cbd office rfr - second half 2013 low res

7/30/2019 CBD Office RFR - Second Half 2013 Low Res

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Negotiating the SwellWhats in the pipeline or CBD Of ce

tenant demand?

CBD OFFICE

Second Hal 2013Australia & New Zealand

Research andForecast report

Accelerating success.


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Improve your perspective. We have.Property Research worth talking about. www.colliers.com.au/subscribe

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$ billionin annual revenue

.5billionsquare eet undermanagement

13,500proessionalsand sta


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Metro Of ceCBD OFFICE

Whats in the pipeline or tenant demand? 5

Our CBD Of ce perspective 10

CBD Of ce market snapshots

1. Sydney 1

2. Melbourne 163. Brisbane 0

4. Perth 4

5. Adelaide 8

6. Canberra 3

7. Auckland 36

Our CBD Of ce experience 40

Contents

How else can we help you?

Speak to one of our property experts today.

au.of ce@coll iers.com

Partner with our Researchand Consultancy team

Our highly experienced team of professionals canpartner with you to ensure your next project hasa positive outcome. we deliver strategic adviceacross a full range of property sectors, ensuring

that your decisions are fully informed.

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and working with us, visit;

www.colliers.com.au

3CBD Of ce | Research & Forecast Report | Second Hal 2013


4/42

Grosvenor Place, 225 George Street, Sydney

Leased and valued by Colliers International

4 A Colliers International publication


5/42


Whats in the pipeline ortenant demand?When looking at current CBD of ce market trends it is important to keepsome perspective. The national CBD vacancy rate, at .%, is in line withthe long term average and Prime Grade incentives range rom % (Perth) to% (Sydney). Both indicators are well below the % plus vacancy ratesand the % to % incentive levels recorded, in some markets, during themid-s.

By Mathew TillerAssociate Director | [email protected]

O ce markets move through cycles like any other asset class. Current leasing conditions are sot however

it does appear worse because we are coming rom a prolonged period o low vacancy, with a record lowo 3.0% achieved in 2008. Promisingly, there is not a mass o new supply in the pipeline and recent global

economic news has been positive. Tenant enquiry data is starting to show signs o lie and investment

markets continue to see record amounts o capital looking or a home.

Economic undamentals across Australia are not in bad shape. Unemployment, while rising, remains below the

long term average, GDP growth is just under trend and ination is low. Providing room or urther interest rate

cuts to stimulate growth. Investment in mining and resource projects has not collapsed but simply moved rom

peak to sustainable investment levels. In a timely move supporting mining and other export reliant industries,

the Australian dollar has depreciated signifcantly, since its 2013 peak o 105.89 US cents.

The major concern is the ongoing record low levels o business confdence and consumer sentiment which

is limiting investment, spending and growth. This in turn has reduced company revenue growth and seen

businesses cut costs to maintain proftability and grow productivity. As part o these measures frms have

scrutinised every expense with labour and rent costs being singled out or special attention. A reduction in

average hours worked and overall headcounts, predominately through natural attrition rather than widespread

redundancies, have been used to minimise labour costs. Allowing companies to in turn reduce or consolidate

o ce tenancies, sublease unused space and in some cases move to lower grade accommodation.

Businesses reluctant, or unable, to shed space have instead investigated ways to make their tenancy and

working practices more e cient. This has been achieved through the reworking o o ce ft-outs and

innovative IT systems to allow o-site access and teleworking. This has assisted productivity growth,

boosting employee engagement and providing a cost beneft by reducing workspace ratios. At the same

time it has resulted in ewer tenants in the market looking to expand and take on more o ce space.

Source: NAB / Westpac-Melbourne Institute / Colliers International

BUSINESS CONFIDENCE & CONSUMER SENTIMENT

0

25

50

75

100

125

150

-30

-20

-10

0

10

20

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Pessimistic

Optimistic

Westpac - Melbourne Institute Consumer Sentiment Index (RHS) NAB Business Condence Index (LHS)



6/42

How has current leasing conditions aectedrents?

As expected, the demand slowdown has had a marked eect on

leasing undamentals, particularly the sotening o eective rents.

On the whole, ace rents across CBD markets have remained

relativity stable. In line with rent reviews and landlords preerence

to increase incentives, over reducing ace rents. Nationally, CBD A

Grade ace rents declined by just 1%, on average, over the frst hal

o 2013 with Perth CBD recording the largest decline, alling by as

much as 5%. All CBD markets, precincts and grades experienced

a sharp rise in incentives over the frst hal o 2013, as competition

to fll vacant space increased. Incentives rose by as much as fve

percentage points (pp) over the frst hal o 2013. Adelaide (5pp)

and Perth CBDs (3.7pp) saw the highest growth and now sit at an

average o 20% and 15% respectively.

The impact o stable ace rents and rising incentives has been asotening o eective rents which ell by 5.1%, on average, over

the frst hal o 2013. The orecast is a little brighter over the next

12 months with the expectation that landlords have bitten the

bullet early and increased incentives based on vacancy orecasts,

rather than the point in time vacancy. Eective rents began their

decline long beore vacancy rates made any major move upwards.

So while it is expected that incentives will climb over the second

hal o 2013, it wont be done at the same aggressive rate as the

frst hal o the year.

Source: Colliers International

NATIONAL CBD A GRADE OFFICENET EFFECTIVE RENT INDEX

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Index

Va

lue

(Base=

Marc

h2000)

Sydney Adelaide Perth CanberraMelbourne Brisbane

5 Martin Place, Sydney

Pre-committed 13,871m to Ashurst by Colliers International



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Is it as bad as everyone thinks?

Despite the doom and gloom, tenant enquiry and lease

transactions have still been occurring, albeit at below average

levels. Recent tenant enquiry data has shown signs o lie over

recent months. The number o lease enquiries received was 33%

higher in the frst hal o 2013, compared to the same period in

2012. Some o this growth can be attributed to cost conscious

tenants looking to downsize or downgrade their accommodation.

In terms o industry types there has been a marked rise in the

number o Inormation Technology and Communication companies

looking to relocate, making up 20% o enquires.

Despite a all in the total size o o ce space leased, the number

o lease transactions in 1H 2013 was 4.4% higher than in 1H 2012,

again driven by smaller leases and renewals. So while it remains

sot or large major tenant moves, there are still savvy small and

medium sized tenants in the market looking to secure a good deal.

When will demand turn around?

The big question across CBD o ce markets is; when is tenant

demand going to return? To answer this we need to look at what

occurred in previous downturns and understand which economic

actors will drive growth going orward. PCA data or Australian

CBD markets, as a whole, shows that since 1991, there have been

three major downturns in tenant demand. None o which involved

more than three six month periods o negative absorption, whilethe average duration o rising vacancy was just over 2.5 years.

I we apply these averages to the current cycle it suggests the

second hal o 2014 should be more positive than 2013. While

history never repeats, we need to keep this cycle in mind when

looking at broader economic actors which will drive growth over

the short, medium and long term. The completion o the election,

lower interest rates and soter Australian dollar are all expected to

be key drivers behind the retrun o confdence and growth acrossthe economy.

Put simply, here is how the recovery could play out:

The problem will be getting these indicators to line up, as

expected, to stimulate the economy. Recent signs o growth in

both the US and UK economies, the cash rate alling to 2.50%

and the dollar depreciating to below USD 0.90, all provide positive

signs or uture growth.

Sept Federal election gets decided

Leads to rise in business condence

END

RBA drops Cash Rate to .%

Households borrow more- Housing construction/ house price growth

- Retail spending increases

Leads to urther rise in business condence- Begin to borrow more or business investment

H Company revenue/ prot increases

H Private (business & household) investment increases

H Businesses look to hire more sta to accommodategrowth

H Businesses look to expand of ce accommodation tot new sta

H The of ce market recovery begins

RECOVERY TIMELINE

567 Collins Street, Melbourne

Colliers International valued and appointed to lease



8/42

Low supply pipeline to put ceiling on vacancy

We dont expect a major increase in vacancy rates, due to the

lack o supply entering the market over the short term. According

to the latest PCA O ce Market Report, 558,637m o new and

reurbished space is expected to be added to Australian CBD

markets over the course o 2013. This is orecast to drop by60%, to just 220,568m in 2014. Barangaroo in Sydney and new

projects in Perth, Brisbane and Melbourne sees supply kick back

up, in line with rising demand, in 2015. Subdued levels o supply,

combined with the 60% commitment to new developments,

currently under construction, should limit vacancy rate growth

over the next 12 to 18 months.

Investors see through current leasing cycle

Despite the sot leasing environment, investment demand or CBD

o ce assets continues to remain strong. Declining deposit ratesand volatile equity markets have seen investors look to diversiy

their investment mix to capture higher, long term yields. The frst

hal 2013 saw $5.7 bill ion worth o CBD o ce assets change

hands, a 44% increase on the same period in 2012. This surge

in sale volumes can be attributed to a rise in the number o large

o ce portolios on the market or sale, as well as the return to

acquisition mode o domestic institutions and REITs. This saw

domestic buyers make up 83% o transactions, across CBD

markets in the six months to July 2013, up rom 39% in 2012.

2013 2014 2015 2016 2017

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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Vacant Space Committed Space

Note: Includes developments currently under construction with of ce NLA above ,sqm


CBD OFFICE MARKET - NEW DEVELOPMENTS UNDER CONSTRUCTION

Harper Collins Publishers

Workplace design, project management and tenant representation byColliers International



9/42


Source: RBA / Colliers International

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

(Yield

,Ra

tean

dSprea

d)

Ofce Yield Bond Rate Spread

NATIONAL CBD PRIME GRADE OFFICE YIELD VS. YEARGOVERNMENT BOND RATE

Competition drives yields tighter

A major issue or buyers in the market is the supply o suitable

assets, on or o market, or sale. This is especially true or those

looking or Prime Grade assets which are traditionally tightly

held, due to the low risk nature o these properties. Increased

competition between purchasers has seen buyers, in some cases,

oer below market yields in order to secure such assets. This has

seen Prime Grade yields, across most CBD o ce markets, tighten

by as much as 25 basis points over the frst hal o 2013.

IRRs and bond rates, the only concern orinvestment markets

The ow o capital into CBD o ce markets is expected to remain

strong in the ace o ongoing low interest, borrowing and deposit

rates. Two issues, however, need to be kept in mind. Firstly,

current leasing conditions have seen uture income growth rates

downgraded, leading to a sotening o Prime Grade IRRs, to

below 8.50% in some cases. Secondly, US bond rates have risen

steadily over recent months. This may in turn see o ce yields

across the major US o ce markets move upwards. While this

is not expected to have a major impact, i t may aect the inow

o oshore capital, as yields begin to look more attractive in the

US and other oshore markets. Although this may be seen as

positive, by domestic players, currently competing with oshore

groups to acquire assets.

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10/42

Sep 2013 Dec 2013Recovery timelineAustralian Federal Election.

Prime Minister electedThis will lead to improvedbusiness confdence

Interest Rates reach 2.00%This will result in householdsborrowing more money

2%

Leads to greater businessconfdence

Housing construction/house prices increaseRetail spending increases

Where has Tenant demand gone?Why?

Company profts andrevenue have declined

Which leads tovacancy rates

increasing

As a result companiescut costs which means

demand or ocespace drops

Vacancy Rate table

Jul-13 Jul-14 (orecast)

Sydney CBD

Melbourne CBD

Brisbane CBD

Perth CBD

Adelaide CBD

Canberra

Auckland CBD

8.9%9.8%

9.8%8.6%

12.8%12.9%

6.9%7.7%

12.1%12.3%

12.0%11.9%

9.9%10.1%

1H 20131H 2014

(orecast)

What eect has sot tenant demandhad on rents and incentives?

0.9%-10.6%

3.2%

7.3%

-1.7% 1.1%-3.4% 1.4%

-0.9%3.3%

-4.1% 0.3%

-4.5% 0.2%

Auckland

Brisbane

Sydney

Canberra

Melbourne

AdelaidePerth

Net Eective Rents

Incentives have risen

Eective rents havedeclined

Is it really that bad?

Enquiry data rom Colliers International tells us thatthere are still tenants in the market looking or space.

CBD Leasing Enquiries400,000

300,000

200,000

100,000

0

OfceNLA(m2)

1H 20101H 20111H 20121H 2013

0-999m21,000-2,999m2

>3,000m2Enquiry Size Requirement Range


11/42

H1, 2014 H2, 2014

Company revenue/ proft increasesPrivate (business & household)investment increasesBusinesses look to hire more stato accommodate growth

Businesses look to expand oceaccommodation to ft new sta

The ofce marketrecovery begins

Future Supply is low and this willhelp the market

National CBD Supply Pipeline2013 2014

Sydney CBD

Melbourne CBDBrisbane CBD

Perth CBD

Adelaide CBD

Canberra

Auckland CBD

141,692 86,609

194,092 72,00018,600 0

3,105 22,325

45,234 0

100,511 24,500

35,700 0

Investment market still remains strong

Whenwill

tenantdem

and

return?

Tenant

demand

Pickupinth

e

ofceleasi

ng

market

Brisbane CBD

Sales Transactions - Exchanged during 1H 2013Number Total Value ($)

1,671,191,200

1,372,688,000

1,230,850,000

1,221,600,000

130,100,000

103,000,000

Sydney CBD

Melbourne - CBD

Perth CBD

Adelaide CBD

Auckland CBD

Canberra

14

17

10

4

3

1

2

worth o CBD sales tookplace in 1H 2013

Largest Sale: 480 QueensStreet, Brisbane boughtby DEXUS

$5.7billion

$543.9million

Buyer Type

REOC & REIT

Unlisted

Oshore

Investment Manager

Super FundOtherSyndicatePrivate

34%

24%

17%

11%

5%3%3%3%

50,550,000


12/42

The perormance o the Sydney CBD o ce market, during thefrst hal o 2013, varied greatly across sectors, precincts and

grades. Capital markets have gone rom strength to strength, as a

result o growing demand rom domestic and oshore institutions,

superannuation unds and private investors. In turn, an array o

investment transactions have occurred, at competitive rates. The

leasing market, on the other hand, has taken the brunt o ading

business confdence and austerity. This has seen demand soten,

driven vacancy higher and motivated landlords to oer more to

entice tenants to move.

The big question or the Sydney CBD o ce markets at presentis; what will drive economic growth across New South Wales?

Construction is one o the industries slated as a key driver to

economic growth over the short to medium term. The ongoing

low interest rate environment has increased housing aordability.

This in turn is expected to see new house sales rise, driving

housing construction, boosting lending activity and improving

revenue or the fnance and insurance sector. Early signs o

activity across the residential property market have been seen in

recent months. Finance commitments, or the purchase o new

dwellings and construction o dwellings, increased 2.0% and 1.3%

respectively, in June 2013.

As the cash rate alls, the desire or capital to move, out o bank

deposits, up the yield curve grows. This continues to drive

investment demand rom private, sub $20 million, buyers across

Sydney CBD o ce market. Interest also remains strong rom

domestic institutional buyers and oshore groups, driven by

positive spreads between debt costs and o ce yields. The major

issue or the market, at present, is the lack o investment stock.

Especially or secure, low risk, Prime Grade assets which are

most in demand. In order to side step this supply issues issue and

gain exposure to the tightly held Prime Grade market, domesticand oshore institutions have increased portolio and und-

through acquisitions.

As oshore institutions direct capital into the investment market,the opposite is transpiring or leasing decisions rom Sydney

CBD based oreign companies. Budget responsibility has shited

back to home country headquarters and with it the ability or

onshore managers to make leasing decisions. Tenants handing

back space on renewal, increased sublease opportunities and

newly reurbished backfll space have all combined to ensure a

sot leasing environment over the frst hal o 2013. Landlords

have been unable to sit out this sotness and are now meeting the

market with very attractive incentives, some, in excess o 30%.

Its not all doom and gloom, one positive indicator moving orwardis the short term supply pipeline. Two new developments , 161

Castlereagh Street and 8 Chiey Square, will complete over the

course o 2013, adding 76,200m o Premium Grade supply into

the market, 90% o which is currently committed. This will drop

signifcantly with only one small, 15,000m, A Grade development

set to reach practical completion during 2014. Combined with a

rise in business confdence, on the back o record low interest

rates and the completion o the election, is expected to provide

some relie rom the sot leasing environment over the year.

*Total market additions over month period

Source: PCA / Colliers International

SYDNEY CBD OFFICE

INDICATOR JULY JULY (F)

A Grade Gross Face Rents $ .%

A Grade Net Eective Rents $ -.%

A Grade Incentives % %

A Grade Yields .% .%

A Grade Capital Values $, $,

A Grade Vacancy Rate .% .%

Total Market Vacancy Rate .% .%

Supply Additions (m)* , ,

COLLIERS INTERNATIONAL RESEARCH FORECASTS

SYDNEY CBD OFFICE

Short term supply pipeline to put ceiling onvacancy rates

Second Hal 2013




13/42


Leasing marketCost drives lease activity

Cheaper space within both Prime and Secondary Grade assets

has attracted the majority o enquiry and interest, over the

frst hal o 2013. Scrutiny o accommodation budgets, by cost

conscious tenants, has been a major driver behind this trend. An

analysis o transactions, signed in the frst hal o 2013, shows

that 52% o leases were in Secondary Grade buildings while

74% were or 700m or less. A positive driver or activity within

the CBD has been the ongoing low vacancy rates in Sydneys

metropolitan o ce markets. Combined with strong rental growth

this has seen tenants rom these markets, particularly North

Sydney, look or comparable accommodation within the CBD.

Landlords reluctant to drop ace rents

The sot demand environment has continued to orce incentives

higher. Landlords have persisted with current ace rental rates, in

order to maintain the uture cash ow and capital value outlook

or their assets. In some cases ace rents have actually increased

in line with ination, rent reviews and outgoings. The top end o

the market has experienced the largest sotening o rents with the

large, expensive, higher oor tenancies receiving the lowest levels

o enquiry. Smaller, lower level suites within the same towers

have continued to attract interest. Stable ace rents and rising

incentives led to a sotening o eective rents, by an average o

2.7%, during the frst six months o 2013. Incentives now range

rom 25%, or ftted out space within well leased assets, to more

than 30% in buildings with higher levels o vacancy. The Premium

Grade market took the biggest hit, in terms o sotening eective

rents, alling by an average o 6% over the frst hal o 2013. In

line with higher levels o interest the B Grade market saw the

smallest decline in eective rents, alling only 0.8% on average

over the same period.

Average enquiry size allsEnquiry volumes across the Sydney CBD leasing market have

remained relatively steady with circa 200,000m o enquiry,

during the frst hal o 2013. Despite this, the average enquiry size

ell 47%, rom 1,380m in the second hal o 2012 to 730m over

the frst hal o 2013. The Business Services industry continues

to dominate, making up 26% o enquiry levels. Signs o lie in the

Finance sector have also begun to emerge with a our percentage

point rise in enquire volumes, over the start o 2013.

Demand to turn around over 2014

Current rent, incentive and tenant demand trends are expected

to remain in place over the remainder o 2013. Sub-lease space

and newly reurbished backfll stock, coming into the market,

continues to pose the biggest threat to rising vacancy rates.

Subdued economic conditions across NSW, since the GFC, has

seen businesses struggle to grow their revenue base. This has led

to the implementation o cost cutting strategies, reducing sta, to

boost proftability and productivity. Low borrowing and fnancing

costs are expected to see frms begin to move rom austerity to

investment, in order to boost growth. This in turn is expected to

have a positive eect or employment markets and o ce demand.

SYDNEY CBD ENQUIRIESNUMBER OF ENQUIRIES BY SIZE RANGE

0

10

20

30

40

50

60

70

80

90

100

Q3 2012 Q4 2012 Q1 2013 Q2 2013

1,001sqm or greater500sqm or less 501-1,000sqm

161 Castlereagh Street, Sydney

Valued on behal o The GPT Group and ISPT




14/42

Investment marketInvestment demand remains strong

The inux o capital chasing CBD o ce assets continues with

demand or core investment assets outstripping supply. The frst

hal o 2013 saw $605 million (excluding portolio sales) worth

o investment transactions take place within the Sydney CBD

o ce market, a 6% rise on the same period in 2012. A buoyant

second hal o the year is also expected with the $317 million,

50%, sale o 200 George Street by AMP, taking place in the frst

two weeks o July. Domestic institutional buyers have ramped

up acquisitions, making up 67% o transactions in the frst hal

o 2013. Oshore capital also remains strong making up 24%

o sales, up rom 19% in the frst hal o 2012. This is expected

to rise over the second hal o the year with Credit Suisse,

reportedly, purchasing 400 Kent Street or $58 million in August.

Portolio sales dominated by domestic buyers

The positive start is even stronger i portolio sales are included

into the mix. Portolio transactions, containing Sydney CBD o ce

assets, rose over the past six to 12 months. The frst hal o

2013 saw Sydney CBD o ce assets worth $499 mill ion change

hands as part o portolio sales. The acquisition o these assets

has turned rom being dominated by oshore groups, in 2012,

to domestic institutional buyers. This trend started in December

2012 with DEXUS acquiring a, three asset, portolio rom the

Direct Property Investment Fund (DPIF) or $530.7 million.

This included two CBD o ce assets being, a 25% interest in

Grosvenor Place or $271.25 million and 39 Martin Place or $143

million. This was ollowed by the frst tranche o o ce assets sold

by GE Real Estate. These were purchased by Mirvac or $584

million in May 2013 and eatured fve Sydney CBD properties

worth $183 million. Then in June 2013, the NSW Government sold

a portolio o o ce assets to Cromwell or $405 mil lion, including

three CBD properties worth $316 million.

Lack o core investment stock limits turnover

The level o transaction activity, concluded to date in 2013, would

have been higher had there been more core investment grade

stock or sale. High quality, Prime Grade assets with long secure

lease covenants, are the investment preerence or the majority o

buyers. However, there are limited, on or o market, opportunities

to purchase these assets, due to their tightly held nature. This

has seen core buyers begin to move up the risk curve and look

at Secondary Grade assets. However, these assets need to have

low leasing risk and capital expenditure requirements and be well

located to attract interest.

Sales evidence yet to show tightening o yields

Low deposit rates, alling global o ce yields and the wide

spread between yield and bond rates have all been talked about

as drivers behind tightening yields. It is widely expected that i

a trophy Premium Grade tower came to market or sale, the

weight o capital chasing such an asset would see the sale reect

this. However, as virtually all sales transacted to date in 2013

have been A and B grade assets, combined with the sot leasing

market, we have not yet seen evidence o yield compression. That

said looking orward, yields or Prime Grade assets are expected

to tighten slightly over the next 12 months, however alling net

eective rents will limit the size o this compression.

SYDNEY CBD INVESTMENT SALES BY BUYER TYPE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 H1 2013

Corporate / End UserInstitutional Foreign

Private Other


Note: Includes portolio sales

10 Barrack Street, Sydney

Sold on behal o Blackrock Investments Management



15/42


Supply, vacancy &demandLack o supply till 2015

One positve actor or the Sydney CBD ofce marekt moving

orward is the constrained supply outlook, over the short term.

Over the last 10 years the market added an average o 138,778m

o new supply every year. The 2013 calendar year is expected to

see 119,582m beore dropping 28% to 85,155m in 2014, 36% o

which is committed. This low supply will assist in placing a ceiling

on rising vacancy rates, over the next 12 to 18 months, beore the

new supply cycle kicks in over the course o 2015.

Backll and sublease the biggest threat

The biggest driver pushing vacancy higher, over the next 12months, will be sublease and reurbished backfll space coming

back into the market. The delivery o ANZ Tower in the frst hal

o 2013 will see ANZ move out o 20 Martin Place. This will have

little initial impact on the market, as Pembroke intend to withdraw

this space and undertake a ull building reurbishment. The

movement o Freehills into ANZ Tower is expected to see their

current space at MLC Centre come back into the market in the

frst hal o 2014 ater short term reurbishment. The movement

o Quantium and Corrs Chambers Westgarth into 8 Chiey Square

is also expected to see backfll space enter the market over the

second hal o 2013.

Vacancy rises due to sublease and supply

The July 2013 PCA O ce Market Report showed that vacancy

across Sydney CBD rose 1.7 percentage points, rom 7.2% in

January 2013 to 8.9% as o July 2013. A combination o actors

drove this large growth. New supply additions totaled 90,843m

or the six month period. Including, 161 Castlereagh Street (ANZ

Tower), reurbished space at 1 OConnell Street and 363 George

Street. A near doubling o sublease space rom 13,603m in

January 2013 to 32,142m in July 2013 also contributed to the

growth in vacancy. The frst hal or 2013 also saw absorption

turn negative or the frst time since January 2010. The

movement o tenants due to the completion o ANZ Tower was

key to this absorption result. This saw Premium Grade absorption

increase 36,393m thanks to the movement o Freehills and ANZ

into the building rom A and B Grade space. A Grade absorption

was -27,846m or the frst hal o 2013, because the PCA counts

the current Freehills space at MLC as vacant at the time ANZ

Tower reached PC. B Grade absorption was -27,070m or the

period chiey due to the withdrawal o the 20 Martin Place.

Southern precinct remains tightThe Southern Precinct was the strongest market across Sydney

CBD over the frst hal o the year. This was the only region which

saw overall vacancy remain stable, at a low 4.4% while A Grade

vacancy ell to 0.8%, or just 960m.

Colliers International orecasts demand to remain sot, over the

remainder o 2013. Vacancy is expected to rise to 9.8% as o

July 2014, beore leveling out, as demand begins return, over the

second hal o 2014 and into 2015.

Australian Bureau o Statistics

Project Management by Colliers International

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

1100002013 2014 2015 2016 2017+

Complete New Bui ld / Vacnat Mooted Commitment

161C

astle

reaghSt

8Chie

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180Th

omas

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5Ma

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Barangaroo

C5

Barangaroo

C3

200Ge

orge

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40YorkS

t

19-31Pitt

St

333Ge

orge

St

289-307Ge

orge

St

183Ge

orge

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37-51Pitt

St

TheRibb

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151Clar

ence

St

AMPCircularQ

uay

33-35Bligh

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TotalOfficeNLA

(m)


SYDNEY CBD OFFICE MARKET NEW DEVELOPMENT PIPELINE

How else can we help you?Speak to one o our property experts today.au.of [email protected]

For urther inormation about our researchplease contact: Mathew TillerAssociate Director | Research | Tel +61 2 9257 [email protected]



16/42

MELBOURNE CBD OFFICE

It is well known that the Sydney and Melbourne CBD marketsare the two most popular destinations in Australia or oshore

investment. Whilst Sydney is generally avoured due to it being

the fnancial capital o Australia, Melbourne has proven to be

just as popular, given it is the second largest market and oers

a capitalisation rate premium to Sydney. Whilst in Melbourne the

most active buyer group or large-scale assets has been the REITs

and unlisted wholesale unds, oshore investors are still eaturing

prominently, accounting or an interest in two (2) transactions

over $100 million in 2013. Oshore investors are expected to

represent the buy-side o more transactions in the second hal

and may end up the dominant buyer group in Melbourne or the

ull 2013 calendar year.

Australia is now attracting a higher portion o the Asia Pacifc

allocation o global investors and unds. When comparing the

return and risk profle o major cities within Asia, investment into

Australia, is very compelling. With capitalisation rates or stabilised

prime grade o ce product in the 6.5% to 7.5% range and the

cost o the debt under 5%, there are opportunities or investors

to make accretive purchases, something that is not as easily

available in other globally competitive cities.

The largest proportion o oshore capital or core, prime grade

Melbourne assets continues to come rom Asia. Singaporean

groups, such as K-REIT who purchased 50% o 8 ExhibitionStreet in June 2013 and Malaysian pension unds have been the

most active. The next wave, however, is expected to come rom

Korean pension unds and Chinese sovereign wealth and pension

unds. The capital activity o European investors in Australia is a

reection o the state o European nations economies, with the

bulk o capital coming rom Germany and Switzerland. A recent

example is a German pension und which acquired 575 Bourke

Street or $70 million in April 2013.

While just over 75% o the $1.07b o Prime Grade stock

transacted in Melbourne over the frst hal o the 2013 calendar

year has been attributed to local REITs and unlisted unds, it

is largely as a result o capital inows rom oshore, as global

pension and sovereign wealth unds account or a large portion

o the investment into domestic balance sheets and unlisted

unds, along with capital rom Australian super unds. Whilst

domestic und managers have become more active, the demand

or direct investment rom oshore investors has not waned and,

i anything, is growing. Investment rom Singapore, Malaysia,

Germany and Canada is expected to continue, and will be

reinorced by greater amounts o capital rom Korea, China and

South Arica.



MELBOURNE CBD OFFICE


A Grade Net Face Rents $ .%


A Grade Incentives % %



A Grade Capital Values (per m) $, $,

New Supply Additions (m)* , ,


Melbourne CBD cements its position as anactive target or global capital

Second Hal 2013


399 Lonsdale Street, Melbourne

Managed on behal o FKP Property Group



17/42


Leasing marketTenant demand hurt by lack o businesscondence

The Victorian economy, by most measures, has slowed since last

year. However, Victorian Gross State Product (GSP) still grew by

2.3% over 2012/13, and is orecast to continue to grow over the fve

(5) year orecast period, albeit at modest rates in the short term.

Victorian inrastructure, despite having its own share o issues, is

seen as better than that in the remainder o the country, and both

overseas and internal migration inows to Victoria are still very

strong. Nevertheless, business sentiment is at, with results rom

the latest VECCI-Bank o Melbourne Survey o Business Trends and

Prospects indicating that the expected perormance o the Victorian

economy over the year ahead remained weak and at a similar level

to that reported in the previous survey. In terms o o ce demand thesurvey provided some more upbeat results, with the fnance, property

and business services sectors the only industries reporting positive

business conditions over the June 2013 quarter.

The good news is that white collar employment growth in the

Melbourne CBD has still been growing. It is orecast to continue to

grow by an average o 2.00%, or about 5,800 workers per annum,

according to orecasts provided by Deloitte Access Economics. This

equates to around 80,000m o o ce demand each year. While

some o this demand will be absorbed into existing underutilised

space, some tenants will choose to take this opportunity to expandinto suitable premises and take advantage o the relatively generous

incentives that are on oer.

Incentives doing their job, activity in the markethas picked up as a result

Incentives or A Grade o ce space in Melbourne now average about

28%, and we expect this fgure to creep up to 30% by the end o

2013. These incentive fgures are averages, and it should be noted

that the incentive oered by a landlord will be very dependent ontheir individual assets vacancy profle.

The incentives currently being oered in the market, as well as the

availability o good quality, contiguous oors, are encouraging tenants

to review their space requirements and take advantage o some

exceptional deals that are on oer. Colliers is aware o a number

o major lease transactions that are currently under negotiation or

these very reasons. While we are orecasting a urther, minor, drop

in eective rents or the remainder o the year, any letting up o some

major vacancy in the market could see the average incentive fgure

move in the opposite direction, as landlords are under less pressure

to let up remaining space.

MELBOURNE CBD WHITE COLLAR EMPLOYMENT

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Ju

n-00

Ju

n-01

Ju

n-02

Ju

n-03

Ju

n-04

Ju

n-05

Ju

n-06

Ju

n-07

Ju

n-08

Ju

n-09

Ju

n-10

Ju

n-11

Ju

n-12

Ju

n-13

Ju

n-14

Ju

n-15

Ju

n-16

Ju

n-17

Ju

n-18

Ju

n-19

Ju

n-20

Ju

n-21

Ju

n-22

Annua

lChnage

Persons

White collar actual (LHS) White collar Annual % Change (RHS)

Source: Colliers International, Deloittes Access Economics

699 Bourke Street, Melbourne

Leased on behal o Mirvac Group



18/42

Investment marketLonger term, leasing market indicators stillattractive to investors

While the Melbourne CBD o ce market has experienced a

period o rental declines, the majority o the decrease in eectiverents that we are orecasting has already occurred. Over a 10

year investment timerame, there is certainly signifcant upside

income opportunity that investors buying into the market can

take advantage o. Further, once the current cycle o new

developments under construction are delivered, the supply side

outlook is also avourable.

Typically, the recovery o secondary grade assets lags that o

the prime grade market, and we expect the same pattern to

occur in the Melbourne CBD. These assets typically orm only a

small proportion o the target asset mix o oshore capital andlocal wholesale unds, but are increasingly popular with private

investors and syndicates. As the bottom o the leasing cycle or

the secondary market approaches, towards the latter hal o 2015,

we expect more transactional activity in this sector.

Further yield compression expected

Global investors looking to place capital in commercial property

normally look or markets that present a low geo-political risk,

and over the long term display balanced supply and demand

metrics. In all respects, Melbourne meets these criteria. Market

cap rates or A Grade Melbourne assets have compressed to arange o 6.40% to 7.25% over the frst hal o 2013 on the back

o some major transactions, and compared to some o the other

major low-risk Asian destinations, such as Hong Kong, Singapore,

Tokyo and Seoul, are still seen as very generous. On all measures,

Melbourne will remain a low risk market, and or this reason

we expect global capital inows to remain high. This will result

in urther yield compression, and we expect another 25bp

compression in the near term.

Oshore interest to continue growing, but are

currency uctuations a actor?Currency uctuations do not aect buyer sentiment, activity

and pricing in the way one might expect. Instead, the impact

is dependent on a number o actors, including the origin, type

and size o the capital source. In the case o the worlds largest

investors, because they are invested largely in all regions and

asset classes globally, they have natural hedges that mean losses

due to currency movements in one region will be oset by gains

in another. Because currency movements (AUD v USD) only

impact a minority o oshore investors, movements generally

do not have a material impact on overall demand and pricing ooshore investors.

NET EFFECTIVE RENTS, HALF YEAR % CHANGE

-15%

-10%

-5%

0%

5%

10%

15%

%c

hange

Prime Grade B Grade

Jul-03

Jan-04

Jul

-04

Jan

-05

Jul-05

Jan-06

Jul

-06

Jan

-07

Jul-07

Jan-08

Jul-08

Jan

-09

Jul-09

Jan-10

Jul

-10

Jan

-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul

-13

Jan-14

Jul-14

Jan

-15

Jul

-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18




19/42


TitleInsert text here0

20,000

40,000

60,000

80,000

100,000

120,000

2015 2016 2017 2018

m

28,835

76,769

112,091

66,358


Supply, vacancy &demandAll new supply or 2013 now completed

Over the hal year to June 2013, Melbourne has seen our (4)new or reurbished A Grade buildings totalling 165,000m added

to the market. Just over 140,000m o this new supply has been

pre-committed. Further supply will be added to the market over

late 2014 and 2015, when 167,000m will complete, and at this

stage 66% o this new supply is pre-committed. The largest

o these is 567 Collins Street, which is due or completion

in August 2015. For the remainder o 2015, we see minimal

opportunities or urther large pre-commitments to kick-start a

new development. The consequence o this is that tenants looking

or large, contiguous oors in quality A Grade buildings should

start considering their options now, as the supply o new stock

gradually dwindles. Year to date, the Colliers International CBD

leasing team have received 158 enquiries or 132,606m o o ce

space.

Vacancy to peak in 2015, although with someupside risk

Following completion o 165,000m o o ce space over the frst

hal o 2013, the vacancy rate has climbed to 9.8%, rom 7.0% in

January 2013. As the vast majority o this new supply was pre-

committed, the relatively large jump in vacancy can be explained

by the associated backfll space rom a number o these tenant

moves. Major Melbourne occupiers such as NAB, CBA, Mercer,

BHP and Service Stream all commenced occupancy in their

new o ces, and let behind an estimated 80,000m o backfll

space. Some o this space is already committed, such as Mercers

11,800m backfll at 11 Exhibition Street by BUPA, while other

space is likely to be taken out o stock and reurbished, including

555 Collins St, which NAB is to ully vacate as part o their move

to 700 Bourke Street.

Given that there are no major new buildings being completed

or very large backfll premises being vacated over the next 12

months or so with the exception o Cbus Propertys 720 Bourke

St we expect the vacancy rate to decline over 2014, and are

orecasting the vacancy rate to be back down to 8.6% by July

2014. There are also a number o major deals in the pipeline thatwill add to net absorption over the remainder o this year and

into 2014, including 5,600m which is currently under oer at 171

Collins Street.

Next pre-commitment/supply cycle tocommence 2016/17

While we are orecasting vacancy to rise to 10.1% by late 2015,

much o this rise will be a result o lower quality backfll space

returning to the market. Just as the current supply cycle comes to

an end in 2015, we also expect the demand side o the equation

to recover. This will cause net eective rents to rise over 2015,

as the market prices in a lower vacancy outlook. For tenants,

this means that the remainder o 2013 and 2014 will be the

most opportune time to negotiate a new deal and take advantage

o the tenant-riendly conditions. Looking orward, Colliers

Internationals CBD leasing team are aware o almost 190,000m

o leases greater than 5,000m coming up or expiry over 2016

and 2017. We expect one or more o these tenants to kick start

the next supply cycle in 2016/17 via a pre-commitment.

LEASE EXPIRIES > ,m


For urther inormation about our researchplease contact: Anneke ThompsonAssociate Director | Research | Tel +61 3 9940 [email protected]

313 Spencer Street, Melbourne

Sold on behal o CBUS Property



20/42

BRISBANE CBD OFFICE

The Brisbane CBD o ce leasing market experienced a signifcantsotening during the frst hal o 2013 (H1 2013). Withdrawals

rom the State Government, waning confdence in the resource

sector and subdued business confdence, all contributed to

weak tenant demand. This moderation in perormance was not

limited to the Brisbane CBD with al l major capital cities recording

negative net absorption. Brisbane however, accounted or over

hal o the national decline in occupied stock.

Counter-intuitively, Brisbanes capital market, unsupported by

leasing undamentals has been strengthening in the past year,

a signal o continued confdence rom investors with long termhold strategies. The A-REIT sector has returned to growth since

mid-2011 with the ASX S&P 200 A-REIT index showing an 11.3%

annualised three year total return. The resultant eect has been a

shit into an acquisition phase, accretive to earnings. The increase

in activity rom institutions has led to upward revisions in pricing

in order or buyers to secure transactions. Rising US Bond rates

could see urther reweighting o asset portolios to increase

exposure to commercial property. Subsequently the top end o the

market may see continued purchasing activity rom the A-REITs

and oreign entities.

Dynamics within the leasing market are now more than ever,

weighted in the tenants avour. Face rents have not experienced

considerable growth while incentives continue to be adjusted

higher in order to secure rental streams. Incentives have

increased between 2.5% and 5.0% over the frst hal o the year,

resulting in a downward shit or eective rents. This negative

growth trend is expected to continue through the second hal

o 2013 and potentially through 2014, albeit to a lesser extent.

Although the market is not expected to see any new project

deliveries prior to H2 2015 at the earliest, any unanticipated uplit

in demand will be absorbed by existing vacancies without placingupward pressure on rents.

A signifcant increase in available sublease space has presented

occupiers with more opportunities when negotiating a new lease.

In some cases, it may now be easible or secondary grade tenants

to move into A or premium grade space as sub-lessors look to

recover some occupancy costs. Our research shows there is

approximately 72,000m available in the sublease market, 58%

o which is currently vacant. The rental spread on direct and

sublease areas has grown in 2013 with an average discount to

market o 30% across all grades in the CBD, urther highlighting

secondary tenant accommodation opportunities.

In the near term, we anticipate continued sotening in the leasingmarket with additional Qld State Government consolidation and

underwhelming estimated growth in mining. However, orecasts

by Deloitte Access Economics (DAE) suggest o ce based

employment may see a positive growth scenario ollowing the

most recent contraction, albeit with continued losses in the public

service and resource sector. Outsourcing o State Government

unctions may be one reason behind an increased demand rom

some sectors. DAE orecasts also show Queensland economic

growth to outpace national GDP growth.



BRISBANE CBD OFFICE


A-Grade Gross Face Rents $ %

A-Grade Net Eective Rents $ -.%

A-Grade Incentives .% .%


A-Grade Grade Yields .% .%

A-Grade Capital Values $, $,

Vacant Supply Additions (m)* ,


Robust investment market unsupported bysubdued leasing environment

Second Hal 2013




21/42


Leasing marketLeasing volume alls

Major withdrawals and subdued tenant demand culminated in

64,069m o negative net absorption recorded during H1 2013

across all grades. While the withdrawals were negated by the

delivery o 18,600m o ully committed new supply, the State

Government exit, backfl l associated with previously completed

new developments and the release o vacant sublease space

placed upward pressure on vacancy, well above previous

expectations. Regarded as the most active participant o the

leasing market, the energy and resources sector accounted or

a quarter o absorption in the two years to mid-2013. H1 2013

illustrated the sotening within the sector, with a contribution o

circa 2% to lease volumes. The transport, logistics and postal

services sector combined or a 40% share o leasing volumeswith Boeing taking 7,500m in 150 Charlotte Street and Aurizon

signing on or 2,800m at 192 Ann Street. Notably, the quantum o

lease transactions was approximately hal the H2 2012 total.

Incentives yet to reach their peak

Face rents have seen minor corrections over the last six months

with prime grade rents declining approximately 1% on average

while secondary assets experienced alls o 2% on average.

Assets owners have largely avoided ace rental adjustments to

protect capital values; however incentives have increased in order

to secure tenants and an incoming cash ow. Incentives are at

their highest level in 15 years or prime and secondary space, with

values in the order o 27.5% and 35% respectively. Forecasts

suggest the leasing environment is not expected to improve

markedly in the second hal o 2013. While ace rents may see

slight downward revisions, incentives are yet to reach their peak.

This will continue to place downward pressure on eective rents,

with an anticipated decline o 3% - 4% on average, across the

market over the next 12 months. Secondary eective rates may

see greater reductions in H2 2013.

Vacant sublease space doubles in six months

Analysis o all available sublease areas suggest there is

approximately 42,041m o vacant sublease space available in

the Brisbane CBD, an increase o 23,399m in 6 months. Our

research indicates there is a urther 26,218m available which

would remain occupied until completion o a deal. Sectors

responsible or the majority o sublease on the market are the

Mining and Energy (44%), State and Federal Government (20%)

and Technical Services (10%). Resource project deerrals and

the handing back o surplus expansionary space rom pre-

commitments were co-contributors to the increase in sublease

oerings, the latter accounting or 8% o the total.

Where will tenant demand come rom goingorward?

According to the latest fgures rom Deloitte Access Economics

(DAE), there was an estimated 3% net decline in CBD o ce

based employment over the frst six months o 2013, largely

attributable to State Government redundancies. The fnance andutilities sectors (gas, electricity, water and waste) also recorded

a large contraction in job numbers. DAE orecasts suggest o ce

based demand or white collar employment will return to a

moderate level o growth in the second hal o 2013. The public

sector is orecast to see a continued decline in white collar jobs.

Mining and agriculture could also expect to see urther reductions

o approximately 8% in the six months to December. While the

public sector and mining may see urther contractions, other

sectors are expecting a return to growth. The proessional and

technical services in combination with fnancial and insurance

frms could see o ce based demand regain some traction in the

second hal o the year.

SUBLEASE AVAILABILITY BY SECTOR

44%

10%

4%

6% 9%

7%

20%

Legal & Acconting Finance & Insurance Services Government Mining & Energy

Technical Services IT & Telecommunications Other


Waterront Place, 1 Eagle Street, Brisbane

Leased on behal o Future Fund (CorVal Partners) and Stockland



22/42

Investment marketCounter cyclical investment

The Brisbane investment market has been in a counterintuitive

strengthening phase, unsupported by leasing undamentals but

rather broader economic drivers. As economic orces place

downward pressure on risk premiums, Investment portolios

have been reweighted in order to gain greater exposure to

higher yielding assets such as equities and commercial property,

particularly prime grade CBD assets. During H1 2013 there were

seven transactions involving 14 assets with a total value o $1.61

billion. As illustrated opposite, the market has seen a resurgence

in activity rom institutional purchasers, namely A-REITs and

domestic unds.

QLD Government disposals

The vendor profle during H1 2013 was weighted towards the

Government (35%) ollowed by Corporates (34%), Institutions

(16%), Foreign (11%) and Privates (4%). As a continuation o

Grosvenor Internationals repositioning o oshore capital, the

overseas und divested their interest in 259 Queen Street with

Investa using their listed Commercial Property Fund to acquire

the A-Grade asset. The asset is 32% leased to the Bank o

Queensland who have agreed to move a new premises in the

Brisbane Fringe.

Domestic institutions reweight to includeBrisbane CBD of ce

Queensland Investment Corporation (QIC) accounted or the

largest quantum o investment through its purchase o a seven

asset portolio rom the Queensland State Government or

$561.9 million or 35% o the total volume. Dexus Property Groupand the Dexus Wholesale Property Fund partnered to acquire

Grocons 480 Queen Street development or $543.9 million.

While institutions dominated the investment landscape with 86%

o transaction, other buyer types were not absent. The South

Australian government, through the Motor Accident Commission

purchased a hal share in 400 George Street or $195.8 million.

Some evidence o prime yield compression

Increased competition or prime assets in the Brisbane CBD has

led to a slight uplit in capital values and some yield compression,

particularly in prime grade assets showing lower risk profles

compared to secondary grade buildings in which vacancy has

increased signifcantly. The hal sale o 400 George Street

(A-grade) showed a reversionary yield o 7.06% with an average

yield spread o 7.00%-8.00% across A-grade. Premium yields

remain between 6.75% and 7.50% while B-grade properties

were also unchanged with an average spread o 9.00%-10.00%.

The reduction o bond rates and continued monetary easing by

the RBA is also placing downward pressure on internal rates o

return.

Investment pipeline

Brisbane CBDs investment market momentum is expected to

continue through the second hal o 2013, particularly i economic

undamentals remain supportive o yield stability. A number o

prime and secondary grade assets are expected to transact in the

next 12 months with institutional, oreign, and to a lesser extent,

private domestic buyers all active participants. With the Australian

Dollar approaching the US$0.90 mark, reduced currency hedging

costs appear more supportive or ongoing and possibly increased

investment rom oshore purchasers.

BRISBANE CBD INVESTMENT SALES BY BUYER TYPE

2010 2011 2012 2013 YTD

Sydicate Private Foreign Insti tution Corporate Government

35% 29%

53%

86%

12%

2%

22%

20%

5%6%

45%

11%

9%

52%

5%

5%

4%

Source: Colliers International400 George Street, Brisbane

Valued on behal o Grosvenor International and HSBC Trinkaus



23/42


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

55Elizabeth

Stre

et

StateG

ovtW

ithdrawal

Combin

edbackfll

Combin

edbackfll

180Brisb

ane

Combin

edbackfll

480Qu

eenStreet

550Qu

eenStreet

1WilliamStreet

111MaryStre

et

FmrS

upremeC

ourtSite

Regent

Tower

Brisb

aneT

ransitCe

ntre

TotalOfficeNLA

(m)

2013 2014 2015 2016 2017+

Complete New Build / Vacnat Reurbishment / Associated Backll Mooted Committed State Govt Backll


Supply, vacancy &demandWithdrawals lead to bounce in vacancy

The latest PCA O ce Market Report indicates the total market

vacancy increased to 281,647m, reecting a rate o 12.8% in July

2013. This is well above previous orecasts o circa 11% with net

absorption o -64,069m. In terms o historical o ce vacancy, the

current rate sits 3.8% and 6.7% above the 5 and 10 year averages

respectively. The lit in vacancy is largely attributable to the

B-grade market which saw 59,801m in negative net absorption.

This decline in occupied space led to B-grade vacancy increasing

rom 6.3% to 17.0%. The State Government withdrawal accounted

or a signifcant proportion o this total, with urther negative

contributions expected over the ollowing 12 months. In generalterms, the prime and secondary vacancy rates were recorded as

9.4% and 16.1% respectively. Looking ahead, Colliers International

research orecasts suggest the vacancy rate may increase to

between 13.25% and 13.75% in January 2014 beore some slight

downward movement in July 2014.

Supply gap

The delivery o the Australian Taxation O ces new Brisbane

headquarters at 55 Elizabeth Street signals the end o the latest

development cycle, with 2014 expected to be the frst year since

2007 when no major new projects will be completed. Although

the developer o 180 Brisbane, a 57,000m prime tower has

signalled its intention to complete the project by H2 2015, it could

be that the market does not see any signifcant new supply until

2016. Following 180 Brisbane, Grocon and Dexus anticipate their

premium tower at 480 Queen Street will reach completion in H1

2016. Cbus and the Queensland State Government have begun

construction on a new 75,000m prime grade building in the CBD

government precinct with an expected delivery date o H1 2017.

Clarity on supply outlook

Following previous reports in which the timing o uture projects

was uncertain, improved clarity on Brisbanes new supply pipeline

has allowed or a frmer market outlook. At the time o writing,

the three confrmed and proceeding developments, 180 Brisbane

(Daisho), 480 Queen Street (Dexus/Grocon) and 1 WilliamStreet (QLD Government/Cbus) were circa 50% pre-committed,

however 15,000m o sub-lease space has been placed on

the market in the State Governments new executive building.

Assuming a conservative level o absorption prior to delivery,

research does not indicate signifcant upward pressure on the

vacancy rate upon completion o these projects. While the market

has generally absorbed much o the recent new supply, it may

be challenging or confrmed projects to achieve desired levels

o pre-commitment prior to completion. With a general ight to

quality trend in tenant demand, the prime market may be better

placed to experience stabilising rents and lower vacancy. The

secondary market, in particular B-grade buildings may be acing a

more challenging 12-24 months in absorbing some 120,000m o

vacant space.

Leasing competition on multiple ronts

Landlords with signifcant levels o direct vacancy in their

assets may ace a challenging leasing environment in the near

term with circa 70,000m o sublease space currently in the

market. Tenants across all grades are now presented with more

opportunities as companies look to reduce ine ciencies by

subleasing surplus space. The result is discounted rents to the

point where tenants may now have the option o taking a sublease

in a higher quality building, albeit or a shorter term. In order to

remain competitive and secure tenants, secondary assets will

be under increased pressure to reurbish and reposition their

property.

BRISBANE CBD CURRENT & MOOTED COMMERCIALDEVELOPMENT


For urther inormation about our researchplease contact: Alex BeerResearch Analyst | Research | Tel +61 7 3026 [email protected]



24/42

PERTH CBD OFFICE

While there is a widespread acceptance around the country that

the peak o the mining boom and resource sector-related project

investment in Australia has passed, confdence levels in the

property sector in WA remain relatively robust.

The Perth market has seen slowing conditions over the past

12 months however, the undamentals remain strong. While

we have seen a pullback in resource sector project investment

and subsequent job shedding in the engineering and technical

services sector, Perth is coming o a 12 month record high in

net absorption and critically low vacancy and stock levels; and

the current results reect a necessary cyclical correction in the

market and a return to more normal conditions.

A slowing o activity in the mining sector has meant there are

now more options or tenants to secure o ce space. While very

little new space will be completed until the second hal o 2015,

there are options or tenants to pre-commit to new buildings and

we have already seen some tenants make this choice.

Vacancy in the Perth CBD continues to be tight at 6.9%. Sub-

lease space, which began to rise in the latter part o 2012, has

moved up only marginally to 2.5%. Direct vacancies primarily

in the non-premium end o the market account or much o the

vacancy increase as shown in the PCA fgures.

The Bureau o Resource Energy and Economics details more than

$220 billion in committed and easibility stage projects or WA.

While research shows a tapering o project investment, Perth is

beginning to demonstrate a durable, resource-related knowledge

sector workorce which will continue to underpin o ce demand

over the long term. Indeed, Deloitte Access Economics is

orecasting an (albeit marginal) increase in CBD and West Perth

white collar employment over the short to medium term.

Evidence o the robustness o the Perth property market can be

ound in recent announcements on the go-ahead or Brookfeld

Stage 2, the sale o Raine Square to Charter Hall and Dexus

purchase o the King Square developments. These results are a

vote o confdence in the undamentals o the Perth o ce market

or the long term.

Net absorption has continued the negative trend that began in the

second hal o 2012 with a urther 12,504m negative fgure in the

frst hal o 2013.

A Grade ace rents are presently averaging $715/m with

incentives averaging around 12.5%, although some sotening o

ace rents is anticipated second hal o 2013 and into 2014 with

the incentive range moving to 12.5% to 17.5%. Subject to current

supply and demand orecasts, a stabilisation and recovery may

start to occur towards the end o 2014.



PERTH CBD OFFICE


A Grade Net Face Rents $ .%


A Grade Incentives .% .%



A Grade Capital Values $, $,

Total Supply Additions (m)* , ,


CBD of ce market remains resilient

Second Hal 2013




25/42


Leasing marketWhile CBD vacancy rates have risen over last 12 months rom

4.6% to 6.9%, it is important to note that this rise came against

the backdrop o critically low vacancy rates and the introduction

o signifcant new supply through 2012. Rather than reecting

any substantive weakness in the Perth o ce market, the rise in

vacancy is more likely a rebalancing o an overheated market

which Colliers International expects will continue to trend back to

a longer-term average profle.

Despite the increase in vacancy and rise in negative net

absorption, Perth remains the best-perorming capital city in

terms o vacancy. The Perth CBD vacancy rate o 6.9% is notably

lower than Sydney (8.9%), Melbourne (9.8%) or Brisbane (12.8%),

and is a mark o the confdence, strength and resilience in the

Perth market. The vacancy rate is at the lower end o market

expectations prior to the release; however there is hidden sub-

lease vacancy (although technically classed as occupied) which

suggests that the actual availability o space may be higher than

the o cial vacancy rate.

Perths net absorption to July 2013 (-12,504m) was less than

20% o the Brisbane rate and less than hal that o Sydney.

The 12 month net absorption was -30,836m, but it should be

remembered that the latter part o 2012 and 2013 to date have

ollowed the highest CBD net absorption period on record.

Sub-lease space, which spiked in the second hal o 2012, has

remained more or less stable at 2.5%, or more than a third o all

vacant space. The stabilising o the level o sub-lease space may

reect a pause in the round o job shedding that occurred in the

wake o the deerral o a number o capital-intensive resource-

related projects in the second hal o 2012. As already stated,

there remains a substantial pipeline o committed and easibility

stage projects scheduled or WA over the near to medium term,

and it is this investment pipeline that may reasonably underpin the

States economic perormance or some time yet.

The current PCA fgures also reect a ight to quality, in that

vacancy rates or Premium Grade buildings have in act tightened

appreciably to 2.7% (down rom 4.5% in January) whereas A

Grade vacancies have increased to 6.3%. The majority o the

movement in vacancies has occurred in the secondary grades,

and this has implications or the viability o this stock as new and

reurbished supply comes on line rom mid to late next year.

Premium and A Grade net ace rents are averaging approximately

$835/m and $715/m respectively, with A Grade coming o

about 3% rom January this year. A Grade net ace rents remain,by some margin, the most robust in the country.

Colliers International expects CBD vacancy rates over the next

six months to increase rom the current 6.9% to a year-end

estimate o low to mid 7%, with the likelihood o urther increases

to by mid-2015. Face rents or A and B Grade wil l come under

pressure with the frst response o landlords to oer greater

incentives. Subsequently, the expectation is or some short term

sotening o ace rents with potential or rising incentive levels. It

is however, anticipated that in the medium term urther resource

sector investment and continued population growth will underpin

improved o ce demand.

PERTH CBD AVERAGE NET FACE RENTS

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CBD Premium Grade CBD A Grade CBD B Grade


863 Hay Street, Perth

Leased on behal o Anglican Dioesesan



26/42

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PERTH A GRADE YIELD RANGE

IMAGE

Investment marketStrong transactional activity in 2013

The frst hal o 2013 has seen a record level o sales activity,

with more than $1.2 billion in transactions taking place. This

fgure exceeds the previous record o $1.1 billion set in 2011 and,

importantly, it has been achieved over just six months unlike

2011, where the fgure was the result o a ull year o transactional

activity.

Major transactions to the end o June 2013 include the Dexus

purchase o King Square towers 1, 2 and 3 or $434.8 million.

These buildings are now under construction and expected to be

delivered mid-2015 and included strong pre-commitment levels.

Other major transactions include Mirvacs $231 million purchase

o Allendale Square, the $458 mil lion sale o 300 Murray St to

Charter Hall and the $97.8 million purchase o the ourth King

Square building (KS4) by not-or-proft insurer HBF, where the

company wil l relocate its Perth head o ce to.

Capital values have remained largely stable in 2013, due to

relatively low vacancy and sound rental returns despite uncertain

global and national economic environments

Premium Grade asset capital values are estimated to be between

$9,700/m and $10,850/m. A Grade values are estimated to have

come o slightly, ranging between $8,200/m and $8,675/m,

while B Grade assets are estimated to be between $5,500/m and

$6,375/m.

Capital yields or Premium Grade assets in the frst hal o 2013

have contracted very slightly, to between 7.5% and 8.25%. There

has been a similar tightening o A Grade yields to a range o

7.75% to 8.5%, whereas B Grade yields have increased slightly to

a range o 8.25% to 9.25%.

Buyer interest and the weight o capital chasing Perth CBD o ce

assets remains strong and is expected to continue in the near

term. The dierential between prevailing yields and the currentcost o capital is believed to be a substantial driver o institutional

activity in the Perth market, and while rents are expected

to moderate somewhat over the short to medium term, the

continuing availability o capital is expected to stimulate continued

investor interest.

In the frst hal o 2013 more than 92% o the value o CBD

and near CBD o ce investments has been by institutions. The

relative value share o activity by institutions has jumped by

more than 75% since 2011. The level o inquiry and interest rom

both Australian and overseas investors is solid and reects anappreciation o the strength o the undamentals o the Perth

market by investors, with overseas investors in particular,

demonstrating increasing interest in Perth.

66 St Georges Terrace, PerthSold on behal o AMP Capital Investors.



27/42


Mooted283,895sqmUnder Construction 166,587m

Proposed 29,388m

Mooted

283,895sqm

2013 20152014

C

U/C

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1MillSt

1006

Hay

St

950Ha

ySt

565Ha

ySt

999Ha

ySt

OldTr

easury

Brookf

eldPlac

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2KS1

KS2

KS3

KS4

KS5

Veil2

53

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100Mu

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374Mu

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108St

Georges

Tce

32StG

eorges

Tce

0

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TotalOfficeNLA

(m)

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rront(Potential

Space)

Uncommitted New Committed New Uncommitted Reurbishment Committed Reurbishment


In addition to these, the proposed Kings Square 4 building, which

has just been purchased by HBF, has an estimated delivery date

o mid-2015. 999 Hay St (10,655m) is 61% pre-committed, and

is expected to proceed to construction in the immediate uture.

Current reurbishment space under construction o 22,540m

includes 565 Hay St and 32 St Georges Terrace.

Supply, Vacancy &DemandThe frst hal o 2013 saw stock additions o just 9,144m with

minimal withdrawals o 703m, resulting in a net supply or the

period o 8,441m. A total o 70% o the new supply was derived

rom the completed reurbishment o 1 Mil l St. Net increase in

stock in the Perth market or the twelve months to end o June

2013 totaled 13,075m.

Currently 166,587m o o ce space is under construction, with

more than 86.5% (144,047m) comprising new build and the

remainder reurbished space. Colliers International estimates just

3,100m (1006 Hay St) o space will be added to stock by the end

o the year.

In the short to medium term there is an estimated 195,975m

either under construction or proposed in the Perth CBD, with

approximately 79% o this space being new build including The

Old Treasury redevelopment at 28 Barrack Street (30,219m), and

the Kings Square Towers 1, 2 & 3 (52,781m) and the Brookfeld

Place Stage 2 building (34,000m).

PERTH CBD OFFICE SUPPLY


For urther inormation about our researchplease contact: Michael KnightManager | Research | Tel +61 8 9261 [email protected]

100 St Georges Terrace, Perth

Valued on behal o ISPT as trustee o the Industry SuperannuationProperty Trust No 2



28/42

AdelAide CBd OFFiCe

Despite sot leasing demand or oce space, pre-commitment

and lease activity has continued across the Adelaide CBD oce

market. Tenant are making the most o sot leasing conditions to

negotiate avorable terms. The current leasing environment has

seen tenants make the most o conditions with those that have

moved, doing so at attractive terms, as landlords continue to oer

higher incentives. Peoples Choice Credit Union and Santos both

recently pre-committed to a new development at 50 Flinders

Street, which will ensure this project will proceed. At the same

time Piper Alderman Solicitors, Medical Insurance Group Australia

and Centrelink all signed new deals.

The sot leasing environment comes on the back o rising

vacancy rates which rose to 12.1%, as o July 2013. This growthin vacant space is the result o above average levels o backll

and new speculatively built space hitting the market, over the

rst hal o 2013. The majority attributed to the completion o

newly constructed 70 Franklin Street, the reurbishment o 100

Waymouth Street and backll rom the ATO move in late 2012.

Outside the construction o 80 Grenell Street and the associated

backll, the supply pipeline in constrained or 2014. This combined

with the slow return o tenant demand over the course o the year

is expected to see vacancy rates tighten over the medium term.

Due to the large amounts o contiguous space coming to themarket at a time when demand is sot, incentives have started

to increase during the rst hal. With incentives ranging between

10-15% over the last ve years it is only now that incentives have

started to jump to 20%.Gross ace rents at this stage appear to

be reasonably stable, but the increase in incentives are having an

impact on net eective rental growth. As vacancy is orecast to

remain above 11% over the next 18 months, it is likely that rental

growth across the market will be reasonably subdued. This is

more the case or secondary stock as many tenants are likely

to take to opportunity to move to better quality accommodation

leaving backll in secondary grade space. *Total market additions over 12 month periodSource: PCA / Colliers International

AdelAide CBd OFFiCe

indiCAtOr July 2013 July 2014 (F)

A Ga Goss Fac rs $490 2.5%

A Ga n efcv rs $296 2.9%

A Ga icvs 20% 20%

toa Mak Vacac ra 12.1% 12.3%

A Ga ys 8.25% 8.15%

A Ga Capa Vas $4,725 $5,020

toa Spp Aos (m) 45,234 20,000

COllierS internAtiOnAl reSeArCh FOreCAStS

Tenants make most of leasing conditions

Second Half 2013

rsac andFocas report

The investment market has seen demand or quality CBD oce

assets continue to grow with a diverse range o buyers are now

in the market looking to secure assets. Small private investors are

back, chasing higher yielding investments, outside o whats on

oer at the banks. Large domestic and oshore institutions are

also in the market looking to secure a high quality asset with long

WALE, secure tenant in place. The key issue is the lack o assets

being oered or sale which refect this criteria. While it is yet to

be seen, yield compression or Prime Grade assets is expected to

be seen i a Premium Grade asset comes on the market o

cbd office rfr - second half 2013 low res

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