The Case for Investment in Australian Logistics Property. May 2015

The Case for Investment in Australian Logistics Property May 2015

INTRODUCTION The industrial real estate sector forms a key part of the fabric of the economic infrastructure of Australia. With a strongly growing population of affluent residents and a geographically dispersed population, highly efficient logistics and distribution facilities are vital to Australian businesses. The retail and housing markets in major East Coast Australian capital cities 1 are undergoing a strong cycle of activity at present. JLL expects this to flow through to stronger industrial tenant demand over a number of years. A below average new development pipeline and rising occupier demand will be supportive of minimal vacancy and steady rental growth levels. Meanwhile, investment demand for industrial property is very strong. Sales transaction volume has recorded new record highs and there has been evidence of broad price growth as domestic and international buyers compete within a limited pool of assets to build scale in Australia s highly-consolidated institutional grade market. Despite recent yield compression, investors remain attracted to the Australian industrial sector s relatively high entry yields, the above average yield spread to risk-free benchmarks, strong income return profile and superior yields relative to many offshore markets. This report explores in detail the key investment influences that make Australian industrial real estate a highly appealing proposition for investors at present. 1 Sydney, Melbourne and Brisbane 2 The Case for Investment in Australian Logistics Property - May 2015

INDUSTRIAL PROPERTY SUPPORTS AUSTRALIA S ECONOMIC INFRASTRUCTURE Australia s strong population growth, driven by an open immigration policy, supports a high level of consumption expenditure. Australia s population of 23.5 million people is geographically concentrated, with almost 67% of the population living in the major capital city markets 2. As a consequence, the scale of Australia s major capital cities means the bulk of industrial property markets are located in core precincts in each major city. Australia continues to benefit from a relatively strong population growth rate for a developed country, encouraged by a favourable government immigration policy that is targeting skilled migration to support economic activity. Over the five years from September 2009 through September 2014, Australia s population increased by 1.8 million people, an average growth rate of 1.6% per annum. Fig 1: Australia s population and population growth rate (% per annum) Population Growth Rate Estimated Resident Population ('000s) (% change p.a.) 24,000 23,000 2.5 22,000 2.0 21,000 20,000 1.5 19,000 18,000 1.0 17,000 16,000 0.5 15,000 14,000 0.0 1981 1985 1989 1993 1997 2001 2005 2009 2013 Australian Population Source: Australian Bureau of Statistics Australian Populaton Growth % p.a. Australia s strong population growth rate is amongst the highest of its peers in the Asian region and amongst other mature global economies. According to World Bank population growth data for the period 2010 to 2014, Australia has grown at more than double the rate of the United States and United Kingdom, and three times the rate of major European countries including Italy, France and Germany. Canada, with its similar total population and economic structure, has grown at 1.2% per annum. Australia s strong population growth is supported by an open immigration policy, aimed at fostering ongoing steady economic growth and maximising participation in key employment industries to boost productivity. According to the 2015 Intergenerational Report, prepared by The Treasury of the Australian Government and released in March 2015, the average annual rate of growth in the population between 2015 and 2055 (the next 40 years) is projected to be 1.3 per cent, compared with 1.4 per cent over the past 40 years. This growth rate would see Australia s population rise to 39.7 million by 2055. Three quarters of the population reside on the East Coast. New South Wales is Australia s most populous State. With around 7.5 million people, New South Wales accounts for 32% of Australia s population. The population of New South Wales increased 1.4% in the year to September 2014. Victoria is Australia s second largest State, with a population of around 5.9 million people. Victoria accounts for 25% of Australia s population and is growing rapidly due largely to strong overseas net migration increasing 1.8% in the most recent year. Queensland is the third largest State with 4.7 million people, accounting for 20% of Australia s population, mostly concentrated in the metropolitan South East Queensland coastal and hinterland 2 67% of the Australian population were estimated by the Australian Bureau of Statistics to reside in the combined Greater Capital City Statistical Areas as of 30 June 2014 (including Greater Sydney, Greater Melbourne, Greater Brisbane, Greater Adelaide, Greater Perth, Greater Hobart, Greater Darwin and the Australian Capital Territory). The Case for Investment in Australian Logistics Property - May 2015 3

fringe. Queensland has been one of Australia s biggest beneficiaries of population growth in the last decade. Last year the population of Queensland grew by a very solid 1.5%. Fig 2: Population by State or Territory (September 2014 and 2024 forecast) Population by State and Territory ('000s) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Northern Territory Australian Capital Territory Tasmania South Australia Population in September 2014 Western Australia Queensland Victoria Source: Australian Bureau of Statistics, Deloitte Access Economics New South Wales Additional population in 2024 Western Australia s 2.6 million people make it Australia s fourth largest State, accounting for 11% of the population. Western Australia continues to grow very strongly, up 2.1% in the year to September 2014. South Australia is the next most populous State; with around 1.7 million people, South Australia accounts for 7% of the population. However, South Australia s population is growing less strongly, up 0.9% in the year to September 2014. Tasmania, Australian Capital Territory and Northern Territory combined account for around 5% of the population with approximately 1.1 million people combined. Tasmania, ACT and NT ranked among Australia s more slowly growing States and Territories in the most recent year. The dominance of Australia s East Coast states is expected to grow further in coming years. Forecasts by Deloitte Access Economics show the major East Coast state populations are expected to grow the most in the decade to 2024: New South Wales and Victoria by 1.1 million people each, followed Queensland with an additional 850,000 residents. Sydney, Melbourne, the greater South East Queensland region and Perth are highly concentrated cities. Approximately 67% of the population reside in the greater capital cities of Australia. This ratio is increasing as the population growth rate of major cities outpaces that of regional locations. The concentration of each city s population means that generally more than 80% of shipped container freight is transported to a distribution centre or warehouse in a radius of less than 40 kilometres from the port. Major retailers and logistics providers today generally operate at least one distribution centre within each East Coast city location. However, some major distribution warehouses in New South Wales and Victoria are used for interstate operations, depending on the goods type they store and distribute and the store locations they service. It is not uncommon for South Australia and even Western Australia networks to be serviced from Victorian facilities. Major road and rail infrastructure will ensure existing industrial locations remain core for the foreseeable future. Infrastructure plays an integral role in enabling future industrial activity centres in Australia. Investment in transport infrastructure can significantly influence the use, development and value of industrial property. Infrastructure can also reinforce the locational advantages of existing areas. The most critical infrastructure developments over the last decade have been new or extended roadways generally tollways or motorways. The development of full ring road systems in Sydney and Melbourne in the last decade opened up access to cheap land that facilitated the development of very large warehouse and distribution centre developments. In Sydney, this included the Erskine Park and Eastern Creek precincts in the Outer West on the M7/M4 Interchange. In Melbourne, the Dandenong market benefited immensely from the completion of the East Link tollway. The industrial property sector provides economic infrastructure to the rapidly growing cities and metropolitan regions. With limited infrastructure under construction or proposed that will change the shape of our cities in the next decade, the current road and rail infrastructure has cemented the existing core industrial locations in major cities for many years to come. 4 The Case for Investment in Australian Logistics Property - May 2015

Strong population growth underpins demand for imported goods. Consumption expenditure is the largest component of national expenditure (approximately 73% in total, 55% of which is private consumption expenditure). Australia s major city population bases are heavily reliant on imported goods for consumption. Australia s demand for imported consumption goods has supported the evolution of the logistics and distribution systems of our major cities the economic infrastructure then ensures goods flow seamlessly from export countries, through importers, distribution and transport providers, retailers and to the end consumer. Fig 3: International merchandise imports: consumption goods (% per annum) Rolling annual % change 20% 10% 0% -10% 2004 2005 2006 Consumption goods Source: Australian Bureau of Statistics, JLL Research 2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 2013 2014 Consumption Goods Ex-Autos International Merchandise Import data from the Australian Bureau of Statistics shows that the total imports of consumption goods (in $ million original terms) increased 7.4% per annum since between 1994 and 2014. Further steady growth in consumption goods imports is expected to provide a solid base for growth in demand for warehouse and logistics facilities, especially along the Eastern Seaboard. More housing is required to accommodate new residents. Rapid growth in population, along with strong demand for residential investment assets, has boosted the underlying demand for housing. A strong development cycle is underway in varying stages in Australia s major cities. On a national basis, dwelling construction approvals in February 2015 reached their highest level since records began in 1983 and on an annual basis are well above the 10-year annual average. Dwelling approvals increased 11.3% in the year to February 2015. The positive impact on industrial occupier demand from an increase in housing activity is both direct (demand for goods) and indirect (greater employment and flow-on economic activity). The relationship is evident between the change in housing investment spending and industrial sector occupier demand. Fig 4: Housing construction investment related to industrial occupier demand Rolling 3-year occupier take-up % 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 1997 Rolling 2-year housing investment % 35% Forecast 25% 1999 2000 2002 2003 2005 2006 2007 2009 2010 2012 2013 2015 2016 2017 15% 5% -5% -15% -25% Sydney Industrial Occupier Gross Take-up Rolling 3-Year Change [RHS] NSW Private Sector Housing Investment Rolling 2-year (1 Year forward) [LHS] Source: Deloitte Access Economics, JLL Research Governments are coordinating increased supply and density enhancing and complementing core industrial precincts. A potentially attractive feature of industrial property is enhancing returns through redevelopment of an asset as it moves through its life cycle. The location of industrial property, often neighbouring residential growth corridors, means that as the concentration of the urban population intensifies there is encroachment on industrial zoned land by higher and better uses (residential and / or retail developments). As a result, industrial property has a natural life cycle that can provide longer term planning or redevelopment benefits for industrial land owners and developers. More recently, in an effort to unlock the supply of urban land to accommodate Australia s strongly growing population, state and local government agencies have coordinated the designation of new zones for urban activation generally allowing for medium to high-density residential and mixed use projects many of which are occurring in former industrial precincts, particularly those close to existing or proposed commuter rail stations. This has been most evident in Sydney, where the NSW Government Department of Planning and Environment has designated key urban activation precincts (now known as Priority Precincts ) to deliver more homes in places with access to infrastructure, transport, services and jobs. 3 The increased density of resident populations within and around these established industrial precincts will lead to enhanced amenity through the demand for services from residents and will complement the industrial precincts by bringing them closer to their ultimate enduser: the consumer. 3 NSW Department of Planning and Environment website The Case for Investment in Australian Logistics Property - May 2015 5

INDUSTRIAL DEMAND DRIVERS ARE IN A STRONG CYCLICAL UPTURN Strong industrial market fundamentals include solid growth in goods imports, the steady recovery in retail spending growth and growth in the e-commerce sector, population growth and the residential development cycle and flow-on to housing associated sectors of the economy. The retail sector is in the early stages of a steady cyclical recovery. Annual retail turnover growth reported by the Australian Bureau of Statistics in 2014 was the highest since 2009. In line with a stronger housing sector, consumers are increasing their spending again, although the pattern of spending is uneven. As expected, due to the transition of the economy away from the mining investment sector and towards a greater share of growth from investment and consumption in the household sector, retail turnover growth has been strongest in the South Eastern states of New South Wales and Victoria (growth of 8.0% and 5.7% over the year to February 2015). Fig 5: National retail turnover growth (% per annum) Retail Turnover % p.a. 8% 7% 6% 5% 4% 3% 2% 1% 0% Feb 2005 Feb 2006 Feb 2007 Feb 2008 Feb 2009 Source: Australian Bureau of Statistics Feb 2010 Feb 2011 Feb 2014 Feb 2013 Feb 2014 Feb 2015 E-commerce and overseas retailers are providing new sources of demand. Two factors that have been at play in the Australian retail sector in recent years are: 1) the rapid rise of e-commerce operators and online retail sales; and 2) the flow of overseas retailers that have come to Australia to establish new operations. Both factors have been highly complementary to the industrial sector requiring excellent goods handling and distribution systems to be successful. The rapidly emerging e-commerce sector is driving a wave of demand growth in Australia. Major online retail operators have committed to large warehouse and distribution facilities in order to accommodate their rapidly growing businesses and fulfil their customers delivery request options. The table below highlights some examples of e-commerce operators and related businesses leasing industrial space directly in recent years. Table 1: Examples of e-commerce operator industrial take-up Group Area (sqm) Year Location The Iconic 12,650 2012 Wetherill Park, Sydney Catch of the Day (The 26,500 2012 Truganina, Melbourne Catch Group) Booktopia 8,300 2014 Lidcombe, Sydney Appliances Online 12,000 2014 Rosehill, Sydney (Winning Appliances) OzSale 17,000 2011 Smithfield, Sydney Kilka 6,200 2014 Oakleigh, Melbourne GraysOnline 5,100 2014 Dandenong South, Melbourne GraysOnline 4,100 2012 Seaton, Adelaide DealsDirect 20,200 2007 Ingleburn, Sydney Chrisco Hampers 20,000 2014 Hendra, Brisbane Chrisco Hampers 20,000 2008 Mount Waverley, Melbourne Chrisco Hampers 6,400 2011 Auburn, Sydney Not Quite Right 8,000 2007 Broadmeadows, Melbourne estore Logistics 15,800 2014 Deer Park, Melbourne estore Logistics 11,600 2012 Laverton North, Melbourne Aussie Farm Direct 12,300 2014 Rosehill, Sydney Source: JLL Research In recent years, online retail sales have grown far more strongly than broader retail sales. According to NAB Research, in 2014 approximately AUD 16.4 billion was spent online, equivalent to 6.8% of total retail spending. More recently the lower value of the Australian dollar is having some impact on the growth and composition of online retail spending; overseas online sales have slowed and now account for only approximately 25% of total online sales. Meanwhile, Australian shoppers have embraced online shopping for more generic items the grocery and liquor segment is now the fastest growing online segment. The internationalisation of the retail sector will see more major regional and international brands enter the Australian market to grow their market share. This trend has been evolving over the last five years or so. Some of the major fashion retailers that have made a strong impact in Australia already are Zara, Topshop Topman and H&M. They have been joined by major international retailers opening Australian stores in UNIQLO, Williams-Sonoma and Sephora. 6 The Case for Investment in Australian Logistics Property - May 2015

Table 2: International retailers with an Australian presence Fig 6: Dwelling approvals and completions 220,000 210,000 200,000 190,000 180,000 170,000 160,000 150,000 140,000 130,000 120,000 Retail Segment Fast fashion Upmarket fashion Homewares Cosmetics Source: JLL Research Dec 2004 Dec 2005 Dec 2006 Company / Brand Zara Topshop Topman H&M Forever 21 GAP UNIQLO COS (Collection of Style) Brooks Brothers Furla Kate Spade MUJI Zara Home Williams-Sonoma Williams-Sonoma Pottery Barn Pottery Barn Kids West Elm Sephora Housing construction remains a key driver of economic activity. Housing more broadly is an industrial sector demand driver because of its linkages to building materials providers, wholesalers, household goods retailers and the transport and logistics industry. A strong development cycle is now underway and will be sustained for Dec 2007 Dec 2008 Total number of dwelling units approved Source: Australian Bureau of Statistics Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Total number of dwelling units completed Dec 2014 several years, given the significant lag between dwelling approvals, development completion and occupation (including furnishing). This sector of the economy is being further supported by government policies aimed at minimising the economic impact of the unwinding of the mining investment and engineering boom that is now underway. We expect the housing construction sector will continue to be supported by government initiatives that lead to further strong activity in the medium term. Real GDP forecast to grow 2.8% per annum in the next decade. Australia is a mature economy with a high level of wealth per capita. The Australian economy has expanded for 23 consecutive years without recession. The diverse composition of the economy has made Australia resilient during times of economic volatility. Deloitte Access Economics forecasts real GDP growth of 2.8% per annum in the next decade, in line with the annual growth rate recorded over the previous 10 years to 2014 of 2.8% per annum. The responsibility for future economic growth has shifted from the resources sector and exports toward domestic business investment, residential construction and consumer spending. Lower interest rates are assisting this rotation, and the housing recovery and the rise in retail spending are now in the early stages of a cyclical upturn. The forecasts assume a rise in private consumption spending, the largest component of national expenditure. Consumption spending is the major driver of national expenditure and is the major driver of demand for imported goods for retailers, the largest occupiers of modern industrial space. Fig 7: Real GDP growth (% per annum) (Growth % p.a.) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Next decade Real GDP growth Decade average to 2014 Source: Deloitte Access Economics Forecast Average The Case for Investment in Australian Logistics Property - May 2015 7

PHYSICAL MARKET LANDSCAPE AND THE DEVELOPMENT OF NEW STOCK The national industrial landscape mirrors the population weightings closely: Sydney is the largest market by physical stock, accounting for 38% of developed space over 5,000 sqm. Melbourne follows closely with 33%, then Brisbane at 16%, Perth at 7% and Adelaide at 6%. Fig 8: Share of physical stock by city 2014 Stock by Area (sqm) = 28.1 million sqm Occupier take-up has been above average nationally in recent years. Demand has been driven by organic business growth, consolidation of operations and the implementation of new practices by tenants to drive efficiencies in their supply chain from real estate. Take-up continues to be driven by growth in the Third Party Logistics and Freight sector, major Retailers, Wholesale Trade and some Manufacturing businesses. Further, the Construction industry has also been a significant occupier of warehouse space. Adelaide 5.6% Brisbane 15.9% Perth 7.2% Sydney 38.3% The construction of new industrial space remains below long-term averages and will decrease in 2015 by some 15% to 20% on 2014 levels. New supply has been mostly pre-leased or for corporate owners committing to new Design & Construct deals. As such, the proportion of speculative projects under construction remains in check. Looking ahead, supply looks likely to remain below the 10-year average in 2016 also. Melbourne 33.0% Source: JLL Research JLL Research has assessed the market value of the five major city industrial markets at AUD 36.0 billion at the end of 2014. Sydney and Melbourne are the largest capital stock bases by value, with approximately 44% and 25% of value respectively. The Brisbane market accounts for approximately 18% of capital stock, followed by Perth at 9% and Adelaide at 4%. Fig 9: Share of market value of stock by city Fig 10: National industrial development pipeline SQM ('000s) 3,000 2,500 2,000 10 year annual average 1,500 Brisbane 18.0% 2014 Market Capitalisation = $36.0 billion Adelaide 3.9% Perth 8.7% Sydney 44.2% 1,000 500 0 2005 2006 Plans approved / submitted Completed *As at 1Q15 2007 2008 2009 2010 2011 2012 Under Construction 10 year annual 2013 2014 2015* 2016* 2017* Melbourne 25.1% Source: JLL Research Source: JLL Research 8 The Case for Investment in Australian Logistics Property - May 2015

The near term construction pipeline remains below average and mostly pre-committed. Solid occupier demand is being supported by organic business growth and new entrants to the Australian market. The new supply environment, on the other hand, remains subdued relative to the longterm average. The construction data shows the recent wave of new supply activity as a result of a pre-lease cycle in previous years is now behind us: stock under construction for the next 12 months to 1Q16 is now less than three-quarters of that completed in the previous 12 months to 1Q15. At this stage, supply looks likely to remain below average for another 18 months at least. There have been fewer opportunities to acquire prime grade investment assets (on market) in recent years. Firstly, a lower construction pipeline has meant fewer investment grade assets have been created each year. Secondly, third party capital partnering arrangements have been put in place by many of Australia s largest institutional property owners and developers. These Joint Venture and Special Purpose Vehicles have pre-funded a large volume of the pre-leased development stock that might otherwise have been offered to the market (or have been absorbed by the fund, resulting in some other non-core asset sales as capital is recycled). The lower forward supply pipeline indicates this will continue to be the case in the near-term, ensuring institutional investors without a development capability will compete more strongly for the opportunities that do come to market. Given the steady demand environment and the focus by corporate occupiers on quality facilities to drive business efficiency, as well as the lower supply environment, the current balance is supportive of low vacancy for institutional owners. Company data from December 2014 shows that vacancy reported by ASX-listed groups that own or manage large industrial portfolios in Australia was generally less than 5% and has remained so over the last five years. The Case for Investment in Australian Logistics Property - May 2015 9

Sydney - a solid activity cycle is now underway, supported by urban activation projects. The Sydney industrial market has among the best fundamentals of all industrial markets at present. Sydney is benefiting from urban activation projects being coordinated by government to increase the population density of inner ring suburbs. As such, many mature industrial markets are being rezoned to allow for mixed use or residential projects. As these sites moved through the planning and development process, tenants are being displaced at the same time as the existing stock base is shrinking. Occupier take-up activity in 2014 was ahead of the long-term average. The subdued development pipeline in Sydney may supress take-up in the very short-term as tenants have fewer options while new land estates are brought on line with additional site specific infrastructure and servicing. New supply in 2015 will be the lowest recorded since 2010. Sydney has been the most active investment market in the country in the last two years attracting on average almost 50% of capital deployed in the direct market over 2013/14. This will create a cascade of occupier activity that will impact the market for some years, creating immediate demand for existing stock, decreasing vacancy and placing upward pressure on market rents. Eventually this will result in demand for larger distribution facilities in the Western Sydney precincts as existing market rents increase and larger users look to grow into more modern facilities. 10 The Case for Investment in Australian Logistics Property - May 2015

Melbourne strong occupier activity and highly favoured investment destination. Melbourne continues to have one of the most stable environments for industrial occupier take-up. Large corporations have always viewed Melbourne as a strategic location for national or regional distribution centres. Real estate costs are generally lower in Melbourne, while distance to the Port, as well as links to road and rail to the northern and western cities, as well as interstate and national networks, make Melbourne an ideal location for distribution centres. The Melbourne industrial market benefits from the Port of Melbourne being the busiest containerised, automotive and general cargo shipping port in Australia with the highest TEU volume per year. It handles more than 2.5 million TEU annually and around 1,000 motor vehicles per day on average. This highlights the importance of Melbourne as an interstate distribution hub. As a result of robust occupier activity, the supply pipeline in 2014 increased strongly. Developers are confident in investing in new projects and continue to develop new stock to cater for immediate demand requirements. However, the outlook for new supply in 2015 is more restrained and there is a lower volume of speculative construction in the year ahead. Melbourne remains highly favoured as a destination for investment capital as Australia s second largest industrial market and second most populous state. Melbourne and Sydney combined accounted for 73% of major industrial investment sales in 2014 and 84% in the first quarter of 2015. Melbourne is again expected to strongly feature in 2015 due to solid investor demand. The Case for Investment in Australian Logistics Property - May 2015 11

Brisbane demand supported by new entrants to the market; highly sought after by investors due to historic under-allocation. Brisbane has undergone a strong occupier recovery in recent years led by large corporate occupiers upgrading facilities, consolidating operations or creating a Brisbane distribution centre for the first time. The Brisbane market has favourable underlying dynamics due to the very strong population growth in Queensland in the last two decades and the strong economic expansion in regional Queensland related to resource investments. As a result, the South East Queensland resident population base has grown considerably, creating a strong case for industrial occupiers to grow. Many retailers and logistics companies have not traditionally had a strong industrial presence in Brisbane. New activity is now supporting a cycle of occupier demand and investment in new property development to cater for larger requirements and more modern, functional space close to the centre of Brisbane. As a result, new supply in Brisbane in 2014 and 2015 will be higher than the 10-year average for the first time in six years, though the outlook for 2016 is for more subdued supply growth as development has been demand-led and is mostly pre-committed. While in recent years the economic growth profile of Queensland has been below trend, the market is poised for a recovery with demand supported by the early stages of a housing investment cycle, improvement in tourism and net exports as the LNG cycle moves from the investment to the production stage. This is expected to remove some of the challenges for the private sector to make long-term real estate decisions in Brisbane. 12 The Case for Investment in Australian Logistics Property - May 2015

Perth new sources of demand as the focus shifts to logistics after years of strong economic and population growth. Perth has undergone a transformation as a result of the mining investment booms in the last decade. Population growth has been among the strongest in the country, while wages and asset values have also grown strongly during this time. The impact on the Perth industrial sector has been profound. Occupier take-up has grown strongly. Major retail brands, third-party logistics providers and other corporates have grown strongly in the Perth market during this time. Despite the mining investment booms, take-up in the direct market by mining industry occupiers in Perth was only 7% of the total between 2007 and 1Q15 (> 3,000 sqm spaces) and most of this is owner occupied. This demonstrates the diversity of industrial demand in the Perth market. Supply, on the other hand, has been more sedate, though it has picked up from the level being developed a decade ago. The Perth market is not heavily institutionalised and the land market is both tightly held and highly controlled by government. As a result, vacancy has generally been very low, speculative construction is scarce and market rents have grown strongly in the last decade. Looking forward, housing construction will be a driver of activity in Perth. Private sector housing investment is forecast to grow by double digits in 2015. Low interest rates, strong growth in household net wealth, and more stable consumer confidence are also expected to stimulate a recovery in retail spending growth in the short term and flow on to demand from traditional industrial occupiers. The Case for Investment in Australian Logistics Property - May 2015 13

INDUSTRIAL ASSET PRICING AND CURRENT INVESTMENT CONDITIONS Institutional grade industrial property remains tightly held by a core group of investors. Most of the domestic institutions holding substantial industrial property are now focussed on increasing their exposure to industrial property. Furthermore, a number of offshore funds and smaller boutique funds are looking to grow their presence in the market. Offshore investors have become more active in the Australian industrial sector in the past three years, in a direct ownership and indirect ownership capacity, driven by the hunt for yield. The Australian industrial sector saw record transaction volume in 2014. Transaction volume (> AUD 5 million) has increased each calendar year since 2008. In that year, total transaction volume was approximately AUD 1.4 billion nationally. In 2014, total transaction volume was approximately AUD 5.1 billion, exceeding the previous record set in 2007 and increasing 38% on 2013 transaction volume. Fig 11: National industrial transaction volumes AUD (millions) 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sales of greater than $5 million Source: JLL Research High value asset sales in 2014 demonstrate the weight of money entering the industrial sector. As well as rising investment volume each year, the number of high value asset sales in 2014 demonstrates the weight of money entering the industrial sector. A number of small portfolio sales and large landmark assets transacted in 2014, setting new pricing benchmarks for this cycle and taking yields for the best quality assets below 2007 levels. In total in 2014, five individual assets or portfolios priced above AUD 150 million were sold. A further 10 assets priced above AUD 50 million were sold 1. As a result, in 2014 the average price of approximately AUD 23.1 million per property sold set a new record, exceeding the previous record of AUD 21.0 million set in 2013 (having increased each year since 2009). This is an indication of the depth of the purchaser pool seeking to invest in the Australian industrial sector at present. There has been strong competition between multiple parties for the largest transactions. This suggests there is a growing pool of unallocated capital with groups that have been unsuccessful in recent campaigns. Furthermore, investment demand at present is very robust across all price points and risk/return spectrums. However, the strongest investor demand is for prime grade logistics or distribution properties in metropolitan areas, in recognised industrial locations, close to major road infrastructure and with recognised tenant covenants and relatively long lease terms. Investors favour the major East Coast cities to deploy capital. Industrial transaction volume in recent years has been concentrated in Sydney, followed by Melbourne and Brisbane. In 2013 and 2014, the majority of industrial transaction activity occurred in Sydney and Melbourne. While this is not uncommon given Sydney and Melbourne are Australia s largest industrial markets, there has been a disproportionately large share of investment activity in Sydney in particular as investors highly rate the Sydney market s fundamentals at this point and look to reweight their portfolios with greater Sydney exposure. Fig 12: Industrial transaction volume: share by market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 2012 2013 2014 2015 Perth Adelaide Brisbane Melbourne Sydney Sales of greater than $5 million Source: JLL Research 1 We have excluded residential development site sales and undeveloped land from this analysis. 14 The Case for Investment in Australian Logistics Property - May 2015

Wide yield spreads to bonds make industrial property exceptionally attractive to long-term investors. While the Australian industrial market entered a steady yield firming cycle in 2014, both prime and secondary grade industrial yields still offer investors a healthy spread to historically low government bond yields. Furthermore, the capital markets at present are accommodative of increased investment in real estate. Government bond yields at historic low rates have increased the spread to real estate yields, allowing for further compression in the near future. In addition, the very low long-term government bond yields are putting downward pressure on borrowing costs and feeding through into discount rate assumptions for real estate investments. Fig 13: Commonwealth Government Bond Yields 7% 6% 5% 4% 3% 2% 1% 0% Mar 2005 Mar 2007 Mar 2009 Mar 2011 Mar 2013 Mar 2015 Yields on Commonwealth government bonds, 10 years maturity Yields on Commonwealth government bonds, Indexed maturity Source: Reserve Bank of Australia Investors assess property yields against measures such as the Commonwealth Government Indexed Bond Rate (the real risk-free rate). The Commonwealth Government Indexed Bond Rate was 0.58% in March 2015, down from 2.11% a year prior in March 2014 (Reserve Bank of Australia). Fig 14: Industrial property prime grade yield spreads to Commonwealth Government 10 year Indexed Bonds 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% Mar 2005 Mar 2007 Mar 2009 Mar 2011 Mar 2013 Mar 2015 Sydney (Outer Central West) Brisbane (Southern) Perth (South) Source: Reserve Bank of Australia, JLL Research Melbourne (South East) Melbourne (West) Prime grade industrial property yield spreads to Indexed Bonds have widened since mid-2013. Despite firming industrial property yields during this period, the spread to Indexed Bonds remains historically very wide. With the spread between property yields and the bond rate widening further, as well as market expectations that official interest rates will decline further this year, further property yield firming is probable in 2015. The Case for Investment in Australian Logistics Property - May 2015 15

The growing Australian superannuation (pension) system ensures strong demand for real estate. Recent capital raising initiatives by unlisted domestic funds highlight the strong investor demand for exposure to direct industrial property from superannuation funds and global pension funds. Total assets controlled by the Australian superannuation (pension) sector surpassed AUD 1.9 trillion for the first time in December 2014 (equating to greater than 100% of GDP). To put the Australian pension system into context, Towers Watson reported that the Australian pension system has the fourth largest asset base in the world behind the US, UK and Japan. The superannuation sector is projected to increase over the next decade. The Superannuation Guarantee levy, which is the compulsory payment Australian wage and salary earners make to their pension funds, increased to 9.5% in July 2014. Based on current laws, the Superannuation Guarantee will remain at 9.5% for seven years, increasing to 10% from July 2021 and eventually to 12% from July 2025. Some estimates have the superannuation sector reaching AUD 3.5 trillion by 2025. Superannuation funds have maintained a relatively consistent allocation to real estate of between 8% and 10%. The current allocation to real estate is 8%. Assuming superannuation funds maintain an 8% allocation to real estate, the incremental demand for real estate between 2014 and 2025 will be AUD 144 billion. Superannuation funds will ensure there is strong underlying demand for real estate investment in the decade ahead. Given the lower return hurdles for real estate and longer investment timeframes from superannuation investors, we expect yields for prime grade commercial real estate assets will continue to be re-rated downwards (in what has been a long-term trend) in coming years as superannuation funds compete for limited investment opportunities. New sources of capital have emerged as significant participants in the industrial investment market. Furthermore, recent campaigns have unveiled new sources of capital from Asia-based fund managers, sovereign funds, pension funds and high-net worth individuals being represented by sophisticated investment advisors such as global investment banks. This trend was confirmed in a global investment intentions survey jointly published by industry associations ANREV, INREV and APREA on 21 January 2015, in which 60% of Asian investors report that they expect to increase their global real estate portfolio exposures over the next two years. Furthermore, according to the survey, the second most popular investment destination in the Asia Pacific behind Tokyo was Sydney, with Melbourne rated a joint-third most popular. This indicates Australian commercial real estate is set to receive more funds from Asian based sources in 2015. As a result, there are now a greater number of offshore participants in the Australian investment market than there were a few years ago and new managers backed by offshore capital have emerged as significant participants in the market also. 16 The Case for Investment in Australian Logistics Property - May 2015

THE CASE FOR INVESTMENT IN AUSTRALIAN INDUSTRIAL REAL ESTATE Key attractions of Australian industrial property are: High entry yield supports income return outperformance Scope for yield compression to support capital value growth; yield compression is expected to be supported by (a) the weight of capital looking for high yielding assets; (b) a continuation of the long-term re-rating of the industrial sector reflecting the changing tenant and investor profiles; (c) the wide spread to real bond rates; and (d) the spread between Australian and offshore markets Historically strong total return performance and lower volatility of returns relative to office Favourable property characteristics for investors such as modern buildings; long lease terms and high average occupancy rates, particularly in institutional grade assets; and leases with rental escalations linked to fixed growth rates above inflation Scope for increased institutional ownership via aggregation of assets; will reduce management cost per sqm and may reduce portfolio risk via diversification Opportunity for value-add earnings growth from secondary asset repositioning The life cycle of industrial assets allow for upside through rezoning and change of use exit strategies Future industrial rental growth in Australian main capital cities is expected to be solid The Australian industrial sector has stronger total returns than office and retail. The Australian industrial sector delivered a return of 11.4% per annum between 1994 and 2014, well above the average for the Australian office sector of 9.4% per annum and marginally higher than the retail sector at 10.8% per annum. Furthermore, volatility was relatively low, reflecting the underlying demand/supply characteristics of the industrial sector, which can be characterised by a relatively fast supply response to low vacancy, volatility. Table 2: Average investment performance 1994 to 2014 Sector Income Return (% p.a.) Capital Return (% p.a.) Total Return (% p.a.) * Based on standard deviation of quarterly returns Source: IPD Volatility of Total Returns* Industrial 8.9% 2.3% 11.4% 2.8% Retail 7.3% 3.2% 10.8% 2.4% Office 7.2% 2.1% 9.4% 3.0% The industrial sector in Australia provides superior income returns to office and retail on average due to the high entry yield on acquisition. Steady rental growth supports higher running yields through the asset life-cycle. The Case for Investment in Australian Logistics Property - May 2015 17

Between 1994 and 2014 the industrial sector has delivered a vastly superior income return of 8.9% per annum. The office sector has delivered a 7.2% per annum income return and the retail sector 7.3% per annum. The industrial asset class is being re-rated by investors due to the importance of achieving a stable, high income return component from real assets. The Australian industrial sector performs well when compared to offshore markets. The diminishing yields on offer from low risk, long-term government bond investments as a result of exceptionally accommodative monetary policy settings in major developed economies has resulted in a global hunt for yield. The high relative entry yields for industrial real estate in Australian markets make local assets an attractive target for offshore investors. Fig 15: Industrial property yields in select global markets Average equivalent yield 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: JLL Orange County Inland Empire East Bay Calgary Houston Toronto London Frankfurt Munich Paris Dublin Singapore Tokyo Hong Kong Sydney Melbourne Shanghai Auckland Using the 1994 to 2014 reference period, industrial property has returned 11.4% per annum in Australia, 10.1% per annum in the United States and 9.3% per annum in the United Kingdom. Table 3: Average investment performance 1994 to 2014 Australia United States United Kingdom Total Return 11.4% 10.1% 9.3% Volatility* 2.8% 4.7% 5.9% *Based on standard deviation of quarterly returns Source: IPD, NCREIF The outperformance of Australia is enhanced by low volatility of returns. Looking at the standard deviation of quarterly returns, Australian industrial property has shown significantly lower volatility than the UK and the US in the last decade. Therefore Australian industrial property has outperformed its global peers in the US and UK both on an absolute return and on a risk adjusted basis over the long term. The relative performance of Australia throughout the GFC is clearly apparent in the data since 2008. The result has been a significant investment in Australian commercial real estate overall by offshore groups in the last five years, particularly into Australian industrial property. One of a few highly transparent real estate markets in the Asian region. The Australian commercial real estate market is highly sophisticated and transparent. Australian real estate markets lead the world in terms of transparency. Australia was rated 3rd in the 2014 JLL Global Real Estate Transparency Index. In Australia s highly transparent market, foreign investors face the same type of market conditions as local investors, and can expect accurate market and financial information, reliable performance benchmarks, clarity regarding taxation and regulation, fair treatment in the transaction process, and high ethical and professional standards. 18 The Case for Investment in Australian Logistics Property - May 2015

CONCLUSION The future looks very bright for the industrial real estate sector in Australia. Tenant demand is being supported by solid economic momentum and a sustained period of stronger activity in the housing and retail sectors. Australia benefits from leading population growth for a mature economy. Australian Government policy has strong international migration as a key plank in ensuring economic resilience continues. Owners of core logistics and distribution property are benefiting from new sources of demand including online retailers, international retailers and ongoing consolidation from major third party logistics operators that favour modern, well-located property in the major cities. The below average new supply environment is conducive to ongoing moderate vacancy conditions for institutional grade stock and steady rental growth around the level of targeted inflation. Investment conditions remain very buoyant and are expected to remain resilient for some time. The low bond yield environment globally is channelling significant capital toward real assets. Industrial real estate remains highly appealing due to its relatively high entry yields compared to office and retail, which supports its income return outperformance. Furthermore, there is scope for further yield compression given the wide spread to real bond yields, the spread between Australian and offshore markets and the ongoing re-rating of the industrial sector as an asset class. Given the relative scarcity of scalable investment opportunities in Australia, offshore investment has historically been reasonably modest. Despite this, offshore investors have been increasingly willing to compete for suitable opportunities to gain a foothold in the Australian market. Given the consolidated nature of the institutional owner and developer landscape, with the right opportunity for investment an offshore investor has the potential to become a key participant in the Australian market that could further benefit from a partnering arrangement with a local developer or manager. JLL believes the Australian industrial real estate market will continue to be an outperformer in coming years, benefiting from strong underlying demand and supply fundamentals and the weight of capital looking to enter the sector from domestic sources and abroad. The Case for Investment in Australian Logistics Property - May 2015 19

Michael Fenton Head of Industrial Australia +61 2 9220 8634 michael.fenton@ap.jll.com Nicholas Crothers Head of Industrial Research Australia +61 2 9220 8525 nicholas.crothers@ap.jll.com JLL Sydney Level 25 420 George Street Sydney NSW 2000 +61 2 9220 8500 www.jll.com.au/insite Jones Lang LaSalle 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.