AUSTRALIAN PROPERTY OPPORTUNITIES FUND IIIQUARTERLY UPDATE 30 JUNE 2017

AUSTRALIAN PROPERTY OPPORTUNITIES FUND III | QUARTERLY UPDATE JUNE 2017 1

The Australian Property Opportunities Fund III (APOF III or the Fund) is pleased to provide this first update for the June quarter 2017 (Q2 2017)

KEY HIGHLIGHTS - Announced acquisition of 241 O’Riordan Street, Mascot, Sydney for $128.4 million.

- Announced an initial distribution of $0.0100 per Unit.

- Portfolio occupancy is 100%.

- The Fund’s weighted average lease expiry (WALE) is 5.5 years.

PORTFOLIO UPDATEACQUISITIONSDuring the second quarter (Q2), the Fund acquired 241 O’Riordan Street in Mascot for $128.4 million. This represented an asset yield of 6.5%. 241 O’Riordan Street is an A-grade office building with ten floors totalling over 19,277sqm. The property was exten-sively refurbished in 2014/2015 and offers a contemporary fit-out, ground floor café, two levels of basement parking for 399 cars, premium end-of-trip facilities, and an on-site gym. Prominently positioned on two main arterial roads, O’Riordan Street and Qantas Drive, the property is directly opposite Sydney Airport’s domestic terminal and next to the Stamford Plaza hotel, approximately 8km south of the Sydney CBD. The building has high exposure to the passing traffic (approximately 35,000 cars per day) and new LED signage on all four sides. The property has excellent connections to transport options, given its immediate proximity to Sydney Airport, the Mascot Train Station, and to major highways including Southern Cross Drive and the M5, as well as Port Botany.The property is 100% occupied with a WALE of 5.5 years and provides defensive cash flow characteristics. The office tower is fully leased with strong tenant covenants including multi-national tenants such as Abbvie and Deutsche Bank on long-term leases and the NSW Government, which occupies 44% of the net lettable area on a new seven-year lease. The building has large, flexible floor-plates of 1,878sqm, with a central core offering good views and natural light from all sides. It is targeting a 4.5 star NABERS Energy rating in 2018.Over the past decade, Mascot has transformed into a busy mixed-use office and residential precinct of considerable scale. Its lo-cation to critical infrastructure, ongoing improvements in the area and Sydney’s limited forecast office supply is expected to provide strong rental growth; prime vacancy in Sydney is at 5.0%, the third tightest market in Australia.

ASSET MANAGEMENTSince the acquisition, the Investment Manager has been looking at ways to further increase the building’s income. Plans are underway to tender management of the car park to ensure its operation is optimised and income maximised. The Investment Manager is also looking at options to maximise the income achievable from the building’s signage.

AUSTRALIAN PROPERTY OPPORTUNITIES FUND III | QUARTERLY UPDATE JUNE 2017 2

CAPITAL MANAGEMENTThe Fund announced an initial distribution of $0.0100 per Unit, supported by the initial cash flows from the 241 O’Riordan Street acquisition. Due to the timing of the acquisition, under our ownership the asset generated cash for less than half of Q2. Pleasingly, the upcoming distribution is expected to increase significantly from the initial distribution.

During the period, 241 O’Riordan Street was acquired using cash on deposit and a new $25 million debt facility established with Na-tional Australia Bank (NAB). As part of the acquisition, $10 million was initially drawn down to fund the acquisition and related costs, as well as providing short-term working capital, resulting in the Fund’s gearing increasing to 7%.

Part of this facility is expected to be soon utilised to fund a lease incentive payment to the NSW Government, once they have com-pleted their move into the newly fitted out tenancy. A price adjustment was made at the time of settlement to reflect this incentive and it has been factored into the indicated asset yield of 6.5%.

The Investment Manager remains focused on identifying additional investment opportunities to complete the investment phase of the Fund.

REAL ESTATE MARKET UPDATE RETAILGrowth in retailer turnover in Australia stabilised at 3.1% year-on-year as at May 2017. In particular, growth in the key discretionary categories of clothing, footwear, personal accessory retailing, and cafes, restaurants and take-away food outlets have remained largely in line with long-term averages.

Increased competition continued to squeeze the retail sector in Q2 2017, with several well-known discretionary retailers entering voluntary administration over the quarter (including Topshop, Oroton and Herringbone). Low inflation continues to supress retail spending growth, with heavy discounting across retail categories resulting in no price growth, other than for the non-discretionary category of food. Sales momentum remained strong in the non-discretionary space, with Woolworths reporting a 5.1% increase in Australian food sales as at April 2017.

Rents were largely stable across the Australian retail sector in Q2 2017. The only exception was Sydney, which recorded modest growth in line with previous quarters.

241 O’Riordan Street in Mascot, Sydney

AUSTRALIAN PROPERTY OPPORTUNITIES FUND III | QUARTERLY UPDATE JUNE 2017 3

Transaction volumes increased during the quarter to approximately $1.6 billion, bringing the total for the first half of 2017 to around $2.3 billion. This robust growth is expected to continue given strong investor demand for retail assets. Yields on retail assets recorded further compression during Q2 2017.

Amazon confirmed its intention to expand into Australia in April; however, the exact nature of this expansion remains unclear. Amazon also announced its acquisition of US supermarket chain Wholefoods, for A$18 billion in June, signalling a new growth avenue in US physical grocery stores for the company.

OFFICELead indicators for the office sector were firm over Q2 2017, with job advertisements increasing 10.5% in the 12 months to June 2017. The NAB Monthly Business Survey (May 2017) also highlighted that business conditions are holding at elevated levels, above the long-run average.

Robust leasing activity was recorded during the quarter, with all six major CBD markets experiencing positive net absorption in Q2 2017. As a result, national prime gross effective rents increased 13.7% in CBD markets over 2017 year-to-date, while average lease incentives also decreased in Sydney, Melbourne and Perth.

The national CBD office market vacancy rate decreased by 0.5% to 10.9% over Q2 2017. The vacancy rate is projected to continue to trend down in 2017 and move into single digits by 2020 (JLL Research). Vacancy profiles differ market-to-market, with Sydney CBD vacancy moving towards the lowest levels in over 15 years (5.0%), while Melbourne CBD vacancy is projected to reach a cyclical low of 6.1% in 2018.

Compression of office sector yields continued in Australia, with Sydney CBD prime yields ranging between approximately 4.60% and 5.25% in Q2 2017. Melbourne CBD prime yields are also expected to remain firm. Transaction activity continues to be very strong, with approximately $1.5 billion of transactions recorded in the Sydney CBD alone.

INDUSTRIAL Strong activity led to approximately 0.8 million sqm of gross industrial space leased in Q2 2017. This brought the year-to-date gross take-up figure to 1.3 million sqm, which on an annualised basis is broadly in line and on track with 10-year averages. However, the national prime average weighted net face rent fell in Q2 2017, with diverging rental movements across major markets. All Sydney and Melbourne forecast prime precincts recorded net rental growth.

Low levels of stock coming to market has restricted sales volume growth, with total national investment volume for 2017 now expected to be below levels in recent years.

FUND STATISTICSPORTFOLIO SUMMARY OCCUPANCY (%) VALUE ($M)1

241 O’Riordan Street, Mascot, NSW 100 128.4

Total 100 128.4

GEOGRAPHIC DIVERSIFICATION(by current value)

SECTOR DIVERSIFICATION(by current value)

NSW Office

100%100%

1. At 30 June 2017.

AUSTRALIAN PROPERTY OPPORTUNITIES FUND III | QUARTERLY UPDATE JUNE 2017 4

For more information, visit the Fund’s website at apof.com.au or email enquiries to info@australianpropertyopportunitiesfund.com.au.

This document relies on actual property data from JLL Research (unless otherwise stated), current as at Q2 2017. This commentary has been produced solely as a general guide and does not constitute advice. JLL, its officers and/or its employees shall not be liable for any loss, liability, damage or expense arising directly or indirectly from any use or disclosure of or reliance on such information

DISCLAIMERThis Quarterly Update (Update) has been prepared by Fort Street Real Estate Capital as Investment Manager of Australian Property Opportunities Fund III (Fund). An investment in the Fund is subject to various risks, many of which are beyond the control of the Investment Manager and the Fund. The past performance of the Fund is not a guarantee of the future performance of the Fund.

This Update contains statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. None of the Investment Manager and the Fund, their officers, employees, agents, analysts nor any other person named in this Update makes any representation as to the accuracy or likelihood of fulfilment of the forward looking statements or any of the assumptions upon which they are based.

This Update may contain general advice. Any general advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider the appropriateness of the advice with regard to your objectives, financial situation and needs, and consider obtaining advice from a financial advisor. You should obtain a copy of the relevant PDS or offer document before making any decisions to purchase the product.

Source: Fort Street Real Estate Capital, JLL

WEIGHTED AVERAGE LEASE EXPIRY (BY GROSS INCOME)

Vacant 2017 2018 2019 2020 2021 2022 2023+

TOP TENANTS (BY GROSS INCOME)

Transport NSW 43%

AbbVie 14%

Landis Gyr 10%

Coates Hire 10%

Newslink 10%

70%

60%

50%

40%

30%

20%

10%

0%