announced figures. Unemployment remained at 5.5%, whilst the participation rate fell slightly to 65.5% (down.1% in March). The ANZ Job Advertisement Series for February remains positive for the short to medium term, sitting 13.3% higher than 12 months earlier. The NAB Monthly Business Survey for February 218 saw the business conditions have reached their highest levels since the commencement of the survey in Western Australia continued to record the strongest growth in business confidence levels, again supported by growing confidence in the mining sector. The Westpac-Melbourne Institute Consumer Sentiment Index saw consumer sentiment fall 2.3% for the month of Feb-18 to Consumer sentiment remained robust in certain areas, showing a positive bias towards the strength of the labour market and economic conditions in the mid to longer term. Total returns from the entire property sector stayed consistent over the year to December 217 as compared with the previous quarter. Total annual return was 11.9% (latest IPD data), still sitting above 5-year and 1-year averages. Continued investor demand and constrained stock levels are holding the markets at compressed yields across all sectors. ECONOMIC GROWTH The Australian economy is gathering pace faster than many have anticipated, growing.4% in the December 217 quarter, resulting in a 2.4% annual growth figure. Household spending was the biggest driver in the final quarter, with a rise of 1.% in household final consumption contributing.6% to the final GDP figure. Source: ABS, Charter Hall Research ECONOMIC PERFORMANCE BY STATE All states recorded growth in state final demand over the course of 217, 217, and apart and all from albeit Western Australia, recorded all states recorded strong growth strong in growth demand in in the demand final quarter. in the final quarter. The negative result in Western Australia for the final quarter was largely due to a 9.6% fall in nondwelling construction over the quarter, resulting in.3% fall in private final demand. Promisingly however, the state recorded a.5% increase in household consumption for the quarter. Source: ABS, Charter Hall Research 8% 7% 6% 5% 4% 3% 2% 1% % DEC2 DEC3 DEC4 DEC5 DEC6 DEC7 DEC8 DEC9 DEC1 DEC11 DEC12 DEC13 DEC14 DEC15 DEC16 DEC17 Annual % (QvQ) Annual % (Rolling Year) Domestic Demand 5% 4.9% 4.4% 4% 3.% 3.% 3% 2.8% 2.6% 2.4% 2.1% 2.1% 2% 1.2% 1.% 1%.9%.8%.3% -.2% % NEW SOUTH WALES VICTORIA QUEENSLAND SOUTH AUSTRALIA WESTERN AUSTRALIA Final Demand Growth QoQ Annual Final Demand Growth 1-year Average Annual Growth 14 Charter Hall Charter Pack 15

9 ECONOMIC DRIVERS FULL-TIME AND PART-TIME EMPLOYMENT RATE 5, BUSINESS AND CONSUMER CONFIDENCE March s labour force figures showed a slowdown in hiring greater than expected given the ongoing strength in vacancies. Only 4,9 jobs were added in March, far short of the 2, predicted by the market. The weak result was underscored by the ABS rebalancing of the seasonal adjustment which saw both January and February employment fall too. Unemployment remained at 5.5%, whilst the participation rate fell slightly to 65.5% (down.1% in March). Source: ABS, Oxford Economics, Charter Hall Research 4, 3, 2, 1, -1, Business confidence in the most recent quarter fell, after reaching a high of 12 in January, to 7 in March. The fall was driven by a number of global events occurring over the period unsettling global markets, including the potential tariff war and tensions between the West and Russia. Consumer confidence has remained relatively steady over the same period, falling somewhat due to the same global uncertainties, but buoyed by strength in the labour market and ongoing economic growth. Source: NAB, Westpac, Thomson Reuters, Charter Hall Research -2, MAR8 MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18-4 MAR8 MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18 Full-time Employment Growth Part-time Employment Growth Business Confidence (LHS) Consumer Confidence (RHS) EMPLOYMENT GROWTH BY INDUSTRY The changing nature of jobs in Australia continues to accelerate, with caring industries hiring at unprecedented rates. Healthcare and education continue to be top contributors to employment growth with the two industries providing almost 225, jobs in the year to February 218. Source: ABS, Charter Hall Research Health Care and Social Assistance Construction 88.1 Retail Trade 87.6 Education and Training 65.1 Transport, Postal and Warehousing 55.2 Arts and Recreation Services 42.9 Agriculture, Forestry and Fishing 27. Electricity, Gas, Water and Waste Services 2.3 Accommodation and Food Services 12.9 Professional, Scientific and Technical Services 11.6 Manufacturing 8.4 Information Media and Telecommunications 7.4 Rental, Hiring and Real Estate Services 2.4 Mining 2.3 Admin and Support Utilities Wholesale Finance and Insurance Retail Manufacturing Hospitality TOTAL Mining Arts and Rec Rental, Hire and R/E 3.5% 3.3% 1.2% -.8% -1.8% 8.5% 12.4% 19.3% 23.7% 29.4% 32.2% CORPORATE PROFITS BY SECTOR Company profits rose 2.1% for the quarter to Dec-17, realising a 3.3% annualised return for the year. Hospitality showed the greatest increase of all industries for the final quarter at 18.8%, followed by Admin and Support (13.8%) and Manufacturing (1.4%). Finance and Insurance struggled in the final quarter with profits falling 16.8% for the industry, somewhat tempering the strength of profits growth for the year. Source: ABS, Charter Hall Research Other Services -5.5 Professional and Tech -2.6% Wholesale Trade -6.3 IT and Telco -2.8% Administrative and Support Services -11. Transport and Warehousing -3.3% Financial and Insurance Services Construction -14.4% Public Administration and Safety Other -25.% % -1% % 1% 2% 3% Total no. persons employed ('s) Annual Return 16 Charter Hall Charter Pack 17

10 SECTOR UPDATES OFFICE INDUSTRIAL RETAIL 18 Image: Charter Western HallSydney University, 1 Parramatta Square, Parramatta NSW

11 OFFICE 13.4 % TOTAL OFFICE SECTOR RETURN The office sector remained the top performing asset class returning 13.4%, well above its 5-year and 1-year averages. 9.5 % WEIGHTED AVERAGE VACANCY RATE Vacancy rates fell across the country significantly the Melbourne CBD market fell below the Sydney CBD market for the first time in four years. OFFICE MARKET INDICATORS 1Q218 Note: Arrows indicate change from prior quarter. Source: JLL Research, Charter Hall Research VACANCY % CHANGE DEMAND PRIME NET EFFECTIVE RENT PRIME YIELD 3 MTH NET ABSORP CHANGE $/SQM CHANGE % CHANGE SYDNEY 5.5-7, MELBOURNE , BRISBANE , Image: 1PSQ, Western Sydney University, Parramatta, NSW 177, sqm TOTAL OFFICE NET ABSORPTION Net absorption for the year to March 218 totalled 177, sqm, with a reduction in leasing activity in Sydney, Brisbane and Perth. PERTH , ADELAIDE , CANBERRA , BRIS FRINGE , PARRAMATTA , The most recent IPD data revealed that in the year to Dec-17, the office sector continued to outperform other asset classes, returning 13.4%, improved on the 13.2% for the year to Sep-17 and well above 5-year and 1-year averages for the sector. The Sydney and Melbourne markets maintained their dominant position compared to other markets, Sydney yielding a 16.3% return for the year to Dec-17 and Melbourne 13.2%. This is well above both markets 1-year averages, however approximately in line with 1-year and 3-year average returns. The Perth market continues to make strides, with total return for the year to Dec-17 lifting to 5.5% as compared to the 4.4% for the September quarter. Australia s CBD office markets recorded 48,251 square metres of net absorption for the first quarter of 218 resulting in 177,71 sqm for the year to March. The result was buoyed by significant uptake in the Melbourne and Brisbane markets, offsetting negative absorption in Sydney, Adelaide and Canberra for the quarter. Net absorption in the Melbourne CBD office market was 36,689 sqm in the first quarter of 218, making up 76% of total net absorption across Australian CBD office markets. Melbourne s strong run in absorption continues to be driven by tenants in the Education and IT sectors. Brisbane maintained positive leasing momentum for the quarter, now recording 38,675 sqm for the 12 months to date with a significant 2,75 sqm in the most recent quarter. Sydney saw a 7,11 sqm decrease in net absorption for the quarter, resulting in 13,142 sqm for the year to Mar-18. Canberra and Adelaide posted small decreases in net absorption whilst Perth achieved 34,424 sqm in net absorption for the year, indicative of the improving labour market conditions. For the year to Feb-18, unemployment rose slightly as compared with the previous quarter to 5.6% (from 5.4%). This was largely due to marginal increases in the New South Wales and Victoria markets to 4.8% and 5.7% (from 4.6% and 5.5%), respectively. Significantly, the Western Australia employment market is improving with the unemployment rate falling from 7.% to 6.% between November 217 and February 218. The participation rate for the nation continues to strengthen and is now at record levels in line with those not seen since October 21. Professional job advertisements continue to grow, with an increase in Australia-wide advertisements of 7.%. Significantly, the Western Australian market saw an increase in professional advertisements of 15.% for the year to Feb-18, followed by a 1.5% rise in Victoria and 8.1% for Queensland. The weighted average vacancy rate across the major capitals remained steady from the previous quarter recording 9.9% as at Mar-18. Vacancy fell most in Brisbane and Melbourne CBDs from the last quarter, with rates falling to 13.9% and 5.4% in each market, respectively. Similarly, the vacancy rates across the grades in the Perth CBD market fell 4 basis points to 21.4% in Q Vacancy in Sydney, Adelaide and Canberra remained relatively stable, with Sydney climbing very slightly to 5.5%, Adelaide to 15.2% and Canberra remaining steady on 13.2%. The Sydney Norwest market vacancy fell, surpassing Sydney Fringe for the lowest vacancy in the nation at 4.%. Net effective rental growth was seen across most Australian office markets, driven by tight vacancies and a lack of supply in Sydney. The greatest growth was seen in Sydney s Norwest, where net effective rents have grown 27% since this time last year. This growth is underpinned by the Sydney Metro project with the Northwest leg due in service in 219. Parramatta and Sydney s CBD saw the next largest increases in net effective rents recording 21% and 17% respectively, with several other markets in Sydney and Melbourne also recording double digit growth. Brisbane was the only market to register negative growth in net effective rents over the year, however net effective rents have grown over the first quarter. Demand for office assets remains robust, with the yield compression cycle continuing into 218 with all office markets persisting at record low yields with some slight compression in Sydney suburban office markets of Chatswood, St Leonards and Sydney Olympic Park/Rhodes. Transaction volumes were approximately $1.53 billion for the quarter and were largely restricted by a lack of investment product on the market relative to the investment capital. 12 MONTH RETURNS BY CBD Over the year to Dec-17, the office sector remained the top performing asset class returning 13.4%. The Australian office performance was underpinned by the continued outperformance of the Sydney and Melbourne CBD office markets. Source: IPD, Charter Hall Research OFFICE VACANCY RATES Melbourne s weighted average office vacancy rate has dipped below Sydney s vacancy for the first time since Mar-14. Melbourne recorded vacancy of 5.4% as at Mar-18 as compared with Sydney s 5.5%. Brisbane experienced a significant 1.1% fall in vacancy over the course of the quarter to Mar-18, whilst Perth declined.4% to 21.4%. The average vacancy rate across all markets remains at its lowest level recorded since Mar-13. Source: JLL Research, Charter Hall Research SYDNEY CBD MELBOURNE CBD BRISBANE CBD PERTH CBD ADELAIDE CBD CANBERRA CBD OFFICE SECTOR 25% 2% 15% 1% 5% % Income Capital 5.5% 6.6% 8.8% 13.2% 12.4% 13.4% 16.3% -5% % 5% 1% 15% 2% MAR8 MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18 Sydney Brisbane Adelaide Melbourne Perth Weighted average 2 Charter Hall Charter Pack 21

12 OFFICE CBD NET ABSORPTION VS PROFESSIONAL JOB ADVERTISEMENTS Professional job advertisements have continued to rise over the quarter to Mar-18, growing 11.5%. This is in line with job advertisement growth for the past year and a continued indication of the strength of the economy and capacity in the labour market. Rolling 12 month net absorption has also remained at similar levels for the most recent quarter, with the exception of Sydney which has almost halved due to 7,11 sqm of negative net absorption for the quarter. Small tenants (<1 sqm) were active in the market, offsetting the negative net absorption. SUPPLY UNDER CONSTRUCTION BY CBD As at Mar-18, 64% of all CBD Office supply currently under construction across Australia has been committed to. Melbourne s 49,9 sqm of CBD Office construction makes up approximately two thirds of all construction activity in the sector in Australia currently. The 184,171 sqm of uncommitted development in Sydney and Melbourne, and the single, 47,7 sqm speculative development in Brisbane CBD s, are clear indications of market confidence in future demand. SQM 4, 15% 3, 1% Sydney.74%.56% 2, 1, 5% % Melbourne 3.6% 1.67% -5% -1% Brisbane.% 1.34% -1, -15% Perth 2.2%.9% -2, -2% -3, -25% MAR13 SEP13 MAR14 SEP14 MAR15 SEP15 MAR16 SEP16 MAR17 SEP17 MAR18 Adelaide 1.81%.4% % 1% 2% 3% 4% 5% 6% Sydney Melbourne Brisbane Perth Change in Professional Job Advertisements (RHS) Committed Uncommitted REAL NET EFFECTIVE RENTS VS VACANCY LEVELS Vacancies have continued to decline over the first quarter, now at 9.5% for the sector, levels not seen since 212. Demand for space has also driven weighted average prime effective rents higher, growing 2.4% over the first quarter and 12.9% for the year to March. This is the 7th quarter with rolling annual growth in double digits. $/SQM 55 2% OFFICE YIELD TO 1 YR AUSTRALIAN GOVERNMENT BOND YIELD SPREAD With office yields at record lows and bond yields rising again, the yield spread is at its lowest point since Jun-1. However, at an average spread of 275 basis points across prime office, the market can support further yield spread compression. When compared with similar office markets globally as at Jun-17, both Sydney and Melbourne Grade A spreads exceeded other prime global cities by between 5 and 19 basis points. 5 4% Yield 9% bps % 8% 5 4 8% 7% 6% % 5% % 4% 2 3% 25 14% 2% 1 2 MAR8 MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18 16% 1% MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18 W.Avg Real Effective Rent ($/sqm) (LHS) W.Avg Vacancy (Inverted RHS) Spread Prime Yield 1Y Bond yield Average spread Source: JLL Research, Savills, Bloomberg Westpac Economics, Charter Hall Research 22 Charter Hall Image: 333 George Street, Charter Sydney Pack NSW2

13 INDUSTRIAL 11.1 % TOTAL INDUSTRIAL SECTOR RETURN The industrial sector returned 11.1% over the year to Dec-17, its highest return in 12 months. 1,69, sqm NEW SUPPLY New industrial supply completed in Australia for the year to March 218 totalled 1.69 million square metres. The Sydney, Melbourne and Brisbane industrial markets accounted for 94% of new supply for the year. INDUSTRIAL MARKET INDICATORS 4Q217 Note: Arrows indicate change from prior quarter Source: JLL Research, Charter Hall research SQM SUPPLY U/C CHANGE DEMAND PRIME NET FACE RENT PRIME YIELD 12 MTH GROSS TAKE-UP CHANGE $/SQM CHANGE % CHANGE SYDNEY 761,89 137, MELBOURNE 259, , Image: Berrinba Distribution Centre, 29 Forest Way, Berrinba, Qld 2,21, sqm GROSS TAKE-UP In the year to March 218, industrial gross take-up across Australia totalled 2.21 million square metres, slightly down on the previous periods 2.39 million square metres. BRISBANE 282,36 78, PERTH 4,5 25, ADELAIDE 18,4 44, The most recent IPD data shows the industrial sector netted a total return of 11.1% over the year to Dec-17, up from 1.5% recorded for the year to Sep-17. New South Wales continued to outperform other Australian industrial markets in the final quarter and New South Wales, Victoria and Queensland performed well above each of their 1- year averages for the year to December 217. Industrial warehouse facilities outperformed all other industrial assets in the year to Dec-17, yielding a total return of 12.6%. Steady levels of occupier activity were recorded across all markets with gross take-up across Australia totalling 419,194 sqm for the quarter and 2.28 million for the year to Mar-18. Melbourne led leasing activity with 138,475 sqm, followed closely by Sydney (137,61 sqm) and Brisbane (78,165 sqm). Occupier activity was driven by the Transport, Postal & Warehousing sector in Perth (71%) and Sydney (61%), whereas leases in Adelaide (52%) and Brisbane (5%) were primarily from the Manufacturing sector. Rental growth continued to be a theme in Sydney and Melbourne across both prime and secondary assets for the first quarter of 218. For the year to Mar-18, Sydney markets experienced the largest level of rental growth recording 7.9% in prime assets in the south and 8.8% in secondary assets in Sydney s north. Melbourne experienced rental growth of up to 3.6% in prime assets in the west. Prime rents in Perth and Brisbane were stagnant and remain below levels recorded 12 months prior. The first quarter of 218 saw 452,374 sqm of completions whilst the 12 months to Mar-18 saw 1.69 million sqm of completions. The Sydney (46%) and Melbourne (4%) markets accounted for the bulk of completions by total area. In the Sydney market, the outer west regions accounted for all the completions, and this trend is expected to continue with 598,336 sqm currently under construction. In Melbourne, completions were accounted for by the south east and west, with 265,947 sqm of new supply under construction, of which 54% is in the growing west region. Brisbane s construction pipeline consists of 228,38 sqm of stock, 14% of the total nation construction pipeline and focused most heavily in Brisbane s south. The construction pipeline for both Adelaide and Perth remains minimal, with a cumulative 3% of industrial assets by area currently under construction across both markets. Increasing developer confidence was evidenced by 66, sqm of uncommitted space delivered in the first quarter of 218. Average yields across primary and secondary assets remained stable across most markets during the quarter, with some marginal compression in the Sydney market. For the year to Mar-18, the largest yield compression was in secondary assets in Sydney recording approximately 5 75 basis points compression. The Melbourne and Brisbane markets recorded approximately 25 basis points compression for the year. Investor demand for industrial assets driven by continued rental growth is likely to maintain yields at or near current levels throughout 218. Transaction volumes continue to be restricted by limited supply of assets on the market rather than a lack of investor demand. The first quarter of 218 saw approximately $1.8 billion in industrial sales, down 43% in terms of value compared to the previous quarter. Annual sales were remained in line with the 12 months to Dec-17 figure ($5.3 billion), totalling $5.15 billion for the year to Mar MONTH RETURNS BY STATE The latest IPD data shows the industrial sector returned 11.1% over the year to December 217. Annual industrial returns increased in the December 217 quarter in NSW, VIC, QLD and WA. Source: IPD, Charter Hall Research 217 STOCK COMPLETED VS GROSS TAKE-UP New industrial supply in the year to Mar-18 was up 8% on the previous quarter, with 1.69 million square metres completed nationally. Source: JLL Research, Charter Hall Research NEW SOUTH WALES VICTORIA QUEENSLAND WESTERN AUSTRALIA SOUTH AUSTRALIA INDUSTRIAL SECTOR Income 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, 12.5% 1.8% 8.4% 7.6% 3.5% 11.1% % 5% 1% 15% Capital Sydney Melbourne Brisbane Perth Adelaide Gross Take-Up Completions 24 Charter Hall Charter Pack 25

14 INDUSTRIAL LEASING ACTIVITY BY TENANT TYPE The majority of leases signed in the first quarter of 218 were by logistics groups, with manufacturing, retailers and logistics groups continuing to drive the bulk of industrial tenant demand for the year to Mar-18 (74% cumulatively). LEASING ACTIVITY BY MARKET In 217, industrial gross take-up across Australia totalled 2.39 million sqm. Leasing activity in 217 in Sydney, Melbourne and Brisbane all exceeded their respective 1-year annual averages. Gross take-up over 217 in the Adelaide industrial market reached its highest annual level since % Other SQM (') % Manufacturing 38% Logistics 8 6 2% Construction 4 13% Wholesale Trade 16% Retail Trade 2 Sydney Melbourne Brisbane Adelaide Perth Take-up 218 YTD (') Take-up 217 (') 1-Year Annual Average AVERAGE PRIME INDUSTRIAL RENTALS ($/SQM) Strong tenant demand in Sydney and Melbourne continue to drive prime rental growth, with both cities recording persistent growth over the 12 months to Mar-18. Significantly, both Brisbane and Perth s rental markets appear to be stabilising, posting two quarters of stable rents following three years of declines SALES ACTIVITY BY CITY National sales volume growth remains restricted by the investment opportunities rather than diminished investor interest. Average industrial yields remained relatively stable in 4Q217 with prime yields only marginally tightening in the Sydney industrial market. AUD (',) MAR7 MAR8 MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18 Sydney Melbourne Brisbane Perth Adelaide AVG Prime 2 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 Adelaide Brisbane Melbourne Multiple Perth Sydney 26 Charter Hall Image: Drystone Industrial Estate, 441 Dohertys Road, Truganina, Vic

15 RETAIL 1.1 % TOTAL RETAIL SECTOR RETURN The retail sector returned 1.1% over the year to Dec-17. Large format retail property outperformed all other Australian retail property types over 217. $ million TRANSACTIONS Retail transactions in Australia for the first quarter were subdued as compared with previous quarters. The remainder of the year is expected to be active, with two major transactions completing in April and several other significant assets on the market. RETAIL MARKET INDICATORS 4Q217 Note: Arrows indicate change from prior quarter. Source: JLL Research, Charter Hall Research SUPPLY U/C VACANCY PRIME NET FACE RENT PRIME YIELD SQM CHANGE % CHANGE $/SQM CHANGE $ % REGIONAL 224, , SUB-REGIONAL 131, NEIGHBOURHOOD 212, Image: Campbelltown Mall, 271 Queen Street, Campbelltown NSW 2.7 % RETAIL GROWTH Growth in retail trade remains challenging with moving annual total retail sales volume increasing by.6% over the quarter to February 218 and by 2.7% over the twelve months to February 218. LARGE FORMAT 98,16 N/A CBD 4, , The most recent IPD data for the Dec-17 quarter revealed that retail assets continued to perform in line with the long-term average, returning 1.1% over the year to Dec-17. For the first time since Jun-13, Super/ Major Regional shopping centres outperformed all other Australian retail assets realising 1.3% in the year to Dec-17. Neighbourhood shopping centres returned 1.1% in the year to Dec-17, with a soft final quarter depressing that figure from the 11.1% seen for the year to Sep-17. Sub- Regional shopping centres stayed constant at 9.7% for the year. NSW, VIC and SA were the only states to outperform their 1-year averages, whilst WA experienced notable depreciation from 8.4% in the year to Sep-17 to 6.6% for the year to Dec-17. February 218 saw a continuation in the trend of rising retail sales with an increase of.6% month-on-month, up on the.2% and.5% experienced in January and December, respectively. The jump was double consensus expectations of.3% and underpinned by gains in all major sub-groups. The most recent result has seen the annual increase in retail sales rise to 3.%, however this is still below the average of 3.9% over the previous four years. The strongest growth contributor surprisingly came from department stores (1.5% m/m), followed by both durable goods categories, footwear & clothing and household goods, which grew by 1.1% m/m. In terms of states, Victoria recorded annual growth of 5.75%, the strongest growth the state has seen since December 215 and almost doubling the second largest growth in New South Wales of 3.1% for the same period. Meanwhile, Western Australia continued to languish in terms of spending, recording -.5% annual growth, and is expected to remain somewhat suppressed into the near term. Australian annual online retail spending grew 35% in the three months to February, now accounting for 5.1% of total retail turnover and significantly, more than half of the annual growth in Australian retail sales. Looking forward, whilst February s results are undoubtedly good news for retailers, rising prices in essential services and stagnant wage growth will limit retail spending, likely driving only modest gains in retail spending for 218. Retail vacancy rate changes were mixed by state and by sub-sector over the second half of 217. While speciality shop vacancies increased in Regional shopping centres in Sydney and Perth, other Australian cities recorded declines in the vacancy rate in their Regional shopping centres. Some Regional centres have been impacted with store rationalisations and several local retailers falling into administration over 4Q217. In contrast, the speciality shop vacancy rate of Neighbourhood shopping centres declined in Adelaide, Brisbane, Sydney and Melbourne over the second half of 217. Rental yields at the prime end of the market tightened modestly in both the regional and sub-regional centres according to JLL Research. Melbourne and Sydney regional assets recorded the greatest compression at the median yield for the 12 months to 1Q18 at 63 and 62 basis points respectively. Large format shopping centres also outperformed at the top-end of the market, with the yield range widening downwards 75 basis points for the 12 months to 1Q18 in Sydney. Divergence between retail asset grades continues, due to underlying fundamentals and changes in investor risk appetite. The market is experiencing continued yield compression in prime assets, whilst stagnating rental growth in secondary assets and larger incentives required to maintain occupancy is holding or widening the yield bracket at the lowerend of the market. Transaction volumes in 1Q18 slowed, reaching just $439m in total with only one major sale over $5m completed. Neighbourhood and Prime CBD transactions accounted for 77% of the transaction volume, with twelve separate transactions occurring. Completions in the first quarter were similarly low at approximately 62, sqm, and are expected to remain below the long-term average for the year according to JLL Research. 12 MONTH RETURNS BY CENTRE TYPE Annual retail returns eased marginally in the December 217 quarter. IPD data revealed that retail property returned 1.1% over the year to Dec-17. Source: IPD, Charter Hall Research RETAIL TURNOVER BY STATE Retail turnover over the 12 months to February 218 continues to remain subdued and below the 1 year average growth rates for most states. Results for the quarter to February 218 were also weaker than the quarter to December 217 which was buoyed somewhat by a strong Christmas period. Retail sector margins have suffered since 211, under the pressure of online retailing, weak wage growth and a host of new entrants to the market. Source: ABS, Charter Hall Research SUPER & MAJOR REGIONAL 1.3% REGIONAL 7.7% SUB-REGIONAL NEIGHBOURHOOD RETAIL SECTOR 9.7% 1.1% 1.1% % 5% 1% 15% Income Capital 4.5% 4.% 4.1% 4.2% 4.1% 3.7% 3.5% 3.3% 3.4% 3.3% 3.% 3.1% 3.% 2.6% 2.5% 2.% 1.5% 1.5% 1.2%.9% 1.%.6%.4%.5%.1%.% -.5% -.1% -.3% NSW VIC QLD SA WA ACT Quarter to FEB18 YoY to FEB18 1-yr CAGR 28 Charter Hall Charter Pack 29

16 RETAIL RETAIL TRANSACTIONS BY TYPE Retail transactions in the first quarter of 218 were subdued at just $438.6 million, approximately two thirds of the value of transactions for the first quarter of 217. The year is however expected to be an active year, with two major transactions occurring in April over $1 million and a number of large portfolios and key properties on the market. RETAIL COMPLETIONS BY TYPE At Dec-17, retail completions for the year totalled 584,386 sqm, up 3.8% from 216. JLL forecasts at the previous quarter were for completions to fall for both 218 and 219. For the first quarter of 218, there have been 57,943 sqm of completions, primarily (45%) in regional centres, with a further 451,735 sqm expected to complete by year end. The development pipeline between now and the end of 22 is expected to be relatively evenly distributed over Regional, Sub- Regional and Neighbourhood centres, with a total of approximately 1.57 million sqm for all retail centre completions for the period. A$bn 9 8 Sqm 1,4, 1,2, Forecast 218 to ,, 8, 6, , 2, CBD Prime Large Format Retail Neighbourhood Other Regional Sub-Regional Regional Centres Sub-Regional Centres Neighbourhood Centres Large Format Centres Total RETAIL TURNOVER BY SECTOR Growth was recorded across all retail industries for the first two months of 218. The greatest increase was in other retailing, recording 1.4%, closely followed by household goods and department stores. Hardware, building and garden supplies were a key driver in household goods growth, with spending increasing 2% over January and February 218, seasonally adjusted. RETAIL YIELD SPREAD TO 1 YR AUS GOVT BOND YIELD Retail yields have compressed across the board in the first quarter, with yields on Regional centres now at lows not seen since Mar-14. Sub-regional and neighbourhood yields also continue to track relatively in line with each other off the back of increased investor demand for neighbourhood centres. 7% 6% 5.3% 5.5% 6% 5% 4.9% 4% 4.% 3.6% 3.2% 4.4% 3.4% 3.8% 3.5% 4.3% 5% 4% 3% 2.7% 3% 2% 1%.4% % 1.%.5% -.1%.4% 1.1% 1.3%.8%.2% 2% 1% % -1% CLOTHING & SOFT GOODS DEPARTMENT STORES FOOD RETAILING HOUSEHOLD GOODS OTHER CAFES, RESTAURANTS & TAKE AWAY FOODS LIQUOR -1% MAR8 MAR9 MAR1 MAR11 MAR12 MAR13 MAR14 MAR15 MAR16 MAR17 MAR18 CYTD YoY 5-yr CAGR Regional Sub-Regional Neighbourhood Large Format Source: ABS, Charter Hall Research Source: JLL Research, RBA, Charter Hall Research 3 Charter Hall Bateau Bay Square, Bateau Bay NSW

17 CONTACT US To learn more contact Charter Hall directly on: research@charterhall.com.au charterhall.com.au IMPORTANT INFORMATION Charter Hall Limited (ABN ) Charter Hall Funds Management Limited (ABN ) This report has been prepared by the Charter Hall Group for discussion purposes only. This presentation does not constitute and should not be interpreted as either an investment recommendation or advice, including legal, tax or accounting advice. It contains general information only and is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. This presentation expresses our current intentions only; it is nonbinding in all respects and is not an offer capable of acceptance. We do not warrant the accuracy or completeness of information contained in this presentation. In preparing these materials, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information obtained from third party sources. CHARTER HALL GROUP