OFFICE - LJ Hooker Commercial · Perth Page 24 Leasing market 44 Investment market 45 Supply 45 Darwin Page 42 Rent $498 psm pa Yield 7.3% ... services catering to non-mining investment

> Leasing demand drives vacancy rates lower

> Brighter prospect for rental growth

> Withdrawals help to offset new supply

1ST HALF 2016

OFFICE

2 LJ Hooker Commercial Office Market Monitor H1 2016

Note: Rent = average prime net rent. Yield = average prime yield. Vacancy = CBD vacancy rate.

Front cover image: For Lease - 45 Jones Street, Ultimo. LJ Hooker Commercial Sydney.

Rent $580 psm pa

Yield 8.00%

Vacancy 20.7%

Rent $810 psm pa

Yield 7.30%

Vacancy 19.2%

Leasing market 26Investment market 28Supply 29

Perth Page 24


Darwin Page 42

Rent $498 psm pa

Yield 7.3%

Vacancy 14.1%

Rent $380 psm pa

Yield 7.5%

Vacancy 8.1%



Hobart Page 38

Adelaide Page 34

33

About us

At LJ Hooker Commercial we are quietly doing something amazing. We are building on some very strong foundations and a proud history. We are passionate about commercial real estate and our brand and we want to take it to even greater heights.

We want to be exceptional.

We are pushing the boundaries, connecting, sharing, learning, creating and doing whatever it takes to be the best in commercial real estate with our customers at the centre of everything we do.

To learn more visit ljhcommercial.com.au

LJ Hooker Commercial, part of the LJ Hooker group, is a national network of commercial real estate agencies providing specialist services to commercial property investors.

Rent $657 psm pa

Yield 7.1%

Vacancy 14.9%

Rent $1069 psm pa

Yield 5.6%

Vacancy 6.3%

Rent $434 psm pa

Yield 7.5%

Vacancy 11%

Rent $614 psm pa

Yield 5.8%

Vacancy 7.7%





Brisbane Page 18

Sydney Page 6

Canberra Page 30

Melbourne Page 12

4 LJ Hooker Commercial Office Market Monitor H1 2016For Lease - 45 Jones Street, Ultimo. LJ Hooker Commercial Sydney.

5

Office leasing markets turning a corner

Two-tier leasing marketHowever, the total absorption figure masks a considerable divergence between cities. Sydney led the pack with a touch over 300,000 sqm, the strongest result since 2007. Melbourne followed with over 170,000 sqm. These were the only two markets demonstrating any real strength, with the others recording flat or negative absorption results.

Withdrawals offset supplyCompletions of new and refurbished stock were strong in Perth (representing an increase in stock of almost 5%) and moderately strong in Sydney, Melbourne and Adelaide. Substantial withdrawals in many markets helped to reduce the impact of new supply. Indeed, net additions to stock were negative in Brisbane, Canberra and Hobart — helping to reduce total vacancy in these three markets.

Vacancies begin to improveSydney and Melbourne recorded falls in their average vacancy rates, boasting the lowest vacancy rates of the capital

city markets. Perth and Darwin were not so fortunate, with net stock additions and soft demand sending their vacancy rates higher. Overall, the six major metropolitan office markets saw a slight improvement in vacancy rates from 10.6% to 10.2% through 2015.

A mixture of rent and incentives movementsMovements in leasing incentives and rents reflect the balance of demand and supply market by market. The stronger office markets of Sydney and Melbourne have seen leasing incentives show early signs of improvement. With face rents edging higher, effective rents also started to recover in these two cities in 2015. However, the oversupplied markets such as Brisbane, Perth, and Adelaide saw leasing incentives edge higher.

Investors continue to dive inThe subdued nature of rental growth has not deterred investors; far from it. Sydney and Melbourne are especially in demand, both being high on overseas

investors’ preferred global destinations. But even the much weaker markets continue to attract considerable investor interest, albeit more concentrated on “core” assets (well-leased, prime CBD buildings with long WALEs). The weight of money chasing office assets is reflected in a firming of prime investment yields. In the stronger Sydney and Melbourne markets, yields are now close to, or already firmer than they were in the pre-GFC boom.

Looking forwardLooking ahead, the prospects vary considerably market by market as the cities are far from synchronised in terms of where they are placed in the office market cycle. Sydney and Melbourne offer the best prospects for strengthening net absorption and falling vacancy rates over the next few years, even though there is a reasonable amount of construction underway. By contrast, those markets in states dominated by the resources sector are likely to suffer further demand-side weakness as mining companies and support industries shed staff.

Bill

ions

Source: LJ Hooker Research / RCA Other/Unknown Institution Occupier/Developer Private Syndicate

Australian retail investment sales transactions

Note: Excludes transfers, equity buyouts and M&A transactions.

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Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Australian office investment transactions

There was a strong improvement in occupier demand and net absorption of office space in 2015. The six major capital city office markets recorded almost 500,000 sqm of net absorption, more than double the 200,000 sqm achieved in 2014.

6 LJ Hooker Commercial Office Market Monitor H1 2016Aerial images supplied courtesy of Airview Online – www.airviewonline.com

77

SydneySydney office markets

At December 2015, Sydney’s office stock stood at about 12.1 million sqm, of which the CBD made up about 5.1 million sqm (42%).

The hallmarks of a strong upswing in the Sydney office market are settling into place. Sydney’s office workforce is set to experience solid growth over the next three years, underpinned by the strength of the NSW economy and rolling investment cycles.

The NSW government is funding a long pipeline of major road and rail infrastructure projects. But perhaps the strongest growth will come via the lower Australian Dollar which is helping to boost the competitiveness of NSW’s key trade-exposed sectors and business and financial services catering to non-mining investment.

Sydney CBD office market

Average prime gross face rent $1,069 psm

CBD vacancy rate 6.3%

Average prime net face rent $893 psm

Average prime yield 5.6%

Average prime incentive 28%

Average prime capital value $14,222 psm


Leasing marketSydney office markets recorded a net absorption of 300,000 sqm in 2015, the strongest level since 2007. More than half this total occurred in the CBD, with 157,000 sqm of space taken up.

Most of the take-up was underpinned by organic growth from resident companies with few major moves in from the suburbs. Demand for office space came from a broad range of sectors and tenancy sizes including professional services firms, financial groups, IT companies and education providers. After years of delaying leasing decisions, businesses are looking to expand, buoyed by the strength of employment growth and the NSW economy.

The combination of strong net absorption and relatively low net additions saw the total market vacancy rate fall to an estimated 7.0% as at December 2015. In the CBD, despite relatively high net additions to stock, even stronger demand contributed to a fall in the vacancy rate from 7.4% to 6.3% over the year. The improvement in the CBD vacancy rate was mirrored in the non-CBD, where the vacancy rate fell from an estimated 9.5% to 7.5%.

The tightening leasing market saw building owners push up net CBD prime, B grade and suburban A grade rents by around 4-8%. However, average incentives remained broadly unchanged at 23-28% on gross rents in the CBD, North Sydney, Macquarie Park and Chatswood. Only Parramatta’s leasing incentives are significantly lower at 16%, reflecting the tightness of the market, particularly in A grade stock.

Sydney

For Lease - 24 Moonee Street, Coffs Harbour. LJ Hooker Commercial Coffs Harbour.

9

Leasing outlookMetro-wide, office net absorption is forecast to average around 200,000 sqm per annum to 2018, of which 60,000 sqm is in the CBD and 140,000 sqm is in the non-CBD markets – stronger than the average over the last five or ten years.

Net additions over the next two to three years will be minimal and, with demand far outpacing supply, we expect the total Sydney office vacancy rate to fall dramatically. We forecast a 5.5% vacancy rate by the end of 2016, on its way to about 4% by 2018. In the CBD, the vacancy rate is forecast to reach 3% over the same horizon. Individual markets within the suburban area are expected to fall to about 4-6%.

Rents and prices in most sub-markets have already reached replacement cost levels. As leasing markets tighten over the next few years, rents will rise sharply, triggering a significant round of office commencements. Even so, the long lead time for new development (especially in the CBD) means it will take time for supply to catch up with demand.

Once building owners in the CBD are confident that the current round of office completions will be absorbed, and as suburban vacancy rates tumble, we expect a substantial winding back of leasing incentives and strong escalation in both stated and effective rents.

Sydney metropolitan office vacancy rateChart 2: Sydney Metropolitan Office Market Vacancy

Year ended December Source: BIS Shrapnel, PCA

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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

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For Lease - 331 High Street, Penrith. LJ Hooker Commercial Penrith.


Sydney

Investment marketThe Sydney CBD office investment market is still running hot, with over $5 billion worth of sales in 2015 – comfortably exceeding the previous record set during 2014. Around 30 properties (of over $5 million) sold last year, with the total value boosted by some major deals.

Most notably, the mid-year portfolio sale of six CBD and one North Sydney property by Investa to the Chinese Investment Corporation for about $1.9 billion set yield benchmarks still applicable now. The most dominant investors in the Sydney CBD over the last 12 months were foreign investors, from the US, Singapore and China.

Overall, activity in the Sydney suburban investment market has also

been strong, with at least 70 major sales exceeding $10 million in value reported. The most active buyers were foreign investors, developers, and private investors/companies, with relatively few assets bought by AREITs.

The weight of money chasing assets pushed down average CBD prime, B grade and suburban A grade yields by 50 to 60 bps, driving strong

increases in prices. In our view, the firming of investment yields in Sydney’s office markets has further to run. Strongly rising rents will fuel investors’ expectations of capital gain and swamp the effect of rising interest rates over the medium term, driving attractive price gains over the next three years.

For Lease - 14 Kings Cross Road, Potts Point. LJ Hooker Commercial Sydney.

11

Supply

Most completions centred on the CBD, where 173,000 sqm was finished – predominantly 5 Martin Place and the first tower at Barangaroo. Across the non-CBD markets, the low level of completions (of 76,000 sqm) was concentrated in Macquarie Park (28,000 sqm) and across the residual markets of South Sydney and Sydney Olympic Park (31,000 sqm).

Withdrawals reduced metropolitan net additions to a relatively low 110,000

sqm in 2015. The continued strength of the residential sector in Sydney and associated price increases has seen development feasibilities favour residential over commercial developments. In the suburban markets, most affected were North Sydney, Macquarie Park and around Ultimo, Epping, Cremorne and Liverpool.

The outlook for completions is quite lumpy over the next three years, with

the pattern of supply in the CBD contrasting with that of the non-CBD. In the CBD, some 270,000 sqm is due this year, before falling back to levels closer to 100,000 sqm in 2017 and 2018. In the non-CBD, completions will be moderate this year and next before starting to pick up in 2018. Most of the development activity will focus on North Sydney and Parramatta, with a notable quantum also planned in Mascot, Pyrmont and Liverpool.

Total office completions across Sydney picked up significantly during 2015 with completions reaching about 250,000 sqm, rebounding close to the average of the last 10 years.

Sydney metropolitan office supply net absorption and additions

Metropolitan net additions

Metropolitan net absorption

Chart 3: Sydney Metropolitan Office Market Net Absorption and Additions

Year ended December Source: BIS Shrapnel

Forecast

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For Lease - 68 Sir John Young Crescent, Sydney. LJ Hooker Commercial Sydney.


1313

Melbourne

Melbourne’s office market is the second largest in Australia, with a stock of almost 8.8 million sqm at December 2015. The CBD & Docklands comprise just over half of the total, with over 4.4 million sqm.

Metropolitan Melbourne enjoyed solid growth in its stand-alone office workforce in 2015, but the pace of growth has slowed somewhat in recent months. Even so, there appears to be a greater willingness by companies to make leasing decisions.

Melbourne office markets

Melbourne CBD office market

Average prime gross face rent $614 psm







Melbourne

Leasing marketMelbourne is estimated to have had a December 2015 vacancy rate of 8.0%, down from the 2013 peak of 9.0%. The CBD & Docklands has seen the greatest improvement – a 210 bps fall to 7.7%. St Kilda Road, Southbank and the suburban markets have vacancy rates slightly above the overall average.

An important trend over the last couple of years has been the centralisation of tenants to the CBD & Docklands – including Jemena, NEC, Porter Davis and VECCI. The result has been that the CBD & Docklands has snared a disproportionately large share of net absorption—117,000 sqm of the metropolitan total of 174,000 sqm in 2015.

While major relocating tenants are tending to downsize when they move, reports are emerging of sitting

tenants looking for expansion space within existing buildings. Demand continues to be solid from small tenants, with landlords splitting floors to accommodate them.

Two pre-commitment deals have been confirmed in recent months, to Arup and Lend Lease at One Melbourne Quarter in Docklands. There are also numerous rumoured substantial pre-commitments, in particular to King & Wood Mallesons, Norton Rose Fulbright and Macquarie Bank.

Despite stronger net absorption and lower vacancy rates, leasing markets remain highly competitive. In most markets leasing incentives have now peaked and rents have generally been edging higher, such that effective rents have begun to rise. The exception is the South-East suburban region, which has seen effective rents pushed lower as a result of leasing incentives being scaled up further.

15

Melbourne metropolitan office vacancy rate

Leasing outlookVictoria faces economic headwinds on several fronts over the next couple of years, which means that its recent economic outperformance is likely to moderate. Office workforce growth has started to ease and we forecast further slowing over the period to June 2018. This will be reflected in net absorption.

However, the CBD & Docklands is expected to continue to outperform in the near term due to tenant centralisations while rents remain relatively low and incentives high. Continued negative net absorption is forecast for St Kilda Road, while Southbank is expected to return to positive territory.

The balance of demand and supply should see little material change in vacancy rates over the next

three years, although there will be six-monthly fluctuations up and down, largely influenced by the lumpiness of new supply and timing of stock withdrawals. We expect the metropolitan vacancy rate to fluctuate between around 7% and 8%, whilst the CBD & Docklands vacancy rate should be a little lower.

Leasing incentives are forecast to remain relatively high over this period, but should nonetheless

reduce somewhat given that they are currently high relative to the vacancy rate. Face rents are anticipated to continue drifting higher, resulting in modest effective rental growth to June 2018. Once the market tightens more substantially at the end of the decade, effective rents can be expected to climb substantially higher.

Chart 4: Melbourne Metropolitan Office Market Vacancy


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Melbourne

Investment marketThe investment market is still running hot, with close to $3 billion of transactions in the CBD & Docklands in 2015. The suburban market set a new record for sales activity in 2015, of around $1 billion. Overseas investors have continued to be active across the board, with Melbourne regarded very favourably as an investment destination.

Office investment yields were pushed lower at an astonishing pace. In both CBD and non-CBD markets, average yields are now close to, or have already breached, 2007 levels. As at December 2015, our average prime yield indicators stood at 5.8% in the CBD, 7.0% in St Kilda Road, 6.3% in Southbank, 6.9% in the City Fringe and Inner East, and 7.3% in the South-East region.

Tightening yields and improving rents saw average prime CBD capital values escalate sharply (by 17%) through 2015, to almost $7,200 per sqm. Similar gains were achieved on average in non-CBD markets. Prime and B grade capital values are well ahead of where they were pre-GFC.

The weight of money is likely to continue to drive down investment

yields over the short to medium term barring another global financial crisis of some kind. However, we expect the degree of firming to be modest compared with what we’ve seen in the last few years. Consequently, while capital values should demonstrate continued gains, the growth rate will be more subdued than it was through 2015.

17

Across Melbourne, some 230,000 sqm of new and refurbished supply was completed in 2015. This was about 20% higher than average completions over the previous three years.

The suburban markets saw the highest level of (gross and net) new supply since 2009, but almost all of it was in the South-East and Outer South regions, with very little in either the City Fringe or Inner East. Competition for sites from residential developers is making office development very challenging in these more central regions.

The CBD & Docklands saw relatively less supply added in 2015 – although gross supply was in line with recent

experience, net additions (of around 60,000 sqm) were well below recent average levels. There were no supply additions in either St Kilda Road or Southbank. On the contrary, there were further withdrawals of stock for residential redevelopment, especially in St Kilda Road, which had the highest level of withdrawals in almost 20 years.

Looking forward, metropolitan completions are forecast to average around 160,000 sqm annually over the next three calendar years with

net additions of just under 100,000 sqm. The respective figures for the CBD & Docklands are around 90,000 and 55,000 sqm, although it’s worth noting that nothing is scheduled for completion in the first half of 2016. Southbank will gain 2 Riverside Quay and the new ABC Centre in 2017, whilst St Kilda Road will miss out, instead undergoing further stock withdrawals.

Supply

Melbourne metropolitan office net absorption and additions

Metropolitan net additions


Chart 5: Melbourne Metropolitan Office Market Net Absorption and Additions


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1919

Brisbane

At around 4 million sqm of office stock, the Brisbane metropolitan area is Australia’s third largest office market. The CBD comprises 55% of the total, with 2.2 million sqm at December 2015.

Over-building, a sharp reduction in the size of the Queensland government’s public service and the bust in the resources investment cycle have led to soft office employment growth and soft leasing conditions across Brisbane.

Despite this, investment demand continues to remain strong with all private investors, institutional buyers and offshore groups all actively seeking to acquire assets in Brisbane.

Brisbane office market

Brisbane CBD office market

A grade gross face rent $657 psm


A grade net face rent $522 psm

A grade yield 7.1%

A grade incentive 35%

A grade capital value $6,069 psm


Brisbane

Leasing marketThe second half of 2015 saw a slight reprieve in metropolitan-wide demand; office employment recorded modest, but positive, growth. Net absorption was slightly positive, but not sufficient to offset the negative result during the first half of the year.

In contrast to the previous three years, no major CBD tenants relocated to the Fringe or beyond. However, a handful of smaller tenants moved in the opposite direction, taking advantage of much lower accommodation costs. One of the most active sectors has been education providers; the mining sector, however, has continued to contract.

Landlords in Brisbane have reacted to rising vacancies by raising leasing incentives rather than dropping face rents. Accordingly, the Brisbane CBD still has amongst the highest leasing incentives of any capital city. The reason is the pending completion of three large towers this year, whose developers have each been trying to attract tenants to their development.

Flat face rents and rising incentives have caused further setbacks to effective rents. In the CBD, average A grade gross effective rents fell by 3% over the 12 months to December 2015, while the decline in the B grade market was 4%. Movements in the Fringe mirrored the CBD, with the combination of flat face rents and rising incentives causing gross effective rents to fall by 2%.

For Lease - 3950 Pacific Highway, Loganholme. LJ Hooker Commercial Brisbane.

21

Brisbane metropolitan office vacancy rate

Leasing outlookConditions will remain challenging in the Brisbane office market for several years to come. Offsetting at least part of the employment decline in the short term is the still buoyant residential construction sector, which will be joined by renewed spending on infrastructure from next year.

Moreover, the lower $A will continue to benefit trade-exposed sectors such as tourism and education, both of which have already seen a marked improvement in business conditions. The CBD is expected to experience soft absorption for another two to three years, primarily due to tenants – particularly the state government –releasing surplus space.

Consequently, the leasing market will remain extremely competitive. Landlords will continue to meet the market by offering higher incentives in order to shore up face rents, although the latter are still expected to drift downwards for secondary grades of space.

Our forecasts are for a rise in average A grade incentives to 37%, accompanied by a decline in gross effective rents of 6% over the coming 12 to 18 months. On a positive note, withdrawals of older style buildings for conversion to residential uses are expected to continue, keeping Fringe vacancy rates well below those of the CBD.

For Lease - Capital Place, 195 Hume Street, Toowoomba. LJ Hooker Commercial Toowoomba

Chart 6: Brisbane Metropolitan Office Market Vacancy


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Brisbane

Investment marketInvestors continue to look to Brisbane as an alternative to the increasingly expensive Sydney and Melbourne markets. Demand remains primarily focused on prime assets, with institutional investors competing for scarce opportunities to acquire properties with long WALEs in the CBD.

Over the six months to December 2015, average premium and A grade yields in the CBD firmed by 15 and 3 bps respectively to stand at 6.4% and 7.1%. At the other end of the scale, investors have generally discounted properties with higher risk of vacancy and/or the need for capital expenditure.

The chronic shortage of prime stock for sale in the CBD has seen investors

increasingly accept Fringe locations as an alternative. As well as straight purchases, institutional investors have turned to pre-purchasing new developments. Average A grade yields firmed by 16 bps to 7.6% at December 2015, taking the total yield compression through the year to 40 bps.

Looking ahead, we expect the period of firming yields to come to an end

over the coming 12 to 18 months. Nonetheless, another landmark deal could still cause a resetting of the benchmark at the top end of the market. For the rest of the prime market, yields are forecast to be flat or gradually drift upwards. Meanwhile, the spread between prime and secondary property is expected to remain around current levels over the coming three years.

For Lease - 6 Enterprise Street, Richlands. LJ Hooker Development Services.

23

SupplyNew supply moderated further over the 12 months to December 2015. Only 39,000 sqm was added to total metropolitan stock, compared with an annual average of over 110,000 sqm over the previous three years.

Moreover, withdrawals of existing stock exceeded new completions through 2015, resulting in a declining stock base. This has helped to reduce vacancies across most of the individual sub-markets. The CBD’s vacancy rate declined from a record high of 15.5% at December 2014 to 14.9% a year later, while the Fringe as a whole recorded a drop of 0.3

percentage points to 12.5% over the same period.

One challenge for Brisbane’s office markets is the impending release of 190,000 sqm of new space – equivalent to 9% of stock. First cab off the rank is 180 Ann Street (57,500 sqm, already online), followed by 480 Queen Street (54,000 sqm) in April

and 1 William Street (75,000 sqm) in late 2016.

Fringe markets will fare better, with almost all new buildings committed to by tenants from the CBD. Its main challenge will be staff losses as mining contractors and tenants recentralise to the CBD.

Brisbane metropolitan office net absorption and additions


Chart 7: Brisbane Metropolitan Office Market Net Absorption and Additions


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For Lease - 3950 Pacific Highway, Loganholme. LJ Hooker Commercial Brisbane.

24 LJ Hooker Commercial Office Market Monitor H1 2016Aerial image supplied by Lofty Visions – www.loftyvisions.com.au

2525

Perth

At December 2015, Perth’s metropolitan office stock stood at around 3.9 million sqm, of which the CBD made up 1.7 million sqm.

Perth’s office markets continue to struggle under the weight of a rebalancing economy. However, leasing activity has been steady with tenants moving to take advantage of more attractive lease terms on offer.

Perth office market

Perth CBD office market








Leasing marketPerhaps surprisingly, given the weakness in the state economy and employment growth, the leasing market in Perth was quite active last year. Indeed, metropolitan-wide net absorption was positive, at an estimated 20,000 sqm, almost all of which was in the CBD.

This result was boosted by previously negotiated pre-commitments into some of the significant volume of new space completed during the year. CBD demand was also helped along by tenant relocations from the suburbs, such as John Holland and Brookfield Multiplex. Companies continue to take advantage of favourable leasing deals to renew existing leases or relocate to better quality space for a lower rent.

The combination of modest net absorption and substantial net additions drove vacancy rates in Perth to 20 year highs. At December 2015, we estimate the total market vacancy rate was 16.4% and an even higher 19.2% in the CBD. The non-CBD stood at about 14%, with West Perth at 12.2%.

Rising vacancies and competition to attract/retain tenants forced

building owners to lower rents with average prime net rents for the CBD softening by 6% over 2015. B grade rents fell more sharply, by 11%. The biggest change over 2015 was the rapid increase in leasing incentives as building owners factored in the dramatically higher vacancy rate.

Perth

For Lease - 28 Belmont Avenue, Belmont. LJ Hooker Commercial Perth.

27

Perth metropolitan office vacancy rate

Leasing outlookThere is no quick rebound in demand in sight as resources investment continues to wind down amidst low commodity prices and the transition from investment to production – which is much less labour intensive.

State Final Demand is forecast to fall by a cumulative 13% over the three years to June 2018, as declining new private engineering construction completely overwhelms any recovery occurring in other sectors of the economy.

Falling engineering construction (and business investment) will flow through

to weaker employment growth. In turn, this will impact on the demand for office space. Over the two and a half years to June 2018, we forecast metropolitan occupied office space will contract by around 30,000 sqm, with growth of only 11,000 sqm in the CBD as some companies centralise.

The consequence of further supply in

the face of negative net absorption will be higher vacancy rates. We estimate that the metropolitan vacancy rate will rise from 16.4% at December 2015 to around 20% by 2018. Effective rents are also expected to remain soft as vacancy rates increase.

Chart 10: Perth Metropolitan Office Market Vacancy


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For Lease - 28 Belmont Avenue, Belmont. LJ Hooker Commercial Perth.


Perth

Investment marketThe Perth investment market was quiet last year with few major sales reported. However, so far this year, at least four deals have concluded each in excess of $50 million. The largest sale was 219–221 St Georges Terrace, which sold for about $200 million.

There has been considerable variation in reported yields on recent sales, with prime CBD yields within a range of 6.0% to 8.0%. At December 2015, we estimate average prime yields averaged 7.3%, reflecting a slight firming over the year, while B grade yields remained unchanged at an average 9.4%.

At the top end of the market, it appears that Perth has benefitted from the weight of money chasing commercial assets nationwide. Nevertheless, the combination of stable to slightly firming yields and falling rents saw capital values on most assets retreat.

Property yields in Perth are defying the leasing market conditions. At some stage, investors are likely to reassess their expectations of capital gain as rents continue to fall. While this is unlikely to happen in the very short term given the weight of money chasing commercial property, we believe it will happen, perhaps triggered by rising bond rates.

For Lease - 40 The Esplanade, Perth. LJ Hooker Commercial Perth.

29

On the supply side, the Perth office market saw a large increase in completions in 2015 as 16 new or refurbished office buildings were brought on stream across the metropolitan area.

In total, around 155,000 sqm was completed, marking the greatest increase in supply since 2012. The largest projects were: three stages of King Square, adding 37,000 sqm; Brookfield Place Tower 2 (33,000 sqm); and 28 Barrack Street (about 30,000 sqm). There was little by way

of withdrawals to offset the rise in completions.

While demand is weak, the supply cycle is not yet at an end. In the CBD, King Square 1 (22,000 sqm) is due to be completed in the first half of this year and has minimal commitment.

This will be followed by Woodside’s 55,000 sqm building in 2018.

In the suburban markets, a moderate stream of projects are due for completion, focussed on South Perth, Osbourne Park and Subiaco.

Supply

Perth metropolitan office net absorption and additions


Chart 11: Perth Metropolitan Office Market Net Absorption and Additions


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For Lease - 40 The Esplanade, Perth. LJ Hooker Commercial Perth.


3131

Canberra

Canberra is the nation’s fourth largest office market after Sydney, Melbourne and Brisbane, but ahead of Perth and Adelaide. Its total stock comprises around 2.4 million sqm.

The largest market, Civic, contains 688,000 sqm, and is followed by the parliamentary triangle of Barton, Parkes and Forrest with a combined 460,000 sqm.

Canberra office market

Canberra office market

A grade gross face rent $434 psm

Civic vacancy rate 11.0%

A grade prime net face rent $352 psm


A grade prime incentive 22%



Canberra

Leasing marketAccording to the PCA, Civic’s vacancy rate declined from 14.0% at June 2015 to 11.0% at December, while non-Civic’s rate rose by 0.6 percentage points to 16.5%. Overall, Canberra’s metropolitan vacancy rate contracted slightly to 14.9% over the same period.

Despite further public sector job losses, net absorption turned positive in 2015. A key driver was a substantial relocation of staff from non-Civic to Civic, resulting in net absorption of around 21,000 sqm of stock in Civic. The discrepancy between contracting employment and positive net absorption points to a large amount of hidden vacancy amongst Commonwealth agencies. Recognising this, the federal government initiated Project Tetris, which attempts to fill sub-lease vacancies via agency co-location.

High vacancy rates have generally kept pressure on building owners, although there are marked differences between grades of space and locations. In Civic, vacancies amongst A grade buildings have declined to 5.7%, half the overall rate, presenting tenants with fewer options. Nonetheless, face rents and leasing incentives have yet to react in any significant way. With no significant changes in either face rents or leasing incentives, effective rents in Civic remained virtually unchanged compared with a year earlier.

Overall, net absorption is likely to remain soft over the next two years with leasing incentives expected to remain at current levels in the near term, despite the falling A grade vacancy rate in the CBD. The problem is the airport, which continues to compete strongly on rents. That said, tenants have shown a preference for quality space in Civic which, if it were to continue, could increase competitive tension.

For Lease - 10 Rudd Street, Canberra. LJ Hooker Commercial Canberra

33

Investment marketDespite a soft leasing market Canberra office buildings remain popular with investors. Average A grade yields firmed by 40 basis points to 7.5% over 2015, delivering the first capital gain since the last cyclical peak in late 2007.

Much of the latest boost was the result of two major transactions, both involving buildings occupied by Commonwealth tenants. Growthpoint Properties bought 255 London Circuit, Civic, for $70 million on a yield of around 6.5%, while Korea’s FG Asset Management bought the Louisa Lawson Building at 25 Cowlishaw Street in Tuggeranong for $255 million. Both buildings featured WALEs in excess of 11 years.

In total, over $500 million worth of office buildings changed hands last year, over 50% more than in each of the two preceding years. The improvement was due to the combination of high quality assets coming to market, as well as investors keen to find assets that offer a significantly higher yield – like for like – than the main markets of Sydney and Melbourne.

High vacancies and associated soft rental growth mean that the Canberra market is unlikely to see the ongoing compression of yields. However, continued interest from investors priced out of Sydney and Melbourne, a lag in valuations or another trophy building becoming available may result in a further firming of yields in the short term.

On the supply side, only 1,200 sqm of new space was completed in the second half of 2015, following 10,700 sqm during the first half. The latter was largely accounted for by Winyu House, the new 9,000 sqm administration centre for the ACT government.

New completions were complemented by a 5,000 sqm building at 50 Blackall Street, Barton re-entering the market after extensive refurbishment. Meanwhile, withdrawals of stock helped to reduce metropolitan-wide vacancies. In total, around 18,000 sqm was withdrawn in the second half of last year, some 10,000 sqm of which was permanent. The remainder will be refurbished, including the historic East Block.

Looking forward, no new supply is scheduled to come on stream until late 2017. The only project currently under construction is a 30,000 sqm building in Tuggeranong for the Department of Social Services, which is currently located at the neighbouring Tuggeranong Office Park.

Several small to medium sized buildings are expected to be

permanently withdrawn, helping to reduce the impact on vacancies of negative net absorption. In a positive move for the market, the Department of Immigration and Border Protection will now remain in Belconnen. The department also announced that approximately 1,500 employees will move from Civic to a newly built 30,000 sqm development at 3 Molonglo Drive at Canberra Airport.

Supply

Canberra metropolitan office market vacancy rateChart 12: Canberra Metropolitan Office Market Vacancy


Forecast

0

5

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15

20

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

%


3535

Adelaide

Adelaide’s CBD office market comprises almost 1.4 million sqm of office stock. The adjacent Fringe market adds some 215,000 sqm.

An improvement in leasing activity has slowly crept through Adelaide’s office markets, although new additions have not helped vacancy rates. Investors have also been active in the market with competition for limited stock for sale leading to a firming of yields.

Adelaide office market

Adelaide CBD office market








For Lease - 81 Flinders Street, Adelaide. LJ Hooker Commercial Adelaide.

Adelaide

Leasing marketCentralising tenants resulted in positive net absorption in the first half of 2015. Net absorption fell back into negative territory in the second half but, even so, the year ended with a positive result of some 2,500 sqm.

The B grade market had the strongest result, with almost 10,000 sqm of net absorption, thanks to centralising tenants and also those upgrading from C and D grade space. There is a reasonable amount of leasing activity overall; indeed, it is estimated at around 80,000 sqm through 2015.

There have been numerous leases involving centralisation from the Fringe or suburban markets to the Frame. HAMBS is moving from the suburbs to 169 Pirie Street, Dimension Data and Pitcher Partners have both moved from the Fringe to the

Frame, taking around 1,000 and 1,500 sqm respectively. Reversing this trend, Viterra Packaging moved from the Frame to the Fringe market in late 2015, taking 2,400 sqm at 186 Greenhill Road.

The modest level of positive net absorption was insufficient to offset net additions through 2015. This saw the vacancy rate climb from 13.5% at the start of the year to 14.1% at December. By grade, the prime vacancy rate increased through 2015 but, at 12.5%, remains somewhat below the overall market average.

The combination of muted demand and solid supply in 2016 is likely to push up the CBD vacancy rate to around 15%. The good news is that this should be the peak. We anticipate that the vacancy rate will fall gradually through 2017 and 2018. The flow-on effect to rents is that we have probably now seen the trough in effective rents. However, leasing incentives are likely to remain at elevated levels for some time, and face rents are unlikely to show much movement while there is plenty of accommodation on offer.

37

Investment marketAdelaide remained popular with investors in 2015, with competition for stock pushing down investment yields. However, a lower amount of stock on offer compared with 2014 meant that transactions were down – from around $700 million (a record) to $200 million.

Notable sales included the sale of 100 Waymouth Street to Norelco Holdings for $73 million, and Norelco’s sale of 81 Flinders Street to a local syndicator for $41 million, while the state government offloaded 60 Wakefield Street and 21 Divett Place to another syndicator for $37 million.

2016 is likely to see a rebound in the value of transactions, as there have already been four large sales in the first few months. The largest transaction year-to-date is

Blackstone’s purchase of 80 Grenfell Street and Rundle Mall Plaza for over $400 million, of which the office component is estimated at about $150 million. In addition, 30 Flinders Street was sold for $65 million by Shakespeare Property Group, which was also active on the buying side, acquiring both 11–19 Grenfell Street for $39 million and 30 Currie Street for $29 million.

We estimate that prime investment yields firmed further in 2015, to an

average of 7.3%. Yields may well show further firming near term given the continued strength of funds flowing into Australia.

The sharp firming of yields fed through to appreciation in capital values. Average A grade values sit at around $4,600 per sqm, but are considerably higher for well leased, upper A assets. Indeed, the sale of 100 Waymouth Street, which has an 8-year WALE, reflects a rate of over $5,900 per sqm.

On the supply side, new and refurbished supply totalled 35,000 sqm, comprising the new 50 Flinders Street (20,600 sqm) and several refurbishments.

50 Flinders Street had been largely pre-committed to by People’s Choice Credit Union (9,800 sqm). The level of withdrawals was reasonably strong, at 23,000 sqm, but these were mainly for refurbishment and will return to the market.

Supply additions are expected to remain robust in 2016, with two new buildings under construction – 6,900 sqm at 113–115 King William Street and 4,000 sqm at Frome+Flinders – and five refurbishment projects. In total, over 34,000 sqm will be completed.

There will also be some small refurbishments in the Fringe market. Supply is likely to be substantially lower in 2017 and 2018, with nothing bar a few refurbishments expected. Charter Hall has secured approval for its 39,000 sqm Precinct GPO project, but its unlikely to be developed within the next three years.

Supply

Adelaide metropolitan office vacancy rateChart 8: Adelaide Metropolitan Office Market Vacancy


Forecast

0

5

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20

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

%


3939

Hobart

The Hobart CBD office market contains some 356,000 sqm of floorspace.

Better economic conditions has seen office market activity begin to rise across Hobart. Although soft employment conditions have limited the extent of this growth. Enquiry from owner-occupiers and investors has begun to improve, in line with the improved economic environment, while construction activity has also begun to grow.

Hobart office market

Hobart CBD office market





Average prime incentive 10–15%



Hobart

Economic overviewTasmania’s economy has improved in recent times, with State Final Demand up 1.7% in calendar 2015. The employment story is less positive with those employed falling 0.7% in the year ending March 2016 – although there are signs that employment may have troughed.

The main office-occupying sectors have underperformed against total employment, although the outlook is brighter. The financial and insurance services sector has improved in recent quarters, but the level of employment remains below the highs achieved late last decade/earlier this decade. There has been a notable contraction in employment in public administration and safety over the last few years. Recent quarterly data suggests that this phase may have come to an end.

Business confidence has improved in line with the state’s better economic performance. The March 2016 Sensis Small to Medium Enterprises Business Index shows robust business confidence in Tasmania. The state ranks second only to New South Wales of the states and territories. Meanwhile, the latest PCA/ANZ Property Industry Confidence Survey shows an even more impressive result, with Tasmania leading all the states and territories with its strongest result on record (since December 2011).

The outlook for the overall Tasmanian economy remains positive near term. The important office-occupying sectors of property and business services, and financial and insurance services are expected to continue to underperform against total employment growth. And, while employment in the public sector may have troughed, anecdotal evidence indicates a likely continued contraction in public service office occupation as greater efficiencies are introduced.

For Lease - 99 Bathurst Street, Hobart. LJ Hooker Commercial Hobart.

Leasing marketJanuary 2016 data shows a fall in Hobart’s CBD vacancy rate over the preceding year, from 8.9% to 8.1%, due to withdrawals from stock.

By building quality, A grade space still has the lowest vacancy rate, although it increased slightly through 2015, from 5.7% to 6.1%. B grade space benefited from both positive net absorption (partly through tenants upgrading to take advantage of good deals) and the withdrawal of 28-32 Elizabeth Street for

redevelopment. These factors resulted in a marked fall in the vacancy rate, from 12.7% to 9.4%.

C grade stock saw the greatest quantum of floorspace withdrawn, but also suffered the most negative net absorption. However, the former

more than offset the latter and the vacancy rate fell from 13.0% to 12.5%. Finally, the smaller D grade market also benefited from withdrawals outpacing net absorption, and its vacancy rate reduced from 10.5% to 9.0%.

41

Investment market

Supply

Despite the subdued state of the leasing market, investor demand remains firm. No A grade stock has come to the market recently to test pricing and yields, but well leased secondary stock is reportedly readily sold.

The revival of the tourism sector continues to have a strongly positive influence on Hobart’s office sector through the withdrawal of vacant office buildings for redevelopment/conversion to hotel or associated tourism uses.

Over 7,000 sqm was withdrawn from stock in eight buildings in 2015, with tourism use the predominant reason.

Very little new supply is due to come on stream in 2016, with just the partial refurbishment of 144–148 Macquarie Street, comprising just under 1,000 sqm.

Calendar 2017 will see a substantial new addition to Hobart’s office stock. The 20,700 sqm office component of the Parliament Square development is under construction, due for completion in late 2017. Although the project is largely pre-committed, considerable backfill space will be released.

Further refurbishments and mixed-use projects are mooted, but they are fairly small scale. Any larger office projects in the pipeline are considered unlikely to start for some time.

Hobart CBD office market vacancy and net absorption

(Vac

ancy

rat

e)

(Net

abs

orpt

ion

sqm

)

Source: PCA

Chart 14: Hobart CBD office market vacancy and absorption

0%

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14%

-8,000

-4,000

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8,000

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16,000

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Net absorption

Vacancy rate


4343

Darwin

At the end of 2015, the Darwin CBD contained around 213,000 sqm of office stock.

The soft economic conditions, a pull back in investment from resource companies and reduction in consultancy firms that service this sector has seen office markets across the Northern Territory struggle.

Darwin office market

Darwin CBD office market








Darwin

Leasing marketBoth public and private sector tenants continue to curtail their costs by cutting back on space or leasing more efficient space. Moreover, competition from cheaper new offices in suburbs such as Parap, Winnellie and Berrimah are attracting cost-conscious occupiers.

After a recent re-grading exercise, A grade stock now makes up nearly two-thirds of the total CBD office floorspace, up from around 50% a year earlier. Uncommitted space in the Charles Darwin Centre saw the A grade vacancy rate increase from 9.3% at December 2014 to 15.6% a year later. The combination of upgrading government tenants and the re-grading saw B grade stock suffer a near tripling

of its vacancy rate last year, with nearly one-third of stock vacant as of December 2015.

Despite rising vacancy rates, leasing incentives are still very modest and rents are holding their own. Although, the fact that ownership of CBD office stock is dominated by local private investors may be the reason for this. They are not subject to the same

stockmarket and analyst scrutiny as AREIT and institutional landlords who are often pressured to sustain and grow cash flows.

At the top end of the market, asking rents are around $650 gross per sqm for the remaining space in the Charles Darwin Centre. At the lower end of the A grade range, landlords are asking around $480 per sqm gross.

Darwin CBD office market vacancy rate by grade

45

Leasing outlookWhile underlying demand points to positive net absorption in the short term, the Territory government in particular will continue to seek efficiencies by lowering the amount of space occupied per worker.

Given that the government is by far the largest office space user in Darwin, actual net absorption is likely to be minimal and vacancy rates will remain high.

There is little doubt that high vacancy rates will put additional pressure on leasing incentives, though mostly in the secondary market. Face rents will likely hold their ground in the prime market. The NT Government recently

announced an EOI for 12,000 sqm of office space, in either Darwin CBD or Palmerston. A decision to move out of the CBD would see vacancy rates rise considerably.

Investment market

Supply

Unlike in the major office centres, the investment market in Darwin has been quiet for the past few years. The last major sale was of the secondary Health House for $19.15 million in mid-2013, but strata suites change hands more regularly with institutional investors largely absent from the market.

Mid-2015 saw the completion of the 16,300 sqm Charles Darwin Centre. This building is the new headquarters for Paspaley Group and carried a 9,000 sqm pre-commitment from the Territory government. Another government department has since relocated to the Centre leaving about 1,000 sqm still available for lease.

The government moves resulted in negative net absorption due to the more efficient use of space and, in the process, released a significant amount of vacancy onto the market.

Looking forward, the government recently called for expressions of

interest for the construction of a new, 12,000 sqm headquarters for the Department of Health. While considering the options of either new construction or the refurbishment of an existing building, a new building would likely see the market vacancy

rate rise considerably unless the old premises is withdrawn from stock. Another risk is that the government is considering Palmerston as a location, further adding to the fragmentation of the office market.

Chart 15: Darwin CBD Office Market Vacancy Rate by Grade

%

Jan-13 Jan-15Jan-14 Jan-16

0

10

20

30

40

Total market A grade B grade C grade

Source: Property Council of Australia

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1

1ST HALF 2016

> Firming yields have boosted construction activity

> Leasing demand has begun to rise

> Large portfolio sales is leading to a consolidation of ownership

> Consumer sentiment strengthens

> Expansion and refurbishment ramps up

> Investor demand tightens yields

> Outlook for divestment strong

2ND HALF 2015

RETAIL

ljhcommercial.com.auLJ Hooker Commercial 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. LJ Hooker Commercial 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.

Aerial images supplied courtesy of Airview Online – www.airviewonline.com Perth aerial image supplied by Lofty Visions – www.loftyvisions.com.au© LJ Hooker Commercial 2016. 0616 LCLJHC117

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OFFICE - LJ Hooker Commercial · Perth Page 24 Leasing market 44 Investment market 45 Supply 45 Darwin Page 42 Rent $498 psm pa Yield 7.3% ... services catering to non-mining investment