New CBD office supply is improving the quality of stock

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1 Australia Office, Q3 215 New CBD office supply is improving the quality of stock National CBD WCE Jun-15.9% p.a National CBD Net Absorption ,sqm F National CBD Net Supply ,sqm F National CBD Vacancy Q % National CBD Prime Yield Q % Figure 1: Prime grade stock as a proportion of total market 7% 6% 5% 4% 3% 2% Australia Sydney Melbourne Brisbane Perth Canberra Adelaide Source: CBRE Research, PCA, Q3 215 KEY POINTS CBRE estimates 35,sqm of new supply will enter Australian CBD markets in H215, a record for any half-year period. Stock withdrawals will partly mitigate the impact, but we forecast vacancy will rise to 12% by year-end. Tenant demand in Sydney has surprised to the upside and we have revised up our 215 forecasts for net absorption (75,sqm) and rent growth (4%). Tenant migration has boosted net absorption in the Melbourne CBD, and we forecast this market will record the highest level of net absorption (8,sqm) amongst CBD markets in 215. Demand conditions in the resource markets (Brisbane, Perth) remain weak. Net absorption turned positive in Adelaide in H115 following contraction in 214. Net absorption also turned positive in Canberra in H115. A relatively inactive pipeline should see vacancy decline over the medium term. The sale of Investa s portfolio of nine office towers to CIC for $2.45bn boosted sales volumes in Q3. Capital markets remain strong in the gateway cities of Sydney and Melbourne. Yields in Australian CBD markets continue to compress (to varying degrees) but we forecast this will moderate over H116. NEW SUPPLY CONTINUES THE TREND OF IMPROVING OFFICE QUALITY IN CBD MARKETS Q3 215 CBRE Research 215 CBRE, Inc. 1

2 Annual Contribution (%) ECONOMIC ACTIVITY DRIVING OFFICE LEASING IN 215 HIGH TENANT INCENTIVES PUSHING REAL EFFECTIVE RENTS TO POST -2 LOWS Figure 2: Contribution to office industries GVA growth Figure 3: Australia CBD office rent growth in real terms Health & social Public administration Professional & technical Finance & insurance Other private services Source: CBRE Research, ABS Q3215 Education Administration Rental, hiring and real estate Info. media & telco GVA - Office based sectors Prime Real Net Face Rent Index Prime Real Net Effective Rent Index Source: CBRE Research, ABS Q3 215 Q3 215 CBRE Research 215 CBRE, Inc. 2

3 Sqm 5 Martin Place 2 Martin Place Barangaroo South T2 Barangaroo South T3 2 George St 333 George St Barangaroo South T1 Darling Square 151 Clarence St The Ribbon 275 George Street 1 Carrington Street 5 Bridge St George & Pitt St (Lend Lease) Pitt St 33 Bligh St 6 Martin Place Net Additions and Absorption (Sqm) Vacancy (%) Sydney Office Markets Figure 4: Net Supply, Absorption and Vacancy 16, 12, 12.% 9.% 8, 6.% 4, 3.%.% -4, -3.% -8, -6.% -12, -9.% -16, -12.% Annual Net Additions (sqm) Vacancy % Annual Net Absorption Figure 5: CBD New Supply Pipeline 12, 1, New Pre-committed Mooted 8, 6, 4, 2, Q3 215 CBRE Research 215 CBRE, Inc. 3

4 Vacancy (%) Prime Net Face Rent ($/sqm) Sydney Office Markets Figure 6: Prime Net Face Rents by Market ($/sqm) $1,2 $1, $8 $6 $4 $2 $ Sydney CBD Crows Nest St Leonards Macquarie Park North Sydney Chatswood Parramatta Figure 7: Vacancy by Market 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Sydney CBD Crows Nest St Leonards Macquarie Park North Sydney Chatswood Parramatta Q3 215 CBRE Research 215 CBRE, Inc. 4

5 Prime Yields (%) Sales Volumes ($m) Sydney Office Markets Figure 8: Office Sales by Market $8, $7, $6, $5, $4, $3, $2, $1, $ Sydney CBD Crows Nest St Leonards Macquarie Park Sydney City Fringe North Sydney Chatswood Parramatta Figure 9: Prime Yield by Market 1% 9% 8% 7% 6% 5% 4% Sydney CBD Crows Nest St Leonards Macquarie Park North Sydney Chatswood Parramatta Q3 215 CBRE Research 215 CBRE, Inc. 5

6 Sqm 313 Spencer St 57 Bourke St 7 Collins Street 699 Bourke St 567 Collins St 525 Collins Street 36 Collins Street Collins Sq Twr 2 8 Collins St 477 Collins St 664 Collins Street 447 Collins St Net Additions and Absorption (Sqm) Vacancy (%) Melbourne Office Markets Figure 1: Net Supply, Absorption and Vacancy 14, 12, 1, 14.% 12.% 1.% 8, 6, 4, 2, 8.% 6.% 4.% 2.%.% Annual Net Additions (sqm) Vacancy % Annual Net Absorption Figure 11: CBD Supply Pipeline 8, New Refurb Precommitted Mooted 7, 6, 5, 4, 3, 2, 1, Q3 215 CBRE Research 215 CBRE, Inc. 6

7 Vacancy (%) Prime Net Face Rent ($/sqm) Melbourne Office Markets Figure 12: Prime Net Face Rents by Market ($/sqm) $6 $5 $4 $3 $2 $1 $ Melbourne CBD Southbank St Kilda Road Figure 13: Vacancy by Market 16% 14% 12% 1% 8% 6% 4% 2% % Melbourne CBD Southbank St Kilda Road Q3 215 CBRE Research 215 CBRE, Inc. 7

8 Prime Yields (%) Sales Volumes ($m) Melbourne Office Markets Figure 14: Office Sales by Market $5, $4,5 $4, $3,5 $3, $2,5 $2, $1,5 $1, $5 $ Melbourne CBD Southbank St Kilda Road Melbourne Suburban Figure 15: Prime Yield by Market 1% 9% 8% 7% 6% 5% 4% Melbourne CBD Southbank St Kilda Road Q3 215 CBRE Research 215 CBRE, Inc. 8

9 Sqm 18 Brisbane 155 Queen Street 48 Queen Street 31 Ann Street 1 William Street 34 George Street Net Additions and Absorption (sqm) Vacancy (%) Brisbane Office Markets Figure 16: Net Supply, Absorption and Vacancy 21, 18, 15, 12, 9, 6, 3, -3, -6, -9, -12, 21.% 18.% 15.% 12.% 9.% 6.% 3.%.% -3.% -6.% -9.% -12.% Annual Net Additions (sqm) Vacancy % Annual Net Absorption Figure 17: CBD Supply Pipeline 8, 7, New Refurb Precommitted 6, 5, 4, 3, 2, 1, Q3 215 CBRE Research 215 CBRE, Inc. 9

10 Vacancy(%) Prime Net Face Rent ($/sqm) Brisbane Office Markets Figure 18: Prime Net Face Rents by Market ($/sqm) $8 $7 $6 $5 $4 $3 $2 $1 $ Brisbane CBD Near City Figure 19: Vacancy by Market 25% 2% 15% 1% 5% % Brisbane CBD Near City Q3 215 CBRE 215 CBRE, Inc. 1

11 Prime Yields (%) Sales Volumes ($m) Brisbane Office Markets Figure 2: Office Sales by Market $3,5 $3, $2,5 $2, $1,5 $1, $5 $ Brisbane CBD Brisbane Near City Suburban Figure 21: Prime Yield by Market 1% 9% 8% 7% 6% 5% 4% Brisbane CBD Near City Q3 215 CBRE Research 215 CBRE, Inc. 11

12 Sqm Golden Sq Kings Sq (Bldg 2) Kings Sq (Bldg 3) Kings Sq (Bldg 4) 999 Hay St Brookfield Pl - Twr 2 Kings Sq (Bldg 1) Colonial Building Old Treasury Bldg Capital Sq Twr 1 48 Hay St Elizabeth Quay Net Additions and Absorption (Sqm) Vacancy (%) Perth Office Markets Figure 22: Net Supply, Absorption and Vacancy 16, 14, 12, 1, 8, 6, 4, 2, -2, -4, -6, -8, 24% 21% 18% 15% 12% 9% 6% 3% % -3% -6% -9% -12% Annual Net Additions (sqm) Vacancy % Annual Net Absorption Figure 23: CBD Supply Pipeline 6, 5, New Refurb Precommitted Mooted 4, 3, 2, 1, Q3 215 CBRE Research 215 CBRE, Inc. 12

13 Vacancy (%) Prime Net Face Rent ($/sqm) Perth Office Markets Figure 24: Prime Net Face Rents by Market ($/sqm) $9 $8 $7 $6 $5 $4 $3 $2 $1 $ Perth CBD West Perth Figure 25: Vacancy by Market 25% 2% 15% 1% 5% % Perth CBD West Perth Q3 215 CBRE Research 215 CBRE, Inc. 13

14 Prime Yields (%) Sales Volumes ($m) Perth Office Markets Figure 26: Office Sales by Market 1,6 1,4 1,2 1, Perth CBD West Perth Suburban Figure 27: Prime Yield by Market 9.% 8.5% 8.% 7.5% 7.% 6.5% 6.% Perth CBD West Perth Q3 215 CBRE Research 215 CBRE, Inc. 14

15 Sqm 5 Flinders St Flinders St 169 Pirie St Wakefield St 1 King William St 115 King William St 17 Frome St Precinct GPO Festival Plaza Net Additions and Absorption (Sqm) Vacancy (%) Adelaide Office Markets Figure 28: Net Supply, Absorption and Vacancy 8, 7, 6, 5, 4, 3, 2, 1, -1, -2, 2.% 15.% 1.% 5.%.% -5.% Annual Net Additions (sqm) Vacancy % Annual Net Absorption Figure 29: CBD Supply Pipeline 45, 4, New Refurb Precommitted Mooted 35, 3, 25, 2, 15, 1, 5, Q3 215 CBRE Research 215 CBRE, Inc. 15

16 Vacancy (%) Prime Net Face Rent ($/sqm) Adelaide Office Markets Figure 3: Prime Net Face Rents by Market ($/sqm) $45 $4 $35 $3 $25 $2 $15 $1 $5 $ Adelaide CBD Adelaide Fringe Total Figure 31: Vacancy by Market 18% 16% 14% 12% 1% 8% 6% 4% 2% % Adelaide CBD Adelaide Fringe Total Q3 215 CBRE Research 215 CBRE, Inc. 16

17 Prime Yields (%) Sales Volumes ($m) Adelaide Office Markets Figure 32: Office Sales by Market $6 $5 $4 $3 $2 $1 $ Adelaide CBD Adelaide Fringe Suburban Figure 33: Prime Yield by Market 1% 9% 8% 7% 6% 5% 4% Adelaide CBD Adelaide Fringe Total Q3 215 CBRE Research 215 CBRE, Inc. 17

18 Sqm Anketell St Offices Mining Industry Hse 1-12 Lonsdale St ACT Govt Gungahlin Office Tuggeranong Office Park Lovett Tower Section 63 Northbourne Square Section 96 Net Additions and Absorption (Sqm) Vacancy (%) Canberra Office Markets Figure 34: Net Supply, Absorption and Vacancy 1, 8, 2% 16% 6, 12% 4, 8% 2, 4% % -2, -4% -4, -8% Annual Net Additions (sqm) Vacancy % Annual Net Absorption Figure 35: CBD Supply Pipeline 6, 5, New Refurb Precommitted Mooted 4, 3, 2, 1, Q3 215 CBRE Research 215 CBRE, Inc. 18

19 Prime Yields (%) Vacancy (%) Prime Net Face Rent ($/sqm) Canberra Office Markets Figure 36: Prime Net Face Rents by Market ($/sqm) $38 $37 $36 $35 $34 $33 $32 Canberra CBD Canberra Civic Canberra Non- Civic Figure 37: Vacancy by Market 18% 16% 14% 12% 1% 8% 6% 4% 2% % Canberra CBD Canberra Civic Canberra Non- Civic Figure 38: Prime Yield by Market 9.% 8.5% 8.% 7.5% 7.% 6.5% 6.% 5.5% 5.% 4.5% 4.% Canberra CBD Canberra Civic Canberra Non- Civic Q3 215 CBRE Research 215 CBRE, Inc. 19

20 Table 1: Major Market s, Q3 215 Sydney CBD Dec-13 Dec-14 Dec-15f Dec-16f Dec-17f Net Additions 12,414 3,22 66,921 47,57 89,4 Net Absorption 6,35 78,262 74,796 57,71 45,181 Vacancy 9.% 7.4% 7.2% 6.9% 7.7% Prime NFR $883 $891 $918 $941 $96 Prime NER $59 $586 $615 $63 $662 Prime Yield 6.43% 5.96% 5.38% 5.39% 5.66% Melbourne CBD Dec-13 Dec-14 Dec-15f Dec-16f Dec-17f Net Additions 79,391 94,124 65,779 61,768 45, Net Absorption ,213 81,713 41,92 47,974 Vacancy 8.7% 9.1% 8.6% 8.9% 8.8% Prime NFR $488 $492 $497 $52 $59 Prime NER $343 $337 $338 $341 $346 Prime Yield 6.73% 6.53% 6.16% 6.23% 6.5% Brisbane CBD Dec-13 Dec-14 Dec-15f Dec-16f Dec-17f Net Additions 1,255-4,436 17,637 16,91-48,812 Net Absorption - 1,99-29,836-4,254 13,395 25,58 Vacancy 14.3% 15.5% 16.4% 19.6% 16.9% Prime NFR $624 $618 $615 $69 $69 Prime NER $445 $49 $4 $396 $48 Prime Yield 7.47% 7.14% 7.% 6.95% 7.25% Perth CBD Dec-13 Dec-14 Dec-15f Dec-16f Dec-17f Net Additions 7,343 29,9 115,346 25,225-1, Net Absorption - 46,442-67,27-28,599 21,271 23,458 Vacancy 9.% 14.8% 22.1% 22.% 2.2% Prime NFR $736 $67 $597 $579 $57 Prime NER $65 $469 $328 $318 $342 Prime Yield 7.93% 7.93% 7.7% 7.85% 8.4% Adelaide CBD Dec-13 Dec-14 Dec-15f Dec-16f Dec-17f Net Additions 37,756-4,389 45,391 1,8 Net Absorption - 6,138-18,73 11,532 8,639 12,277 Vacancy 12.4% 13.5% 15.5% 15.5% 14.6% Prime NFR $39 $411 $413 $413 $417 Prime NER $311 $38 $289 $289 $3 Prime Yield 8.6% 7.96% 7.7% 7.22% 7.54% Canberra Dec-13 Dec-14 Dec-15f Dec-16f Dec-17f Net Additions 61,232 46,57 5,288-23,629 17,44 Net Absorption 35,297-21,765 18,49 18,561 27,499 Vacancy 12.9% 15.4% 15.2% 13.6% 13.% Prime NFR $359 $357 $365 $372 $379 Prime NER $276 $275 $281 $286 $292 Prime Yield 7.71% 7.74% 7.39% 7.38% 7.67% f: forecast, NER: net effective rent, NFR: net face rent Table 2: Major Office Sales, Australia, Q3 215 Address Market Sale Date Sale Price Purchaser Vendor Investa Property Trust portfolio* Various Aug-15 $2.45bn China Investment Corporation Investa Property Trust *Assets comprised 126 Phillip St (25%), 225 George St (25%), 4 George St (5%), 31 Market St (1%), 55 Market St (1%) and 255 Elizabeth St (1%) in Sydney; 8 Pacific H way (1% in North Sydney); 12 Collins St (5%) in Melbourne; and 41 Ann St (1%) in Brisbane. 222 Exhibition Street Melbourne CBD, Vic Aug-15 $222.5m LaSalle Investment AMP Capital Aurizon Headquarters Fortitude Valley, Qld Sep-15 $17.m Charter Hall Core Office Fund/Direct Office Fund Consolidated Properties Space 27 St Leonards, NSW Aug-15 $169.5m Altis Property Valad Property Group ATO Building Box Hill, Vic Sep-15 $156.m FG Asset Management Cromwell Australian Federal Police Building Sydney CBD, NSW Sep-15 $15.m Commerzbank Kinder Investments 114 William Street Melbourne CBD, Vic Aug-15 $125.1m Straits Real Estate Kyko Group The Forum St Leonards, NSW Aug-15 $115.m Abacus Property Group Challenger Life ATO Building Northbridge, WA Aug-15 $11.m Warrington Property/Goldman Sachs Deka Immobilien 19 Harris Street Sydney CBD, NSW Jul-15 $91.9m Grocon LaSalle Investment Management Q3 215 CBRE Research 215 CBRE, Inc. 2

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