Australia Office MarketView

Australia Office MarketView Q4 212 QUARTERLY GDP.5% OFFICE JOBS GROWTH -.8% CBD OFFICE VACANCY 8.1% PRIME RENTAL GROWTH +3.2% CBRE Global Research and Consulting PRIME YIELD 7.45% Q412 INVESTMENT VOLUME (Q-O-Q) -9% OFFICE FUNDAMENTALS WEAKENING BUT SECTOR PRICING IN GROWTH Main Points National Demand Office market fundamentals impacted by deterioration in employment market conditions National Capital Markets Investment market activity likely to improve this year led by institutions which will provide support to yields despite the low growth environment States Tenant demand is subdued on the eastern seaboard relating to reduced space requirements in the finance and insurance sector (Sydney) and consolidation in the Government sector (Melbourne and Brisbane) Perth continues to outperform the other major capitals with sublease vacancy likely to be absorbed relatively quickly. The Adelaide office market continues to perform in line with history while conditions in the Canberra market remain challenging There is currently overwhelming evidence of a slow growth environment. At the same time, risk markets have shown signs of improvement with the equity market making solid gains and the A-REIT sector having a stellar run which suggests the pricing in of cap rate compression. In recent times the major focus on risk and risk adjusted returns led to a significant reallocation of funds into low-risk assets. This was evidenced by a substantial shift of superannuation funds under management into cash assets over 211 and 212. Risk averse behaviour also led to considerable inflows into government bond markets and bond yields falling to historical lows. Returns on risk free assets have subsequently fallen in recent years. All things being equal, this should support a movement in asset allocation further up the risk return spectrum over time. However this shift has been limited by the seeming lack of growth stimulus. This trade-off is directly linked to the appetite for risk in the market. Despite interest rates and borrowing spreads falling (Chart 1), overall expectations for growth remain weak. In this environment income yields are likely to be sustained at higher levels in order to satisfy required returns. This is demonstrated by the current high spread of the ASX divided yield to government bonds (Chart 2). Until future growth is factored into the investment decision, income yields may persist at high levels. This scenario helps to explain that while transactional activity has improved modestly in commercial property markets, yields remain relatively flat, reflecting the higher income return required with moderating growth. Despite these factors, capacity for improvement has emerged; leverage levels are low and risk markets have improves in early 213 with borrowing rates and credit risk premiums lower. However a more general lack of confidence in the growth outlook is holding back property market valuations. Chart 1 & 2: Corporate Bond Spreads to Government Debt and ASX Dividend Yield (Gross) to Bonds 1 Source: RBA, CBRE Source: ASX, CBRE

Q4 212 Australia Office MarketView OFFICE DEMAND DASHBOARD SECTORAL DIVERGENCE EFFECTING PROPERTY MARKETS Property markets reflecting disparate economic performance Fundamentally, Australia is experiencing below trend economic growth with business investment (Australia s traditional major driver of growth), diminishing in its contribution to national growth. The contrast between general economic conditions and headline GDP stems from the impact of mining infrastructure spending. This had led to state divergences and negative correlations across sectors. Business confidence continues its downward trend, promoting the focus on risk. The varied performance of the state economies is reflected in Australia s terms of trade and the current level of the Australian dollar. Australia s terms of trade are driven by commodity prices and as such are a strong driver of the Australian dollar. Over time we have seen a structural shift in Australia s terms of trade, implying the long term level for the Australian dollar has shifted higher also (Chart 3). Furthermore, the sustained strength in the Australian dollar since the terms of trade fell last year suggest ongoing demand for Australian assets, meaning Australia s high relative returns are also supporting the Australian dollar at the moment. The current global and local economic climate has seen a steady decline in business confidence (Chart 4). One of the biggest drags on confidence is the component related to employment conditions, signalling likely further deterioration in labour markets in the near future. This has also placed a significant drag on consumer sentiment with households firmly focused on de-leveraging and the re-building of wealth. More recently we have seen an improvement in consumer confidence which if sustained may translate to a stabilisation in business confidence going forward. The latest NAB survey on capacity utilisation showed it is at is lowest level nationally in over a decade, impacting the non-mining sector investment outlook. In line with this, productivity is also at historical lows and we expect that businesses will focus on low labour productivity this year with possible reductions in labour. The deterioration in labour markets is evident in office employing industry growth (Chart 5) which shows an overall decline in the number of persons employed in office employing industries nationally over 212. This decline was led by the reduction in public administration (-5.%). Public sector consolidation has been most felt in the Brisbane and Melbourne office markets, while in the Sydney office market the reduction in employment was driven by the finance and insurance sector. Given the current labour market outlook, we expect white collar employment growth to underperform historical averages. While supply remains generally constrained at a national level, vacancy risk is generally to the upside with required net absorption in order to maintain vacancies unlikely to transpire in the short to medium term. Chart 3: AUD/USD and Terms of Trade 1.2 1..8.6.4.2 AUD/USD (left axis) ; Australian Bureau of Statistics Terms of trade (right axis). Mar-83 Mar-87 Mar-91 Mar-95 Mar-99 Mar-3 Mar-7 Mar-11 12 1 8 6 4 2 Chart 4: Consumer and Business Confidence Chart 5: Office employing industry growth 2 Source: ABS

NATIONAL OFFICE CAPITAL MARKETS SECTOR PRICING IN YIELD COMPRESSION BUT WHERE IS THE GROWTH COMING FROM? Yield versus growth It is often assumed that when bonds and borrowing rates fall that property yields will follow. However, we normally see an inverse relationship between interest rates and yields. As rates are moving higher, growth is strong and growth has a bigger impact on valuations than the base rates. This can be seen in the major turning points of Chart 7. The current slowing of growth explains stability in yield over the last 12 months, despite lower interest rates. In addition to this, lending criteria has become more stringent as banks focus more closely on risk and satisfying capital adequacy requirements. While tenant demand has been weak, strong investor interest in commercial office assets has been evidenced in a number of large scale transaction by local and offshore institutions. This year activity is likely to be driven by the listed sector supported by continued demand from the unlisted wholesale sector. The listed sector has re-capitalised and is now poised to drive office market investment supported by significant capital inflows and lower levels of leverage. In addition, the unlisted sector will continue to provide a constant inflow of capital into the commercial property market. A major driver of this activity is the superannuation sector. In order to satisfy current allocations to direct property, significant and steady investment is required over the long term as the superannuation sector builds funds under management. It should not be concluded however, that transactional activity alone will result in a significant compression in office market yields. Given the expectation of low levels of growth, the focus on yield may potentially remain a feature of the market in order to satisfy required rates of returns. This may lead to an environment where low growth expectations are balanced by a strengthening in capital inflows, sustaining yields at current levels. The improved investor demand is likely to be met by limited assets available on the market, supporting values. In addition; leverage levels, borrowing rates and credit risk premiums have reduced in early 213. Chart 6: Net Transaction Expenditure ($m) Source: IPD Investment Flows Index September 212 Q4 212 Australia Office MarketView Chart 7: Australian Office Yields and Rents Chart 8: Business Credit Growth and Office Yields, RBA, ABS, RBA, ABS 3 Table 1: Major office sales, Australia December quarter 212 Sale Date Building Purchaser Sale Price ($ million) Sale Rate ($/sq m) Initial Yield (%) Equivalent Yield (%) Dec-12 225 George Street, Sydney Dexus Property Group (25%) $271.25 $12,688 5.4% 6.5% 8.9% Nov-12 6 Station Street, Parramatta REST $167.5 $6,51 7.28% 7.35% 9.1% Oct-12 54-58 Barrack Street, Perth Kepple REIT (5%) $165. $5,357 7.15% 7.15% 9.87% Dec-12 39 Martin Place, Sydney (Office) Dexus Property Group $143. $8,751 5.7% 7.5% 9.4% Dec-12 2-4 Dawn Fraser Ave, Sydney Dexus Property Group (5%) $82.7 $4,842 7.8% 8.% 8.9% IRR (%) 3

Q4 212 Australia Office MarketView SYDNEY OFFICE MARKETS DEMAND FUNDAMENTALS WEAK - MARKET SUPPORTED BY SUPPLY LEVELS Vacancy tightens but beneath the surface market underlying demand remains soft The January 213 PCA office market report found a decline in vacancy within the Sydney CBD to 7.2% from 9.% a year ago as a result of 62, sq m of new supply versus 134,5 sq m of withdrawals (a decline in total stock of 72,5 sq m). While vacancy fell, the market is acutely aware of the challenges facing tenant demand. Over the last decade 6% of the growth in white collar employment within the Sydney CBD office market was attributed to the businesses services and finance and insurance sectors. According to the ABS, the actual number of persons employed in office employing industries within New South Wales fell by 3% over 212, with a 4.2% decline in the Finance and Insurance sector. Given the deterioration in labour market conditions and continued downward trend in business confidence, focus is currently placed on which sectors have the capacity to support white collar employment growth required to maintain trend net absorption levels in the short to medium term. In the absence of sufficient stimulus we expect vacancy to rise to 8.5% by mid 13 and face rental growth to be limited to 3% in the short to medium term. Beyond the CBD, vacancy in the North Sydney office market remains tight by historical averages (7.8%) with available space in prime grade accommodation at just 4.7% of stock. While net supply additions remain low, we expect a continuation of this strong trend and see prime face rents growth of 6.% in FY13 with total market face rents rising 4.%. On the North Shore, market conditions in Chatswood have shown signs of general improvement with tenant demand for space strong. Vacancy sits at 8.9%, a decline from 1.7% twelve months ago. A number of tenants are earmarked to Chart 9: Sydney CBD net supply additions, 25-6 to 213-14 take space over 213, supporting sold net absorption in the market. Vacancy declined in the St Leonards/Crows Nest office market to 12.% in January 213 and we expect face rents to have achieved 3.% p.a. growth by mid 213. Macquarie Park sustained strong net absorption in 212. Relative stability in the market is likely as the supply pipeline over the next 5 years keeping in line with historical averages. The lack of recent development has supported tight vacancy in the prime grade market and expectations for relatively strong employment growth in the precinct should support demand for space over the medium term. Conditions in the Parramatta office market remain positive despite the slight pick up in vacancy on the back of the completion of Eclipse Tower in 212. We expect growth in face rents to accelerate to 4.2% p.a. by mid 13 followed by 4.6% FY14. Non-CBD markets are expected to out-perform the CBD over the short to medium term with the expected best performing market to be North Sydney followed by Parramatta and Macquarie Park. Chart 1: Prime net face rental growth and total vacancy, Sydney metropolitan 4 Source: PCA, CBRE Note: Rental data at Dec 12; Vacancy data at Jan 13

SYDNEY OFFICE MARKETS TRANSACTIONAL ACTIVITY LIKELY TO IMPROVE Appetite for institutional grade asset is strong despite challenging demand conditions Since the GFC, there has been little change in prime office yields in the Sydney CBD. The emphasis on risk and risk adjusted returns has promoted the prime market with secondary style assets lagging, resulting in a relative widening in the yield spread. With limited growth stimulus on the horizon, yields are likely to remain stable over the year, however strong demand for institutional grade assets will provide support. A pick up in capital flows (weight of money) is likely to support yields at their current levels with scope for compression at the tight end of the market. Risk premiums have started to converge, potentially offering a base for Sydney office yield compression as a safe asset class. Prime yields currently range from 6.2% to 8.75% with secondary asset yields within the range 7.75% to 9.5%. While investment demand has driven substantially high rental growth in North Sydney, prime office yields have also shown little movement and currently sit between 7.% and 9.%. The spread between prime and secondary yields remains wide comparative to history given the relative tightness within the prime grade market. Secondary yields range from 8.5% to 1.%. On the North Shore, yields remain steady in Chatswood with investors focused on the best quality assets. Prime yields range between 8.5% and 9.5% with a spread of approximately 8 basis point between prime and secondary. In St Leonards/Crows Nest yields also remain fairly steady but we expect softer demand conditions in prime locations to keep additional pressure on secondary assets in the short Chart 11: Office investment activity, New South Wales $ Millions 4, 3,5 3, 2,5 2, 1,5 1, 5 Note: Sales of $5 million plus 26 27 28 29 21 211 212 term. Prime yields currently sit between 8.25% and 9.5%. In 213 it is unlikely that any material change to market conditions will occur as development and leasing activity continues to be tenant led. Solid market fundamentals in Macquarie Park have supported yields at their current levels since 211. Prime yields currently range 7.5% to 8.5% however pricing and the assessment of risk is asset specific. Future development is somewhat dependant on face rental growth and a reduction in net incentives given yields remain steady. These factors should assist maintaining stability of supply and income returns in the absence of swings in vacancy. The appetite for well located quality suburban office assets is evident in the sale of Eclipse Tower in the Parramatta office market this year. Yield compression at the tighter end of the market was noted in the December quarter 212 with prime yields currently ranging from 7.% to 9.75%. Q4 212 Australia Office MarketView Chart 12: Prime and secondary yield comparison, Sydney metropolitan (as at December 212) 5 5

Q4 212 Australia Office MarketView MELBOURNE OFFICE MARKETS NEW SUPPLY IN 213 WILL BE CONCENTRATED TO WITHIN THE DOCKLANDS PRECINCT Backfill issues persist Melbourne CBD vacancy rose to 6.9% at January 213, compared to Sydney s 7.2% and Brisbane s 9.1% according to the PCA. Although Melbourne recorded the second tightest vacancy rate nationally; CBRE estimates approximately 9, sq m of sub lease space currently exists within the market, driven by space consolidation in the banking, finance and government sectors. Leading into 213, some 3, sqm of sub-lease space is expected to convert to direct vacancy, still acting at a brake on rental growth over the year. Subdued demand for significant space requirements 5, sq m and above saw prime incentives within the CBD rise to 25%, the highest level in a decade. However tenant enquiry below 1,5 sq m is supporting demand at the smaller end of the market. New supply will again be mainly contained to within the Docklands precinct, with developments for NAB, Marsh Mercer and Aurecon, equating to over 1, sq m of office space over the next 12 months. The associated backfill will likely place further upward pressure on vacancy. Development within Melbourne s traditional CBD core is limited to the Charter Hall site at 171 Collins Street expected to complete this year. This is the first premium building to be built in the CBD core in 2 years. Vacancy within the St Kilda Road precinct decreased from 1.4% to 9.3% in the six months to January 213, due to no new supply, good incentive levels and improved affordability in comparison to City Fringe locations. Net face rents within the precinct stabilised over the second half of 212 to range from $265/sq m to $34/sq m net face. Chart 13: Melbourne CBD net supply additions, 25-6 to 213-14 sq m 2, 15, 1, 5, (January 213) Forecast 26 27 28 29 21 211 212 213 214 Soft levels of tenant enquiry continued within the Suburban office market in 4Q. The improved affordability of the CBD and St Kilda Road markets has subsequently lead to a recent rise in back fill space. Subdued demand within the suburban office market has enabled tenants to seek better net effective deals with landlords seeking to maintain their cash flows in the face of long term vacancies. Significant leasing deals to occur in the second half of 212 include, MYOB (5,32 sq m) at 235 Springvale Road, Glen Waverly, Catch of the Day (5,3 sq m whole building) at 767 Springvale Road, Glen Waverly and Panasonic (5 sq m) lease part of the ground floor at 4 Nexus Court, Mulgrave which was part of a speculative component following an earlier precommitment. Chart 14: Prime net face rental growth and total vacancy, Melbourne metropolitan 6 Source: PCA, CBRE Note: Rental data at Dec 12; Vacancy data at Jan 13

MELBOURNE OFFICE MARKETS INVESTOR APPETITE REMAINS FOR QUALITY ASSETS While Melbourne s CBD office market noted a reduced level of investment activity over the first half of 212. This was driven not by a lack of investor interest but the lack of quality assets available given owners reduced willingness to part with core assets. Transactional activity improved somewhat in the second half of 212, with a total of $35 million transacting in assets over 5 million in value. Significant transactions to occur in 4Q included the sale of B grade assets, 333 Exhibition Street ($22million), 4 Market Place ($46.5 million) and 37 Docklands Drive ($38.5 million), purchased by Foreign Asian Investors, and 61 Bourke Street ($29.1 million) which sold to a European Fund. Investment appetite is anticipated to improve leading into 213 with $177 million of assets expected to transact during the first part of 213. While demand fundamentals remain soft and supply additions continue to enter the market, values within the CBD should be underpinned by domestic and overseas interest in favourable core style returns offered by the Australia s prominent CBD office markets. The strong investor interest within the St Kilda Road office precinct in 212 ($94.3 million transacted in the second half of the year) is likely to dissipate with expectations for growth somewhat softer. Major sales to occur 4Q include, 417 St Kilda Road purchased for $81.3 million by Newmarket Property Group and 14 Queens Road sold to Hallmar Apartments Pty Ltd for $13 million. With conditions challenging in the CBD and limited activity in Southbank, little scope for the improvement in values is expected in the market this year. Yields in Southbank continued to range from 7.% to 8.75% over 212. Sales volume ($ millions) Chart 15: Office investment activity, Victoria 2,5 2, 1,5 1, 5 26 27 28 29 21 211 212 (December 212) Note: Sales of $5 million plus A total of ten properties transacted in Melbourne s Suburban office markets over the second half of the year, equating to $28 million. Properties to transact in 4Q included, 11 Cremorne Street, Cremorne ($15.55 million), 71 Moreland Street, Footscray ($14.42 million), the ATO building at 913 Whitehorse Road, Box Hill ($116.75) and 436 Johnston Street, Abbotsford ($32 million). Private investors and syndicates remain the dominant investors in this market. While economic conditions in Victoria remain a drag on demand for office space, appetite for quality CBD office stock is likely to support values generally. Despite the challenging economic outlook and limited expectations for growth, this investor focus on institutional grade assets is likely to continue given the consistent growth in the pool of funds allocated to investment grade, direct property. Q4 212 Australia Office MarketView Chart 16: Prime and secondary yield comparison, Melbourne metropolitan 7 7

Q4 212 Australia Office MarketView BRISBANE OFFICE MARKETS MAJOR PROJECT COMMENCEMENTS LIKELY IN 213, DESPITE DEMAND UNCERTAINTY Weak short term outlook, although major developments are expected to commence The two key drivers of recent take-up in Brisbane s office markets (Queensland State Government and the resources sector) are cutting jobs, vacating tenanted space and face an uncertain future - at least in the short term. This has led to a considerable weakening in market conditions in Brisbane. Brisbane CBD office market vacancy rose over the final quarter of 212 to be sitting at 9.1%, up from 6.2% at the start of the year. Annual net absorption totalled 35,7 sq m, boosted by the completions of One One One Eagle Street and 145 Ann Street. Underlying tenant demand remains weak, however, and the net take-up of space slowed significantly over the latter half of 212 (to just 2,4 sq m). Absorption may turn negative in the first half of 213 as the State Government vacates at least a further 2, sq m of tenanted space. Despite this, three major developments may commence during 213, with all potentially delivered in 216. With BHP Billiton confirming a 14, sq m pre-commitment to Grocon s 48 Queen Street (65, sq m), work appears likely to commence by mid-year. The privately owned 18 Brisbane (58, sq m) on Ann Street is set to commence speculatively. The Queensland State Government has announced CBUS Property as the successful tenderer for their 75, sq m 1 William Street project. This will drive further rationalisation of occupied space as well as the possible disposal/redevelopment of other CBD office assets. Prime CBD net face rents at December 212 were sitting at an indicative $635/sq m net face ($695/sq m for premium grade space and $575/sq m for Grade-A space), having changed little over the course of the year. Chart 17: Brisbane CBD net supply additions, 25-6 to 213-14 (January 213) Incentives rose slightly to 23% and 25% respectively and are expected to remain under upward pressure for some time. Given constraints on business investment, incentives at present are often taking the form of fit out assistance. With a rise in both direct and sub-lease space available, Near City vacancy increased to 9.6% at the end of 212. Annual net absorption was negative 17,2 sq m. No new supply was added over the final quarter of 212. Almost all expected supply is within the Urban Renewal precinct. This is likely to maintain the upward pressure on vacancy. Near City rentals were unchanged during Q4 212, with leasing activity minimal. Rents at December 212 were at an indicative $475/sq m net face (grade-a+) and $36/sq m (grade-a), with incentives ranging 2% to 25%. Precommitment rents for stock completing from 214, however, are reaching as high as $625/sq m gross face. This is likely to put a brake on rental growth within existing stock. Chart 18: Prime net face rental growth and total vacancy, Brisbane metropolitan & Gold Coast Net supply additions ('s sqm) 2 15 1 5-5 26 27 28 29 21 211 212 213 214 Year to June Forecast 8 Source: PCA, CBRE Note: Rental data at Dec 12; Vacancy data at Jan 13

BRISBANE OFFICE MARKETS INVESTMENT MARKET SLOWS Lack of quality assets limits transaction volume Brisbane CBD office investment activity slowed further during the December quarter, with just one major transaction identified. A private investor acquired 443 Queen Street for $4 million. The sale comes after two previous contracted sales of the asset over the past 18 months failed to settle. Several other assets were in the process of selling at the end of 212, although none had reached a confirmed settlement While transactions in 212 surpassed levels in 211, the limited activity in the second half shows a slowing market with limited quality stock available, a miss match between purchaser and vendor expectations and a diminishing pool of potential buyers. In addition, the Queensland Investment Corporation is progressing with their proposed acquisition of eight Queensland State Government owned and leased office buildings in a deal likely to be worth circa $7 million when completed. Offshore capital, which had been a key driver of activity from 21 into the first half of 212, appears to have moved largely to the sidelines, with suitable investment opportunities limited at present. Concerns around growth drivers and market fundamentals in the short to medium term are impacting sentiment in the market. Indicative yields remained virtually unchanged in 212 in line with the greater focus on risk, a consistent theme across the eastern seaboard office markets. At December 212, prime CBD yields were ranging 7.15% to 8.7%, with secondary yields ranging 8.5% to 1.%. Chart 19: Office investment activity, Queensland Sales volume ($ million) 3,5 3, 2,5 2, 1,5 1, 5 (January 213) Note: Sales of $5 million plus 26 27 28 29 21 211 212 The Near City/Suburban investment market remains subdued. Just one Near City asset was identified as changing hands during Q4 212, that being 252 St Pauls Terrace in Fortitude Valley. The 3,71 sq m secondary grade building transacted for $17.37 million achieving an initial yield of 1.5%. Three suburban assets (48 Miller Street, Murarrie, the DaVinci Centre at Brisbane Airport and Vantage in Indooroopilly) also sold, achieving prices of $13.6 million, $12.2 million and $11.8 million respectively. Transactional activity in 212 was well below levels in 211, further indicating the greater investor focus on the risk return profile of non-core markets. Values remained steady over the year with current prime yields sitting between 7.75% to 9.15% for prime assets and 9.25% to 1.% for secondary stock. Q4 212 Australia Office MarketView Chart 2: Prime and secondary yield comparison, Brisbane metro. & Gold Coast (as at December) 9 9

Q4 212 Australia Office MarketView PERTH OFFICE MARKETS SUB-LEASE SPACE LINKED TO VOLATILE COMMODITY PRICES Market sentiment shifted during Q4 212 but positive outlook maintained After witnessing record net absorption over the 1H 212 on the back on the delivery and occupation of two new premium grade buildings, market sentiment changed over the 2H of 212 as a result of falling commodity prices and uncertainty surrounding the sustainability of the resources sectors contribution to growth. On the ground, this change in sentiment influenced companies the majority of which are related to the iron ore sector to place approximately 37, sq m of sub-lease on the market. This trend is highlighted in the latest PCA survey; net absorption was recorded at -18,332 sq m over the 2H 212 whilst vacancy increased from 4.2% at July 212 to 5.7% at January 213, with sub-lease space vacancy increasing from.5% to 2.4% over the same period. Contrastingly, companies related to the LNG sector continue to ramp up with Chevron and Inpex expanding their office requirements recently. The December quarter witnessed a moderation in growth after eight consecutive quarters of strong rental growth. Prime CBD rents at December 212 were at an indicative $775/sq m net face ($85 sq m for premium grade space, $75/sq m for grade-a+, and $685/sq m for grade-a). Incentives remain in order of 5% to 1%. Secondary rents averaged an indicative $595/sq m (net face) with incentives averaging 1%. There have been a number of pre-commitments secured in the last few months now that economic rents and market rents are more closely aligned. Aurecon have pre-committed to approximately 5% of a new building at 861 Hay Street, which will add 1,947 sq m of new supply in late 214. Kings Square has gathered some momentum recently securing two commitments; one from Shell for a 19, sq m building and the second from HBF to owner occupy a 13, sq m building both on the Perth City Link site. Chart 21: Perth CBD net supply additions, 25-6 to 213-14 (January 213) West Perth vacancy rose over the 2H of 212, resting at 4.5% as at January 213, up from 3.3% six months ago similar trends to the CBD. Prime rents stabilised and were at an indicative of $56 net face with incentives in order of 5% to 1%. There were two new developments completed in the December quarter being 1 Havelock Street (4,6 sq m) and 34 Parliament Place (1,848 sq m), however new supply remains restricted going forward. Perth s suburban office market continues to perform well with an increase in the number of developments underway during 212. Tenants now have a choice between modern near-city suburban office locations at a similar price to secondary CBD premises. Locations such as Subiaco, Herdsman and Belmont remain popular to tenants. Market sentiment is likely to improve during 213 on the back of a recovery in commodity prices and the continued strong performance of the LNG gas sector. The major concern for the market is a potential shift in the tenancy mix as the cycle moves from construction to production, however, this isn t likely until 215 at the earliest. Chart 22: Prime net face rental growth and total vacancy, Perth metropolitan Net supply additions ('s sqm) 2 18 16 14 12 1 8 6 4 2 26 27 28 29 21 211 212 213 214 Year to December Forecast 1 Source: PCA, CBRE Note: Rental data at Dec 12; Vacancy data at Jan 13

PERTH OFFICE MARKETS STRONG APPETITE FOR INSTITUTIONAL GRADE PROPERTIES CONTINUES IN THE CBD Investment market split, with a small number of high grade assets changing hands There was a continuation of solid levels of investment activity in 212 after a record total in AUD sales in 211, with seven major sales confirmed at a total of $529 million. These sales varied widely in grade, location, WALE and value blurring trends. The largest sale of the year was the off market transaction of a 5% interest of the Old Treasury Building at 54 Barrack Street, Perth for $165 million at an initial yield of 7.15% in September 212. There are several major assets in the process of selling which should provide a boost to investment volumes throughout 213. There is a strong appetite for prime assets from a range of different buyers as they look to gain exposure to the strong growth fundamentals evident in WA, underpinned by unprecedented investment spending in the resources sector. Despite the intense interest in Perth, investment yields have moved only moderately. Indicative yields for prime assets tightened slightly during 212 on the back of new high quality assets being added to the CBD. At December 212, prime CBD yields were ranging 6.5% to 8.75%. Contrastingly, secondary yields softened, ranging from 8.75% to 1.% mainly due to a lack of rental growth potential given major tenants have the option to occupy newly constructed space at similar rents. It is likely there will be little change to yields in 213. There were two transactions (over $5 million) in West Perth in 212 totalling $43.5 million. The first was 111 Hay Street to a private investor for $29 million in February with a net yield of 8.6% and an equivalent yield of 9.37%. The second asset, 8-1 Ord Street, also sold to a private investor for $14 million on a net yield of 8.34% and equivalent yield of 8.12%. Chart 23: Office investment activity, Western Australia Sales volume ($ million) 1,4 1,2 1, 8 6 4 2 26 27 28 29 21 211 212 (January 213) Note: Sales of $5 million plus The positive forecast of tight vacancy and significant rental growth has increased interest from syndicates and high equity individuals and this level of interest is expected to continue during 213. The buoyant investment market conditions supported a slight tightening in yields over the year. Prime yields ranged between 8.% and 8.75%, firming by around 2 basis points since the beginning of 212. Secondary yields range from 8.75% to 9.75%. Over the medium to long term LNG is set to replace iron ore as WA s dominant resource export led by sustained demand for LNG by Asia. While growth in China is expected to slow with a shift from investment to consumption as the major driver of growth, LNG will remain a key component in the provision of energy to the population, supporting steady demand in the long run. This may reduce much of the volatility related to the WA economy as LNG projects are longer term with pricing inexplicably linked to oil prices, which are widely expected to rise over the next decade. Q4 212 Australia Office MarketView Chart 24: Prime and secondary yield comparison, Perth metropolitan (as at December) 11 11 Source: CBRE

Q4 212 Australia Office MarketView ADELAIDE OFFICE MARKETS SENTIMENT IMPROVES POST OLYMPIC DAM EXPANSION RE-PROFILING The biggest building in the CBD is completed While Australia s eastern seaboard office markets face significant demand headwinds, the Adelaide CBD continues to exhibit relative stability. While new supply continues to enter the market with a subsequent uptick in vacancy, market fluctuations remain muted and sentiment has improved following the re-profiling of the Olympic Dam Expansion project. In 212 the Adelaide CBD saw the delivery of Tower 8 (32, sqm) which is now the largest building in the Adelaide CBD. This building is mostly occupied by the Australian Tax Office which has consolidated all staff from two other locations. Net Absorption (s sq m) Chart 25: Adelaide CBD Supply Additions, Absorption & Vacancy 8 7 6 5 4 3 2 1 (1) (2) Forecast 28 29 21 212 213 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % % Vacancy Vacancy in the Adelaide CBD has risen to 9.5% compared to 7.7% as at July 212, mostly due to 97 Waymouth Street and Rundle Mall Plaza being vacated by the Australian Tax Office. Vacancy could have been higher, but two buildings were withdrawn from stock for refurbishment. There are currently two other projects under construction. 7 Franklin (22, sq m) has 4, sqm of space committed and 8 Grenfell (2, sq m) will be occupied by Bendigo Adelaide Bank on completion. Both are expected in 213. Demand picked up in the second half of 212 with positive net absorption recorded at 9,557 sq m. This brought annual net absorption to 7,491 sq m for the Adelaide CBD. Highlighting weakness elsewhere nationally, the Adelaide CBD recorded the second strongest net absorption result nationally for the second half of 212, behind Canberra. Prime vacancy is expected to increase in 213 to over 8% due to new supply with rental growth constrained to 3%. Net Absorption Supply Vacancy Rate Source: PCA (Jan 213) Secondary vacancy is likely to peak in 215, with rents and incentives coming under pressure due to backfill remaining from the addition of City Central and 7 Franklin Street. In the Adelaide Fringe negative net absorption of 473 sq m was recorded. Vacancy in the precinct rose to 6.1% in January 213 from 5.5% in July 212. Resthaven have started construction of their new headquarters on corner of Bartley Cres and Greenhill Road and Deloitte Private have committed to a new building at 171 Fullarton Road, Dulwich. Limited availability of prime space in the Adelaide Fringe saw prime net face rents up 6.% over the year, averaging $295/sq m while secondary indicative net face rents sit at $235/sq m. Incentives for both prime and secondary grade space are in the 1% to 15% range. Demand remains solid with significant advantages of car parking, close proximity to the CBD and smaller floor spaces appealing to local businesses. Chart 26: Prime net face rental growth and total vacancy, Adelaide metropolitan 12 Source: PCA, CBRE Note: Rental data at Dec 12; Vacancy data at Jan 13

ADELAIDE OFFICE MARKETS CAPITAL FLOWS LIMITED Limited listings of quality stock and therefore limited sales Investment activity in the Adelaide CBD was very slow through 212, with only seven sales over $5 million through the year. Office transactions across the total Adelaide office market (over $5 million) totalled $229.5 million, below the five year average of $262 million. The most recent transactions in the Adelaide CBD were 169 Pirie Street and 118 Franklin Street. 169 Pirie Street was sold to a private syndicate for $22.1 million, but settlement is delayed until the owner occupier (Bendigo Adelaide Bank) move to their new accommodation in late 213. The syndicate then plan to refurbish the building after settlement. The second sale was 118 Franklin Street which sold for $6.6 million to a developer. Offshore and local investor interest remains for well placed assets. This is generally limited to prime quality assets with strong tenant profile, long lease terms and favourable rental growth prospects. There are only approximately 2 buildings that meet this profile and are tightly held as many of these buildings transacted in the last five years. Secondary quality assets are proving difficult to sell though yields remain stable. Investment activity has remained solid in the Adelaide Fringe market with several smaller transactions throughout 212, although many of these relate to strata office units. The largest sale in the Fringe market was 27 Greenhill Road. This was sold by Commercial & General to a private investor for $5.5 million with an initial yield of 7.25%. This building was recently refurbished and is occupied by Siemens. Sales Value $Millions Chart 27: Office investment activity, South Australia 6 5 4 3 2 1 26 27 28 29 21 211 212 (December 212) Note: Sales of $5 million plus Another sale of note in the suburban market was Westpac, 1 Hugh Cairns Drive, Bedford Park. This was sold by Mirvac to a private investor for $16.5 million with an initial yield of 1.56%. The pipeline of new supply and refurbished space entering the market this year will result in vacancy increasing further from the current 9.5% (tighter in prime grade). In the absence of the Australian Taxation Office relocation, conditions in the Adelaide CBD are generally unchanged on six months ago. While other CBD office markets have witnessed significant swings in white collar employment growth, incentives and rents, employment market conditions are generally more steady with fluctuations in tenant demand less pronounced. This bodes well for the assessment of risk around returns currently offered by the market. Q4 212 Australia Office MarketView Chart 28: Prime and secondary yield comparison, Adelaide metropolitan (as at December) 13 13

Q4 212 Australia Office MarketView CANBERRA OFFICE MARKETS PRIME VACANCY TIGHTENS SHARPLY AS SECONDARY VACANCY GROWS Divergence between prime and secondary markets widening Given the Canberra office market is heavily driven by government tenants, the nature of the stock currently sought by this sector has created divergence between the prime and secondary markets. Current government mandates specify that government departments are to only occupy buildings with high NABERS or Green Star ratings. It is this requirement that led prime vacancy in Canberra Civic to tighten sharply over the six months to January 213, while secondary vacancy softened. Prime net absorption reached a record high in the Civic submarket during the 6 months to January 213 (25,7 sq m) in conjunction with a net increase to stock of 2,8 sq m. While prime net absorption reached a record high, secondary net absorption was negative 29,54 sq m. This shift between secondary and prime net absorption was driven by a number of large government departments pursuing upgraded space. The most significant development to reach practical completion during the second half of 212 was the Nishi building (21, sq m). The Nishi building was designed to meet a five-star NABERS and six Green Star energy rating and is anchored by the Department of Climate Change and Energy Efficiency (12,sq m). The supply pipeline is forecast to see more buildings like Nishi complete in coming years as the government continues the role out of their sustainability mandates. Chart 29: Canberra net supply additions, 25-212 to 213-14 's sqm 12 1 8 6 4 2 (2) (October 212) Forecast 26 27 28 29 21 211 212 213 214 Average net face indicative rents in Canberra Civic experienced marginal growth over the 12 months to December 212. With government mandates set to remain focused on prime grade space, secondary grade stock is forecast to see an increase in secondary grade vacancy. This increase in secondary grade vacancy is forecast to be the catalyst for a decline in secondary rents. Secondary net face rents are forecast to decline by 1.5% by June 213 (year on year) and a further 1.% to June 214. Chart 3: Prime net face rental growth and total vacancy, Canberra (as at December) 14 Source: PCA, CBRE Note: Rental data at Dec 12; Vacancy data at Jan 13

CANBERRA OFFICE MARKETS INVESTOR SENTIMENT REMAINS STRONG DESPITE RESTRICTED SALE VOLUME Investors levels remain strong despite limited assets coming to market Strong transaction levels have not been seen in recent years, however, this is not a reflection of subdued investor interest. Transaction levels are constrained due to the limited nature of stock available for purchase. The current focus on risk adjusted returns is reflected in the solid investor interest in the Canberra office market. Unlike other capital city office markets Canberra features strong covenants (Federal Government) with long term WALEs. Transaction levels are expected to remain constrained given assets in the market are tightly held over a long time horizon. No sales were recorded in the second half of 212, however four office assets transacted in the first half of 212 totalling $378.7 million. The most significant sale was 5 Marcus Clarke Street in Civic. This 6 star Green Star rated building had a long term WALE to the Federal Government Department of Education, Employment and Workplace Relations (DEEWR). Singaporean capital trust CIMB purchased this building for $225.9 million on an initial yield of 7.26% in February 212. Given the strong investor interest and relative stability in rents over 212, prime yields in Canberra Civic and Non- Civic were generally flat over the year. Civic secondary prime yields softened slightly over Q4 212 as the migration of Government tenants continued and expectations for growth softened. Prime yields in Canberra currently range between 7.5% and 9.% while secondary ranges between 9.% and 13.75%. Chart 31: Office investment activity, Canberra $ Millions 9 8 7 6 5 4 3 2 1 26 27 28 29 21 211 212 Note: Sales of $5 million plus As the shift between prime and secondary space continues investors focus will remain firmly on the prime market with potential interest in repositioning opportunities in the secondary market. Government requirements for high level NABERS rated buildings are set to drive the development pipeline. With government tenants migrating into prime space, confidence within the secondary market is likely to remain soft looking forward. Withdrawals in supply are expected to continue within the secondary market as more space is removed for redevelopment or conversion purposes. Prime net face rents are forecast to stabilise over coming year while secondary net face rents are anticipated to decline further. Q4 212 Australia Office MarketView Chart 32: Prime and secondary yield comparison, Canberra (as at December) 15 15

NATIONAL OFFICE INDICATORS AND FORECASTS Table 2: Australian office market indicators, December quarter 212 Market NLA (sq m) Vacancy Rate (%) Jan 213 Annual Net Absorption (sq m) Average Net Face Rent ($/sq m) % Change on LY Average Yield (%) BP Change on LY Average Capital Value ($/sq m) Australian CBD Premium 1,911,775 6.4% 157,349 $695 3.5% 6.95% -8 $9,98 4.9% Australian CBD A Grade 6,924,977 7.1% 185,929 $51 3.5% 7.75% 4 $6,58 3.% Australian CBD Prime 8,836,752 7.% 343,278 $575 3.2% 7.45% -2 $7,725 3.6% Australian CBD Secondary 8,197,594 9.3% -71,285 $4 4.7% 8.75% 1 $4,59 3.1% Australian CBD Total 17,34,346 8.1% 271,993 - - - - - - Australian Non CBD Total 7,317,579 9.1% 11,499 - - - - - - Sydney CBD Prime 2,56,472 7.% 37,593 $665 3.3% 7.35% -3 $8,995 3.7% Sydney CBD Secondary 2,352,655 7.4% 16,182 $44 3.1% 8.35% 32 $5,24 -.8% Sydney CBD Total 4,859,127 7.2% 53,775 - - - - - - Melbourne CBD Prime 2,573,318 5.8% 53,646 $455 2.9% 7.% 4 $6,51 2.3% Melbourne CBD Secondary 1,642,645 8.7% -14,221 $325 7.6% 8.% $4,15 7.7% Melbourne CBD Total 4,215,963 6.9% 39,425 - - - - - - Brisbane CBD Prime 1,55,719 8.1% 53,974 $635 -.1% 7.9% -5 $8,35.6% Brisbane CBD Secondary 1,121,149 1.% -18,248 $42.1% 9.5% -8 $4,645 1.% Brisbane CBD Total 2,176,868 9.1% 35,726 - - - - - - Perth CBD Prime 925,615 5.1% 86,853 $775 8.5% 7.9% -18 $9,81 11.% Perth CBD Secondary 663,151 6.5% 16,17 $595 1.3% 9.4% 17 $6,325 8.4% Perth CBD Total 1,588,766 5.7% 12,87 - - - - - - Adelaide CBD Prime 524,152 6.2% 3,628 $38 -.7% 8.4% 4 $4,54-1.2% Adelaide CBD Secondary 816,628 11.7% -23,137 $265 1.1% 9.25% -29 $2,885 13.5% Adelaide CBD Total 1,34,78 9.5% 7,491 - - - - - - Canberra Prime 967,947 11.8% 71,813 $345.2% 7.9% $4,325.2% Canberra Secondary 1,316,172 12.% -35,419 $255 1.1% 11.2% -9 $2,285.4% Canberra Total 2,284,119 11.9% 36,394 - - - - - - % Change on LY Q4 212 Australia Office MarketView Source: Property Council of Australia (Jan 213); CBRE Table 3: Prime Australian office market forecasts 16 Prime Office Net Absorption ( sq m) Prime Net Face Rental Growth (%) Market Pre GFC * Post GFC* 212 213 212-217 Pre GFC * Post GFC* 212 213 212-217 Sydney CBD 84.5 18.3 53.9 33.9 76.2 6% 1% 5% 3% 3% Melbourne CBD 98.6 91.3 46.8 55.9 57. 3% 2% 3% 2% 2% Brisbane CBD 9.4 5.5 77.7 23. 37.4 17% -3% 2% 1% 3% Perth CBD 18.1 25.7 13.7 43.8 33.5 22% 2% 13% 6% 5% Adelaide CBD.8 22.3 34.4 4. 23.3 8% 5% 3% 3% 3% Canberra Civic 13.1 14.2 5.3 19.6 48.5 5% -1% -3% % 1% Note: * Pre GFC (22 28); Post GFC (28-212) 16

Q3 Q4 212 Australia Office MarketView CONTACTS For more information about this MarketView, please contact: Australia Research Stephen McNabb Head of Research Australia Research CBRE Level 25 363 George Street Sydney t: +61 2 9333 3493 e: stephen.mcnabb@cbre.com.au Claire Cupitt Senior Research Manager Australia Research CBRE Level 25 363 George Street Sydney t: +61 2 9333 357 e: claire.cupitt@cbre.com.au + FOLLOW US GOOGLE+ https://plus.google.com/116 441333254289478#1164 41333254289478/posts FACEBOOK http://www.facebook.com/pag es/cbre/8527765893 TWITTER Global Research and Consulting This report was prepared by the CBRE Australia Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. 17 Disclaimer CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE. www.cbre.com