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Metro OfficeMETRO OFFICE

Investment tide continues 5

Our perspective - metro office 10

Sydney 12

Melbourne 18

Brisbane 24

Adelaide 28

Perth 30

Newcastle 34

Gold Coast 36

Our experience - metro office 38

Contents

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3Metro Office | Research & Forecast Report | Second Half 2015

B8, 576 Swan Street, RichmondLeased on behalf of Botanicca 8 Pty Ltd

4 A Colliers International publication


Investment tide continuesThere is currently unprecedented demand for office assets in our capital city CBDs from both local and offshore investors. Even developers are scouting underutilised or ageing office buildings, with the intention of capitalising on the nation’s seemingly insatiable appetite for residential property by converting existing office buildings into luxurious apartments. Metro office markets are now very much witnessing this demand spill over into their suburban markets. The much-discussed influx of Chinese capital into Australia is now also spreading to metro markets. In North Sydney, four office assets have sold to Chinese investors for a total of almost half a billion dollars. All of these buyers were major chinese institutions. In Melbourne, Chinese buyers have been active in metro markets, however they have all been private buyers. We expect that Chinese buyers will continue to scour metro markets for good quality assets, with long term development upside seen as a positive. By Anneke Thompson Associate Director | Research [email protected] While stock in CBD markets is increasingly hard to come by and highly competitive when listed, it is not just spillover demand targeting metro assets. Many investors are taking a deliberate approach to invest in our metro markets, attracted by the higher yield, long term development upside potential, as well as infrastructure improvements that are benefitting some markets. This report will discuss those markets around the country that are attracting some of this capital, and what the prospects for future investment will be. OFFICE INVESTMENT SALES BY MARKET TYPE (YEAR TO JUNE)

68%60%

82%74% 76% 80%

64% 61%

32%40%

18%26% 24% 20%

36% 39%

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013 2014 2015

CBD Metro

Source: Colliers Edge

Metro markets are becoming increasingly popular, and particular pockets of the market are attracting the institutional and offshore investment that previously focussed almost solely on CBD markets. Institutional buyers traditionally prefer the


established metro markets of Parramatta, North Sydney and St Leonards in Sydney, Fortitude Valley and West End in Brisbane, and St Kilda Road and Southbank in Melbourne. A number of groups, including Centuria and GPT, have recently created listed metro office funds, however, it is offshore and private buyers who are driving the demand for metro office. Offshore investment into metro markets increased from $2.25 billion in financial year ending 2014, to $2.63 billion in financial year ending 2015 (for assets over $20 million), while private investment more than doubled, increasing from $477 million to $1.15 billion. Private investors currently have access to low priced debt, however are finding themselves priced out of hotly contested CBD markets.

Demand for metro office investments is strongest in Sydney, where over the financial year ending 2015, Metro office sales volumes outperformed even Melbourne CBD sales volumes. The Sydney metro office market offers some quality investment grade assets with good tenant covenants, and in 2015 it has been predominately offshore and institutional purchasers who acquired assets, although private investors also increased their activity compared to 2014. The volume of offshore investment in the Sydney metro market was greatly increased by the sale of Australand’s assets to Singapore’s Frasers Centrepoint. Six of the assets that formed part of this sale were located in Sydney metro markets, with their total value exceeding $700 million. The

largest sale in the Sydney metro market was also to an offshore buyer. This was the sale of 101 Miller Street & Greenwood Plaza to Henderson Global Investors and TIAA CREF for $302.6 million in November 2014.

Parramatta saw almost half a billion dollars of investment activity (greater than $20 million) in financial year ending 2015, and other than Rhodes (whose total sales volumes were derived from the Frasers Centrepoint/Australand deal), was the precinct that attracted the most sales activity in metro Sydney. Centuria, Eureka, VennCap Real Estate and GDI Property all invested in the precinct over financial year ending 2015, using both local and offshore capital. Parramatta has become increasingly popular with investors who are attracted to the strong occupancy fundamentals of the market. The office vacancy rate in January 2015 was 6.3 per cent, and this increased to 7.4 per cent in July 2015. These vacancy rates are still some of the lowest of all PCA monitored Metro markets in Australia. At the prime end of the market, the vacancy rate is virtually negligible, with only 6,573sqm of space currently available. Tenant demand remains consistently strong in Parramatta, with government, financial and professional services firms the key tenant groups driving demand. Supply, however, is muted. The only building currently under construction is Parramatta Square (Stage 1), a 26,500sqm, which is almost fully pre-committed by the University of Western Sydney. The

19 Foster Street, Surry HillsSold on behalf of W Property



development is due for completion in late 2016, and was sold by Leighton Properties in December 2014 to Charter Hall’s Core Plus Office Fund and Direct Office Fund on a fund through basis.

Parramatta will continue to attract increasing interest from a multitude of investor types. This market offers two distinct types of commercial stock which appeal to two completely different buyer profiles. Above-$100 million assets such as the Justice Precinct, which was sold for $170.1 million in December 2014 to Eureka Funds Management, offer secure investment grade stock with solid long-term covenants. These appeal to super funds, wholesale funds and other annuity type purchasers. The 6.6 per cent initial yield achieved demonstrates the competition for such assets. The sub-$100 million market appeals to local investors who have a greater appetite for risk and seek value-add opportunities. Sydney-based Capital Property Funds is a good example of this type of buyer. They purchased 91 Phillip Street in Parramatta for $30 million in June 2015. The group believes it can acquire well-located properties of institutional quality, and believes there are a host of buildings in the $20 to $50 million range that are higher yielding than CBD buildings but also have excellent investment characteristics.

St Leonards is another market attracting interest from investors, even as the market actually contracts in size as buildings are taken out of stock and converted to residential. Indeed, this trend is only increasing the value of remaining office stock. Private investment firm Altis Property Partners recently purchased Space 207 from Blackstone and fund manager Primewest for $169.5

million. The location of Space 207 in St Leonards, which stands to benefit from state spending on infrastructure, was believed to be a key reason for its appeal. So far in 2015, over $560 million worth of investment or development stock has transacted in St Leonards. This compares to $345 million of transactions over the whole of 2014.

Of course office buildings in St Leonards with residential conversion potential are also highly sought after. In August of this year, a Chinese development company, have purchased 500-520 Pacific Highway, for $150 million from Charter Hall’s Direct Office Fund. The property is an existing office building within an expanding residential location. Charter Hall spent the previous 18-24 months undertaking a Gateway Rezoning process to residential and, on completion, the development will yield approximately 500 apartments. The campaign generated significant interest from local and offshore developers, including several new groups from China, further highlighting the ongoing confidence in the Sydney residential market. The majority of interest came from Mainland China, with the eventual purchaser having their first direct investment into the Australian Property market.

Mirvac have also joined the list of developers converting office buildings in St Leonards, buying two office buildings at 472 and 486 Pacific Highway, St Leonards for $121 million from CIMIC Group (June 2015). The towers are currently the headquarters of Leighton, although they have already committed to move to their new tower at 177 Pacific Highway in North Sydney. Mirvac

Valley Metro, 230 Brunswick Street, Fortitude ValleySold as part of the Lend Lease Core Plus Portfolio on behalf of Lend Lease


Stanley Street House, Little Stanley Street, South BrisbaneSold as part of the Lend Lease Core Plus Portfolio on behalf of Lend Lease

is believed to be applying to build both residential units and commercial office space on the site.

North Sydney continues to be one of the prime metro office investment locations in the country. Over $640 million of sales have transacted in North Sydney in the year to September 2015. The most recent sale was the $90 million sale of 33 Berry Street to Australian Catholic University for $90 million. Just down the road, 20 Berry Street sold to the Chinese Yuhu Group for $60 million. Both sales represented a circa 7.3 per cent yield.

OFFICE INVESTMENT SALES, SELECTED SYDNEY METRO MARKETS

-$100

$100

$300

$500

$700

$900

$1,100

2010 2011 2012 2013 2014 2015 YTD

$AUD

Mill

ions

Parramatta St Leonards North Sydney


In Melbourne, institutional activity in the metro markets is traditionally centred around St Kilda Road and Southbank, although currently this year there have been no sales in these markets. This is due to a lack of supply, rather than a lack of

demand. We expect some sales to transact by year’s end. The Primewest owned 616 St Kilda Road is believed to be in due diligence for somewhere between $50 and $55 million. And arguably the best located office building on St Kilda Road is currently on the market, with Colliers International in the process of selling 324 St Kilda Road on behalf of Perth-based syndicate Lester Group, who purchased the building in 2013. The building occupies a high profile location at the sought-after northern end of St Kilda Road and is arguably one of the best located office buildings within the precinct, being one of very few buildings within walking distance of the CBD. The nine level property offers a total of 7,101sqm of quality office accommodation and ample basement parking for 70 vehicles. In Southbank, Deka Immobilien’s office tower at South Wharf is also believed to be in due diligence, and should finalise before the year is out.

In the wider Melbourne metro market, office transactions are on track to reach similar record levels reached in 2014, when just over $1.1 billion worth of sales were recorded. At the time of writing, $883 million worth of sales have transacted. One of the most recent sales to complete, that of 913 Whitehorse Road, Box Hill, is also the year’s most valuable sale. The building was sold by Cromwell for $156 million to FG Asset Management. The Australian Tax Office (ATO) has recently moved into the brand new asset on a 15 year lease. FG Asset Management is a Seoul based alternative asset management and financial services firm



43-45 Centreway, Mount WaverleyLeased on behalf of Australian Postal Corporation

that specialises in real estate investment. The deal represents a sharp circa 6.1 per cent yield, which reflects the quality asset and lease profile of the building. Other major sales include the $86 million sale of 191-197 Salmon Street, Port Melbourne to Altis Partners. The building was purpose built for GM Holden in 2005, and comprises a three level office building of 21,763sqm on a 23,960sqm site. In South Melbourne, the Dimension Data building at 10-16 Dorcas Street was sold in June 2015 by Colliers International for $30.75 million to a private offshore investor, represented by a locally-based fund manager. The property is 100 per cent leased until November 2019 to one of the world’s largest telecommunication service providers, Dimension Data Australia Pty Ltd., a wholly owned subsidiary of Nippon.

Given the strong demand for quality assets in our metro markets, it is not surprising that there has been yield compression across most precincts. In Parramatta, yields for A Grade stock now average 7.63 per cent, down from eight per cent in March 2015 – although it should be noted that newly developed A Grade stock

in Parramatta can attract yields at a 100bp premium to this. In St Leonards, yields have compressed by 50bp over the six months to September 2015, to now average eight per cent.

In Melbourne, St Kilda Road A Grade yields now average 7.63 per cent, down from 7.88 per cent in March 2015, while city fringe yields now average seven per cent.

METRO AVERAGE A GRAADE OFFICE MARKET YIELDS

7.00%

7.50%

8.00%

8.50%

9.00%

9.50%

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Sydney - Metro Melbourne - Metro Melbourne - SKR Melbourne - Southbank Brisbane - Metro




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

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Our perspective METRO OFFICE AUSTRALIASECOND HALF 2015

NATIONAL METRO OFFICE SALES

28%

39%

Long term average proportion

Highest proportion of total office sales since 2009

*Year to Sept 2015

PRIVATE INVESTORS DOMINATE METRO SPEND

NORTH SYDNEY FOCUS OF THE CHINESE INVESTORS

NORTH SYDNEY, NSW

PRIVATE INVESTMENT IN METRO OFFICE DOUBLES

YIELDS COMPRESS IN ALL MAJOR METRO MARKETS*

MELBOURNE7.56%25bp

SYDNEY7.63%32bp

BRISBANE8.13%12bp

ADELAIDE7.75%0bp

Buyer: Yuhu Group Property: 20 Berry Street Price: $60 million

Buyer: Aqualand Property: 168 Walker Street Price: $157.5 million

Buyer: Fosun Property: 73 Miller Street Price: $116.5 million

Buyer: CIC Property: 80 Pacific Highway (part of Investa portfolio)

METRO MARKET OUTLOOK Private and institutional Chinese investors continue to spread out from CBD to metro markets.

•

Supply will be impacted by withdrawals, particularly St Kilda Road, Southbank and St Leonards.

•

Yields set to decline another 25bp in major markets.

•

Infrastructure upgrades and government investment is key to long term potential of metro markets.

•

Vacancy in metro markets will tighten as many tenants still want to remain in these locations.

•

$1.15 billion

$477 million

FY 2013-14

FY 2014-15

PERTH8.50%25bp



For more information about Colliers Internationaland working with us visit:www.colliers.com.au

Our perspective METRO OFFICE AUSTRALIASECOND HALF 2015

NATIONAL METRO OFFICE SALES

28%

39%

Long term average proportion

Highest proportion of total office sales since 2009

*Year to Sept 2015

PRIVATE INVESTORS DOMINATE METRO SPEND

NORTH SYDNEY FOCUS OF THE CHINESE INVESTORS

NORTH SYDNEY, NSW

PRIVATE INVESTMENT IN METRO OFFICE DOUBLES

YIELDS COMPRESS IN ALL MAJOR METRO MARKETS*

MELBOURNE7.56%25bp

SYDNEY7.63%32bp

BRISBANE8.13%12bp

ADELAIDE7.75%0bp

Buyer: Yuhu Group Property: 20 Berry Street Price: $60 million

Buyer: Aqualand Property: 168 Walker Street Price: $157.5 million

Buyer: Fosun Property: 73 Miller Street Price: $116.5 million

Buyer: CIC Property: 80 Pacific Highway (part of Investa portfolio)

METRO MARKET OUTLOOK Private and institutional Chinese investors continue to spread out from CBD to metro markets.

•

Supply will be impacted by withdrawals, particularly St Kilda Road, Southbank and St Leonards.

•

Yields set to decline another 25bp in major markets.

•

Infrastructure upgrades and government investment is key to long term potential of metro markets.

•

Vacancy in metro markets will tighten as many tenants still want to remain in these locations.

•

$1.15 billion

$477 million

FY 2013-14

FY 2014-15

PERTH8.50%25bp

Investment sales conditions in Sydney metro markets surpassed expectations. A substantial reduction in yields eventuated, compressing by up to 0.75 percentage points over the last six months. Despite this, transaction volumes have been lower than last year due to a shortage of stock being brought to market. Enquiry for investment opportunities has been strong with the level of demand reflected in aggressive deal pricing. There remains significant unsatisfied capital which is prompting growing off market activity. Both domestic and offshore investors priced out of the Sydney CBD have been making their presence felt in metro markets where property remains relatively attainable.

Historically low interest rates have intensified the search for higher yielding properties. Investment conditions are akin to those pre-GFC, but unlike that period the cost of capital is cheaper, rental growth is forecasted and the low development pipeline over the last five years has created scarcity of stock. Residential uses are out-pricing commercial in Sydney’s metro markets, leading to the withdrawal of stock and the removal of the development pipeline. Competition for assets will remain fierce.

The leasing market has performed well over the first half of 2015, fuelling interest in commercial investment opportunities. The residential conversion trend is forcing tenants into the market whilst simultaneously reducing their supply options, stimulating activity. Although somewhat affected by the withdrawal of stock, vacancy rates have fallen across nearly all metro markets due to positive absorption from existing businesses expanding and new market entrants.

With the growing tenant demand, increased leasing acitivity, and the scarcity of stock, the next 12 months will witness further vacancy decline and net effective rental growth. Investors are likely to be factoring in rental growth in their purchasing decisions given current strong pricing. Due to weight of capital, tightness of stock, compressed interest rates, low commercial development pipeline and leasing market improvements, strong sales conditions are expected to endure for the next six to 12 months.

SYDNEY METRO OFFICETide of money making waves in Sydney metro

Second Half 2015


73 Miller Street, North SydneyLeased on behalf of Investa Asset Management Pty Ltd

SYDNEY METROPOLITAN A GRADE OFFICE MARKET

MARKET AVERAGE NET FACE RENTS ($/m² pa)

AVERAGE INCENTIVES

AVERAGE MARKET YIELD

REGION H1 2015 H2 2015 H1 2015 H2 2015 H1 2015 H2 2015

North Sydney $600 28% 6.63%St Leonards/ Crows Nest $455 28% 7.75%

Chatswood $455 25% 8.25%North Ryde/Macquarie Park $332.5 28% 7.63%

Parramatta $445 18% 7.63%Sydney Olympic Park/Homebush Bay

$405 20% 7.63%

Rhodes $380 28% 7.75%

Norwest $355 23% 9.13%

South Sydney $375 23% 7.25%

Sydney CBD Fringe $545 22% 7%

Note: Figures represent market averages at 1 July 2015Figures relate to existing A Grade floorspace, not newly built floorspaceSource: Colliers Edge

COLLIERS INTERNATIONAL RESEARCH FORECASTS



North SydneyVacancy falls againVacancy in North Sydney fell to eight percent over the six months to 1 July 2015 as a result of 8,363sqm of positive absorption. This represents the fourth successive six month reduction since 1 July 2013. In this period, A Grade vacancy fell from 4.9 per cent to 3.7 percent. The market is being impacted by withdrawal of secondary office stock for residential conversion coupled with limited new supply. The B Grade market is active, due to price-point and spec fit-out availability. Net effective rents have grown and in some cases exceed those in Sydney CBD. There is strong appetite for quality product.

The first new office development for six years, 177 Pacific Highway, will complete next year. This may add market choice, depending upon how much sublease space is available within the pre-committed Leighton’s floorspace. Jacobs has already taken sublease space in this property. Despite latent demand from large tenants, no pre-commitments have yet been secured to trigger the release of the remaining pipeline comprising 100 Mount Street (45,000sqm) and 1 Denison Street (48,000sqm).

SYDNEY METRO A GRADE NET FACE RENTS & INCENTIVES

24%

28%

25%

28%

18%

28%

26%

23%24%

23%

0%

5%

10%

15%

20%

25%

30%

North Sydney St Leonards Chatswood North Ryde Parramatta SOP Rhodes Norwest Sydney CBDFringe

South Sydney$0

$100

$200

$300

$400

$500

$600

$700

Net F

ace

Rent

s ($

/sqm

)

Gross

Rent Incentives Source: Colliers Edge

Strong investment deal pricingPricing for assets which are offered to the market is strong, with a lack of stock curtailing activity. Four major investment sales occurred in North Sydney over the first half of 2015, equating to $339.4 million. The residential conversion trend permeates the market, with Aqualand acquiring 168 Walker Street for $157.5 million, the highest value sale over the period. The strength of the market is evident from 140 Arthur Street, which was purchased by HK Realway in June. This B Grade asset with limited value-add potential was sold for $58.0 million, displaying a 7.5 per cent initial yield. Yields have compressed considerably over the last year.

Spec-fit outs popular with tenantsOccupier demand in North Sydney remains strong, with good quality fit-outs being highly sought after. Tenants are becoming educated, realising that with an existing spec fit-out they can get a market incentive on top. Demand is focused on small sub-300sqm tenancies but several larger users have entered the market.

Asciano was the largest leasing transaction finalised in North Sydney in the first half of 2015, with this tenant committing to 5,609sqm at 15 Blue Street and relocating from Parramatta. St Leonards/ Crows Nest Declining vacancy despite negative absorptionAs at 1 July 2015, vacancy in St Leonards was recorded at 11.2 per cent representing a 0.4 percentage point reduction over the prior six months. Notwithstanding this, occupied floorspace fell marginally over the period with the decline in vacancy reflective of stock withdrawal. Tenant demand is focused on properties which have speculative fit-outs. The major deals were Big Air taking 1,335sqm at 203 Pacific Highway and Primary Health Care taking 4,000sqm in the same building. St Leonards is facing challenges in attracting tenants comparative to other North Shore markets, which are deemed to offer broader entertainment options and greater amenity.

Residential outpricing commercialSt Leonards lends itself to residential development given land use zoning, location, transport and civic infrastructure including schools, hospitals and parkland. In May, Charter Hall secured permission for a rezoning at 500-520 Pacific Highway enabling the redevelopment of the site for high density residential uses. The adjacent site at 472-486 Pacific Highway was rezoned at the same time. The withdrawal and redevelopment of the commercial buildings on these sites will see further contraction of the office market.

203 Pacific Highway, St Leonards Leased on behalf of Verizon Australia Pty Limited


Two major investment salesTwo major investment sales occurred in St Leonards over the first half of 2015 with several others progressing. Abacus and Goldman Sachs acquired 201 Pacific Highway for $115 million in June. This deal showed a 8.5 per cent yield and a capital value of $6,947/sqm. Also in June Leighton’s Properties sold the rezoned 472-486 Pacific Highway to Mrivac for $121 million. The high capital value of $10,415/sqm reflected residential upside.

ChatswoodActive leasing marketChatswood comprises a busy leasing market with lots of activity. It remains a popular choice with good local amenity, high car parking ratios, affordable rents and expanding local businesses. Over the first six months of 2015, vacancy fell from 8.2 per cent to 6.8 per cent with 3,267sqm of positive absorption eventuating. Vacancy fell across A, B and C Grade floorspace as a result of tenant uptake. Significant leases included Creston Electronics taking 708sqm at 15 Help Street. Tenants in Chatswood are seeking quality floorspace and value for money. Fit-outs are key in attracting tenants.

No investment sales activityThere were no major investment sales in Chatswood over the first half of 2015. The Zenith was brought to the market but has yet to sell. Notwithstanding this, as with other metro markets in Sydney, there remains strong interest from investors due to weight of capital and low interest rates. The second half of 2015 will see investment sales activity in this market.

Commercial floorspace likely to have peakedDespite strong demand and shrinking vacancy in Chatswood, there are no commercial developments in the pipeline and lease lengths tied up existing stock. Pressure for residential development continues to be exerted. Chatswood is likely to have reached its peak commercial office development capacity.

North Ryde/Macquarie Park Plentiful leasing activityNorth Ryde/Macquarie Park is a busy market with good floorspace demand from a range of tenants. Vacancy fell by 1.6 per cent points to 8.4 per cent at 1 July 2015 as a result of strong positive absorption. Futhermore, net face rents have increased. AMP’s refurbishment of 1 Thomas Holt Drive was well received by the market. This will largely serve as the new headquarters of Metcash with the two remaining floors now leased. North Ryde/ Macquarie Park make a compelling cost proposition to tenants given the substantial rent differential compared to the other metro

markets. However, in spite of this, limited speculative development has yet to progress in the market.

Strong investment pricingThe first half of 2015 saw two major sales in North Ryde/ Macquarie Park totalling $67.7 million. This compares to $111.2 million for the same period in 2015 indicating quieter sales conditions, although interest in investment opportunities remains strong. A datacentre at 17-23 Talavera Road was acquired by the Keppel DC REIT for $43.3 million in June on a 7.1 per cent yield. Also in June, 4 Research Drive was brought by Macquarie University from Goodman for $24.35 million. Several other deals for pure office assets are currently underway and are expected to show low yield outcomes in the second half of 2015.

Infrastructure to drive the marketOver the next 12 months strong sales conditions will continue. There may be scope for further yield compression on account of rental growth projections, downward interest rate movement and competitive tension between investors. Two major pieces of transport infrastructure will positively impact on office floorspace in Macquarie Park. Development of the North West Rail Link will open up public transport access and the completion

The Zenith, 821 Pacific Highway, Chatswood Leased on behalf of Skycorp Property



of NorthConnex will deliver significant travel time savings to workers. Implementation of the Macquarie University Masterplan will also boost commercial office demand.

ParramattaLack of stock prevailsParramatta remains tight with a lack of available stock inhibiting the potential for existing tenants to expand and new tenants to locate into the market. The Propery Council of Australia (PCA) estimate current vacancy at 7.4 per cent with A Grade vacancy at 2.4 per cent. However, the true vacancy figure is likely to be lower than this given that a number of deals had been done at 1 July 2015 with floorspace yet to be occupied. Based on our estimates approximately 12,900sqm of vacancy floorspace was not available to lease at 1 July but not counted by the PCA. With this considered, the vacancy has in fact declined in this period, remaining below six per cent.

Colliers International completed a number of successful leasing deals over the first six months of 2015. These included: Parramatta City Council taking 5,700sqm at 126 Church Street; Hanson taking 1,830sqm at the Jessie Street Centre; and the Australian College of Nursing taking 1,220sqm at 9 Wentworth Street. These deals were all brokered by Colliers International. Net face rents have increased as a result of competition for limited stock. Steady enquiry remains, focused on smaller tenancies due to a lack of large stock options.

High level of investment interestFour properties in Parramatta sold for a combined total of $99.4 million over the first six months of 2015. The acquisition of 80 George Street by GDI Property Group for $38.7 million was the highest value sale over the period. This property was brought from Heathley Keystone Property and exhibited an 8.4 per cent reversionary yield. Colliers International brokered this deal.

Expression of interests marketed by Colliers International in Parramatta have been well-received with strong interest from a range of investors. Offshore interest is on the rise, albeit local privates and syndicators accounted for the majority. A number of off market transactions occurred due to investors electing to place strong unsolicited offers after missing out on public sales campaigns.

SYDNEY METRO A GRADE COMMERCIAL INVESTMENT YIELDS

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

North Sydney St Leonards/Crows Nest

Chatswood North Ryde/Mac Park

Parramatta Sydney OlympicPark

Rhodes Norwest Sydney Fringe South Sydney

Aver

age

A-Gr

ade

Yiel

ds (

%)

2014 H1 2014 H2 2015 H1


Pipeline being deliveredThe commercial development pipeline is starting to be unlocked with Parramatta Square Stage 1 now under way. More development will be required to alleviate constrained supply in Parramatta but construction remains focused on residential. There are currently 22 development cranes in Parramatta, of which all but one relate to residential development. New commercial supply will be required if low stock availability is to be alleviated. The developer Walker Corporation has secured a tender to develop the largest stages of the $2 billion Parramatta Square redevelopment project. This will comprise Stage 2’s Aspire Tower and two commercial towers in Stages 5 and 6. These are expected to deliver approximately 140,000sqm of commercial floorspace.

Norwest Offices highly sought afterNorwest has been experiencing strong tenant demand with 15,000sqm of floorspace absorption in the last six months. In one of Australia’s largest non-CBD lease renewals, Mirvac renewed its lease with Woolworths’ head office. Excluding Council Chambers there have been no new commercial buildings completed in

9 George Street, ParramattaSelling on behalf of Hyperion


Norwest since 2012 and there are now only four vacant non-strata options of over 1,000sqm available. A range of tenants are being enticed into Norwest which offers an affordable price point and high car parking ratios. With the ongoing development of new infrastructure serving this market, primarily the North West Rail Link, tenant demand is expected to strengthen.

One investment dealNorwest Quay, 21-23 Solent Circuit, Baulkham Hills was the only major commercial investment sale over the first half of 2015. This Colliers International brokered deal saw this four level A Grade asset sell for $38.9 million on a 7.8 per cent initial yield, with Investec acquiring it from Altis in March. Floorspace in this property was subsequently leased by Colliers International to Bosche, NSW Strata and Imation.

Sydney Olympic ParkCommercial development continuesThe first six months of 2015 was quiet for leasing activity in Sydney Olympic Park. Positive absorption was recorded on account of the completion of 3 Murray Rose Avenue in March. This new 12,900sqm A Grade commercial office building is 100

percent committed to Samsung and will provide their national headquarters. The new NRMA headquarters are now under construction. 4 Murray Rose is being marketed by Colliers International with good enquiry registered due to a lack of supply in the market. There are three active tenants seeking 7,000sqm to 9,000sqm.

There were no investment sales in Sydney Olympic Park over the first half of 2015.

Residential uses prevailSignificant volumes of residential development are being delivered in Sydney Olympic Park. Carter Street is designated as a Priority Precinct (formerly Urban Activation Precinct) in order to promote high density residential development in conjunction with employment and retail uses. Ongoing residential development in Sydney Olympic Park will create greater amenity for commercial tenants through new retail and entertainment floorspace. It will also facilitate improved access by foot and public transport, making the area more attractive to tenants.

Rhodes

New leasing space approachingRhodes comprises a mature office market with little further development capacity. Activity in the first half of 2015 was limited to existing tenants expanding and recommitting, such as Link Market Services. New deals will occur in the second half of 2015 with some well fitted space to become available due to tenant relocation from within and outside Rhodes. Tenant drivers are work-life balance due to the nearby presence of childcare, gyms and retail, with strong accessibility.

Investment interestRhodes did not see any major investment sales over the first half of 2015. We understand that the second half of 2015 will see at least one major sale to transact at strong pricing. This will encourage further downward pressure on yield expectations for the market.

South Sydney

Good floorspace absorptionSouth Sydney has had an active leasing market over the first six months of 2015, attributed to both tenants moving within the market and entirely new tenants. There has been good deal flow in A Grade buildings and adaptive reuse premises. Tenants are attracted by accessibility, comparatively lower face rents and the high car parking ratios.

Although the erosion of commercial stock due to residential development is is still significant, new commercial floorspace are

256-280 Coward Street, MascotManaged on behalf of private clients



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

For further information please contact: Sas Liyanage Research Analyst | Research | Tel +61 2 9249 2039 [email protected]

being developed. 289 King Street is seeking pre-commitments and is due to complete in the second half of 2015. Travelodge has committed which will enable the office 5,500sqm office component to be delivered speculatively. Stage 1 of Goodman’s Connect Corporate Centre has been pre-committed by Qantas Credit Union (2,500sqm) and is currently being developed. Pre-commitments are being sought for Stage 2.

Limited investment opportunitiesOne major pure commercial investment sale occurred in South Sydney over the first six months of 2015. This comprised the Sydney Airport Centre, 15 Bourke Road, which was sold by local private Capital Corporation to CR Kennedy for $35 million in February on a 7.9 per cent yield. The property comprises a fully leased office building of 8,832sqm. CR Kennedy will occupy 1,600sqm when the existing tenant vacates. This year has been quieter than the equivalent period last year which saw $156.7 million of commercial investment sales. This is reflective of a lack of stock, rather than a lack of demand.

Erosion of office stockSouth Sydney continues to witness the erosion of both commercial and industrial stock for residential redevelopment. This trend is also constraining the development pipeline. The mixed use transitioning of the area will provide greater retail and entertainment, improved amenity and streetscape. Re-routing of roads is planned which should improve vehicle travel times.

Sydney fringe Rental growth evidentThe Sydney fringe market contains over 1 million square metres of commercial office floorspace of which approximately 372,600sqm or 35 per cent is provided in 17 A Grade office buildings. In the first six months of 2015, the market has seen an overall reduction in total vacancy across A and B Grade floorspace, from 6.3 per cent to 5.3 per cent driven by 10,818sqm of positive absorption. The market is tight, particularly for tenants seeking greater than 5,000sqm with no options available in the short-term until the 23,300sqm refurbishment of 100 Harris Street completes. Floorspace in this development is already hotly contested, indicative of pent up occupier demand and scarcity of stock. It has been confirmed that 4,000sqm has been committed to Domain at approximately $685/sqm gross. There is evidence of rental growth and a decline in incentives. This is expected to influence upcoming lease renewal negotiations.

Darling Harbour set to shineCommercial development activity in the Sydney city fringe is limited. The two major developments are Fraser’s Central Park site on Broadway, Chippendale and Darling Harbour Live. Central Park incorporates approximately 50,000sqm of A Grade office floorspace in two buildings. We understand that some of this floorspace may be developed for residential or hotel uses. The Darling Harbour precinct is underway with a new A Grade commercial office building of 22,000sqm currently awaiting pre-commitment to trigger development. This is expected to deliver one of the world’s most dynamic mixed use precincts.

Investment marketIn the first half of 2015 investment sales activity in the Sydney fringe market has been limited. Although sales activity was substantially higher in 2014, yield compression and capital value growth has continued as the Sydney fringe market intensifies. The three major sales were: 8 Central Avenue, with a 50 per cent share sold to Centuria in April for $110 million on a 6.75 per cent yield; 65-67 Foveaux Street which sold in May for $10.75 million to a private investor at a 6.46 per cent yield; and 19 Harris Street which UBS-Grocon brought for $91.92 million in June at a 6.75 percent yield. This latter off market transaction was undertaken by Colliers International.

The second half of 2015 will see strong demand continue. With the lack of well leased investment grade stock in the marketplace, the number of groups actively looking to buy and with interest rates remaining low, there is potential for further yield compression.19 Harris Street, Pyrmont

Sold on behalf of La Salle Investment Management


MELBOURNE METRO OFFICE

Office transactions in Melbourne’s metro market are on track to reach similar record levels reached in 2014, when just over $1.1 billion worth of sales were recorded. At the time of writing, $883 million worth of sales have transacted. One of the most recent sales to complete, that of 913 Whitehorse Road, Box Hill, is also the year’s most valuable sale. The building was sold by Cromwell for $156 million to FG Asset Management. The Australian Tax Office (ATO) has recently moved into the brand new asset on a 15 year lease. FG Asset Management is a Seoul based alternative asset management and financial services firm that specialises in real estate investment. The deal represents a sharp 6.1 per cent yield, which reflects the quality asset and lease profile of the building. Other major sales include the $86 million sale of 191-197 Salmon Street, Port Melbourne to Altis Partners. The building was purpose built for GM Holden in 2005, and comprises a three level office building of 21,763sqm on a 23,960sqm site. The building formed party of Mirvac’s ‘Diversified Office Portfolio’

which consisted of a collection of five high profile office buildings in Melbourne, Sydney and Canberra, which were sold by Colliers International in July 2015.

Solid transaction activity has resulted in strong yield compression in the major transaction markets of the city fringe, inner east and outer east. Yields in each of these markets have compressed by 50 basis points, with A Grade yields now averaging seven per cent in the city fringe and inner east, and 7.25 per cent in the outer east. As exemplified by the FG Asset Management’s purchase in Box Hill, institutional grade assets with very strong tenant covenants and long WALEs can achieve significantly tighter yields than the market average.

Despite the above-mentioned major transactions being sold to institutional buyers, the majority of buyers in the Melbourne metro market are private investors. By total sale price, over 50 per cent of sales were to private investors (versus 37 per cent for institutional buyers), and by number of sales this rises to 60 per cent for private investors and only 16 per cent for institutional buyers. Low interest rates continue to attract owner occupiers to the market, with a full $122 million, or 16 per cent, of transactions selling to owner occupier buyers.

Although we have seen strong transaction activity in the Melbourne metro market, there is still a lack of stock on offer, given the sheer number of potential purchasers looking for buying opportunities.

The leasing market has seen a jump in vacancy across each of the metro precincts. The outer east and south east markets have experienced the biggest increases in vacancy, as new stock and backfill space add to supply. The outer east vacancy rate increased from eight per cent in March 2015 to 10.8 per cent in September 2015, while the South East increased from a very low 2.9 per cent to 7.7 per cent over the same time period. Overall, the Melbourne metro vacancy rate increased from six per cent in March 2015 to 8.1 per cent in September 2015.

Investors snap up rare institutional grade offerings

Second Half 2015


990 Whitehorse Road, Box HillLeasing on behalf of Glorious Sun



Investors snap up rare institutional grade offerings

City fringe/inner east City fringe still the preference for metro office buyersOver $345 million worth of office stock has transacted in the city fringe market at the time of writing, which represents almost 45 per cent of total metro office market sales for 2015. The largest sale was the previously mentioned sale of Holden’s Headquarters at 191-197 Salmon Street in Port Melbourne for $86 million to Altis Partners. Other major sales include 185 Rosslyn Street in West Melbourne for $40 million. The site sold by Australia Post in March 2015 and is currently utilised by them as a Call Centre. In time, the site is likely to be converted to a residential development. In South Melbourne, the Dimension Data building at 10-16 Dorcas Street was sold in June 2015 by Colliers International for $30.75 million to a private offshore investor, represented by a locally- based fund manager. The property is 100 per cent leased until November 2019 to one of the world’s largest telecommunication service providers,

Dimension Data Australia Pty Ltd., a wholly owned subsidiary of Nippon. The northern fringe market also saw one of the largest sales in that sub-precinct for some time. Castlerock purchased 172-186 Moreland Street in Brunswick for $20.95 million in July 2015 on a sharp 6.5 per cent yield. The property is fully leased until October 2022 to Centrelink.

Sales in the inner east have been quieter than the city fringe, although that is not for lack of demand. Only three office buildings have transacted in the year to date. The most recent was the sale of 1911 Malvern Road in Malvern East to a private investor. The building sold just after auction for $9.85 million. The Colliers-led sales campaign was met with an influx of interest from a deep pool of buyers. The 2,315sqm, three-level office building, with 87 on-site car parking spaces, is situated on a 1,604sqm site and is currently fully leased. It returns a net income of approximately $717,091 per annum, representing a 7.3 per cent yield. Also in June 2015, 1155 High Street Armadale sold for $10.6 million to an offshore private investor.

Vacancy rises as new supply in city fringe comes onto marketThe vacancy rate in each of the city fringe and inner east markets has risen in the six months to September 2015. In the city fringe, the vacancy rate increased from a historically tight 5.97 per cent to 7.83 per cent. This was predominately due to new supply coming on to the market, including 14,471 sqm at 81-109 Moray Street in South Melbourne, and 3,975 sqm, at 48-58 York Street, also in South Melbourne.

In the inner east, the rise in vacancy was more moderate, with the vacancy rate increasing from 5.95 per cent to 6.2 per cent. Looking forward, we are expecting a decrease in vacancy in the inner east at our next vacancy count in March 2016. Beyond that, however, the completion of 16,000sqm of new supply at Chadstone Shopping Centre will see the vacancy rate climb again.

235 Springvale Road, Glen WaverlyProject Managed On behalf of MYOB Winner of PCA

MELBOURNE METRO OFFICE A GRADE MARKET INDICATORS

REGION AVERAGE NET FACE ($/M² PA) INCENTIVE RANGE YIELD RANGE

H2 2015 H2 2015 H2 2015 H2 2015 H2 2015 H2 2015

City Fringe $340 18%-27% 6.75%-7.25%

Inner East $350 18%-22% 6.75%-7.25%

Outer East $293 20%-30% 7%-7.5%

South East $260 20%-25% 7.75%-9%

North & West $253 18%-25% 8%-9%

St Kilda Rd $325 25%-32% 7.25%-8%

Southbank $440 20%-30% 7%-7.75%



MELBOURNE METRO OFFICE SALES VOLUMES

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Outer east Vacancy increases as backfill becomes available Landlords in the outer east were pleased to see a major downwards movement in the outer east over the six months to March 2015 when vacancy reduced from 10.9 per cent to eight per cent. However, the vacancy rate has since climbed back to near September 2014 levels, to now be at 10.8 per cent. The reason for the increase was the completion of the ATO’s new building at 913 Whitehorse Road, and the associated backfill

that the ATO have departed at 990 Whitehorse Road. The Box Hill market is having the greatest impact on outer east vacancy overall, with the vacancy rate in that suburb currently sitting at a record 19.8 per cent. This is an opportune time for tenants to secure good space in Box Hill, as the suburb historically has been tightly held, and there is limited scope for new commercial supply in the market, given the competitive nature of the residential development market at the moment. The other major impact on the Outer East market is development happening at Caribbean Gardens in Scoresby, where approximately 12,000sqm of space remains vacant after pre-commitments by Rubbermaid (2,000sqm), Miele (1,300sqm) and Scandanavian Tobacco (700sqm).

We expect that there will be another sharp rise in vacancy over the next six months, as further new buildings are completed and tenants move to these new buildings from within the precinct, or centralise their premises by moving to the CBD. The latter half of 2015 will see the completion of 211 Wellington Rd (60 per cent pre-committed) as well as 8 Nexus Court, Mulgrave (7,500sqm and 67 per cent pre-committed to GS1), with the majority of these pre-committed tenants vacating space from within the outer east market. In terms of centralisation, 321-327 Ferntree Gully Rd, Mt Waverley, will be vacated by Jemena who are re-locating to 567 Collins Street in the CBD. Our current forecasts show vacancy peaking at 14.6 per cent in March 2016.

Bayside Junction: 973 Nepean Highway, BentleighSold on behalf of CVC Nepean Pty Ltd



The current and forecast increase in vacancy has meant incentives have risen across both A Grade and secondary grade stock. Incentives for A Grade stock increased from an average of 20 per cent in March 2015, to 25 per cent in September 2015. Tenants looking for secondary grade stock can expect incentives of between 25 per cent and 35 per cent. It should be noted that these incentive levels are averages, and that some suburbs within the outer east are still experiencing quite low vacancy and supply levels. There has also been a decline in net face rents in the outer east, such that effective rents have declined by 12 per cent across both the A Grade and secondary grade markets.

MELBOURNE METRO OFFICE MARKET VACANCY

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City Fringe Inner East Outer East South East North & West


North & west New supply continues to grow north & west office marketThe Melbourne north & west market has continued to increase supply, with 3,800sqm (or 1.5 per cent) added to total stock levels. At MAB’s University Hill project, 12 Ormond Square (3,800sqm) was recently completed, with well over half of the building already sold or leased at the time of writing. In 2016, further developments are expected at 6 English Street (5,000sqm) at Essendon Fields and 2,000sqm at South Centre Road in Tullamarine. Vacancy in the north and west increased from 4.6 per cent to 5.3 per cent, which is still moderate by historic standards.

There was limited sales activity greater than $5 million recorded in the six months to September 2015. In Essendon, 333 Keilor Road sold for $6.75 million in July 2015 to a part owner occupier.

MELBOURNE METRO AVERAGE A GRADE OFFICE YIELDS

6.50%

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City Fringe Inner East Outer East South East North & West


South east Vacancy climbs after ATO moves to new building in DandenongVacancy in the south east climbed from a record low of 2.9 per cent in March 2015, to 7.6 per cent in September 2015. Much like the outer east and the ATO’s Box Hill development, the increase in vacancy in the south east was primarily due to the ATO’s move from 14-16 Mason Street (15,051sqm) to 11-13 Robinson Street (13,803sqm), both in Dandenong. Other major moves include the departure of Glenvill Homes from 1,366sqm at 840 Dandenong Road in Caulfield, for more centralised premises in Richmond. In Cheltenham, a speculative development at 27-43 Grange Road reached completion, further contributing to rising vacancy in the precinct. The vacancy rate in the south east is expected to peak at 12.5 per cent in March 2016, after South East Water moves from 8,000sqm at 20 Corporate Drive in Moorabbin to 11,000sqm to brand new premises in Kananook Creek Boulevard in Frankston.

The second half of 2015 saw the largest on-market metropolitan campaign to date in finalise with the sale of Bayside Junction for $41.5 million. The building was purchased by Henkell Brothers Investment Managers on behalf of a partnership of European investors. The sale represented a yield of about 8.7 per cent. The building had recently undergone an extensive lobby refurbishment and had welcomed brand new high calibre tenants Alfred

271-279 Robinsons Road, RavenhallManaged on behalf of the Trust Company Australia acf Ravenhall Office Trust


Health as an agency for Headspace and Royal District Nursing Services. This was in addition to the Commonwealth Government confirming their commitment to anchor around 50 per cent of the building for another five years.

St Kilda Road & SouthbankOffice buildings continue to be purchased for residential conversionInvestment sales activity in the St Kilda Road and Southbank precincts has traditionally been very cyclical, and that trend continues in 2015, as the quiet point in the transaction cycle is being felt. Following a record year of office investment activity in 2014, when just over $500 million worth of office stock transacted in the St Kilda Road precinct and just over $365 million was sold in Southbank, there has been no investment sales activity in either of these precincts in 2015. There have been two transactions of office properties in St Kilda Road in 2015, however both of these buildings are being converted to a residential use. Private investment and development group Qualitas purchased 499 St Kilda Road in April 2015 for $80 million, and are currently partnering with LAS Group in marketing a boutique residential development known as The Fawkner. The other major transaction was the sale of the St Kilda Road Police Complex at 412 St Kilda Road to Malaysian developer UEM Sunrise for $58 million. The Victorian Police Force are in the process of vacating the building to move into their new purpose built premises in Spencer Street in the CBD. UEM Sunrise will convert the building and/or site to a residential use.

By year’s end, there is likely to be at least two investment sale transacted in St Kilda Road, with the Primewest owned 616 St Kilda Road believed to be in due diligence for somewhere between $50 and $55 million. And arguably the best located office building on St Kilda Road is on the market amidst strong demand for assets in this tightly held precinct, with Colliers International in the process of selling 324 St Kilda Road on behalf of Perth-based syndicate Lester Group, who purchased the building in 2013. The building occupies a high profile location at the sought-after northern end of St Kilda Road and one of very few buildings within walking distance of the CBD. The nine level property offers a total of 7,101sqm of quality office accommodation and ample basement parking for 70 vehicles. In Southbank, Deka Immobilien’s office tower at South Wharf is also believed to be in due diligence, and should finalise before the year is out.

Despite the lack of sales evidence, yields have compressed in the St Kilda Road and Southbank precincts, in line with compression levels in the CBD and Metro markets. St Kilda Road A Grade yields now average 7.63 per cent, down from 7.88 per cent in March 2015, while in Southbank, average A Grade yields are 7.38 per cent, down from 7.63 per cent.

ST KILDA RD & SOUTHBANK OFFICE SALES VOLUMES

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Melbourne - SKR Melbourne - Southbank


St Kilda Road vacancy continues to trend downAs predicted back in March, the St Kilda Road vacancy rate continues to fall, and at July 2015 the PCA vacancy rate was 9.3 per cent, down from 9.8 per cent in January 2015. Since the publication of this rate, a number of lease deals have occurred, and coupled with the continued trend of office buildings being removed from stock for residential development, we will see another vacancy fall in January 2016, to around 8.7 per cent.

There have been a number of sub-500sqm deals in St Kilda Road over the past six months. Investment Strategists are moving from Punt Road, to a refurbished floor at 636 St Kilda Road, taking

324 St Kilda Road, MelbourneSelling on behalf of Lester Group




For further information please contact: Anneke Thompson Associate Director | Research | Tel +61 3 9940 7241 [email protected]

75 Dorcas Street, South MelbourneLeased to Mondelez

324 St Kilda Road, MelbourneSelling on behalf of Lester Group

242sqm of space. The company was looking to upgrade from its previous premises and was attracted to the quality of 636 St Kilda Road’s presentation, including the great end of trip facilities. Other sub-500sqm deals that have occurred in St Kilda Road include Publisher’s Internationale taking 114sqm at 468 St Kilda Road and SIRVA taking a five year lease over 254sqm at 636 St Kilda Road, with the lease starting in September 2015. At the larger end of the deal spectrum, Fair Work Building and Construction has taken the last remaining tenancy at 509 St Kilda Road. The Federal Government agency leased 1,649sqm of space, and completes one of the largest St Kilda Road backfill leasing campaigns in recent years. All of the tenants that took space at 509 St Kilda Road have come from within a 500m radius of 509 St Kilda Road, demonstrating ongoing demand from tenants currently within the St Kilda Road market to upgrade their office accommodation and stay within the market.

In the Southbank precinct, Colliers International’s Ben McKendry and Rob Joyes have facilitated a new 10-year lease to Mondelez at 75 Dorcas Street in South Melbourne. The deal – the most substantial lease deal in the Melbourne metro market to date in 2015 – will see Mondelez occupy approximately 4,600sqm on Level 10 and part of Level 9, from late 2015.

MELBOURNE METRO OFFICE MARKET VACANCY

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St Kilda Road Southbank Forecast



BRISBANE METRO OFFICE

The acquisition of secondary stock for conversion continues to proliferate and become a defining theme in the metropolitan market. The majority of sales (above $5 million) that have materialised in the capital market have been acquired for residential upside. Secondary office buildings within the fringe, predominantly along Wharf Street in Spring Hill and the Inner South precinct will continue to be the main targets for residential conversion. With Council well underway in its preparation of new neighbourhood plans for these areas and some significant population and dwelling targets in place, these precincts will experience a renaissance of residential development.

On the capital market front, the pursuit for residential development sites in Brisbane has intensified. Australia’s economic climate and its perception as a “safe haven” for investment is driving a healthy flow of offshore funds into the country. Despite the recent devaluation in China’s currency; the fall in stocks and the monetary policy changes in China are likely to trigger more cross-border investment. As Brisbane provides greater affordability and viability for residential development, the appetite for sites in the Brisbane Metro market will continue to gather momentum with no signs of cessation. With demand insatiable and constraints in market supply, further yield tightening is anticipated. Fund managers including Primewest are capitalising on investor demand after having brought their portfolio to the market and the compression bias is likely to continue with an expectation that yields will firm by up to 50bps over the next six to 12 months.

The vacancy rate in the Metro market dropped marginally to 12.6 per cent aided by the removal of office stock. The combination of a residential apartment development boom and a drought in the supply pipeline will see the vacancy rate drop to below 10 per cent over the next few years. Beyond the Southpoint (Flight Centre) and Joule (Tatts Group) developments and the most recent announcement of Consolidated Properties construction of a purpose-built facility for Aurizon (19,000sqm) at 900 Ann Street, there are no other developments that will proceed with certainty. There are some larger tenants considering fringe locations including Aurecon, NAB, and the Brisbane Catholic Education, with pre-commitment to drive future commercial supply.

The fringe market recorded positive net absorption of 10,095sqm over the twelve months to July 2015. The take up of space was largely biased towards new A Grade stock reflecting flight to quality, as tenants including Lend Lease (5,482sqm) amalgamated their four sites and Robert Bird (1,430sqm) relocated into Kings Gate leaving behind space in the CBD. High incentives and the downward pressures placed on effective rents may lead to a higher volume of leases involving tenant migration from fringe to CBD, as tenants upgrade and move into newer space taking advantage of the competitive rents.

As most businesses have been downsizing, tenant demand has been focused on smaller occupiers in the sub-500sqm. Notwithstanding this, there have been some larger deals signed, with Fujitsu Australia occupying 1,839sqm at 1 Breakfast Creek Road and Minor DKL Food Group taking on a 1,800sqm lease

Sites with development upside in pursuit

Second Half 2015


Level 12, 100 Wickham Street, Fortitude ValleyLeased on behalf of Fortius Funds Management Pty Ltd



BRISBANE METRO OFFICE PRIME GRADE MARKET INDICATORS

REGIONAVERAGE

GROSS FACE ($/m² pa)

INCENTIVE RANGE YIELD RANGE

H2 2015

H1 2016 H2 2015 H1

2016 H2 2015 H1 2016

Urban Renewal $538 30% - 40% 7% - 7.75%

Inner South $553 25% - 35% 7% - 7.75%

Milton $495 30% - 40% 8% - 8.75%

Toowong $475 30% - 35% 8.5% - 9%

Spring Hill $500 30% - 40% 8.5% - 9%


across two levels at 199 Grey Street. Analogous to the Brisbane CBD market, education providers have been the most active sector, with Careers Australia having leased over 3,300sqm across two sublease deals and most recently Pragmatic Training having leased 3,600sqm in the K1 office tower. Whilst market conditions remain soft, incentives are expected to remain at their current levels along with effective rents.

Inner south Demand for sites insatiable The quest for development sites in inner south has been relentless. Three market transactions (over $5 million) have been recorded so far in 2015 totalling $120.8 million, with only one sale for pure investment. Private investor, Green Future Australia acquired the 41 Buchanan Street asset in West End for $20 million from BIS Properties, at a yield of 7.63 per cent. The other sales were sold to developers for redevelopment potential.

The appetite of offshore investors chasing sites with significant capital uplift, and in particular those that have development applications already in place is evident. Chinese property investor, Guangzhou R&F, is making its second acquisition in a year, on this occasion paying triple the amount ($82 million) for a site at 25 Donkin Street. This is less than a year after Brisbane based property developer Pointcorp had acquired the property from DEXUS. The investor had purchased the site subject to development approval and remediation.

While competition for sites has been pricing out some Australian property developers, others have been reaping tremendous capital gain. The 19-23 Hope Street in South Brisbane also transacted early in the year and is understood to be undergoing redevelopment for residential purposes.

Most tightly held market despite rise in vacancy Vacancy in the inner south precinct climbed to six per cent in July 2015 due to negative net absorption of 9,115sqm. Despite

Levels 4 & 5, 143 Coronation Drive, MiltonLeased on behalf of AMP Capital Investors

the increase in vacancy, it continues to remain the most tightly held of the metro markets. More office stock will be withdrawn as residential development burgeons, and with the fully committed Southpoint the only new supply due to be delivered to the market in 2016, vacancy levels will lead to further tightening.

INNER SOUTH - SUPPLY ADDITIONS,WITHDRAWALS, VACANCY

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-15,000

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Source: PCA OMR July 2015/Colliers Edge

Urban RenewalNew development drives leasing activityUrban Renewal continues to be one of the most sought after precincts as it affords high amenity. Significant supply additions have been delivered to the market over the past three consecutive half year periods totalling just shy of 63,000sqm. K1 at Kings Gate (15,990sqm) in Bowen Hills has been the latest addition. As flight to quality remains an ongoing trend, leasing activity in Urban Renewal has been robust and correspondingly net absorption has been high. Over the six moths to July 2015, Urban Renewal experienced positive net absorption of 14,732sqm with Lend Lease, Robert Bird, Konica Minolta and State Government signifying large leasing deals.


There will not be further supply additions until the completion of Aurizon’s purpose-built facility (19,000sqm) and Joule (25,000sqm) in around 2018. Tatts Group will consolidate its Melbourne headquarters and Albion operations into the proposed structure within the Newstead Riverpark precinct. Construction on their 17-storey tower is expected to begin next year.

K1 at Kings Gate is largest dealThe largest office investment deal this year-to-date in the metropolitan market has involved the exchange of K1 at Kings Gate between Lend Lease and Impact Investment Group. The new A Grade asset sold for $131.9 million at a reversionary yield of 6.96 per cent underpinned by leases to Lend Lease, Ezidebit and Robert Bird Group with Pragmatic Training the latest to commit. Further to this sale, Terrace Office Park in Bowen Hills is currently under due diligence. It achieved a sale price of $31 million. The 7,003sqm site is planned for redevelopment comprising 521 units across two towers. In addition, Engage Capital has sold its 130 Commercial Road property to a private investor for $16.75 million. The sale reflected a reversionary yield of 8.73 per cent and a WALE of 3.29 years.

BRISBANE METROPOLITAN OFFICE - INVESTMENT SALESQUARTERLY AND ROLLING ANNUAL SALES VOLUME

0

100000000

200000000

300000000

400000000

500000000

600000000

700000000

800000000

900000000

2006

H2

2007

H1

2007

H2

2008

H1

2008

H2

2009

H1

2009

H2

2010

H1

2010

H2

2011

H1

2011

H2

2012

H1

2012

H2

2013

H1

2013

H2

2014

H1

2014

H2

2015

H1

Rolling Ann Sales Vol Half Yr Sales Vol

Source: RP Data/Colliers Edge

Spring HillRegeneration of underutilised precinct The Spring Hill Neighbourhood Plan has been approved by Council and is with State Government for review. The plan proposes to protect the heritage and “rich character” of Spring Hill while increasing density in the inner-city suburb. Key planning outcomes are to allow for the planned growth of significant educational and medical facilities. This transformation will result in further tightening, which is already being evidenced by falling vacancy rates as supply is continually being withdrawn from the market.

Over the six months to July 2015, a further 7,274sqm of office stock was withdrawn for residential/hotel conversion, including two buildings on Wharf Street (Queensland Transport and Main Roads and Hatch Engineering). Consequently, Spring Hill has contracted and is continuing to reduce its share of office space relative to the other precincts. Currently it comprises 11.5 per cent of office stock representing a halving from ten years ago. With the level of activity proposed and the vision for the area, Spring Hill will constitute less than 10 per cent of the share of office space in the combined metro precincts. This is positive news for the other markets, as displaced tenants will need to find suitable premises and relocate. An example of a displaced tenant was the Australian Federal Police who took on a 4,000sqm lease at 45 Commercial Road in Newstead.

In the short to medium term, Spring Hill is likely to experience further contraction. There were two sales in 2015, both having been purchased for redevelopment upside. A private investor acquired 383 Boundary Road for $6.01 million at a capital value of $3,466/sqm. A larger transaction signified Cbus’s acquisition of the 185 Wharf Street building previously tenanted by State Government for $14.5 million reflecting a higher capital value of $7,793/sqm. Both sites have been earmarked for residential/hotel conversions.

SPRING HILLS SALES VOLUMES

$37.70 $37.50

$10.23

$22.17 $19.60 $20.31

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

2011 2012 2013 2014 YTD 2015

Sale

s vo

lum

e ($

m)

Investment Redevelopment

Source: RP Data/Colliers Edge

Milton & ToowongEffective rents may face downward pressureThe Milton and Toowong precincts will continue to be challenged. Businesses are placing more focus on location, and areas

419 Upper Edward Street, Spring HillSold on behalf of Butler




For further information please contact: Vivienne Bolla Manager | Research | Tel +61 7 3026 3305 [email protected]

affording greater amenity are typically the frontrunners. There is also greater importance placed on end of trip facilities as parking and congestion become increasingly problematic.

Both Milton and Toowong have maintained a fairly stable supply of office space over the past several years. The last supply additions to Toowong were in 2007 and in Milton in 2010. Subsequently, these markets have been at a competitive disadvantage relative to the CBD, inner south and Urban Renewal, which have been experiencing significant growth as new stock has been delivered to the market incorporating elements key to attracting tenants. To demonstrate their quantum of growth, the inner south and Urban Renewal precincts have collectively more than doubled their office stock over a ten year period to July 2015, adding 413,185sqm of floorspace. In contrast, 57,228sqm of supply was added to the Milton and Toowong precincts combined.

Landlords looking to lease space in Milton and Toowong will be contested by the attractive incentives and lease terms on offer, particularly in the CBD for more modern and high quality space.

74 High Street, ToowongSold on behalf of IOOF

Consequently, effective rents in Milton and Toowong could face downward pressure.

Vacancy approaching record high in MiltonIn the six months to July 2015, Milton had negative net absorption of 5,723sqm and this in turn led to a rise in the vacancy by more than two percentage points to 19.7 per cent, the highest since January 1997 (21 per cent). The story in Toowong was slightly more positive in that vacancy remained stable at 10.4 per cent with net absorption nil.

The Milton and Toowong precincts will endure lower levels of absorption compared to the other precincts as tenants are biased toward new space and on the quest for value. Although the CDOP 7 building in Milton has been approved, its development will be dependent on pre-commitment. There have however been some large leasing deals signed. Transmax, Waltz Group, Queensland College, Stream Insurance, and Nautilis Minerals all took on leases in the Milton and Toowong markets.


ADELAIDE METRO OFFICE

Vacancy in the Adelaide fringe and suburban markets have continued to fall over the first half of 2015. Fringe vacancy fell to eight per cent in July 2015 down from 8.3 per cent in January 2015. Suburban office has also fallen to six per cent from 6.6 per cent in January. The suburban office market has the best performing vacancy rate out of all of the office precincts in Adelaide.

Net absorption in both the Adelaide suburban and fringe markets for the last six months. The second quarter saw a jump in the number of leases signed in the Fringe and suburban markets with 33 leases signed in the quarter accounting for just over 11,000sqm. More than half of these leases were signed in the fringe market. The largest lease signed in fringe market this year was Viterra Packaging which is moving from South Terrace in the CBD. Viterra Packaging signed a deal in May for 2,402sqm at 186 Greenhill Road, Eastwood. The largest lease signed in the suburban market was Boral Resources lease for 730 square metres at 49 The Parade, Norwood.

Gross face rentals have remained generally stable over the last six months in the fringe and suburban office markets. Incentives however have followed the trend of the CBD office market and have jumped during the first half to now range between 20-25 per cent across most grades. Although the fundamentals of the fringe and suburban markets remains stronger than the CBD with both markets recording significantly lower vacancy, these markets in some cases compete for tenants, therefore incentives are a reflection of the trend of higher incentives in the CBD. The jump in incentives and lack of growth in gross face rents has placed pressure on net effective rents across all office markets during 2015.

The Adelaide suburban office market is some what fragmented with inner metro markets which have good amenity, parking and close access to the CBD continue to be in demand for both tenants and investors. For investors these assets tend to fall in a lower price bracket usually below $5 million which therefore tends to attract private investors and owner occupiers. Some of the inner metro areas and the fringe in particular have seen

changes to planning laws over the last two years which allow for higher built heights, and more mixed use developments. These changes are aimed at improving infill in the inner suburbs with limited impact on many of the heritage areas which tend to exist in the inner city. At this stage there has been no major withdrawal of office space from the fringe or metro markets for conversion to residential use, but as buildings become more obsolete these conversions will begin to occur.

The investment market below $5 million has seen strong activity during the first half of 2015 with the sales value this year already surpassing the total value from 2014. Three major assets have exchanged during 2015 with a total sales value of $20.4 million.

Forecasts for growth in white collar employment have deteriorated in the last six months with limited growth forecast over the next 18 months. Improvements in white collar employment are currently forecast are looking more positive for the first half of 2017. The Adelaide metro office markets have relatively low vacancy and limited supply therefore the fundamentals for these markets remain positive with these markets well positioned when the uplift in demand returns.

Vacancy in Adelaide metro markets falls

Second Half 2015


153 Port Road, HindmarshLeased on behalf of Boral Resources (SA) Limited




For further information please contact: Kate Gray Associate Director | Research | Tel +61 8 8305 8806 [email protected]

ADELAIDE METROPOLITAN OFFICE MARKET

INDICATOR FRINGE SUBURBAN

Grade A Gross Rents ($/m²) $432 $395

Grade A Gross Rental Growth p.a. 0.0% 0.85%

Prime Incentives 25% 25%

Total Market Vacancy Rate 8.0% 6.0%Average Prime Grade Yields 6.75% 7.75%

Prime Grade Capital Values $4,690-$5,200 $3,600 - $4,000

New Supply Additions (m²) 0 0


Subsequent to the changes in zonings there are opportunities for some of the secondary grade stock to be either withdrawn or converted to mixed use. Prime stock is still in short supply, and demand is still strong from both tenants and investors for this type of stock.

Investment activityAs previously noted sales activity in the Adelaide fringe and suburban office market has remained buoyant with $20.4 million of assets exchanging during the year. This is reflective of the increased interest in commercial property as an asset class over the last 12 months. In the current lower growth environment investors are finding returns in the share market and cash are poor and therefore are turning to property as an alternative investment class. This has seen the buyer pool for investment grade assets continue to improve with interest for larger prime grade assets with strong lease covenants remaining in strong demand. This is however limited by the small number of prime grade assets which are likely to attract institutional grade investment. Private investors and owner occupiers continue to drive the investment in below $5 million category and tend to be a strong buyer type for fringe and metro office assets. All of the assets which have exchanged this year were all purchased by private investors.

With the current low interest rate environment likely to continue into the medium term, there is some scope for yields to continue to tighten over the next 12 months. Other asset classes such as shares and bonds have seen poor returns recently and therefore investors are turning to property as an alternative asset classes, which is improving the weight of capital in the market. This combined with limited stock on the market supports the case for yields to continue to tighten.

ADELIADE METRO OFFICE YIELD RANGE

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

Fringe Grade A Fringe Grade B Fringe Grade C Grade A inner Metro

Yiel

d (%

)


METRO AND FRINGE OFFICE VACANCY

0%

2%

4%

6%

8%

10%

12%

H1 2013 H2 2013 H1 2014 H2 2014 H1 2015 H1 2015

Vaca

ncy

(%)

Metro o�ce Fringe o�ce


New supply remains tight New supply in the fringe remains tight with only one building under construction and nearing completion in the second half of 2015. This building in the fringe office market at 6-8 Bartley Crescent, Wayville (2,653sqm) will be owner occupied by Resthaven on completion. The pipeline for new supply is likely to remain tight, with most of the projects still requiring pre commitments before construction commences. There are two major refurbishments which are underway in the fringe market which include 128 Greenhill Road, Unley and 123 Greenhill Road, Unley. The property at 123 Greenhill Road, Unley has been removed from stock this half as the refurbishment is due to commence. Both of these buildings are likely to be completed in the second half of 2015.

There are no major projects under construction in the suburban office market, although there are several projects in the suburban office market pipeline. The Adelaide Airport recently announced a major redevelopment including several buildings for an office park. This project is likely to be staged developments which are mostly pre-commitment led. This development is one of the few significant developments on offer for prime grade space in the suburban office market.


PERTH METRO OFFICE

Following some stability over the second half of 2014, Perth’s metropolitan/suburban office market now looks to be under pressure. With continuing economic uncertainty, soft demand and increased competition from vacancies in West Perth and the Perth CBD, suburban office market face rents are contracting.

The rising Perth CBD vacancy rate, which was 16.6 per cent according to the Property Council of Australia (PCA) in July 2015, is underpinning a flight to quality unseen since the brief period during the GFC when rents corrected. The CBD is becoming much more appealing to office tenants; the cyclical downturn is delivering opportunities for tenants to secure CBD A Grade tenancies at rates not experienced for nearly a decade, as well as very attractive incentives that are averaging in excess of 35 per cent.

West Perth vacancy was reported by the PCA to be 11 per cent as at July 2015; this was slightly lower than the January 2015 vacancy of 11.1 per cent. Competitive pricing of vacant office space looks to have attracted new tenants to West Perth, with a net 1,397sqm of A and B Grade space absorbed in the six months to July 2015.

Continuing for the second consecutive six month period, the increased competition has resulted in tenants upgrading out of C and D Grade space. A total 7,559sqm of C and D Grade space has been vacated over the past 12 months to July 2015.

Unlike the Perth CBD, the suburban office market precincts are not expecting a strong level of new supply over the next 12 months. Colliers International estimates there is 37,325sqm currently under construction, consisting of metropolitan developments with over 1,000sqm of commercial office floor area. This compares to 188,280sqm for the Perth CBD precinct.

The tail end of a decade-long resource sector investment spending cycle is also translating to soft tenant demand for suburban office space, resulting in deferral or abandonment of numerous proposed suburban office projects. Given the current

Mixed use buildings grow suburban office supply

Second Half 2015


development cost metrics, demand conditions and achievable rental returns, projects are difficult to stack-up financially unless undertaken by cashed-up long-term investors with no or minimal financing requirement.

In this edition of the suburban office market report, Colliers International will be featuring the suburban precinct of Subiaco, in addition to the West Perth market.

The Subiaco precinct ranks in Perth’s top five suburban office markets along with Northbridge, Herdsman/Osborne Park, Great Eastern Highway Precinct and Fremantle.

103 Abernathy Road, Belmont Leased on behalf of The Lakis Superannuation Fund



Mixed use buildings grow suburban office supply

Subiaco has an estimated 161,745sqm of commercial office space within buildings over 1,000sqm, as at the end of July 2015. Of this, approximately 65 per cent is less than 10 years old.

As in the previous two precincts Colliers International profiled (Herdsman/Osborne Park and Great Eastern Highway Precinct between Victoria Park and Ascot), the surge in demand for office space over the last decade underpinned a wave of developments leading to over 105,335sqm of new space built in Subiaco.

Subiaco has good access to the CBD - with Hay Street, Roberts Road, Bagot Road and the Subiaco Train Station providing good connectivity to the Perth CBD and West Perth. Another catalyst for office space demand was the social and retail amenities for which Subiaco had become well known. These traits and comparatively lower occupancy costs made Subiaco a favourable alternative to the Perth CBD and West Perth.

Over the past 10 years, the precinct was able to attract major tenants from the CBD and West Perth precincts such as: iiNet, Newmont Mining, John Holland, Australia Post, Conoco Phillips, Thales and the Western Australian Local Government Association.

Colliers International has noticed a dramatic increase in availabilities in Subiaco over the past 24 months. We estimate the volume of space for lease in the Subiaco precinct to be approximately 15.1 percent of stock or 24,425sqm, as at July 2015.

Colliers International estimates that some 53 per cent of space availability in Subiaco comprises A Grade buildings. Similar to the Perth CBD, soft economic conditions have led to an increase in sub-lease availability in Subiaco; this is currently estimated to account for two per cent of the 15.1 per cent total vacancy.

West Perth vacancy contracted over the six months to July 2015, however there is still 46,470sqm of space vacant. According to PCA statistics as at July 2015, 17 per cent of West Perth vacancy was in A Grade space and 46 per cent in B Grade space. In terms of sub-lease vacancy there were 4,504sqm available, which was down from 7,502sqm in January 2015. The marginal contraction in the total vacancy rate was largely a result of the absorption of approximately 3,000sqm of sub-lease space over six months to July 2015.

The current economic environment is delivering challenges to landlords, but it is providing businesses a much needed opportunity to reduce operating expenses via lower occupancy costs. This reduction in operating expenses could aid the expected transition of economic growth drivers away from resources towards manufacturing, goods and services exports and domestic consumption drivers.

Due to the significant contraction in demand and rents over the past 24 months, sentiment and demand for investment assets in general has been impacted. This has resulted in some softening in capital values, particularly in secondary grade assets. However, as with other locations, the relatively strong demand for real estate 49 Cedric Street, Stirling

Leased on behalf of Roselakes Pty

assets has provided support. Owner-occupiers particularly are attempting to source attractive acquisition targets. The current lull in the market is delivering opportunities unseen since the GFC. Astute long-term investors are also targeting quality assets with lease covenants that have the ability to weather a temporary downturn.

Rents and incentivesAverage rents in the non-CBD office market were generally tracking lower at the end of the June 2015 quarter. There is strong competition for tenants as a result of the increase in vacancy; however, net tenant demand is low. In addition to lower rents and decade high vacancy rates, anecdotal evidence confirms a subdued market with low enquiries and increasing time on market.

Full floor A Grade rents in West Perth have eased to between $385/sqm and $445/sqm in the June 2015 quarter, with B Grade stock ranging between $320/sqm to $375/sqm. The incentive range increased marginally, with the lower end increasing to 25 per cent and the upper end remaining stable at 30 per cent.

Prime Subiaco market office rents currently range between $295/sqm to $395/sqm depending on size and location. This range represents an average fall of 17.5 per cent since the June 2014 quarter and 30 per cent lower than the 2012 peak. Secondary grade rents are estimated to range between $150/sqm and $265/sqm - showing an annual average decline of 13.5 per cent.

SupplyOver the six months to July 2015, West Perth saw 850sqm added to stock according to PCA statistics, resulting in total stock of 422,840sqm. West Perth currently has approximately 1,595sqm of office space under construction; and this is expected to be completed in the first half of 2016. Apart from this, mooted


and proposed projects for the West Perth precinct total nearly 40,000sqm. However, with market conditions as they are, these are unlikely to break ground in the near term.

Subiaco has a larger supply pipeline; Colliers International research indicates 12,525sqm of space is currently under construction for buildings over 1,000sqm. This includes a mixed-use project at 23 Railway Road which has approximately 2,200sqm of office space over three levels. This project has a scheduled completion of October 2015. In addition, construction recently commenced at 500 Hay Street, on the old ACE Cinemas site. This is also a mixed-use project with a nine-level hotel, cinema and retail complex, as well as approximately 10,325sqm of office space over six levels in a separate building that fronts Hay Street.

Outside of Subiaco and West Perth, there is 23,500sqm of office space under construction in various projects throughout the metropolitan area. These are all expected to be completed by the end of 2016.

InvestmentInvestment sales activity has remained somewhat subdued over the first half of 2015. This has been caused by a combination of a

203 Wanneroo Road, Tuart Hill Leased on behalf of a private owner

lack of quality stock, in addition to an uncertain economic outlook. Quality assets with good lease covenants that do become available have been quickly acquired; such as The Gateway Building at 59 Albany Highway, Victoria Park which was purchased by a Singaporean based buyer for $72.8 million in February 2015 soon after it came to market. The building is anchored by Monadelphous, which has a 12-year lease with a further 12-year option commencing in 2010.

Although Singaporean based investors have traditionally been significant investors in the Perth real estate market, the transaction confirms that demand by astute long-term international investors for good yielding Perth assets remains buoyant, even as Perth’s office leasing market looks to underperform other major Australian capitals in the short-term.

There were a total of four major transactions of commercial office assets in suburban locations in the first half of 2015. Transactions included the Federal Police Headquarters at Perth Airport for $18.4 million, 20-24 Stirling Highway, Nedlands, for $8.6 million, and 172 Burswood Road, Burswood for $4.6 million.

The hunt for yield has pushed market yields lower for quality assets, with A Grade West Perth assets now ranging between 8.25 and 8.75 percent, down from 8.5 to nine percent in 2014.




For further information please contact: Misha White Manager | Research & Economics |Tel +61 8 9261 6675 [email protected]

9/166 Brighton Road, ScarboroughLeased on behalf of a private owner

B Grade asset yields are also lower at nine to 9.75 percent. However, this level still represents a large spread over yields in competing asset classes such as treasury bonds, cash deposits and current financing rates.

Should major assets with good lease covenants in near-CBD suburban precincts such as Subiaco come to market, achievable market yields would be comparable to that of West Perth.

OutlookYields for good assets can be expected to remain around current levels with the possibility of some tightening should real estate investment demand continue to build, despite an unfavourable short-term leasing market outlook.

Comparable returns from tenanted assets with strong lease covenants and good cash-flow outlook are favourable compared to the outlook for alternative investments, and are likely to remain so over the next six months.

Over the next 12 months, Colliers International expects challenging conditions for white collar employment growth as major WA iron ore and LNG projects approach completion and move into the production phase. There has already been resource sector and related white collar employment contraction in the past 24 months as a result of reduced investment spending and project completions.

Perth CBD completions over the next six to nine months could add downward pressure on rents in suburban locations as competition for tenants escalates. However, the relatively low volume of projects in the pipeline in suburban locations is a positive for landlords when economic and market stability emerges.

Although there is potential for further reduction in market rents, we expect that most of the rental contraction has passed and rents are at levels that are in-line with prevailing economic conditions. Barring another major global economic event, expected population growth and a rebalance of WA’s economic activity to other growth drivers should result in market conditions stabilising.


NEWCASTLE METRO OFFICE

Australia’s seventh largest city, Newcastle is currently benefitting from a number of substantial developments, together with the State Government funded Newcastle Urban Renewal Strategy (NURS). The public investment in Urban Renewal coupled with existing projects underway such as the Newcastle Law Courts, as well as the commencement of the University of Newcastle’s “NeW Space” city centre campus, has led to a substantial level of mixed use development and increased enquiry for development opportunities within the CBD.

Mixed use development will increase the population density within the CBD, which in turn is increasing demand from service related occupiers and stimulating the repurposing of older lower grade accommodation.

Newcastle CBD provided 255,166sqm of commercial office floorspace at 1 July 2015 based on the latest Property Council of Australia (PCA) Office Market Report. Of this, 22,163sqm was vacant floorspace, giving the market an 8.7 percent vacancy. The Newcastle CBD comprises predominately A and B Grade floorspace which accounts for 34 and 33 per cent of the market respectively.

Current and projected supplyAs new commercial office floorspace supply has been limited, the A Grade commercial market recorded falling vacancy throughout the second half of 2014 to reach 2.7 percent as at 1 January 2015 where it remained over the six months to 1 July 2015.

The last major completion was the A Grade Watt Street Commercial Centre which completed in the second half of 2014, adding approximately 11,090sqm of floorspace to the market. Prior to this, the last A Grade supply addition was NIB House and GHD Tower, which were completed in 2008.

Colliers International is forecasting an increase in vacancy in the short term heading into 2016. This will result from The Australian Taxation Office downsizing by approximately 6,628sqm within 266 King Street, which will be released in stages between November 2015 and March 2016.

The next new commercial development is currently anticipated to be at 18 Honeysuckle Drive. New development is otherwise unlikely in the short term, unless there was sufficient leasing demand coupled with rental levels to ensure the commercial feasibility of new development. The table below provides a summary of the current mooted commercial projects within the Newcastle CBD.

Market overview

Second Half 2015


SITE COMMERCIAL GFA (m²) DESCRIPTION

18 Honeysuckle Drive 7,500

Recently acquired by DOMA Group, a Canberra based developer who announced on 16 May 2014 their intentions for two seven storey buildings comprising:

• 7,500sqm of commercial office space;

• 71 residential units, and

• Ground floor retail and café.

The development of 18 Honeysuckle Drive may occur with lower levels of pre-commitment given the residential component has been well received.

291 King Street 9,600

The proposed redevelopment will comprise an additional four levels of commercial office space totalling approximately 9,600sqm. The developer obtained consent with deferred commencement (DA2013/167) in June 2013. This is unlikely to commence until a minimum of two floors have secured pre-commitment.

Former S&W Miller Site, Stewart Ave 10,000 Proposed development yet to be DA Approved, however it is currently being marketed for lease.

Total 27,100




For further information please contact: Sas Liyanage Research Analyst | Research | Tel +61 2 9249 2039 [email protected]

Market overview

DemandThe four level 3,500sqm commercial development on the former Newcastle Museum Site (168 Parry Street), which is currently under construction, has been fully committed. Auscoal will occupy this building and are relocating from Warners Bay, together with a local business on the ground floor.

Colliers International is experiencing increased enquiries for A Grade accommodation in the Newcastle CBD, with small and medium sized enterprises (SMEs) active. Larger businesses are looking at efficiencies and activity based working models.

Over the last twelve months, strong market activity has been witnessed in the residential market owing to the NURS, construction of the Newcastle University City Campus and Law Courts. These announcements have resulted in high levels of pre-sales for proposed residential developments, which have in turn attracted developer interest to the Newcastle CBD. As a result, further stock withdrawal of C and D Grade commercial space for residential conversion is envisaged.

RentalsA Grade gross face rentals for good quality office accommodation typically range from $450/sqm to $500/sqm gross, with rentals up to $500 per square metre achieved within the waterfront precinct on Wharf Road. Most recently, gross face rental growth has occurred predominantly due to increasing outgoings, with a modest change in net face rentals.

B Grade gross face rentals have come under pressure owing to the increasing A Grade vacancies and lack of enquiry, with

refurbished accommodation currently marketed at approximately $220/sqm to $260/sqm gross.

IncentivesIncentives remain a part of lease negotiations within the Newcastle market, and in light of the reduced vacancy in the market, have reduced from approximately 15 per cent to 20 per cent evidenced in 2008/2009 to between eight per cent to 15 per cent of the lease term.

The reduction coincides with the low A Grade vacancy rate, however, incentives can fluctuate quickly given the small A Grade commercial market in Newcastle CBD. It is noted that the incentives in 2008/2009 were countered in some instances by higher face rentals, resulting in neutral net effective rental growth. In terms of back-fill space, existing fitouts are frequently being utilised as a form of incentive when negotiating rentals.

Sales TransactionsThe Newcastle commercial market is currently experiencing similar trends to Australian major commercial markets, whereby yields are tightening in spite of the soft leasing market. Similar to the broader Sydney metro markets, the weight of capital has driven higher prices in the market. Significant yield compression, particularly for prime grade assets, is beginning to emerge as the demand intensifies. In December 2014, the GPNSW building at 237 Wharf Road sold to a local private investor at an equivalent yield of 7.8 per cent. This property was divested by the NSW Government in a Colliers International brokered deal for $14.85 million.

Watt Street Commercial, Newcastle Leased on behalf of Watt Street Commercial Pty Limited


GOLD COAST METRO OFFICE

The Gold Coast office market is roughly half the size of the Brisbane fringe. With 560,000sqm of office space sweeping the region from Ormeau in the north to Coolangatta in the south, this reflects a per capita provision of one square metre per person. As the population of the Gold Coast is projected to increase by around 150,000 over the next decade, this begins to illustrate the scope for the growth potential of the Gold Coast office market. With population growth expected to be concentrated along the northern corridor in Coomera and Pimpama, this suggests that these areas will play host to an extra supply of office accommodation in the medium to long term.

Significant investment into the Gold Coast region, including the Gold Coast light rail project, the University Hospital in Parkwood and the upcoming 2018 Commonwealth Games, combined with the continued favourable economic climate has aided in restoring business sentiment into the market. This has culminated in an upswing in activity in both the occupier and capital markets.

LeasingUpward tick in demand Following a period of muted business activity leading into the first half of 2015, businesses on the Gold Coast have been transitioning into growth phase. Tenant enquiry has lifted and many businesses approaching the end of their lease tails have been seeking larger premises for occupation. While the financial sector has been the most active in their pursuit for office space, the injection of funding into government departments provides some suggests that expansionary activity may also be on the horizon for the government sector, which would subsequently translate into office space demand.

As at August 2015, the Property Council of Australia (PCA) reports that the vacancy for the Gold Coast office market dropped to 14.8 per cent representing a 40 basis point decline over the previous six months. This resulted from positive net absorption of 3,291sqm reflecting strong demand in the market. The overall vacancy rate is expected to tighten as The Base in Robina (4,000sqm) is the only development likely to proceed.

Upswing in leasing activity

Second Half 2015


GOLD COAST OFFICE PRIME GRADE MARKET INDICATORS

REGION AVERAGE GROSS FACE ($/m² pa) INCENTIVE RANGE

H2 2015 H1 2016 H2 2015 H1 2016

Broadbeach $475 15% - 20%

Bundall $420 15% - 25%

Robina $440 15% - 25%

Varsity Lakes $380 15% - 25%

Southport $420 15% - 25%Surfers Paradise $400 20% - 30%


Bankwest Business Centre, SouthportSold on behalf of Arcon Group Pty Ltd




For further information please contact: Vivienne Bolla Manager | Research | Tel +61 7 3026 3305 [email protected]

Broadbeach is the smallest of the five office markets tracked by the PCA comprising only six per cent of total office stock. With vacancy having fallen to an eight year low of 4.2 per cent, it is characterised as the most tightly held market, which in part is a reflection of no new supply. Comparatively, the Robina – Varsity Lakes market also experienced a tightening in vacancy levels, falling to seven per cent as 3,728sqm of office space was absorbed over the six months to July 2015. A combination of strong demand for modern and high quality space and the larger floorplate provisions have been generators of heightened leasing activity in this precinct.

In contrast, Surfers Paradise has been somewhat challenged with vacancy rates on an upward trajectory increasing to 29.9 per cent at July 2015. While this reflects the highest level in nearly 20 years, we anticipate a decline over the next six months as Gold Coast’s largest commercial tower, 50 Cavill Avenue, continues to gain momentum securing new leases. The precinct is also beginning to reap the benefits from the Gold Coast light rail network particularly with regard to staff retention and connectivity to retail centres and accommodation establishments.

Colliers International has around 4,500sqm of leases currently under negotiation, which will positively impact Gold Coast’s absorption of office space and is a further indication of improving business confidence.

InvestmentTransaction volume expected to reach record high Investment activity on the Gold Coast has been on an upward spiral despite a period of low investment volume in the preceding six months. Favourable lending conditions and attractive yields are driving investment activity. Earlier this year, the Foxtel Building represented the largest deal in three years. Institutional REIT, Centuria Funds Limited acquired the asset for $46 million and set a new benchmark. The A Grade building achieved a yield of 7.77 per cent and a capital value of $4,687/sqm, reflecting the quality of the building and its long WALE to Austar (8.5 years).

The Gold Coast market is set to witness further sales activity leading up to the end of the year as the largest office tower is due to change hands. The Rocket, one of Gold Coast’s largest office towers with 12,815sqm of NLA is currently in due diligence. Brisbane based fund manager, Sentinel Group, is reportedly purchasing the A Grade asset for $70 million. With a number of appealing variables including a secure lease profile (92 per cent

occupied by an array of blue chip tenants), prime location, and robust cash flow, it is understood to have received interest from a range of domestic and offshore high net worth private investors and property funds. The asset is expected to achieve a sharp yield. Its transaction would bring the total volume of sales in line with those achieved in 2012.

GOLD COAST SALES VOLUMES

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2010 2011 2012 2013 2014 2015

Sale

s Vo

lum

e (S

m)

Broadbeach Bundall Robina - Varsity Lakes Southport Surfers Paradise Source: Colliers Edge

Further to this, the owners of 50 Cavill Avenue (17,010sqm) and Seabank (8,492sqm) in Southport are looking to capitalise on strong investor demand after having brought these prime assets to the market.

The increase in business sentiment in the market is further evidenced by the level of demand which has transpired for strata offices. Notably, the Citypod development on Scottsdale Drive in Robina has attracted significant interest from local investors with additional sales materialising. Stages 3 and 4 of the development are now complete and total occupation sits at around 70 per cent. The unique style, floorplans, street exposure and branding opportunities have been indicated as draw cards for the buyers.

We expect further yield compression on the Gold Coast as buyers capitalise on the low interest rate environment and the large volume of infrastructure spending, which in turn will ultimately lead to an increase in rental growth.

13-15 Short Street, Southport Leased on behalf of private owner


B8, 576 Swan Street Richmond, VIC$46.5 million

On behalf of Botanicca 8 Pty Ltd

Our experience METRO OFFICE



IN THE LAST 18 MONTHS

leased 126 Church Street Parramatta, NSW5,778m²

On behalf of Gemnoll Pty Limited

75-91 Magill Road Stepney, SA2,700m²

On Behalf of John McArdle

75 Dorcas Street South Melbourne, Vic4,644m²

On behalf of Investec Bank (Australia) Limited

metro office space for more than 587 companies totalling 343,110m²

managed 191-197 Salmon Street Port Melbourne, Vic21,763m²

On behalf of Altis Property Partners

187 Todd Road Port Melbourne, Vic19,875m²

On behalf of Podco Management Pty Ltd

438-517 Kingsford Smith Drive Hamilton, Qld9,328m²

On behalf of 360 Capital Industrial Fund

managing over 1,950,000m² across 433 metro office assets

soldCSIRO North Ryde, NSW$170 million

On behalf of Challenger

6-22 Gladstone Street Moonee Ponds, VIC$83 million

On behalf of Charter Hall

$3.15 billion of metro office assets

valuedHQ North 520-540 Wickham Street Fortitude Valley, Qld 29,364m²

On behalf of Cromwell Property Securities Limited

86-136 Harris Street Pyrmont, NSW 25,900m²

On behalf of Harris 88 Pty Ltd

197 Salmon Street Port Melbourne, Vic 21,762m²

On behalf of GM Holden Ltd

over 2,410,000m² totalling more than $7.61 billion worth in value

88 Phillip Street Parramatta, NSW5,800m²

On behalf of IOOF Holdings Limited

235 Springvale Road Glen Waverly, Vic4,900m²

On behalf of MYOBWinner of Best Workplace, PCA Innovation and Excellence Awards 2015

50 Fairfield Street Fairfield, NSW5,600m²

On behalf of Komatsu

projects delivered by our award winning team designed and project managed

Our experience METRO OFFICE AUSTRALIAIN THE LAST 18 MONTHS

18 Brodie Hall Bentley, WA 614m²

On behalf of Otraco

Level 3, Gasworks 1, 76 Skyring Terrace, Newstead, Qld1,967m²

On behalf of Aveo Group

25 Moore Street Turner, ACT1,040m²

On behalf of Victory Homes

metro office space for more than 587 companies totalling 343,110m²

10-16 Dorcas Street South Melbourne, Vic7,567m²

On behalf of Crescent Wealth

3 Horwood Place Parramatta, NSW5,013m²


45 Commercial Road Newstead, Qld1,913m²

On behalf of private clients

managing over 1,950,000m² across 433 metro office assets

74 High Street Toowong, Qld$21.5 million


3 Horwood Place Parramatta, NSW$25.4 million

On behalf of MAB Funds

300 Ipswich Road Annerley, Qld$6.2 million

On behalf of Gontil Pty Ltd

$3.15 billion of metro office assets

Gateway 241 O’Riordan Street Mascot, NSW19,500m m²

On behalf of Valad Core Plus Management Limited

80 Pacific Highway North Sydney, NSW 13,701m m²

On behalf of LaSalle Investment Management Australia Pty Ltd

21 Third Avenue Mawson Lakes, SA 5,732m m²

On behalf of SAAB Australia Pty Ltd

over 2,410,000m² totalling more than $7.61 billion worth in value

For more information about Colliers Internationaland working with us visit: www.colliers.com.au

Pacific Life RE Gateway Building 1 Macquarie Place Sydney, NSW1,000m²

Design and project managed

22 Lambs Road Artarmon, NSW1,700m²

On behalf of Bard Medical

885 Mountain Highway Bayswater, Vic1,600m²

On behalf of Merk Millipore

projects delivered by our award winning team

Note: Metro office track record includes the following areas: Sydney Metro (North Sydney, St Leonards, Chatswood, North Ryde, Sydney Olympic Park, Rhodes, Parramatta, Norwest, Sydney CBD Fringe and South Sydney), Melbourne Metro (Melbourne CBD Fringe, Inner East, Outer East, South East, North, West, St Kilda Rd and Southbank), Brisbane Metro (Brisbane CBD Fringe, Inner South, Milton, Toowong and Spring Hill) and Adelaide Metro (Adelaide CBD Fringe and Metro). Figures calculated over an 18 month period from February 2014 to August 2015.

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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © Colliers International 2015.


Documents

Metro Office RFR Second Half 2015