Sydney cbd office research forecast report second half 2012

Sydney CBd OffiCeReseaRch & FoRecast RepoRt

www.colliers.com.au/research

second half 2012 | offIce

85 castlereagh street, sydneyThis newly built Premium Grade building has benefited from new commitments over the past six months.

*equivalent Reversionary yielddata correct as at Q2 2012Source: Colliers international Research

sydney cBd oFFice MaRket indicatoRs

Grade precinctaverage Gross

Face Rents ($/m² pa)

average incentives

average outgoings($/m² pa)

average capital Values ($/m²)

average Market yield*

Low hiGh Low hiGh Low hiGh Low hiGh

pReMiuM

Core $800 $1,295 21% 25% $180 $9,760 $17,445 6.25% 6.55%

Midtown $765 $1,015 24% 28% $140 $9,495 $13,270 6.55% 6.65%

Western Corridor $675 $845 23% 27% $115 $8,455 $10,970 6.50% 6.75%

a GRade

Core $655 $820 23% 28% $150 $7,305 $9,720 6.75% 7.00%

Midtown $595 $725 25% 28% $130 $6,365 $8,110 7.15% 7.50%


Southern $510 $565 21% 26% $115 $4,965 $5,675 7.85% 8.15%

B GRade

Core $570 $660 26% 29% $120 $5,855 $7,040 7.55% 7.95%

Midtown $525 $615 25% 29% $115 $4,980 $6,035 8.00% 8.60%


Southern $430 $480 28% 30% $100 $3,840 $4,415 8.30% 9.05%

MaRket indicatoRs FoRecast - 6 Months

oVeRaLL peRFoRMance

new suppLy

tenant deMand

Vacancy /

incentiVes

Face Rents

eFFectiVe Rents

capitaL VaLues

yieLds

key hiGhLiGhts

The Sydney CBd office market saw the largest decline in vacancy across all Australian CBd markets during the first half of 2012. The latest Property Council of Australia Office Market Report, showed that Sydney’s CBd vacancy rate declined by 1.5 percentage points (pp) from 9.7% in January 2012 to 8.2% in July 2012. This decline can be attributed to a distinct lack of supply with only 13,225m² entering the market, combined with a positive absorption result, of 45,309m² during the period.

The biggest news for the Sydney CBd office market during the period was the announcement that Westpac, KPMG and Lend Lease had pre-committed to tenancies in the first two towers at Barangaroo. The deal represents approximately 120,000m² or 70% of office space within the two towers. in a separate announcement and one that gave further commitment and confidence that construction of the project will move forward on schedule is that Canada Pension Plan investment Board (CPPiB) has formed a joint venture with Lend Lease to finance the project. This will see the joint venture commit $2 billion of the equity for the project with CPPiB committing 50% or $1 billion and Lend Lease and APPfC each committing 25% to the joint venture.

The past six months has seen investment demand remain strong with both offshore and domestic investors continuing to focus on quality Prime Grade assets. However, the limited number of these assets for sale has seen the majority of deals transact off-market or to related parties. This has seen yields for Prime Grade assets remain stable while the yield spread between high and low quality Secondary Grade assets has continued to widen.

The CBd leasing market has seen an increase in new leases signed by former fringe and metro based tenants. However, despite the decline in vacancy, subdued tenant enquiry levels and softer lease volumes has seen face rents remain relatively stable over the period, while incentives have begun to show signs of softening.

Absorption Drives Decline in Vacancy

• The vacancy rate within the Sydney CBd office market declined from 9.7% to 8.2%.

• The decline in vacancy was driven by a strong rise in absorption with 45,309m² recorded for the first half of the year.

• Prime Grade yields have stabilised while the yield spread between high and low quality Secondary Grade assets has continued to widen.

stRonG Q1 2012 Gdp ResuLt

The March Quarter 2012 Australian Bureau of Statistics (ABS) Gross domestic Product (GdP) data showed robust growth for the Australian economy during the quarter. in seasonally adjusted terms, GdP increased 1.3% during Q1 2012, up from 0.6% in Q4 2011, taking through-the-year GdP growth to a strong 4.3%, the largest annual result since September 2007. The main contributors to expenditure on GdP, during the quarter, were household final consumption (0.9 percentage points) and private gross fixed capital formation (0.8 percentage points) while net exports detracted 0.5 percentage points. The main industry contributors to GdP were mining (up 2.3%), financial and insurance services (up 1.7%) and professional, scientific and technical services (up 2.8%).

eMpLoyMent ReMains tiGht

despite seeing a slight rise in unemployment, the June 2012 monthly ABS Labour force data shows that the Australian employment market continues to remain tight. The national unemployment rate experienced a slight increase of 0.1 percentage point during the month to 5.2% seasonally adjusted with total employment decreasing by 27,000. This decline was driven by a decrease in full-time employment of 33,500 persons and a slight increase in part-time employment of 6,600 persons.

inFLation Rate ReMains Low

The latest inflation data from the ABS shows that annual headline inflation rose just 1.2% during the 12 months to June 2012, down compared with a rise of 1.6% through the year to March 2012. This saw the Consumer Price index (CPi) grow by 0.5% during the quarter and ensures that the inflation rate remains well below the RBA’s target range of 2% to 3%. Underlying inflation was also contained increasing by 0.6% during Q2 2012, taking annual growth to 1.9%.

cash Rate ReMains staBLe

following a reduction of 50 and 25 basis points in May and June 2012 respectively, the Reserve Bank of Australia (RBA) decided to keep the official cash rate stable at 3.50%, during both their July and August monthly board meetings. The RBA judged that “with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate”.

austRaLian doLLaR FLuctuates

Ongoing uncertainty over european sovereign debt issues has continued to fuel concerns regarding the global economic outlook. Combined with the slow pace of economic recovery in the United States, this uncertainty saw the Australian dollar reach a record high in late July 2011, trading at $US110.62, before slipping below parity in december 2011. After regaining value during Q1 2012, the Australian dollar again fell below parity in May 2012 due to a flight by investors to safe haven assets, as election results in Greece and france further clouded the outlook for the european economy. A rebound in recent months has led to the Australian dollar currently trade between $US1.02 and $US1.06.

Economic Update

Source: deloitte Access economics / PCA / Colliers international Research

sydney cBd white coLLaR eMpLoyMent GRowth V net aBsoRption FoRecast

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Net A

bsor

ptio

n -

(Sq

m)

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Whi

te C

olla

r Em

ploy

men

t Gro

wth

(6 m

th %

cha

nge)

6 Mth Net Absorption Sydney CBD White Collar Employment Growth

Forecast

Interest rates remain steady at 4.25%.

coLLieRs inteRnationaL | p. 2

research & forecast report | second half 2012 | offIce | sYdneY cBd

Employment Trends and Leasing Demand white coLLaR eMpLoyMent GRowth ReMains positiVe•The latest employment data from deloitte

Access economics shows that white collar employment growth slowed during the first half of 2012.

• Total white collar employment within the Sydney CBd increased by 0.51% during the period, down from 1.4% in the second half of 2011.

•The information, media and telecommunications sector recorded the largest growth increasing by 8.1%, followed by Construction with 4.7% growth.

•The finance and insurance sector which makes up approximately 25% of tenants by area within the CBd saw white collar employment grow by just 0.4% during the period.

•Looking forward deloitte Access economics forecasts white collar employment growth to remain subdued growing by 0.3% in the second half of 2012.

Lease VoLuMes ReMain suBdued•Ongoing low business confidence levels saw

the number of leases signed by tenants during the first half of the year decline by 16%, as compared to the second half of 2011. This was despite the overall size of office area leased remaining stable. (excluding the Barangaroo pre-commitments).

•The majority of leases signed during the period were to smaller, sub 1,000m², domestically focused tenants with the average size of leases signed being 675m², up from 550m² during the second half of 2011.

•The first half of 2012 saw approximately 105 leases signed making up a total area of 70,000m² across all Sydney CBd grades and precincts.

tenant enQuiRy soFtens•The total number of new tenant enquiries in

the Sydney CBd office market declined by around 11% over the first half of 2012, compared with the second half of 2011.

•Ongoing low levels of business confidence and company profit results has led to an increase in tenants looking to take up their option, renew their lease and stay put, rather than commit to the cost of moving tenancies.

•The total number of new enquires still remained over 140 for the six month period, however the total area of new enquiry declined to around 90,000m² for the period.

• This saw the average size of enquiry decline from 1,025m² in the second half of 2011 to 615m² over the course of the first half of the year.

Source: Colliers international Research

Source: deloitte Access economics / Colliers international Research

Num

ber o

f Lea

ses

Sign

ed

O ce

Are

a (m

²)

Number of Leases Signed O ce Area Leased (m²)

0

20

40

60

80

100

120

140

160

180

200

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 1H 2011 2H 2011 1H 2012

sydney cBd Lease tRansactions

sydney cBd white coLLaR eMpLoyMent GRowth FiRst haLF 2012 - By industRy

0

50

100

150

200

250

300

1H 2009 2H 2009 1H 2010 2H 2010 1H 2011 2H 2011 1H 2012

Num

ber o

f Enq

uire

s

Oce

Are

a (m

²)

0

50,000

100,000

150,000

200,000

250,000

300,000

Number of Enquires Total Size of Enquires (m²)


sydney cBd oFFice tenant enQuiRy LeVeL

-600 -400 -200 0 200 400 600 800 1,000 1,200

Public Administration and Safety

Accommodation and Food Services

Retail Trade

Electricity, Gas, Water and Waste Services

Transport, Postal and Warehousing

Other Services

Education and Training

Wholesale Trade

Rental, Hiring and Real Estate Services

Manufacturing

Agriculture and mining

Arts and Recreation Services

Health Care and Social Assistance

Administrative and Support Services

Construction

Financial and Insurance Services

Professional, Scientific and Technical Services

Information Media and Telecommunications

Total White Collar Employment Growth

Indu

stry

Sec

tor

Sydney CBD White Collar Employment Growth - By Industry First Half 2012

Number of Persons



Supplyno new deVeLopMents in 2012•After experiencing close to 200,000m² of

supply additions during 2011, the 2012 calendar year is expected to see only 60,000m² added to the markets, 45% is currently committed.

•The first half of 2012 saw 13,225m² enter the market which was offset by 42,237m² of withdrawals. Leading to a negative net supply result of -29,012m², during the six month period.

•The largest addition during the period was 52 Martin Place which added 7,500m² of newly refurbished space into the market.

•The second half of 2012 is forecast to see a slight increase in supply additions with close to 47,000m² of refurbished space due for completion during the period.

•The largest being 1 O’Connell Street which has undergone a major refurbishment and is expected to add 19,000m² of space.

•On top of this Colliers international has identified approximately 15,000m² of backfill space will enter the market, due to the relocation of a number of tenants and a further 17,000m² is expected to be withdrawn over the second half of 2012, as landlords continue to refurbish stock.

two new deVeLopMents FoR 2013•A total of 130,000m² of supply additions are

expected to be added to the market over the

course of 2013 with two new developments due for completion.

•The largest being 161 Castlereagh Street which is set to bring 54,437m² of Premium Grade space to market in the first half of the year of which 80% is pre-committed by freehills and AnZ Bank.

•The second is 8 Chifley Square. This 19,000m² office building is being developed by Mirvac and is currently 42% committed to by Corrs.

•2014 looks set to be a year in which the Sydney CBd will again experience a lack of supply with the only new development due for completion being 5 Martin Place, subject to pre commitment.

BaRanGaRoo announceMent BRinGs ceRtainty to suppLy pipeLine•The Barangaroo pre-commitment

announcement provides clarity to the development and supply pipeline over the next five years.

•The relocation of Westpac to C4 is set to increase the amount of backfill space entering the market with Westpac likely to vacate approximately 89,000m². The majority of which is set to be withdrawn for redevelopment or refurbishment.

•C5 which is committed to by KPMG and Lend Lease will lead to 43,000m² of backfill space across two buildings, being 10 Shelly Street and 30 Hickson Road.

note: includes additions above 5,000m²Source: Colliers international Research

sydney cBd cuRRent & Mooted coMMeRicaL deVeLopMent

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

55 H

unte

r St

52 M

artin

Pl

338

Pitt

St46

4 Ke

nt S

t30

9 Ge

orge

St

363

Geor

ge S

t1 O

'Con

nell

St

52 M

artin

Pl (

2nd

Tran

che)

259

Geor

ge S

t99

Eliz

abet

h St

161 C

astle

reag

h St

175

Live

rpoo

l St

255

Geor

ge S

t2

Park

St

8 Ch

i�ey

Sq

255

Eliza

beth

St

339

Pitt

St1 F

arre

r Pl

19 M

artin

Pl

180

Thom

as S

t47

8-48

0 Ge

orge

5 M

artin

Pl

383

Geor

ge S

t1 M

artin

Pl

Bara

ngar

oo C

415

5 Cl

aren

ce S

t20

Mar

tin P

l55

Mar

ket S

t11

5 Ba

thur

st S

t33

3 Ge

orge

St

Bara

ngar

oo C

519

-31 P

itt S

t10

She

lley

Stre

et30

Hick

son

Rd

190-

200

Geor

ge S

t33

-35

Blig

h St

60 M

artin

Pl

289-

307

Geor

ge S

tYo

ung

& Lo

ftus

The

Ribb

on

Bara

ngar

oo C

3

182

Geor

ge &

33-

35 P

itt37

-51 P

itt S

t15

1 Clar

ence

St

Tota

l O�

ce N

LA (m

2 )

2012 2013 2014 2015 2016 2017+

Complete New Build/Vacant Refurbishment/Back�ll CommitmentMooted

no new developments due for completion in2012.



RecentLy coMpLeted and pRojects undeR constRuction

address precinct office nLa(m²) status completion owner project type Major tenant

current occupancy/commitment

309 George Street Core 5,200 U/C Q3 2012Abacus Property

Group Partial Refurb - -

363 George Street Core 10,500 U/C Q4 2013 iSPT Partial Refurb TAL 100%

1 O'Connell Street Core 19,000 U/C Q4 2012Harina Company/ Australian Prime Property fund

Partial Refurb Middleton’s 40%

161 Castlereagh Street Midtown 54,437 U/C Q2 2013

LaSalle investment Mgt/ GPT Wholesale Office fund / iSPT

Super Property

new development AnZ & freehills 80%

8 Chifley Square Core 19,000 U/C Q4 2013 Mirvac / K-ReiT new development Corrs 42%

Barangaroo C4 Western Corridor 7,500 dA Approved Q3 2015 Lend Lease new development Westpac 70%

Barangaroo C5 Western Corridor 78,000 dA Approved Q1 2016 Lend Lease new development

Lend Lease, KPMG

70%

New Supply Pipeline


Mooted coMMeRciaL deVeLopMents

address precinct proposed nLa(m²) status Mooted

completion owner/developer comments

5 Martin Place Core 30,000 dA Approved 2014 Colonial first State / Cbus new development

180 Thomas Street Southern 15,000 dA Approved Q3 2014 Transgridnew development, owner has committed to 37%

190-200 George Street Core 38,000 dA Lodged Q3 2015 Mirvac Groupdesign competition for new office building now on exhibition.

383 George Street Core 13,400 dA Approved Q2 2015 fife Capital Construction of mixed use development

20 Martin Place Core 20,673 dA Lodged Q4 2015 Pembroke Real estateMajor redevelopment of existing office building.

The Ribbon Western Corridor 38,000 Pre dA 2015+ Markham/ Groconnew innovative designed 18 storey office building with large 3,000+ floorplates. (iMAX Theatre site)

155 Clarence Street Western Corridor 11,500 Pre dA 2015+ St HillersMajor redevelopment of exisitng heritage office building.

333 George Street Core 13,318 dA Approved 2016 Charter Hall new office and retail development

Barangaroo C3 Western Corridor 100,000 dA Lodged 2016 Lend Lease new commercial office development

33-35 Bligh Street Core 23,536 dA Approved 2016+ investadA lodged for a mixed use retail, commercial & residential building with a maximum height of 235 metres.

city one301 George Street

Core 60,000 Stage 1 Approved 2017+ Thakral HoldingsConstruction of 32 storey building with 2,100m² floorplates.

37-51 Pitt Street Core 80,000 Pre dA 2017+ Ge Capital Real estate -

182 George Street & 33-35 Pitt Street

Core 80,000 Pre dA 2017+ Lend Lease -

Young & loftus2-10, & 20 Loftus & 5-17 young Streets

Core 37,698 Pre dA 2017+ AMP Capital investors / Grocon -




7.7%7.8% 7.5% 7.8%

12.2%

0%

2%

4%

6%

8%

10%

12%

14%

Premium A Grade B Grade C Grade D Grade

Vaca

ncy

Rate

Jul-12Jan-12Jul-11

Vacancy

the sydney cBd Vacancy Rate decLined FRoM 9.7% in januaRy 2012 to 8.2% as oF juLy 2012.•The driver behind the decline was the

combination of a lack of supply additions, increased withdrawal activity and a return of strong positive net absorption.

•Absorption was above the long term average, recording 45,309m², after experiencing just 10,709m² of net absorption over the course of the 2011 calendar year.

•Overall, direct vacancy in the CBd declined by 0.9pp to 7.8% while sub-lease vacancy also fell by 0.4pp during the six month period to 0.4% or just 20,568m².

•The B Grade market was the standout performer during the first half of 2012 with vacancy declining by 2.3pp to 7.8%; this was on the back of 21,093m² of absorption and 19,662m² of withdrawals.

•The A Grade market saw a 1.7pp decline in vacancy to become the tightest market across the CBd with a vacancy rate of 7.5%. This was driven by a large withdrawal of 21,315m² and positive absorption of 18,021m².

•The Premium Grade market saw a 0.4pp increase in its vacancy rate, rising to 7.8% with a weak absorption result of -551m² during the period.

•The Western Corridor remained the precinct with the lowest vacancy rate, despite increasing 0.4pp to 6.0%.

•The Southern precinct was the outperformer during the first half of the year, recording the largest decline in vacancy across all precincts, declining by 3.0pp to 6.9%, led by a strong 3.9pp decline in A Grade vacancy in the area. An increase in positive absorption was the driver behind this result with a number of metro and fringe based tenants moving into the precinct during the period.

•The Core precinct also performed well recording absorption of 28,992m² leading to the vacancy rate falling by 2.6pp, to 9.1% as of July 2012.

•The largest decline in vacancy across all grade and precincts was the Core B Grade market which declined by 4.5pp to 7.1%. This was due to strong positive absorption of 15,070m² combined with no new supply and the withdrawal of 18,000m² of space during the period.

•Colliers international Research forecasts the vacancy rate to continue to decline over the course of the second half of 2012, reaching 7.9% by January 2013. This is due to the ongoing combination of limited supply entering the market, an increase in withdrawal activity from landlords looking to refurbish stock and positive absorption over the remainder of the year.

Source: PCA OMR July 2012 / Colliers international Research

sydney cBd totaL oFFice MaRket Vacancy

Rate

8.2%

20 Year Historical Average9.6%

0%

2%

4%

6%

8%

10%

12%

14%

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Vaca

ncy

Rate

Total Vacancy Factor 20 Year Historical Average


sydney cBd Vacancy By GRade

sydney cBd – stock & Vacancy By pRecinct & GRadepRecinct/

GRade totaL MaRket coRe Midtown westeRn coRRidoR southeRn

stock (m²)

Vacancy (%)

stock (m²)

Vacancy (%)

stock (m²)

Vacancy (%)

stock (m²)

Vacancy (%)

stock (m²)

Vacancy (%)

total - all Grades

4,902,737 8.2% 2,091,343 9.1% 1,154,495 9.8% 1,215,671 6.0% 339,825 6.9%

premium 720,427 7.8% 408,261 11.3% 135,045 6.0% 177,121 0.9% n/a n/a

a Grade 1,778,485 7.5% 685,865 9.8% 439,927 9.1% 478,608 4.5% 126,783 3.7%

B Grade 1,587,287 7.8% 694,739 7.1% 384,184 6.8% 336,599 10.9% 130,374 6.8%

c Grade 615,189 12.2% 243,965 10.6% 118,824 26.3% 192,791 5.2% 46,021 13.1%


a grade vacancy declines by 1% to 8.9%.



Leasing Market Activity


sydney cBd aVeRaGe net Face Rents

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Dec-

00

Jun-

01

Dec-

01

Jun-

02

Dec-

02

Jun-

03

Dec-

03

Jun-

04

Dec-

04

Jun-

05

Dec-

05

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06

Dec-

06

Jun-

07

Dec-

07

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08

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08

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09

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09

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10

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10

Jun-

11

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11

Jun-

12

Dec-

12

Jun-

13

Dec-

13

Jun-

14

Aver

age

Rent

($ p

er m

2 pe

r an

num

)

Premium Grade

B Grade

A Grade

Forecast

suBdued RentaL GRowth•despite the decline in vacancy and a sharp

increase in absorption, face rental growth remained subdued over the first half of 2012.

•Overall, gross face rents across all grades and precincts increased by 1.7% from Q4 2011 to Q2 2012, chiefly driven by increasing outgoings.

•An increase in demand from cost conscious tenants pushed Secondary Grade rents higher with B Grade face rents increasing 2.4% during the period. While Premium Grade face rents increased by 1.9% and A Grade by 0.8%, driven by rent review and outgoing increases.

•Core precinct rents remained relatively steady increasing 0.6%. Midtown rents grew by 2.5% driven by a 5% growth of B Grade rents, while Western Corridor rents rose by 2.8%.

•Southern precinct rents increased by 1.6% primarily driven by the A Grade market which increased by 2.3% due to tenant demand.

•The number of Metro and fringe based tenants looking for space within the CBd increased over the first half of 2012, due to the tight vacancy rates for quality space in metro office markets. These tenants have chosen to relocate into the CBd in order to help attract and retain staff.

•An example was the 10,500m² lease by TAL (formally known as Tower) who will relocate from Milsons Point to 363 George Street in Q4 2012.

•Colliers international forecasts rental growth to remain slow but positive over the course of the next 12 months, as economic conditions continue to ensure lease and expansion decisions are delayed. despite this, the lack of supply entering the market and tighter vacancy rates ensure that growth prospects for quality space remain favourable.

incentiVes soFten•Softer enquiry levels combined with a delay in

the decision making process by tenants has seen landlords begin to offer slightly higher incentives to secure deals.

•This has seen incentives increase by 1pp on average across all grades and precincts, rising to an avergae of 26% as of Q2 2012.

•Premium Grade incentives rose 2.1pp on to an average to of 24%, A Grade incentives remained steady at 26% while B Grade incentives rose by 1pp point to 28% on average.

eFFectiVe Rents•A Grade effective rents remained stable while

B Grade effective rents increased 2.0% during the period. The larger than expected rise in Premium Grade incentives saw effective rents fall by 1.8%.

aVeRaGe incentiVe RanGe

Grade Q2 2011 Q4 2011 Q2 2012 6-month Forecast

premium 19% - 27% 19% - 27% 21% - 28% n

a Grade 23% - 29% 23% - 29% 23% – 29% n

B Grade 25% - 30% 25% - 30% 25% - 30% n

1 Market street, sydneyThis building has seen a number of new tenants take up space within this landmark A Grade tower over the past six months.



Investment Market ActivityinVestMent deMand ReMains stRonG•Quality office buildings, particularly Premium

and A Grade, that offer a WALe of four years or greater continue to be in high demand from investors. However, there have been very few of this type of asset offered for sale as these properties continue to enjoy low vacancies and owners are holding for future capital gain.

•Conversely, there are a number of Secondary Grade properties currently for sale that have short WALes (two years or less) and some require higher levels of capital expenditure. These assets are harder to finance and as such demand has been limited and yields have begun to soften.

•There were eight, non-related party, property sales during the first half of 2012 with the largest being 48 Martin Place. This predominantly vacant asset was purchased by Macquarie Bank from the Commonwealth Bank for $131 million, while offshore buyers purchased 149 Castlereagh Street ($40.6 million) and 333 Kent Street ($47.75 million) during the period.

pRiMe yieLds staBLe and secondaRy incRease•The only Premium Grade asset sale during the first

half of 2012 was the 25% acquisition of 126 Phillip Street for $176 million by investa Commercial fund from investa. The yield on this transaction was 6.35% and does not support a movement in the yield range for Premium Grade assets across

Sydney CBd of 6.25% to 6.75%.•Two A Grade assets sold during the period; firstly,

the vacant possession sale of 48 Martin Place for $131 million while the second was a 50% stake in 7 Macquarie Place which sold for $55 million from Stockland to its co-owner UniSuper, on a yield of 7.24%. Both these sales indicate stabilisation of A Grade yields.

•Seven Secondary Grade asset sales took place in the first half of the year with yields ranging from 6.5% to 9%. This market is seeing a divergence in yields between assets priced above and below $25 million.

•The demand for sub $25 million properties is strong from private investors who have the backing of bank finance with the sale of 60 Clarence Street (6.5%) and 191 Clarence Street (6.94%) being examples of this demand.

•Above $25 million, particularly for assets that have a WALe of less than three years, values have declined and yields softened. This is due to the lack of debt availability and higher capital expenditure requirements for these assets.

•The equivalent reversionary yields for the sale of 333 Kent Street (8.5%) reflected a longer WALe while the vacant possession sale of 149 Castlereagh Street, sold for 9.5%.

diVeRGence oF capitaL VaLues•Capital Values for Prime Grade have increased in

line with rental growth. An increase in Secondary Grade yields, for assets above $25 million, has seen capital values for these assets decline, while those below this price saw values increase by 1.7%.

aVeRaGe yieLd RanGes

Grade Q2 2011 Q4 2011 Q2 2012 change in yields since Q4 2011

premium 6.55% - 7.00% 6.25% - 6.75% 6.25% - 6.75% Stable

a Grade 6.85% - 8.15% 6.75% - 8.15% 6.75% - 8.15% Stable

B Grade 7.55% - 8.75% 7.55% - 8.75% 7.55% - 9.00% i 10-25 basis points


sydney cBd a GRade aVeRaGe yieLds

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

Equi

vale

nt R

ev Y

ield

s (%

)

175 castlereagh street, sydneythis quality 4.5-star naBers energy rated B Grade building was recently on the market for sale and is now in due diligence.



Source: iPd Australia / Colliers international Research

sydney cBd a GRade oFFice RetuRns

-20

-15

-10

-5

0

5

10

15

20

Mar

-05

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

(Rol

ling

Annu

al %

pa)

Capital Return Income Return


sydney cBd inVestMent saLes By BuyeR type

8%9%3% 5%

18%

4% 3%

31% 20%

28% 15%

41% 19% 39% 33% 72%

56% 35% 61%

2008 2009 2010 2011 2012 (YTD)

Institution

Foreign

Private

Corporate/End User

Government

Investment Analytics cBd oFFice RetuRns GRow•According to iPd Australia’s Property investment

digest, Sydney’s CBd office market has continued to experience capital and income return growth, over consecutive quarters, during the past 12 months.

•Capital returns increased by 0.2pp to 3.0% per annum in March 2012 with income returns remaining steady at 6.7%, taking total returns to 9.9% per annum.

•Premium Grade office assets within the CBd saw a strong growth in total returns increasing by 0.9pp to 10.6% per annum. This was due to a rise in annual capital returns by 1.1pp to 3.8% and a slight decline in income return to 6.5%.

•The A Grade office market saw a slight decline in total annual returns, falling by 0.5pp to 9.5% per annum as of March 2012. This occurred due to a 0.3pp fall in capital returns and income returns fell by 0.2pp to 6.8% per annum.

doMestic institutions ReMain actiVe • investment sales activity remained steady across

Sydney’s CBd during the first half of 2012 with 10 office sales changing hands valued at $541 million.

•domestic institutional buyers, such as superannuation funds, banks and ReiTS, have been the most active buyer type during the first half of 2012, making up 72% of the total value of office sales during the period.

•This was a sharp increase from 33% over the course of 2011, with acquisitions by the likes of Macquarie Bank, investa Commercial Property fund and UniSuper contributing to the 2012 result.

•foreign investment also remained fairly strong, making up 20% of acquisitions during the period. This saw Blackstone from the US and Maville Group from China acquire assets within the CBd. enquiry levels from offshore buyers have not softened to any great extent since the doubling of the MiT tax rate with transactions from foreign buyers expected to rise in the Second half of 2012.

• in terms of the number of investment sales transactions; institutions made up 50% of sales while foreign buyers made up 30% with private and corporate buyers a further 10% each.



inVestMent saLes actiVity

address precinct Grade sale date* sale price

capital Value (m²)

yield** Vendor purchaser

60-62 Clarence Street Western B Jun-12 $14,250,000 $7,645 6.65% Private Levanai nominees Pty Ltd

149 Castlereagh Street Midtown B Mar-12 $40,600,000 $3,110 9.5% Record Realty Blackstone

191 Clarence Street Western C Jun-12 $18,780,000 $5,799 6.94% fivex Property Group Private investor

333 Kent Street Western B Apr-12 $47,750,000 $5,343 8.44% AMB Capital Partners Maville Group

7 Macquarie Place Core A Apr-12 $55,000,000 $8,099 7.24% Stockland UniSuper (50%)

9–19 elizabeth Street Core C Apr-12 $13,000,000 $2,910 VP CBA Macquarie Group

48 Martin Place Core A Mar-12 $131,000,000 $6,768 VP CBA Macquarie Group

161-163 Clarence Street Western d Mar-12 $28,000,000 n/A n/A Brookfield Properties Crown

126 Phillip Street Core Premium Mar-12 $176,250,000 $13,652 6.50% investa Property Groupinvesta Commercial Property fund (25% option sale)

30 Windmill Street Walsh Bay C feb-12 $17,000,000 $4,612 8.75%Tesrol Properties (PPB Advisory)

Primewest Management

LeasinG actiVity

address precinct Grade start date area (m²) Face Rent* ($/m²) tenant

Barangaroo C4 Western Corridor Premium Q3 2015 60,000** n/A Westpac

Barangaroo C5 Western Corridor Premium Q2 2016 25,000** n/A Lend Lease

Barangaroo C5 Western Corridor Premium Q2 2016 35,000** n/A KPMG

363 George Street Core A nov-12 10,500 n/A TAL

56 Pitt Street Core A Oct-12 824 $790g invesco Asset Management

1 Market Street Western Corridor A Aug-12 485 $760g nUiX

9 Hunter Street Core B Aug-12 535 $650g Harbour City ferries

260 elizabeth Street Southern A Jul-12 768 $460n nSW Police

85 Castlereagh Street Midtown Premium Jun-12 1,000 n/A Kennedys Lawyers

55 Hunter Street Core B Jun-12 883 n/A Amazon Corporate Services

55 Clarence Street Western Corridor B Jun-12 634 $595g Cor Cordis Chartered Accountants

1 Castlereagh Street Core B Jun-12 532 $650g Community Services & Health industry Skills Council

260 elizabeth Street Southern A May-12 1,860 $460n Civil Aviation Safety Authority

123 Pitt Street Core A May-12 810 $1,040g department of foreign Affairs & Trade

9 Hunter Street Core B May-12 952 $620g Vistaprint Australia

55 Hunter Street Core B May-12 479 n/A STW Communications

55 Hunter Street Core B May-12 467 n/A MfS investments

405 Sussex Street Southern C May-12 1,140 n/A British American Tobacco

9-13 young Street Core C Apr-12 499 $400g Mayer Bulk

*g – denotes gross face rent *n – denotes net face rent Source: Colliers international Research

**- approximate area

*Sales date is exchange date**yields quoted are equivalent reversionary yieldsSource: Colliers international Research

Recent Market Transaction Activity



Outlook

coLLieRs inteRnationaL

Level 12, Grosvenor Place225 George StreetSydney, nSW, 2000teL 02 9257 0222FaX 02 9347 0710

ReseaRcheR

Mathew tillerManager/ResearchteL 02 9257 0348FaX 02 9347 0848

512 offices in 61 countries on 6 continentsUnited States: 125Canada: 36Latin America: 18Asia Pacific: 194eMeA: 117

• $1.5 billion in annual revenue

• 978.6 million square feet under management

• More than 12,500 professionals

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. COPyRiGHT - Colliers international 2012.

Accelerating success.

Global financial and economic news and activity will continue to drive leasing and investment decisions over the coming six to 12 months. despite this, Australian property markets will continue to be looked favourably upon by global and domestic investors, as the mining and resource sectors underpin growth and provide stability in the domestic economy. demand and enquiry from investors looking for high quality Prime Grade assets is expected to continue to remain strong over the course of 2012. forecasts suggest that the weight of capital chasing quality assets will lead to a further tightening of Premium and A Grade yields by as much as 25 basis points over the next 12 months. Leasing and tenant enquiry activity within Sydney’s CBd is expected to continue to remain buoyant from smaller non-CBd based tenants who are looking to take advantage of softer market conditions to evaluate and upgrade their tenancies. Limited supply entering the market and positive absorption over the remainder of 2012 is expected to see vacancy rates decline across the Sydney CBd office market. This is expected to result in subdued rental growth and a stabilization of incentives over the period. Colliers international Research forecasts that vacancy within the Sydney CBd will continue to tighten falling further to 7.9% by January 2013, before rising slightly to 8.2% as of July 2013, on the back of 161 Castlereagh Street entering the market during the first half of 2013.



www.colliers.com.au/research

Documents

Sydney cbd office research forecast report second half 2012