Sydney CBD Office Market

WINTER 2016 MARKET TRENDS Leasing demand strong, led by take-up in the property services, education and finance and insurance sectors. Supply levels high over 2015 Stock withdrawals to increase in 2016 and 2017. Rental growth strengthens. Sales activity strong and yields firm driven by overseas and domestic investors and developers. IN THIS REPORT Market overview 1 Demand, supply, vacancy 2 Rental market 6 Investment market 7 Outlook 9 Sydney CBD Office Market Sydney s CBD office market saw demand strengthen significantly over the year to May 2016. This has contributed to vacancy decreasing, despite a strong volume of building completions over the same period. This has in turn placed upward pressure on effective rents. The Sydney CBD office market witnessed high levels of supply and strong tenant demand, moderate rental growth and a strong investment market over the past 12 months, making it one of the best performing office markets in Australia. Tenant demand was derived from expansion of existing tenants as well as tenants moving from suburban locations to the CBD to take advantage of incentives on offer during 2015. Demand is expected to remain strong over 2016 despite variable confidence. Demand from firms benefiting from low interest rates, strong property and construction markets and a strengthening US economy are likely to drive this growth. Net absorption is forecast to be positive but more moderate than the level achieved over 2015. This is due to an expected lack of available contiguous space and rising rentals in the CBD, which may result in tenants looking to surrounding markets to satisfy space requirements. Supply increased over 2015 to its highest level since 2011. Withdrawals to stock and strong demand, however, resulted in a fall in vacancy over the year to 6.3%. Stock withdrawals have been below long term averages over the past three years. Looking over the next two years, higher than average withdrawals of stock are forecast with conversion to residential, hotel and mixed uses, redevelopments and the Sydney Metro being key drivers. Investment activity was strong and yields firmed over the year to June 2016 due to buoyant investment demand. KEY INDICATORS SYDNEY CBD OFFICE MARKET Stock 1 (m 2 ) Vacancy 1 (%) Gross face rents 2 ($/m 2 ) Outlook (1year) Incentives 2 (%) Yields 2 (%) Outlook (1year) CBD 5,066,472 6.3% 575-1,790 26.0-32.0 5.13-7.00 Prime 2,789,551 6.3% 775-1,790 26.0-32.0 5.13-6.00 Grade B 2,276,921 6.2% 675-1,000 27.0-28.0 5.75-7.00 Source: 1.Property Council of Australia OMR (January 2016) 2. m3property (June 2016).

SUPPLY DEMAND AND VACANCY STOCK AND SUPPLY Stock in the Sydney CBD office market totalled 5,066,472 square metres as at January 2016. Around 173,131 square metres of gross supply, including Barangaroo T2 (87,661 square metres) and the redevelopment of 5 Martin Place (33,000 square metres) completed over 2015. This was partially offset by 68,387 square metres of stock withdrawals, bringing net supply over the year to a healthy 104,744 square metres. The year to January 2017 is expected to differ significantly. While m3property is forecasting high levels of gross supply again, totalling over 258,200 square metres. The level of withdrawals is expected to increase substantially to 255,836 square metres. The year to January 2018 is expected to again see above average withdrawals to stock, however, supply is expected to drop below long term averages. The outlook for new supply projects and withdrawals over 2016 and 2017 is shown in the chart following. Net supply likely to be minimal in 2016 despite gross additions expected to reach around the same level achieved in the pre-olympic Games boom year of 2000. Supply or withdrawal ( 000m 2 ) 140 120 100 80 60 40 20 - -20-40 -60-80 -100 Barangaroo T3 176-182 George/ 33-35 Pitt 333 George 301 George & Others 200 George Sydney New Supply and Withdrawals 275 George 234 Sussex 333 Kent 2-10 Loftus/ 9-13 Young/ 33 Alfred Barangaroo T1 1 Alfred 19-31 Pitt Street 80-82 Pitt Conversion to residential, hotel or mixed use Sydney Metro Station New projects and major office redevelopments 50-58 Park 189 Kent 55 Hunter 39 Martin 5 Elizabeth 12 Castlereagh 175 Castlereagh 570 George DHL In addition to the new projects there are also a number of refurbishments due to complete over the next few years. A list of new and refurbished projects and their estimated completion dates are shown below. MAJOR SYDNEY CBD OFFICE SUPPLY PROJECTS Project address Comp date Project type NLA (m 2 ) Stage Large Commitments Most of the major new projects due to complete over the next few years have significant pre-commitments. 190-200 George Street 2016 New 38,676 Complete Barangaroo Tower T3 2016 New 79,221 Construction Ernst & Young, Mirvac, AGL KPMG and Lend Lease 333 George Street 2016 New 12,453 Construction Charter Hall GPT, 1 Farrer Place 2016 Part Ref 11,000 Construction Barangaroo Tower T1 2016 New 101,050 Construction King & Wood Mallesons PWC, HSBC and Marsh 30 The Bond 2017 Full Ref 15,300 DA Applied Roche Products 10 Shelley Street 2017 Full Ref 26,261 DA Applied Suncorp Darling Harbour Live 2017 New 22,773 Construction Commonwealth Bank 151 Clarence Street 2018 Full Ref 22,000 Construction ARUP and INSA 259 George Street 2018 Part Ref 20,300 Early Source: m3property (May 2016) New and refurbishment projects due 2016-18, 10,000 square metres and over in size. Comm3ntary Winter 2016 P2

DEMAND, SUPPLY AND VACANCY NSW forecast to achieve solid employment growth over the next five years. Job ads continues to grow over the past 12 months despite a slowing over the past six months. This suggests employment growth is likely to continue looking forward. Business confidence strengthens DEMAND DRIVERS - ECONOMIC Unemployment continues to improve with the rate reaching 5.7% as at April 2016. This is down from a cyclical peak in late 2014/early 2015 of 6.3% and is below the long term average. NSW has generally performed well with unemployment at 5.3% and employment growing by 3.9% over the year to April 2016. Looking forward employment growth is expected to rise by 9.9% over the five years to November 2019 in NSW and 15.2% in the Sydney City and Inner South area, according to the Department of Employment. Job advertisements are a leading indicator of employment growth. They fell 0.8% month on month in April but remain broadly unchanged since October last year. Over the year to April 2016 job advertisements rose by 6.3%. Positive jobs growth improves sentiment and drives growth in the economy benefiting all property sectors. The National Australia Bank s index of business confidence saw the index rise from 3.0 in February to a net balance of 5.0 in April 2016. The survey also continues to point to a very favourable business environment for Australian firms with conditions rated as an above average 9.0 points. Consistent with the employment results above, service industries have persistently been the best performers, although other sectors including manufacturing and transport are also showing positive sentiment. Net absorption was strong over the year to January 2016. Demand for prime stock continued to be stronger than secondary, tenants looking to upgrade and a reduction in available secondary stock are key drivers of this trend. Gross absorption strengthens, which bodes well for net take up in 2016. TENANT DEMAND Tenant demand was strong in the Sydney CBD over the year to January 2016 with 157,150 square metres of net absorption recorded, according to the Property Council of Australia. This represents the strongest calendar year net absorption since the year to January 2005. The vast majority of net absorption was in prime stock, which accounted for 187,773 square metres. While grade C stock also recorded a slight positive net absorption of 1,606 square metres, overall secondary net absorption was negative at -30,623 square metres. This is consistent with firms looking to upgrade their accommodation due to incentives still being offered for buildings in the CBD. The reduction in availability of secondary grade space, due to withdrawals of stock and the increasing availability of prime space, due to building completions is also driving the net absorption divergence between prime and secondary graded stock. Gross absorption was estimated by m3property to be around 321,461 square metres over the year to April 2016. This represents an increase of 24.6% compared to the year to April 2015. The number of moves, however, increased by a slower rate of 7.4% over the year to April 2016. This was reflected in the average size of leases signed increasing to over 2,450 square metres. Western Corridor, Core and Midtown saw the most moves over the year to April 2016. NLA (m 2 ) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Sydney CBD leases signed 30 27 24 21 18 15 12 9 6 3 0 Number leases reported as signed Southern The Rocks Western Walsh Bay Midtown Core Number leases signed Source: Property Daily and m3property Comm3ntary Winter 2016 P3

DEMAND, SUPPLY AND VACANCY The leases reported as signed is a leading indicator of net absorption and indicates that net absorption is likely to remain strong over the short term. Given the current low level of vacancy and strength of net absorption over the year to January 2016, net take up this year is unlikely to reach the volume achieved over 2015. The finance and insurance sector accounted for the most moves in terms of square metres of space leased over the year to April 2016. Net absorption forecast to remain positive. As is usually the case, the Finance and Insurance sector accounted for the most moves (in terms of square metres of space signed) over the year to April 2016, representing 50.0% of the total. The two sectors that witnessed the strongest increase in gross take up over the year to April 2016 compared to the same period to April 2015 were the Wholesale and Retail Trade sector (which was coming off a particularly low base), the Education and Training sector and the Property sector. Looking forward, net absorption is expected to remain positive over the short to medium term outlook. This is based on strong levels of current leases signed, which is a leading indicator of net absorption, positive forecasts for white collar employment growth and Gross State Product in NSW, which is also forecast to be solid over the next five years ranging between 2.0% to 3.0%. Tenants to be forced up in grade or to the suburbs due to withdrawals of space for the Sydney Metro and residential conversion. DISPLACED TENANTS UP OR OUT At current m3property have found 118 office tenancies still in buildings, which are being withdrawn in 2017 to make way for the Sydney Metro. There are a further 223 office tenancies in buildings being withdrawn from stock for residential conversion between 2016 and 2018. These tenants are largely in secondary grade buildings where there is only 141,468 square metres of space available as at January 2016. This means that only around half of these tenants will find similar graded space in existing Sydney CBD buildings based on estimates of average tenancy area. The remainder of the tenants will be forced to either move into prime space where 317,214 square metres is available or move out of the CBD to the City Fringe or other suburban office markets. A further complicating issue is the potential withdrawal of further stock over the period from 2016-2018 for office buildings undergoing redevelopment. An estimated 225 further tenants could be impacted by the activation of these office projects. Projects that make up the total include: Brookfield s Wynyard Place, AMP s The Circular Quay Redevelopment, LaSalle s 275 George Street and Lend Lease s CQ Tower. Total vacancy fell in the Sydney CBD over the year to January 2016 to 6.3%. Vacancy is set to fall over 2016 and 2017 due to moderate demand and strong levels of stock withdrawal. Net supply is expected to push vacancy up again from 2018. VACANCY The Sydney CBD vacancy rate, driven by strong demand, fell over the year to January 2016 from 7.4% to 6.3%. This vacancy rate lies well below the long term average for the CBD of 9.4%. Sub-lease vacancy in the CBD decreased in the 12 months to January 2016 from 0.5% to 0.2% of total stock. Prime and secondary vacancy was similar at 6.3% for prime stock and 6.2% for secondary stock. Looking forward the vacancy rate is forecast to fall until the end of 2018. This is due to the strong level of stock withdrawal over the period with a total of over 457,000 square metres due to be taken out of stock for refurbishment, redevelopment and the Sydney Metro stations. From 2018 to 2020 further increases to supply from potential projects such as Quay Quarter, One Carrington Street, 60 Martin Place, CQ Tower at 176-182 George Street and 33-35 Pitt Street, 151 Clarence Street and 388 George Street are likely to result in vacancy increasing again. Comm3ntary Winter 2016 P4

DEMAND, SUPPLY AND VACANCY 12.0% Sydney CBD vacancy forecasts Vacancy is set to fall over 2016 and 2017 before rising again from 2018. Vacancy rate 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: Property Council of Australia OMR January 2016, m3property Research (May 2016) SELECTED MAJOR LEASING DEALS Tenant Address Type Est. start date NLA (m 2 ) Term (yrs) Net rent ($/m 2 ) HSBC T1, Barangaroo New Dec-20 8,000 10 >$1,000 UBS Chifley Tower, 2 Chifley Square Renew Nov-18 17,848 6 ~$900 Westpac 275 Kent St Renew Nov-18 58,400 12 Conf IAG Commonwealth Bank Darling Park 2, Sussex St Darling Harbour Live New Oct-18 33,000 12 $835 New Dec-17 ~22,000 12 $650 Holman Fenwick Willan 1 Bligh Street New Nov-17 ~1,150 7 ~$950 Suncorp 10 Shelley St New Sep-17 24,300 11 Conf ING Direct 60 Margaret St New May-17 10,030 10 Conf Lend Lease T3 Barangaroo New Dec-16 19,800 12 $9\70 Ernst & Young 190-200 George St New Dec-16 28,300 10 High $900s Marsh & McLennon T1, Barangaroo New Nov-16 10,400 8 Conf Minter Ellison Salesforce.com King & Wood Mallesons GMT 1 Farrer Place Tower 3, Darling Park, 201 Sussex St GPT 1 Farrer Place New Oct-16 9,500 12 High $900s New Oct-16 ~1,512 5 ~$800 Renew Sep-16 11,982 10 High $900s Navitas 255 Elizabeth St New Sep-16 24,000 14 Mid $600s Comm3ntary Winter 2016 P5

RENTAL MARKET Prime rents increased over the year to June 2016 on the back of strong demand. Secondary rents have also increased but due to the reduction in available space due to building withdrawals. RENTAL GROWTH Prime gross face rents in the Sydney CBD have increased over the 12 months to June 2016 with an average increase of around 4.6% being recorded. Stronger rental growth is expected over the year to June 2017 due to forecast low vacancy and continued positive demand. Secondary gross face rents also increased, albeit at a lower rate than prime grade rents over the year to June 2016. While net absorption for secondary stock was negative, vacancy decreased significantly, due the withdrawal of stock. This is expected to continue to be the case over the next few years and is likely to drive further growth for secondary graded property in the CBD. Prime net rents ($/m 2 ) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- Sydney CBD average prime gross rents Gross face rents Gross effective rents Source: m3property Research Incentives remained high over the year to June 2016 for prime and secondary stock due largely to the increased supply levels over the second half of 2016. INCENTIVES Despite falling over the year to June 2016, incentives have remained high in the Sydney CBD. Prime incentives currently range from 26.0% to 32.0% while grade B incentives range from 27.0% to 28.0%. Despite a number of large supply completions due over the remainder of the year and into 2017, incentives are forecast to reduce significantly. A larger drop is expected over 2017 and 2018 as available contiguous space and vacancy reduces. Incentives are likely to decrease significantly over the second half of 2016 through to 2018. Incentives (%) 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Prime Secondary Sydney CBD incentives 5.0% 0.0% Source: m3property Research Comm3ntary Winter 2016 P6

INVESTMENT MARKET Sales volumes in the Sydney CBD reached record levels in 2015 and strong sales volumes are expected again in 2016. INVESTMENT MARKET Recent transaction activity has been considerable with approximately $4,531,550,000 worth of office stock traded in the Sydney CBD market over 2015 and $1,322,357,000 recorded in the first four and a half months of 2016. The largest sale in the Sydney CBD so far in 2016 was for 1 Shelley Street, which sold for $525,000,000 in May 2016. Charter Hall and Morgan Stanley purchased the leasehold interest on a yield of 5.25% from Brookfield Property Group. Sales volume ($millions) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 * Source: m3property Research *Office Sales over $5 million to 15 May 2016 Sydney CBD office sales volume Overseas investors and developers continue to demand Sydney CBD office assets. Overseas investors have maintained strong investment activity in the CBD over the past few years accounting for 47.1% in 2014 and 69.8% of sales in 2015. Over the first four and a half months of 2016 overseas investors accounted for 43% of sales by volume. Unlisted trusts have accounted for the majority of sales so far in 2016 purchasing 53.1% of office property in the CBD (or $705,000,000) already exceeding their annual total purchase volume for 2014 and 2015. In terms of overseas investment into Australia, Asian investors (in particular Chinese developers and investors) accounted for the largest value of purchases by overseas investors from January 2015 to mid-may 2016 accounting for 71% of sales. The CIC portfolio sale contributed significantly to this total. Investors from other countries were also active especially those from Singapore and Germany. Of the overseas groups the Investa to CIC portfolio sale made CIC the purchaser of the most Sydney CBD property. Wanda Hotel Development Co. (arm of Dalian Wanda Group) accounted for the second largest purchase volume, with the single asset purchase of Goldfields House at 1 Alfred Street for $425,000,000 in January 2015. Sales volume ($millions) 5000 4000 3000 2000 1000 0 Sydney CBD sales, by purchaser type 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* A-REIT Corporation Developer Foreign Investor Government Institution Owner Occupier Private Investor Superannuation Fund Syndicate Undisclosed Unlisted Fund Source: m3property Research, *Office Sales over $5 million to 15 May 2016. Comm3ntary Winter 2016 P7

INVESTMENT MARKET Prime investment yields tightened due to the flow of capital into the market, particularly from overseas investors and developers and local and overseas superannuation funds. Prime yields tightened by around 40 basis points over the 12 months to June 2016, to range between 5.13% and 6.00%. Over the same time frame grade B yields tightened by around 88 basis points to range from 5.75% to 7.00%. Low interest rates and strong capital flows into property from overseas investors and superannuation funds investing in unlisted funds, A-REITs expanding and developers looking to take advantage of zoning changes has largely driven the tightening in yields in the CBD. Average yields (%) 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Sydney CBD prime and secondary yields Prime Secondary Source: m3property Research Investment yields are set to tighten further over the year to June 2017, albeit at a slower rate compared to the year prior. This is likely to be driven by continued strengthening of fundamentals and low cost of debt. SELECTED SYDNEY CBD OFFICE SALES Property address Date Price (millions) Rate $/m 2 Market yield IRR Purchaser 1-19 Shelley Street May-16 $525.00 $15,915 5.25^ NA 420 George Street (75%) Apr-16 $442.50 $15,655 5.28% 7.06% 151 Castlereagh Street Mar-16 $120.00 $9,336 5.71% 6.96% 77 King Street Feb-16 $158.02 $10,688 5.60% 7.38% Charter Hall and Morgan Stanley Investa Property Group Deutsche Asset Management Invesco Asia Core Fund 61 York Street Feb-16 $33.00 $10,678 5.26% 6.86% Undisclosed 175-181 Castlereagh Street Dec-15 $98.00 $8,290 NA NA Transport for NSW 117 Clarence Street Dec-15 $81.00 $6,434 7.03% 7.87% 160 Sussex Street Oct-15 $51.70 $6,248 7.52% 8.63% Roxy Pacific Holdings Burcher Property Group NA Not available, ^ Initial yield Comm3ntary Winter 2016 P8

m3property Research For more information please contact: OUTLOOK The outlook for the Sydney CBD office market is positive. Net supply and absorption (m 2 ) 240,000 200,000 160,000 120,000 80,000 40,000 Net supply is expected to be minimal over 2016 before falling substantially in 2017 and remaining negative in 2018. Supply is forecast to increase again from 2019 to 2020. Tenant demand is forecast to be moderate, over the next few years driven by the lack of available contiguous space particularly in secondary grade stock. This is likely to force tenants to consider fringe and suburban markets for large space requirements. The balance between net supply and net absorption is expected to result in vacancy rates falling between 2016 and 2018. Solid demand should result in pre-lease activity rising over the next few years, which is forecast to result in further supply completing from 2019 to 2020 and therefore an increase OFFICES 0-40,000-80,000-120,000-160,000 Adelaide Brisbane Melbourne Level 3 44 Waymouth Street Adelaide South Australia 5000 T 61 (8) 7099 1800 F 61 (8) 7099 1850 Level 2 15 James Street Fortitude Valley Queensland 4006 T 61 (7) 3620 7900 F 61 (7) 3620 7999 Level 29 600 Bourke Street Melbourne Victoria 3000 T 61 (3) 9605 1000 F 61 (3) 9670 1658 Perth Sydney Disclaimer Unit 2 168 Stirling Highway Nedlands Western Australia 6009 T 61 (8) 6500 3600 F 61 (8) 6500 3698 Sydney CBD market balance Level 23, MLC Centre 19 Martin Place Sydney New South Wales 2000 T 61 (2) 8234 8100 F 61 (2) 9232 5144 Net supply Net Absorption Vacancy Rate Source: Property Council of Australia OMR January 2016, m3property Research (May 2016) in vacancy over those years. 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Face rents are forecast to increase by around 6.5% over the year to June 2017 on the back of low vacancy and solid demand for CBD office space. Incentive levels are also likely to reduce over the year as contiguous space becomes scarce. Sales activity is expected to be strong in 2016 and may exceed the record sales volume achieved in 2015 as unlisted funds appear to have ramped up investment and overseas investors continue to look at Australian property markets. Investors continue to take advantage of cheap debt and high levels of equity accumulated over the past few years. Investment yields are set to tighten over 2016 driven by strengthening fundamentals. info@m3property.com.au Vacancy rate m3property Australia. This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Research Contacts Jennifer Williams P 02 8234 8116 M 0400 116 343 jennifer.williams@m3property.com.au Key Valuation Contacts Andrew Duguid P 02 8234 8101 M 0417 343 772 andrew.duguid@m3property.com.au Trent Hession P 02 8234 8107 M 0438 634 426 trent.hession@m3property.com.au Don Semken P 02 8234 8102 M 0433 222 956 don.semken@m3property.com.au Definitions A-REIT: ASX listed Australian Real Estate Investment Trust Completion date: determined by issue of a Certificate of Occupancy Grade: is determined using the PCA report A Guide to Office Building Quality. Net absorption: is the change in occupied stock within a market over a specified period of time. Net lettable area (NLA): defined in accordance with the PCA Method of Measurement Pre-commitment: contract signed to occupy space in new or refurbished space prior to construction commencing. Prime: Combination of premium and grade A. Secondary: Combination of grades B, C and D. WALE: Weighted average lease expiry.