m3commentary MELBOURNE INDUSTRIAL

m3commentary MELBOURNE INDUSTRIAL Spring 2016 Key Research Contacts: Jennifer Williams National Director NSW (02) 8234 8116 Erin Obliubek Research Manager VIC (03) 9605 1075 Casey Robinson Research Manager QLD (07) 3620 7906 Zoe Haskett Research Manager SA (08) 7099 1807 Janis McLaren Research Manager WA (08) 6500 3613 www.m3property.com.au m3property.com.au P1

CONTENTS Market Overview 3 Key Influences 4 Sector Changes 5 Market Fundamentals 6 Submarkets 7 Investment Indicators 9 Key Sales 10 Outlook 11 DEFINITIONS Submarket West North City South East East Suburbs include: Altona Brooklyn Deer Park Derrimut Footscray Laverton North Sunshine Truganina Bundoora Broadmeadows Brunswick Campbellfield Coburg Craigieburn Somerton Thomastown Tullamarine Abbottsford Brunswick Collingwood North Melbourne Port Melbourne Richmond South Melbourne West Melbourne Braeside Dandenong Clayton Keysborough Lyndhurst Moorabbin Mulgrave Bayswater Croydon Mount Waverley Rowville Scoresby FUNDAMENTALS STABLE IN THE MELBOURNE INDUSTRIAL MARKET Building approval levels at historic highs; Face and effective rental growth was generally static over the year to September 2016; Incentives remain high, driven by the availability of land within new industrial estates; Yields for prime assets remain compressed due to the weight of investor demand in a low interest rate environment; Investment demand remains healthy across all submarkets, although there were few prime investment grade transactions over the first half of 2016; and Generally land prices have been relatively stable due to the high level of land supply. www.m3property.com.au Comm3ntary Spring 2016 P2

MARKET OVERVIEW Industrial building approval levels have reached highs observed prior to the Global Financial Crisis (GFC) over the past year, with vacancy levels to remain low in the short term. Rents have stayed largely stable while prime yields remained compressed in the September quarter 2016. Transactional activity continues to be healthy, particularly for secondary stock and is expected to remain so leading into 2017. The health of the Victorian economy continues to underpin demand within the Melbourne industrial market, with the Victorian economy forecast to grow by 3% over the 2017 financial year. The State continues to benefit from solid population growth and a strong housing sector, however below average retail trade growth and low manufacturing activity remains a concern. Solid demand for industrial space remains across the Melbourne industrial submarkets, with building approval levels now well above previous highs observed over the 2005 to 2008 period. Prime and secondary net rents were largely stable across Melbourne s industrial market over the twelve months to September 2016. Incentives remain at historic highs, driven by robust competition amongst developers and landlords. Healthy investment demand remained over the twelve months to September 2016, however, transactional activity is slightly down compared to the twelve months prior. A number of portfolios have come to market in 2016 as vendors leverage off solid investor appetite. Prime yields marginally firmed in the September quarter 2016 on the back of increased competition for premium assets, while secondary asset yields were unchanged. Land values across the Melbourne industrial submarkets were relatively stable over the year to September 2016. At present, over 700 hectares of land is currently available across major industrial estates, with the south east and western regions continuing to be the main focus of land supply. Demand for industrial land continues to be driven by large owner occupiers and Transport, Logistics and Distribution (TLD) facilities. m3property Valuation: Reece National Distribution Centre www.m3property.com.au Comm3ntary Spring 2016 P3

KEY INFLUENCES $ ECONOMIC GROWTH Australian gross domestic product has remained positive with seasonally adjusted growth of 3.8% over the year to June 2016 according to the Australian Bureau of Statistics (ABS). Domestic final demand (excluding exports) increased by just 0.5% over the June quarter with State Final Demand for Victoria significantly higher at 1.1%. Victoria s economy continues to grow with 3.0% growth forecast for 2016-2017, according to The Victorian Department of Treasury and Finance. The Victorian economy will continue to benefit from solid population growth, improving business confidence and demand for residential construction. TRANSPORT INFRASTRUCTURE Transport infrastructure is important in providing accessibility to new and existing industrial regions. Melbourne has a number of infrastructure projects underway. These include: the Western Distributor, which will provide Melbourne s west with an alternative to the West Gate Bridge, the project also includes the Monash Freeway Upgrade; the widening of CityLink and the Tullamarine Freeway will provide additional lanes in both directions and increase the roads capacity by 30% on completion; the Victorian government has commenced the removal of 50 level crossings across Metropolitan Melbourne; Infrastructure Victoria was established late 2015 with the purpose of developing a 30 year infrastructure strategy with a pipeline of projects for Victoria s short, medium and long-term infrastructure needs; and the Westall Road Extension will provide improved access to regional areas, freight routes and connection to activity centres within Melbourne s south east. FREIGHT ACTIVITY Container traffic through the Port of Melbourne continued to improve over the first nine months of 2016. Over 2.63 million TEU s (twenty-foot equivalent units) went through the Port of Melbourne in the year to September 2016 reflecting an annual average growth of 1.6%. The Victorian Government was successful in the privatisation of the Port of Melbourne through a long term lease to the Lonsdale Consortium (Future Fund, QIC, GIP and OMERS). INTEREST RATES Changes to interest rates can effect Melbourne s industrial market directly through the investment market and indirectly through it s impact on other sectors. Australia s record low interest rate (currently at 1.50%) has had a positive impact on construction and residential sales over the first half of 2016, which has had a positive flowon effect for manufacturing and warehousing. However, the impact of a low interest rate environment has been somewhat reduced due to Banks refusing to pass on the full rate cut to customers. m3property Valuation: Hyundai Dealership Berwick m3property Valuation: Estate One www.m3property.com.au Comm3ntary Spring 2016 P4

SECTOR CHANGES LOGISTICS Retailers continue to be the main users of the logistics sector in Australia, contributing 36.8% of revenue according to IbisWorld (July 2016). Retailers use the full range of logistics services although the focus is now more on transport and storage, than handling and distribution, due largely to just-in-time inventory management. Retail has gone through major changes over the past few years, which has led to inventory reduction, outsourcing of non-core activities and retailers expanding or creating online services to increase their customer base and compete with overseas firms and hence increasing demand for logistics services. Retail turnover has been positive in Victoria. From August 2015 to August 2016 growth was 2.9%, down from 4.8% over the year prior. The continuing low cash rate combined with strong residential construction and prices has kept spending positive, despite global and equity market uncertainty and low wages growth over much of the period. Inventory levels have seen a reducing growth rate over recent years. The four largest inventory holding industries are wholesale trade, manufacturing, retail trade and mining. From June quarter 2015 to June quarter 2016, manufacturers (-2.9%) ran down inventory levels, while retailers (4.0%), wholesale trade (5.5%) and miners (10.0%) increased levels according to the ABS. The demand for logistics services by wholesalers has remained strong, as goods need to be readily available in an improving retail market and imports from overseas although having slowed with the reduced Australian dollar have substituted for the reduced level of domestically manufactured goods. This has helped make wholesalers the second largest contributor to the logistics sector in 2015-16, accounting for 31.9% of revenue, according to IBISWorld. The third largest contributor to logistics revenue is the manufacturing sector (25.4% of revenue). Although it has been generally on the decline in Australia over the past 40 years it still contributed around 6.8% of gross value add at current prices to GDP in the 2015 financial year. This is due to the overall trend towards offshoring to countries with cheaper labour and other costs. While the reduction in the Australian dollar over the past few years has helped shift the cost imbalance back towards manufacturing of products on shore, in some cases, such as the automotive industry, this has occurred too late and wages costs continue to impact Australia s competitiveness. TECHNOLOGY New technology not only creates new products, which need to be transported and stored but it also influences the way goods are transported and stored. Mobile applications and solutions are impacting the manufacturing sector, including: communications, data collection, onsite visualisation, databases, control equipment, remote access, scheduling, safety applications and employee tracking. These applications and solutions reduce order status calls and can increase sales. Storage solutions including automated storage systems save time, space requirements and costs in logistics. The latest automation systems, include: high-speed unit picking, voice picking and intelligent conveyor systems. Integrated transport and warehouse systems can be complemented by energy-efficient initiatives including rain water harvesting and energy monitoring. Driverless logistics is another technology which is likely to result in major changes in the industrial markets around the world. The key benefits are cost reductions and a lower environmental impact of logistics as well as increased efficiencies and cost savings within warehouse. However, new technology can also be detrimental to a warehouses longevity, especially so when existing integrated technology is superseded and no longer considered to be world s best practice. m3property Valuation: AMG Abattoir www.m3property.com.au m3commentary Spring 2016 P5

Value of building approvals ($millions) Number of building approvals Vacancy rate (%) m3property Research MARKET FUNDAMENTALS VACANCY 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Industrial Vacancy Rate Vacancy remains low for prime stock in the Melbourne metropolitan area, while secondary space continues to be affected by the migration of tenants to purpose built facilities. Based on our sample of prime properties in Australia s major industrial A-REITs, the vacancy rate was 5.0% as at June 2016. This was down from 5.1% in June 2015. The forecast is for the vacancy rate to be fairly stable over the short-term. However, the looming closure of automotive manufacturers Ford, Holden and Toyota could result in a rise in vacancy leading into 2017. Source: Various industrial A-REIT annual reports and 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Victorian Industrial Building Approvals Number of approvals Factories Agriculture & aquaculture blg No. of approvals (RHS) Source: ABS and m3property (August 2016) Warehouses Other industrial 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - SUPPLY & TENANT DEMAND Building approval levels, by number, were strong over the year to August 2016. Building approval levels have now reached above the pre-gfc highs observed over the 2005 to 2008 period. Supply levels are expected to remain strong over the short term, driven by the rebound in the TLD industry and in particular freight distribution services, e-commerce/online retailing and temperature controlled warehousing. Tenant demand remains moderate, driven by gradually improving key industrial sectors, continued population growth and improvements in business confidence, however tenant demand still remains below long-term average levels. Most space absorbed recently has been prime buildings reflecting an ongoing flight to quality by tenants attracted by historically high incentives. High incentives have been driven by the availability of land in new industrial estates and investment competition. Demand for larger space from the TLD sector remained positive over the first half of 2016, with Spectrum Brands (Remington) pre-committing to a 30,668 square metre purpose-built facility in Chifley Business Park, Moorabbin Airport. Manufacturers Bondor and Dana have precommitted to facilities in Somerton (14,000 square metres) and Keysborough (18,000 square metres), respectively. Furthermore, Corning Cable Systems have also renewed a lease over an existing facility in Clayton South. Numerous tenants in the Melbourne industrial market continue to leverage off current market conditions to either upgrade to new facilities or relocate to strategically located parcels (especially in relation to infrastructure). www.m3property.com.au Comm3ntary Spring 2016 P6

SUBMARKETS CITY FRINGE Net face rents were relatively stable over the year to September, with prime and secondary stock to range from $150-$300 per square metre and $75-$85 per square metre, respectively. Melbourne s city fringe submarket is becoming increasingly tightly held, as industrial land owners continue to take advantage of reformed planning schemes, leading to the on-going conversion of secondary assets to residential and mixed-use developments. Although secondary stock continues to make the way for residential and mixed-use developments, industrial property within the submarket will remain an important component to the city fringe property market given it s geographical advantage including close proximity to the Westgate Bridge, Port of Melbourne and the CBD. Incentives in the submarket remained around 20%-25% for prime, with incentives trending down to 0%-15% for secondary assets as at September 2016, although the disparity between effective rates remains. Prime yields tightened to an indicative 6.57%, with secondary yields stable at an average of 7.80%. NORTH Melbourne s northern industrial submarket has become increasing popular with the TLD sector, given the market s strategic transport infrastructure links and ease of access to the Melbourne Airport and connectivity to Sydney. Net face rents in the northern submarket were stable ranging from $70-$80 per square metre for prime and $55-$70 per square metre for secondary stock as at the September quarter 2016. Increased supply will ensure rents are stable over the next six to twelve months. Prime yields in the north tightened 25 basis points at the lower end to now range from 6.50% to 7.50%, while secondary yields were stable over the September quarter 2016. Incentives generally continue to be in the range of 20%-30% for prime and 10%-15% for secondary assets. EAST & SOUTH EAST Net face rents in the south east have stabilised to range from $70-$90 per square metre for prime and $60-$70 per square metre for secondary assets over the year to September 2016. The south east remains one of Melbourne s main industrial locations with a large population base in the south east region and excellent strategic transport infrastructure. New supply within the south east continues to be demand-led ensuring vacancy within the submarket remains in check. Rents within Melbourne s east as at September 2016 range from $80-$90 per square metre for prime stock and $60-$70 for secondary stock. A low CPI forecast will place further pressure on rental growth, resulting in rents being stable over the short to medium term within the eastern submarket. Incentives within the east and south eastern submarkets generally range form 20% to 35% for prime and 10% to 15% for secondary assets. WEST Prime net face rents in the western submarket are in the range of $70- $80 per square metre with secondary net face rents between $55-$70 per square metre. Prime yields in the west tightened to an average 6.75%, while secondary yields were stable ranging from 7.50% to 8.25% over the September quarter 2016. Net incentives continue to range from between 20%-30% for prime and 10%-15% for secondary assets. Plans to improve Melbourne s infrastructure will increase the western regions importance as Melbourne s key industrial hub. Geographically, the western regions continue to attract the majority of tenant demand due to the availability of relatively cheap land. Land values in the west are in the range of $110- $200 per square metre for 1 to 2 hectare lots. Incentives in the submarket continue to range from 20%-35% for prime, while incentives for secondary assets remain between 10%-15% as at the September quarter 2016. m3property Valuation: Chifley Business Park www.m3property.com.au m3commentary Spring 2016 P7

1-2 ha serviced lots ($/m 2 ) Yields Sales ($millions) m3property Research INVESTMENT INDICATORS INVESTMENT DEMAND $2,000 $1,500 $1,000 Vic Industrial Sales, by Purchaser Type Transactional activity remains healthy within the Melbourne industrial market, sales over the year to September 2016 were in excess of $843,600,000, however this is down from the $925,700,000 reported over the year to September 2015. This is mainly due to fewer institutional grade transactions occurring in 2016. $500 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 A-REIT Corporation Developer Government Institution Owner Occupier Private Investor Syndicate Undisclosed Superannuation Fund Foreign Investor Unlisted Fund Source: m3property Research (*Up to end September 2016) A number of portfolios have come to market in 2016 as vendors leveraged off solid investor appetite. Portfolio sales include: the Altis Property Partners portfolio, which was separately purchased by AMP Capital and Mapletree; Charter Hall purchased the Alex Fraser portfolio; and Blackstone purchased a Goodman portfolio which included a high proportion of Victorian assets. YIELDS 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Industrial Yields and 10 Year Bonds 10 yr Bond Rate Melbourne Prime Melbourne Secondary Sydney Prime Sydney Secondary Source: m3property Research The average yield for prime and secondary assets in Melbourne s industrial market was stable over the first half of 2016. Prime yields marginally tightened across all submarkets in the September 2016 quarter to range from 6.25% to 7.50%, while secondary yields continued to range from 7.50% to 8.25%. The minor tightening in prime yields reflects the continued hunt for premium assets by investors. Sydney yields demonstrated a similar trend to Melbourne with a 25-50 basis point compression across all submarkets over the year to September 2016 for prime, well-located space, whereas yields for more risky assets tightened by between 50 to 100 basis points over the same time frame. Although the yield gap between prime and secondary stock in Sydney remains wide, relative to Melbourne, the gap has reduced over the past year. Despite a historically low yield environment, the gap between government bonds and industrial prime yields is currently the widest it s been over the past 10 years. However, we anticipate the gap to compress leading in to 2017 as prime yields continue to tighten. $300 $250 $200 $150 $100 $50 $0 Melbourne Land Values (1-2 ha lots) North South East West East LAND VALUES Melbourne s industrial land market remains focused within the outer areas, driven by ongoing residential development, improving infrastructure and land affordability. At the same time inner precincts have seen a steady reduction in the supply of available sites and larger redevelopment options that do come to the market are often converted to alternative uses, such as residential or mixed-use where planning regulations permit. Land values across the Melbourne industrial markets have Source: m3property Research. been relatively stable over the nine months to September 2016. www.m3property.com.au Comm3ntary Spring 2016 P8

SELECT SALES TO DATE Property sales Date Price Equated Market Yield 53-61 Horsburgh Drive, Altona North 3Q-16 $35,000,000 6.94%* Vendor Langley Pty Ltd/ Toll Properties Purchaser Logos 485 Dohertys Road, Truganina 3Q-16 $102,500,000 5.33% CorVal (RF Capital) Charter Hall Alex Fraser Portfolio, Greater Melbourne 2Q-16 $44,000,000 7.40% Alex Fraser Group Charter Hall (CPIF) 810-848 Kororoit Creek Road, Altona North 2Q-16 $40,000,000 5.67% Prixcar Transport Charter Hall (CPIF) 11-13 Chambers Road, Altona North 2Q-16 $10,800,000 7.86% Highmarsh UA Holdings Pty Ltd 28 Salta Drive, Altona North 1Q-16 $36,000,000 6.90% F.Mayer APPF Industrial Please contact one of our Commercial Valuers for a detailed sales analysis. *Analysed inclusive of a development agreement. LAND AVAILABILITY Key industrial estates with land availability. Key Industrial Estates 1 Merrifield Business Park 2 Northpark Industrial Estate 3 Alliance Business Park 4 Biodiversity Business Park 5 Orbis Business Park 6 Paramount Industrial Estate 7 Dexus Industrial Estate 8 West Industry Park Industrial Esate 9 Wyndham Industrial Estate 10 Stage 3, Dexus Industrial Estate 11 Link360 Industrial Park 12 Access Altona Industrial Estate 13 Riverwalk Business Park 14 The Key Industrial Park 15 M1 and M2 Industry Park 16 Innovation Park 17 Inter Link Business Park 18 Power Park 19 Thompsons Base 20 Evans Park Business Village 21 SouthEast Business Park www.m3property.com.au Comm3ntary Spring 2016 P9

OUTLOOK MELBOURNE INDUSTRIAL The outlook for the Melbourne industrial property market is expected to remain positive. Improving economic growth supported by stronger housing, a gradual recovery in port trade volumes and a growing TLD sector should support the industrial property market going forward. A high level of industrial building approvals suggest a healthy supply pipeline over the short to medium term. While the flight to quality trend will continue to divide prime and secondary markets as tenants take advantage of new supply. Rental growth is expected to remain subdued, in line with historical averages, given the high level of land supply and insufficient tenant demand to drive rental growth over the short-term. With high incentives to sustain relatively low effective rental levels. Although economic challenges remain, headed by global uncertainty, changing exchange rates and volatile equities markets, which could impact property investment decisions, we expect the Melbourne industrial market to remain attractive by global standards. Activity in the investment market is expected to improve over the remainder of 2016 and leading into 2017, with a higher level of transactions expected than the first half of 2016. This is likely to result in further yield compression, especially for prime and better quality secondary assets. KEY INDUSTRIAL VALUATION CONTACTS Josh Phegan Senior Valuer VIC (03) 9605 1000 Gary Longden Director VIC (03) 9605 1040 James Farrugia Director NSW (02) 8234 8104 Basil Simitci Director QLD (07) 3620 7908 m3property provides national coverage in all States and Territories. info@m3property.com.au Neil Bradford Director SA (08) 7099 1809 Gavin Chapman Managing Director WA (08) 6500 3601 DISCLAIMER 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.