cbd office rfr 2016

Is Australia becoming too expensive?

Prices soar as offshoreinvestment dominates

CBD OFFICE

First Half 2016Australia & New Zealand

Research and Forecast report

Accelerating success.

New breed of tenants Strategic owners adapt to change

CBD OFFICE

Second Half 2015Australia & New Zealand



HOTELS

Second Half 2015Australia

Research and Forecast Report


Destination Australia Arrivals increase as accommodation sector takes off

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

Nerida ConisbeeNational Director | Research+61 439 395 [email protected]

Luke Dixon Associate Director | Research+61 417 118 [email protected]

Want better insights, faster? Talk to a Colliers Edge expert today.

colliers.com.au/colliersedge

Want real time data that matters most to your business? Colliers Edge is a subscription service developed by our in-house property research specialists, drawing on the expertise of our national network of operators.

We provide clients with a quarterly series of real estate data, collected in a consistent and timely manner to ensure the highest standard of quality.

Colliers Edge has the longest data time series for office, industrial and retail markets across all major Australian cities. Updated quarterly, Colliers Edge is an all-encompassing data analytics tool that can help your business make informed decisions.

Metro OfficeCBD OFFICE

3CBD Office | Research & Forecast Report | First Half 2016

The view from offshore - Is Australia still a target for investment? 5

Our perspective – CBD office 10

CBD office market snapshots

1. Sydney 12

2. Melbourne 16

3. Brisbane 20

4. Perth 24

5. Adelaide 28

6. Canberra 32

7. Auckland 36

Our experience – CBD office 38

Contents

How else can we help you?

Speak to one of our property experts today.

[email protected]

Partner with our Research and Consultancy team

Our highly experienced team of professionals can partner with you to ensure your next project has a positive outcome. We deliver strategic advice across a full range of property sectors, ensuring that your decisions are fully informed.

[email protected]

For more information about Colliers International

And working with us visit:

www.colliers.com.au

4 A Colliers International publication

14 Moore St, Canberra CityLeased on behalf of Quintessential Equity



The view from offshoreIs Australia still a target for investment?

Nerida Conisbee National Director | Research, [email protected]

Australian CBD office space is just one per cent of global office floorspace, however for such a small market it is remarkably popular with investors. In our 2015 Global Investor Outlook survey, Sydney and Melbourne were ranked as the second and third most popular destinations in which global investors wanted to target. London which has an office market more than three times larger than Sydney, ranked first.

Offshore investors now own 17 per cent of Australian office stock, around twice as much as they did five years ago. Investment levels continue to rise. In 2015, offshore investors accounted for 67 per cent of total direct investment in CBD office buildings. If indirect investment is included, this proportion is a lot higher.

The reasons behind Australia’s reputation as an attractive destination for offshore capital are well documented. Australia’s strong economy, high transparency and low sovereign risk continue to play a key role in driving investment decisions. However, yield compression is continuing to occur and some investors are beginning to see Australia as too expensive. We consider this is unlikely to lead to a significant reduction in offshore investment in CBD Office investment in 2016.

Australia as a global investment destinationIn 2015 offshore investors purchased far more than they sold in Australia, which is in direct contrast to Australian investors who were net sellers of property. Right now offshore investors overwhelmingly see Australia as a good market to be in and made a direct push to enter the market or dramatically boost their portfolios.

For CBD office property, the strength of offshore buyers is even more apparent, with these groups buying half of all office buildings in 2015. By value Chinese investors spent more buying CBD offices in 2015 than Australian investors. Whereas historically Singaporean, US and Canadian investors dominated investment, Chinese are now eclipsing all of these groups when it comes to purchasing this asset class.

The key challenge for offshore investors is that although Australia is a particularly popular target, the small size of the market makes it difficult for them to access stock. Although the main Australian CBD markets contain 15.5 million sqm of office, the majority of offshore capital continues to target Sydney and Melbourne which reduces the amount of stock available to less than 10 million sqm.

2015 CBD OFFICE MARKET SIZE OF KEY CITIES

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Tokyo Paris New York London Shanghai Sydney

Mill

ion

sqm

Note: Cities included are those that attracted the most cross-border capital for office assets in 2015 Source: Colliers Edge


The other issue is that Australian CBD office ownership is becoming more concentrated. The top five owners, all Australian institutions, now control more than 20 per cent of total stock and these groups have a tendency to hold CBD office assets for long time periods. The ability of offshore groups to purchase prime CBD office properties is going to become increasingly difficult unless an acquisition of a major owner is undertaken.

CBD OFFICE OWNERSHIP, 2009 AND 2015

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Australian Institution Private Offshore Government Other

% o

f tot

al s

tock

2009 2015

Source: Colliers Edge

Incentives on Australian property are high from both an historical perspective, as well as in comparison to overseas. Currently, the vacancy in Sydney CBD office is 6.3 per cent and incentives are 31 per cent. The last time incentives were at this level in Sydney was in June 1992 when the vacancy was sitting at 20.3 per cent. In comparison to global markets, New York has a vacancy rate at 10 per cent and incentives are just 10 per cent. For other major offshore capital destinations such as Shanghai and Tokyo, incentives are likely to be high however there is little consistent data available to understand these properly.

CBD OFFICE VACANCY AND INCENTIVES FOR KEY CITIES, 2015

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Sydney CBD Paris London New York

Vaca

ncy/

Ince

ntiv

es

Vacancy Incentives

Note: Incentives are offered in Shanghai and Tokyo however these levels are typically not disclosed Source: Colliers Edge

High incentives impact upon yields and although Australian office yields are high, once incentives are taken into account (“effective” yields) they are reduced dramatically. Borrowing costs also make a difference. Sydney effective yields are currently at 4.2 per cent, higher than London at 3.1 per cent however the Bank of England’s interest rate is currently sitting at 0.5 per cent compared to Australia at two per cent.

2015 CBD OFFICE YIELDS AND EFFECTIVE YIELDS FOR KEY CITIES

2.7%3.1%

3.5% 3.5% 3.7% 3.8% 3.7%4.1%

2.8%

3.5%3.8%

4.7%

3.8%

6.7%

6.0% 6.0%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Hong Kong London Munich New York Singapore Brisbane Sydney Melbourne

Effective Yield Yield


What are offshore investors thinking now? In late 2015 and early 2016, we held one on one interviews with 10 major offshore investors in Australian property including Real I.S, Deutsche Bank, TH Real Estate, Invesco, CPPIB and GIC. It was a mix of investors with an Australian presence, as well as those with no local operations. Not surprisingly, particularly given the high levels of investment made in 2015, sentiment towards Australian property remains strong. Riverside Centre, 123 Eagle Street Brisbane

Leasing on behalf of The GPT Group



Australian property is getting expensive but there are still a lot of reasons to buyThere was a general consensus that Australian property is getting expensive. Although Australian yields are generally higher than comparable markets, once Australia’s high tenant incentives and higher borrowing costs are taken into account, the gap tightens significantly.

Having exposure to Australian property is now considered to be a necessity for most large global players. For some, it is a low risk way to have Asia Pacific exposure in a portfolio. A decade ago, Australian property was not on the radar for many global investors and it was at this time that Australia represented exceptionally good value when compared to similar options.

Australia’s exceptional economic growth record remains one of the main reasons for such strong interest in Australian property however the sophistication and maturity of our property markets are also a factor. Australia’s transparency, strong governance and robust planning regime are well established. In addition, we are considered to have a relatively friendly foreign investment policy and tax regime.

More directly, the close links between listed capital markets and real estate is considered to make pricing efficient. Our lease terms are also considered favourable, particularly long lease terms. The indexation of rents to inflation is also highly valued. The current recovery in occupier markets, particularly Melbourne and Sydney, is seen as supporting pricing.

Amazon, Sydney & MelbourneDesigned with Information Architects Inc.

Looking to innovative ways to enter the marketThe popularity of Australian property and the focus on Sydney and Melbourne prime assets as the top targets means that it is increasingly difficult to access stock. As a result, offshore investors are increasingly looking at different ways to increase their exposure to the market with flexibility in the ways in which they will invest being a focus. Even though the majority of investors still focus on core, one alternative entry method is to move up the risk curve. This can be in a range of ways, either by purchasing lower grade stock and looking to value add through upgrades or conversion to residential, buying in secondary locations or investing in property types such as student accommodation, self storage and retirement living. Looking for value add opportunities is at present the far more popular option.

Capital partnering with local groups is another option and there continues to be a large number of these deals. Offshore groups look to these for a number of reasons including the ability to build scale quickly, the ability to tap into local expertise and accessing development pipeline. Australian institutions are generally well established with good track records and hence retain the ability to mitigate risk also contribute to their attractiveness.

Other ways that large offshore groups look to increase their exposure to Australian property include company acquisitions, public to private deals, investing in wholesale funds, investing in companies (both listed and unlisted) and providing debt.


530 Collins Street, MelbourneValued on behalf of GPT Wholesale Office Fund

Australia is getting more expensiveAustralian property is becoming expensive, even relative to major cities such as London. Yields are still higher however once incentives (e.g. 11 per cent incentives for London prime office compared to Sydney at 30 per cent) and interest rates are taken into account, the gap becomes minimal. A decade ago, this was not the case. There was a significant gap and Australia was a standout as being very well priced relative to other countries.

Economic growth is attractiveWe made the decision to increase our exposure to Australia dramatically in 2012. A major factor driving that decision was the strong economic growth story. We are still looking to buy in Australia however globally we are looking closely at other markets. For example, Paris has been a big focus for us over the last quarter.

Importance of Australia in a global portfolioFor most global investors, it has become important to have exposure to Australian property and this is why we have seen such a dramatic rise in offshore ownership of Australian assets. The strong flow of capital has also lead to yields becoming more in line with global markets.

Vishant NarayanManaging Director, Real I.S. Australia

The market is not without riskThe most frequently cited concern about investing in Australia was economic risk. The end of the mining boom, risks associated with a slowdown in China, disruptive conditions in financial market and housing market risk are all seen as potential problems. Again, it not seen as completely negative as there is room to move with monetary policy and the weaker currency is supporting the larger non-mining states of New South Wales and Victoria.



Price growth was strong in 2015Our view is that whereas Australian real estate represented compelling value relative to other comparable global real estate markets over 2015, strong upward market pricing lowered this conviction. While international real estate investment into Australia has always been a cyclical feature of the market, it is apparent by the volumes and diversity of foreign investment that the Australian real estate market has become a more prominent and integrated global investment market. Despite higher pricing levels, Australia’s location in Asia and relative liquidity will continue to attract foreign investment.

There are still many reasons to investThere are still many compelling structural and macro reasons to invest here with continued economic growth being a major factor, as well as high levels of transparency and clear title and relatively stable government and legal structures. Most Australian real estate markets (outside of the mining investment boom states) are now moving into income growth and this is attractive. We consider that the cap rate compression that has been occurring will slow as we move into the next phase of the cycle.

The Australian dollar remains an important consideration for most offshore groups, and hedging decisions have an impact on asset affordability. Even though yields have firmed significantly, this has been offset somewhat by a depreciating local currency, particularly for those investors that have held unhedged positions.

Office and retail are our preferred sectorsOur currently preferred sectors are Office, particularly multi-tenanted Sydney and Melbourne CBD core and most types of retail. Right now we consider Industrial to be getting too expensive given expected rent growth. In the US, TH Real Estate are very active in multifamily and we would be interested in offering a similar product in Australia if this became feasible.

There is a lot to like about Australian propertyThere are many characteristics attractive about Australian property including the high levels of transparency and the rigorous and clear legal and regulatory framework which gives investors significant security in their property rights. Compared to other countries in Asia, higher excess returns relative to the 10 year bond rate provides a margin of safety should interest rates rise faster than expected.

The close linkage of real estate to the listed capital markets is also important. This, combined with high transparency, makes the pricing of assets in Australia efficient. Low volatility is also an attractive feature, particularly compared to Asian markets. This is partly attributable to longer lease terms.

Office fundamentals will continue to improve in 2016We invest across all asset classes in Australia however our preferred sectors at the moment are:

• Office, particularly in Sydney and Melbourne

• Logistics with longer leases and stable or stepped up rents

• Retail, particularly non-discretionary suburban retail such as neighbourhood centres.

The office sector we find attractive as we believe that healthier fundamentals will continue in 2016. The challenge is strong competition for assets and further tightening of yields.

We anticipate that in the near term, headwinds for the Australian property market remain particularly around softness in the economy as a result of the slow down in the mining sector, as well as the generous incentives being offered to tenants. Hedging costs continue to be a drag on returns for our investors, although this has improved.

Natasha-J LeeAssistant Vice President, Deutsche Bank – Singapore

Stephen PhilpHead of Capital Transactions – Australia, TH Real Estate

AUSTRALIA EXPERIENCED GROWTH IN CBD OFFICE A GRADE YIELDS

TENANT TRENDS TO WATCH IN 2016 INVESTMENT TRENDS TO WATCH IN 2016

2015 ENQUIRIES BY CAPITAL CITY GLOBAL SNAPSHOT OF VACANCY RATES

Dubai | 25%

Perth | 19%

Los Angeles | 16%

Washington DC | 15%

Mumbai | 15%

Brisbane | 15%

Nice time to be an employee – greater focus on wellness

Gradual shift to an owner’s market

in Sydney and Melbourne CBDs

Shortage of B Grade space in

Sydney CBD

Centralisation of tenants to slow

Demand from Finance and

Insurance tenants to remain weak

Precinct amenity to remain a focus

Offshore investors to continue to

dominate

Concentration of ownership

Move from a focus on capital growth to income growth Mergers and

acquisitions to continue

Australian groups to continue to move offshore

CBD Office conversions to

residential to slow

1

2

34

5 61

2

3

4

5

6

Sum of space requirement (m²)

CHINA LEADS THE WAY IN CBD OFFICE INVESTMENTS IN AUSTRALIA FOR 2015

Canberra | 15%

Chicago | 15%

New York | 14%

Adelaide | 14%

Singapore | 9%

Melbourne | 8%

SYDNEY CBD EXPECTED TO SHOW HIGHEST RENTAL GROWTH FROM 2015-2016

Beijing | 7%

Sydney | 6%

Tokyo | 5%

London | 3%

Hong Kong | 3%

December 2015


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

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

SYDNEY

`480,947

BRISBANE

104,949

MELBOURNE

356,092

PERTH

92,107

ADELAIDE

127,838

CANBERRA

81,071SYDNEY MELBOURNE BRISBANE

ADELAIDE PERTHCANBERRA

12.8%10.7%

6.4%5.9%

1.5%

-9.5%SYDNEY

PERTH ADELAIDE MELBOURNE

BRISBANE 7.0%

7.1%

7.2%

6.8%

8.0%

6.7%

6.0%

7.2%

7.4%

CANBERRA

20142015

6.0%

7.9% 7.4%

CHINA AUSTRALIA USA

Our perspective CBD OFFICE AUSTRALIAFIRST HALF 2016


Despite financial markets suffering a rocky start to 2016, overall conditions within the Sydney CBD office market appear to be improving. There had been some concern that cap rate compression had been driven purely by the hunt for yield without many other supporting drivers. However, we now see more reason to become constructive on Sydney CBD assets other than just relative asset class yields. On the investment side we remain of the view that foreign capital will continue to flow into our markets although domestic competition for assets may heighten as hurdle rates applied by domestic funds are lowered. In leasing markets, the combination of residential and infrastructure related withdrawals combined with an influx of Information Technology (IT) tenants have led to rental growth and falling vacancy. Indeed, the outlook for secondary asset metrics is improving.

Investment marketOffshore skew becoming more pronouncedIn 2015, overall Sydney CBD office investment volumes increased by seven per cent on 2014, although we note the skew is now heavily weighted to offshore investment which now accounts for 70 per cent of the total. The most notable offshore transaction was the acquisition of Investa Property Group’s nine asset portfolio by China Investment Corporation (CIC) for $2.45 billion at a sharp yield of five per cent which repriced the market. Looking forward it’s reasonable to assume that given the small amount of China’s outbound real estate investment relative to local investment, we could see this offshore skew become more pronounced. Further evidence of consolidation in the listed property space became apparent when Dexus Property Group (DXS) announced its intentions to acquire Investa’s listed portfolio (IOF) using a mix of scrip and cash for an estimated value of $2.5 billion. However more recently CIC has been reported to be running the numbers over IOF implying there is some possibility of a counter bid coming to market. If the CIC bid were successful, this would only add weight to the volume of offshore investment entering the

Australian CBD office market. Either way the probability of further bids from other sources such as unlisted domestic or offshore capital cannot be ruled out given the intense competition for assets. In other key offshore investments, the Hong Kong Monetary Authority was revealed as the mystery investor within Lend Lease’s International Tower One, taking a $350 million slice of the development subject to Foreign Investment Review Board approval.

DOMESTIC/OFFSHORE SALES VOLUME – SYDNEY CBD OFFICE

$0

$1

$2

$3

$4

$5

$6

$7

2007 2008 2009 2010 2011 2012 2013 2014 2015

Sale

s Vo

lum

e ($

Bill

ions

)

Domestic Offshore


Fundamentals improving

SYDNEY CBD OFFICE

First Half 2016


ME Bank Sydney & MelbourneProject managed on behalf of ME Bank



Rebasing of hurdle rates An interesting dynamic to consider in the future will be the

potential re-entry of domestic wholesale funds back into the

Sydney office market. With such high levels of compression

taking place in office market metrics over the past two years,

many of these funds with return hurdle rates of 8-8.5 per cent

have effectively found themselves priced out of the market as

transactions drive down rates well below eight per cent. Market

speculation suggests that a number of these funds will seek

endorsement from investors to lower return hurdles in 2016 which

to date have been quite sticky and misaligned with current market

conditions. Should this shift occur, it has the potential to bring a

significant volume of capital back into play. For example four of our

largest domestic wholesale funds; AMP Capital Wholesale Office

Fund (AWOF), the Lend Lease managed Australian Prime Property

Fund Commercial (APPFC), GPT Wholesale Office Fund (GWOF)

and Investa Commercial Property Fund (ICPF) are sitting on an

average gearing of 14.8 per cent and have combined Gross Assets

of $15.7 billion as at 31 December 2015.

SYDNEY OFFICE MARKET AVERAGE YIELDS

0%

1%

2%

3%

4%

5%

6%

7%

8%

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Yiel

d/ R

ate/

Spr

ead

Spread to Bonds Prime Grade 10-Year Govt Bond Rate

Source: Colliers Edge/RBA

Wharf 10, 52 Pirrama Road, PyrmontLeased on behalf of Marks Henderson Funds Management

Leasing marketSecondary market tighteningThe Sydney CBD leasing market is benefitting from multiple tailwinds, particularly in the secondary market. We estimate that up to 368,000sqm of stock has been earmarked to be withdrawn from the Sydney CBD office market through to 2019 and beyond, some 60,750sqm of which will be acquired by the state government for the construction of the metro line project. Almost all of this stock is from B and C Grade assets, leading to an element of upheaval in the sector. It is understood that some tenants in the state government acquisitions have already received notifications to exit premises by as early as December 2016, therefore it’s unsurprising that demand for floor space under 500sqm has lifted. This will ensure continued tightening of incentives in the secondary market. By the end of 2015 average incentives had reduced from the high 20 per cent mark to circa 25 per cent. Recent transactions at the commencement of 2016 are averaging 20-25 per cent. Unsurprisingly, vacancy is falling within the secondary market on the back of this withdrawal as demand for smaller office suites increases. Withdrawn assets that are seeing an outflow of tenants driving this demand include 175 Castlereagh, 12 Castlereagh, 39 Martin Place, and 55 Hunter which all have smaller floorplates under 500sqm. Given that much of the activity has been induced by government policy and will be supported by government compensation to tenants, it will be interesting to observe the incentive levels offered by landlords to tenants displaced by acquisitions.


Tech tenants driving demandOutside the secondary market, tenant demand is also strong, particularly due to activity within the IT sector. Notable leases include Apple at 20 Martin Place (6,200sqm), Expedia at 1 Martin Place (4,500sqm), LinkedIn at 1 Martin Place (3,576sqm) Dropbox at 5 Martin Place (2,000sqm) and Amazon at 2 Park Street (9,260sqm). Serviced office providers have also looked to capitalise on the increase in high end demand with Regus taking space in the core precinct. Regus has taken 2 floors at 20 Martin Place following the floor it opened in late 2015 at 52 Martin Place. Also following this theme, fintech hub start up Stone & Chalk announced its move to take up 2,300sqm of agile office space at 50 Bridge Street in mid-2015. The decision came after the company outgrew its original office space of 1,230sqm at 45 Clarence Street. Additionally, with Google and Atlassian still looking for suitable premises, we feel the uptake of CBD stock by the IT sector will support the Sydney leasing market in the near term.

Strategic importance of western corridorWhile the CBD core is benefiting from an influx of IT tenants, we believe the western corridor will benefit from its strategic location and positioning. Until now, Barangaroo has been viewed as a development site, or work in progress, however as the project reaches its final stages and key tenants fill floors, the dynamics of the broader CBD will begin to change. Assets within the western

corridor will effectively bridge Barangaroo/Walsh Bay with the CBD core, becoming strategically important to businesses that service clients in both areas. Furthermore, tenants displaced by withdrawals will look to this corridor to service their existing clients in the Core and, potentially, Walsh Bay corridors. Another interesting dynamic occurring within the CBD precincts is the polarisation between the north and south. Conversion for highest and best use has often been driven by a lack of residential and hotel accommodation within the CBD, however this is mostly occurring south of the core precinct. As a result, this region is becoming more mixed use in nature with a variety of residential, hotel and retail assets being developed. Meanwhile the north appears to be more tilted toward pure commercial with both current and future developments essentially bringing more office stock online.

Quality enquiryFinally, our data suggests that enquiries throughout the later stages of 2015 and into early 2016 have been improving in quality which is a positive leading indicator. Prior to this, when vacancy and incentive levels were higher, the objective of many enquiries was to obtain a better set of leasing metrics, and this was often achievable given the number of options available to tenants. However we have observed that enquiry is now being driven more by genuine expansion requirements as opposed to tenants simply seeking better deals.

Walsh Bay

The Rocks

City Core

Western

Midtown

175 Castlereagh Street

12 Castlereagh Street

55 Hunter Street

Source: PCA

39 Martin Place



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

For further information please contact: Daniel Lees Associate Director | Research | Tel +61 2 9257 0327 [email protected]

Supply and vacancyThe vacancy rate is expected to experience further downward pressure as a result of the aforementioned withdrawal in office space for the proposed CBD Metro stations. Consequently, Colliers International forecasts indicate the vacancy rate will decline to 5.09 per cent, the lowest level since the GFC, by January 2017. The withdrawals, all secondary class assets, are expected to increase the demand for A and B Grade space as displaced tenants look to secure new locations. Approximately 78 per cent of the floorspace to be withdrawn will be from B Grade properties. This is projected to create a shortage in the availability of smaller leases, given the average size of lease in the withdrawn development are 413sqm with only four leases being in excess of 900sqm. Meanwhile, average floorplates delivered over the past six months have been 1,930sqm in size.

In the near term however the vacancy rate is expected to remain stable at just over six per cent. Since July 2015, approximately

134,860sqm of space was completed, with an additional 128,500sqm scheduled for completion over the next six months. Of the total 263,360sqm, over 81 per cent of the delivered space was pre-committed. This significant supply will therefore be countered by pre-commitment and withdrawal of commercial floorspace.

SYDNEY CBD VACANCY

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Vaca

ncy

Vacancy Long-term vacancy

Source: Colliers Edge/PCA OMR/Deloitte Economics

2 Park Street, SydneyValued on behalf of GPT RE Limited as Responsible Entity for General Property Trust and Charter Hall Wholesale Management Limited (CHWML) as Trustee of Charter Hall Office Trust (CHOT)


Development in the Docklands precinct of Melbourne’s CBD began in 2002 with the construction of NAB’s Headquarters at 800 Bourke Street, and 14 years later the success of Docklands as a commercial precinct in Melbourne continues. A number of major pre-commitments, as well as leasing of backfill and sublease space have occurred, proving that the area is still in demand from CBD core tenants and suburban tenants looking to move into the city.

The Melbourne pre-commitment market continues to remain strong, despite years of new supply, particularly in Docklands. In 2015, Lang Walker’s Collins Square development attracted major tenants such as KPMG, Maddocks and Link, and late in the year,

Lendlease confirmed the signing of Arup, in addition to their own commitment to their new Melbourne Quarter development. A number of other major tenants who are in the market looking for space are also believed to be circling Docklands developments, including Minter Ellison (10,500sqm), IAG (30,000sqm to 40,000sqm), Deloitte (25,000sqm) and HWT (13,000sqm). Based on the developments in the pipeline and the level of pre-commitment activity in the market, we estimate that commercial development in Docklands should be near completion by 2020.

While the pre-commitment market in Docklands is well known, the success of leasing small and medium sized tenancies is less understood. These come to the market as either backfill, sublease or leftover space in new, primarily pre-committed developments. Cbus Property’s 720 Bourke Street is a good example of small and medium sized tenants being attracted to Docklands. Following Medibank’s relocation to the building in late 2014, a further 17,000sqm remained for lease. Over 2015, a number of tenants of varying sizes have taken space, leaving only about 1,200sqm of space currently available. Tenants who have committed include tenants who were previously located in Collins Street’s eastern core - Chubb Insurance (1,578sqm) and CASA (1,340sqm) – as well as smaller tenants who continue to grow into more space, such as Esuperfund, who originally took 1,623sqm in the building and have now taken an additional 770sqm, for a total tenancy of 2,400sqm. Esuperfund originally started their business in a small, strata suite in Docklands.

Demonstrating just how successful a year the leasing market in Docklands was, the vacancy rate has decreased from 7.2 per cent in January 2015, to five per cent in January 2016. Net absorption for the year was 67,418sqm. Following all the smaller leasing deals in the second half of the year, 16,097sqm of space was leased in the second half of the year alone. To put this in perspective, the Western Core – a much larger precinct at 1,598,802sqm vs 812,499sqm in Docklands – had an increase in vacancy of 13,833sqm over the second half of 2015.

Rents in Docklands also continue to keep pace with the CBD A Grade average. The space leased in 720 Bourke achieved rents

The Docklands story continues

818 Bourke Street, DocklandsSold on behalf of The GPT Group

MELBOURNE CBD OFFICE

First Half 2016




in the high $400s to low $500s, which is at a slight premium to the current A Grade average of $467/sqm. While it is true that the eastern core of the CBD will still consistently perform better in terms of rent than the rest of the CBD and Docklands, the quality of the space on offer in Docklands ensures that rents remain comparable with the majority of the CBD core.

Leasing market Rents climb as demand strengthens Average net face rents across Premium and A Grade buildings climbed by their greatest level in years over 2015. Premium net face rents increased by an average of 5.8 per cent and A Grade net face rents by a slightly higher 6.1 per cent. These increases are well ahead of the 10 year averages for each of these grades, which are 2.6 per cent and 5.1 per cent respectively.

This increase in rents has occurred after a period of sustained low rental growth. Not only have net face rents grown, but we have seen an increase in effective rents, as incentives start their descent downwards, albeit slowly. Over the 2015 calendar year, net effective rents grew by 5.9 per cent for A Grade property, and a very healthy 7.1 per cent for Premium Grade. The aforementioned net face rental growth played a key role in this, but a subtle shift down in incentives also helped. Both grades saw a decline in incentives of one percentage point over the year.

Looking forward, we anticipate that declines in incentives in 2016 will be more pronounced, and are currently forecasting a drop from an average of 31 per cent for Premium Grade currently, to 28 per cent by the end of 2016. We also expect A Grade incentives to fall to around the same levels.

Tenant demand remains elevatedAs new supply continues to be added to the Melbourne CBD market (125,824sqm in 2015) in significant levels, it therefore follows that demand for space from tenants – both existing CBD

520 Collins Street, MelbourneLeased on behalf of Mering Corporation

tenants, as well as metro tenants – is the key reason for the increase in effective rents. The Melbourne market absorbed a total of 116,763sqm of space in 2015. Vacancy also decreased from 400,783sqm in January 2015, to 344,480sqm in January 2016 – a huge drop of 56,303sqm. This is also the lowest amount of space available since July 2013.

Demand is evident from both smaller tenants – who have taken up multiple smaller suites that have been offered for the first time in some of Melbourne’s premier buildings such as 120 Collins Street – as well as the medium sized tenants, who typically drive the Melbourne market and absorb backfill and part floors. Mirvac’s 367 Collins Street is a good example of attracting demand from these tenants, and it is now fully leased. In the second half of 2015 deals were done with Regus (1,1167sqm), Australian Institute of Company Directors (1,800sqm), Red Cross (1,200sqm), Bensons Property Group (1,116sqm) and VIMG (357sqm). At the newly completed 567 Collins Street, Connective Broker Services took 2,057sqm on Level 20.

In the Eastern Core, 101 Collins Street has just signed the first childcare centre for that precinct. Guardian Childcare will occupy 2,300sqm in the space that is known as 101 Collins East, and will have contracts to provide childcare services to 101 Collins Street major occupiers, which will no doubt further enhance the reputation of 101 Collins Street as Melbourne’s premier building.

MELBOURNE CBD OFFICE

INDICATOR CURRENT 12 MONTHS

A Grade Net Face Rents $467 $486A Grade Net Effective Rents $316 $350A Grade Incentives 32% 28%A Grade Yields 5.99% 5.5%A Grade Capital Values $7,884 $8,452A Grade Vacancy Rate 6.5% 8.6%Total Market Vacancy Rate 7.7% 8.0%Supply Additions (m²) 125,824 98,500

COLLIERS INTERNATIONAL RESEARCH FORECASTS


MELBOURNE CBD NET FACE RENTS

$200

$250

$300

$350

$400

$450

$500

$550

$600

$650

$700M

ar-1

0

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

$/sq

m/p

a

Premium A Grade B Grade


Investment marketOffshore groups dominate the buy and sell sideSales of office property in the Melbourne CBD in 2015 reached a crescendo in December, when deals totalling $1.066 billion transacted. Initial indications are that the early part of 2016 will follow suit, with just over $400 million in transactions currently in due diligence. In addition to these sales, five buildings that form part of Walker Corporation’s Collins Square development are currently for sale, and could fetch up to $2.5 billion. In total, $2.8 billion worth of office stock transacted in 2015. This is down on 2014 figures, when $4.04 billion transacted – this included almost $830 million of transactions as part of the CPPIB/Dexus buyout of the Commonwealth Property Office Fund.

The notable transaction trend in 2015 was the depth of demand for individual assets that came to market. It was not uncommon to see four or five under bidders in each transaction that were in the immediate vicinity of the successful bidder. Not surprisingly, this resulted in significant yield compression. A Grade assets compressed from 6.75 per cent in December 2014, to 5.99 per cent in December 2015. The rate of compression for Premium Grade assets was the same, declining from 6.16 per cent to 5.38 per cent over the same period. Evidence from some of the transactions completed in late 2015 – particularly that of the Southern Cross Towers transaction – suggests that further yield compression in the order of around 25 basis points is likely for the early part of 2016. The Collins Square transaction also has the potential to provide a new benchmark for A Grade yields in 2016.

While much discussion has been made of the buy up of Asian assets in Australian markets, it was actually buyers from the USA who were the biggest purchaser in Melbourne in 2015. USA buyers – consisting of Blackstone (Southern Cross Towers), Pembroke Real Estate (161 Collins Street) and LaSalle Investment Management (222 Exhibition Street) purchased 43 per cent of the total volume of office assets sold in Melbourne in 2015. On the sell side, offshore groups greatly increased their activity, with 41 per cent of sellers (by $ volume) being offshore vendors. This is by far the biggest proportion of offshore vendors we have seen

before, and illustrates the growing maturity of the Melbourne market, as some assets owned by offshore owners come to the end of their investment cycle.

Despite the dominance of US buyers, Asian buyers were also prevalent, and made a renewed entry into the Melbourne market after being absent in 2014. Some of these buyers were encouraged by the decline in the value of Australian dollar, which made investments into Australia more affordable. The biggest of these purchases was China Investment Corporation’s (CIC) 50 per cent purchase of 120 Collins Street for $401 million. Other major sales were CIMB TCA’s purchase of 575 Bourke Street ($90 million), Straits RE’s purchase of 114 William Street ($125 million) and Sterling Global’s purchase of 383 LaTrobe Street ($70.7 million), albeit on long settlement terms.

120 Collins Street, MelbourneValued on behalf of Investa Commercial Property Fund (ICPF)




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

460 Lonsdale Street, MelbourneManaged on behalf of private client

MELBOURNE CBD OFFICE SALES - OFFSHORE ACTIVITY

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

2011 2012 2013 2014 2015

% o

f tot

al s

ales

by

$ vo

lum

e

Purchaser Vendor Source: Colliers Edge

Supply, vacancy and demandPre-commitments kicking off the next supply cycleThe first pre-commitments in what is anticipated to be the next major supply cycle in Melbourne were finalised in late December 2015. Arup and Lendlease have signed up for circa 5,500sqm and 6,000 to 7,000sqm respectively to Lendlease’s One Melbourne Quarter, which in total will be 25,000sqm. Lendlease are anticipated to build a further 75,000sqm of commercial space at Melbourne Quarter over the next few years, as well as further office space in Victoria Harbour. Combined with Collins Square’s three buildings that are currently being built for a variety of pre-committed tenants – including KPMG and Link – as well as Mirvac’s building at 664 Collins Street for Pitcher Partners, a total of 179,000sqm of space is currently under construction in Docklands, with 93,500sqm committed.

The completion of 567 Collins Street in July 2015 added a further 54,000sqm of space to the Melbourne market in the second half of the year. In total, new supply of 125,824sqm was completed, and 116,763sqm of space was absorbed for the year. There has also been a major decrease in vacancy, from 9.1 per cent in January 2015 to 7.7 per cent in January 2016, which can be attributed to these good absorption figures as well as strong levels of withdrawals at 65,364sqm. In Melbourne, an average of 40,000sqm of space a year has been withdrawn from the market over the past 10 years, so 2015’s withdrawal figures are well above average.

The supply story for Melbourne looks set to continue over the medium term outlook also. A total of eight buildings covering almost 450,000sqm of space are ‘mooted’ for the Melbourne

CBD. This includes Cbus’s mixed use development at 447 Collins Street, which will comprise approximately 50,000sqm of office space. This space looks set to be added to Melbourne’s supply over the next three to five years, and is coming at a time when Melbourne’s employment growth levels are forecast to require an additional 100,000sqm of space per annum over the next 10 years to accommodate the growing white collar workforce. Coupled with continuing withdrawals of older office space for residential conversion, the long term outlook for Melbourne’s office market is positive and we are forecasting the total market vacancy rate to drop to 6.3 per cent by the end of 2017. This is just below the long term average level of 6.6 per cent and represents a balanced market.

MELBOURNE’S CBD SUPPLY CYCLE - COMMITTED AND MOOTED DEVELOPMENTS

0 20,000 40,000 60,000 80,000 100,000 120,000

839 Collins Street (Victoria Harbour)

180 Flinders Street

Melbourne Quarter (remaining)

82 Collins Street

405 Bourke Street

447 Collins Street

477 Collins Street

Wesley Church

664 Collins Street (Pitcher Partners)

Tower 5, Collins Square

One Melbourne Quarter

Tower 2, 727 Collins St (KPMG, Maddocks, AECOM)

Tower 4, 727 Collins St (Link)

525 Collins St

Mooted Committed Remaining



Three office buildings that are currently under construction will both literally, and figuratively, reshape the Brisbane CBD. As discussed in further detail in the supply section, one of the most intriguing elements of each of these developments is the location. The boundaries of the CBD are expanding, new ant tracks will develop or be enhanced and underutilised areas will be regenerated.

Beyond the physical changes to the CBD, the affect 1 William Street, 180 Brisbane (Ann Street) and 480 Queen Street will have is beginning to flow through the market. Notwithstanding that the PCA reported the current vacancy rate in Brisbane at 14.9 per cent at the end of 2015, more important than that what has happened in Brisbane is the story of what is to come.

Upon the completion of 480 Queen and 180 Brisbane in the first half of 2016; prime vacancy is expected to increase to above 16.5 per cent for the first time since the early 1990’s. With below trend forecasts for white collar employment growth in the short to medium term and no identified major tenant requirements until 2019, the surface mood in Brisbane should be pessimistic. However, where some see disaster, others see opportunity. The addition of some 200,000sqm of prime stock is a vote of confidence in the underlying conditions and upside to be found in the Brisbane markets. Further, the looming vacancy will force further refurbishment or withdrawal of older stock.

BRISBANE CBD OFFICE - VACANCY FORECAST

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2010

H1

2010

H2

2011

H1

2011

H2

2012

H1

2012

H2

2013

H1

2013

H2

2014

H1

2014

H2

2015

H1

2015

H2

2016

H1

2016

H2

2017

H1

2017

H2

2018

H1

2018

H2

2019

H1

2019

H2

2020

H1

2020

H2

Tota

l Vac

ancy

Rat

e (%

)

Vaca

nt S

pace

(sq

m)

Premium A Grade B Grade C Grade Total Vacancy Rate (RHS)

Source: PCA OMR July 2015/Colliers Edge

New buildings reshape the CBDAt the bottom of the previous vacancy cycle in the wake of the GFC, the flight to quality resulted in the withdrawal of many secondary buildings for redevelopment, refurbishment or conversion.

The subsequent competition for tenants and favourable credit conditions led to the development of or refurbishment to high quality A-Grade space. In turn with the development of 111 Eagle Street and now 480 Queen Street there is substantial vacancy and refurbishment pressure on the existing premium stock.

With some 27,000sqm of backfill space to be brought to market, there’s a substantial opportunity to modernise these buildings further. The opportunity for this has previously been prevented by sheer lack of vacancy.

Mitsubishi Brisbane & MelbourneProject managed on behalf of Mitsubishi Brisbane & Melbourne

BRISBANE CBD OFFICE

First Half 2016




180 Brisbane, 180 Ann Street, BrisbaneLeasing on behalf of Daisho Co. Ltd

function rooms, café-style kitchens and flexible workspaces with videoconferencing capabilities. From a lifestyle perspective, more weight is being placed on the requirement for end of trip facilities, activated spaces and precinct amenity.

To illustrate the importance of employee amenity, Grocon’s 480 Queen Street will deliver an innovative premium office tower incorporating an extensive retail hub spanning over three precincts. The development will provide unique urban retail spaces featuring dual connectivity, dynamic rooftop spaces with panoramic views and its town centre will comprise 1,600sqm of retail floorspace across a mix of cafes, food and service retail opportunities. It will also feature the first high-rise public park in Brisbane catering for both businesses and the public.

Competition for tenants heats up between A-Grade and Premium spaceAs premium space comes to market, there has been a trend towards tightening in the rental premium (in net effective rents) between older premium buildings and new or recently refurbished A-Grade buildings. Constructed or fully refurbished in the

Leasing marketNew entrants to the CBD in IT&T and education Several requirements emerging from new entrants to the CBD office market form the IT&T and education sector led enquiry in late 2015. While other sectors continue to employ cost efficiency measures and are achieving lower floor space per FTE ratios, these, albeit individually modest requirements ran against a trend towards negative net absorption in the half. Capitalising on competitive net rental rates, these entrants are opening up new services to the CBD.

Following the IT&T and education occupants, a heads of agreement has been signed by Tatts group for approximately 18,000sqm in Daisho Co. Limited 180 Brisbane; abandoning plans to develop a consolidated headquarters in Breakfast Creek. This deal is evidence of the growing spread between the market net effective rent and the cost of construction in fringe locations.

With the exception of the Tatts deal, the most active tenant of the market has been in the 1,000 to 3,000sqm requirement tenant, with several leases struck in this range during 2015. Smaller tenants that have traditionally occupied secondary stock have started to take advantage of current incentives to upgrade into prime stock. This activity has been limited to date, however, is expected to be a theme until the next round of major corporate requirements expected in 2020.

Backfill space driving incentives higher An unprecedented volume of backfill space in prime and premium buildings will see vacancy levels including sub-lease space peak at just below 20 per cent in prime buildings. The largest volume of space being brought to market by Grocon as the ‘Riverside Selection’ is made up of the collective lease tails of tenants relocating to 480 Queen Street. This space is currently being marketed at a significant incentive level of up to 50 per cent of the face rent, although this incentive is heavily influenced by the short lease terms offered. With no immediate large requirement on the horizon the vacancy levels, led by backfill and sublease space are expected to maintain.

Dynamic workplaces are the way forwardAs businesses are no longer confined to traditional workplaces, they are investing extensive time and money into creating dynamic formats. Demographic changes, the economy, seamless intuitive technology, health and lifestyle, and the growing importance of our CBDs are all influencing the evolution of workplaces. As small and medium-sized enterprises (SMEs) have less capital available than larger corporations, many hybrids are operating adopting various elements. Most new business workplaces are now incorporating collaboration hubs,


previous vacancy cycle in the years following the GFC while other buildings were fully occupied; the value for money proposition to tenants of these A-Grade buildings has limited growth in Premium Grade rents. GPT and Dexus, the owners of Riverside Centre and Waterfront place are expected to carry out rolling refurbishment programmes to combat this tightening as vacancies prevail in the premium grade. These refurbishment programmes are expected to capitalise on the opportunity to carry out an update to buildings that have not had a major refurbishment in 30 years.

The signs of changeFinally in the second half of 2015, for the first time ever, signage rights were taken up at waterfront place, with St. George placing two signs at the top of the tower for approximately $300,000 per annum.

Investment marketYield compression supported by dearth of stock brought to marketDespite headwinds from subdued occupier activity and looming increased vacancy; yields continued to compress. This compression was largely a result of scarcity; very few buildings were brought to market over the half. In total $600 million of office buildings transacted in the second half of 2015, down from the $850 million recorded in the first half.

The majority of these transactions occurred in the secondary market including the sale of two State Government tenanted buildings; the Primary Industries Building (80 Ann Street) and Mineral House (41 George Street) located adjacent to the future Queens Wharf development. The buildings contracted for $63 million and $160 million respectively, however, 80 Ann Street is subject to remediation works being carried out by the Vendor and Mineral House is considered a medium-term residential or hotel conversion prospect with holding income. These sales emphasise the appetite of investors for stock that is well positioned for development upside while holding a passing income from a tenant with a strong lease covenant.

The remaining sales that occurred during the second half of 2015 included the Department of Main Roads anchoring 313 Adelaide Street for $125.4 million and 410 Ann Street as part of the CIC portfolio acquisition from Investa. The sale of 313 Adelaide Street at a reversionary yield of approximately 7 per cent is reflective of continual tightening of market yields for A-Grade assets.

Yield compression of A-Grade stock leading to convergence of indicative spread between prime gradesIndicative yields of premium grade buildings and A-Grade buildings converged further in the second half of 2015 supported by the limited transactional evidence. Colliers International research estimates that the current average market yield spread between Premium and A-Grade markets is 20-50 basis points. The value for money proposition of many new or extensively refurbished A-Grade Buildings, compared to older premium grade buildings, along with the lack of stock available for transaction is driving this convergence. As rolling refurbishment programmes are carried out in older premium buildings and the new 480 Queen Street project is added to the basket we are expecting indicative premium yields to compress closer to six per cent from currently inflated highs.

100 Wickham Street, Fortitude ValleySold on behalf of Fortuis Funds Management




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

26 Wharf Street, BrisbaneManaged on behalf of HCK Australia P/L

Supply, vacancy and demandThree buildings to be delivered in 2016Adding approximately 195,000sqm of space, three buildings will be completed in 2016 including; 180 Ann Street, 480 Queen Street and 1 William Street.

A large proportion of this space is now committed with Tatts signing a heads of agreement for approximately 18,000sqm in 180 Ann Street. This deal increases the total of committed

space in these projects to above 150,000sqm (circa 75 per cent occupancy). The majority of this vacancy remains in 180 Ann Street, which is now just over 50 per cent leased as it nears completion.

Premium sub-lease vacancy a free-hit for GPT and DexusThe backfill space resulting from the development of 480 Queen Street came to market in late 2015 with attractive rental rates, as Grocon seek to offset some of the cost of the lease tails left in other buildings. Some 27,000sqm of space will become available in the second quarter, however, notwithstanding the attractive rentals on offer, with no major tenant moves expected until 2019 it’s unlikely that the letting up process will be quick.

The volume of space will likely be used to facilitate a full rolling refurbishment programme following on from works recently undertaken at the Riverside Centre and Waterfront Place. Both buildings have maintained a PCA ‘Premium’ grade for over thirty years without major refurbishment (per annum) and will likely be repositioned to capitalise on the next round of expected major tenant moves later in the decade

Break in development pipeline and withdrawals to reduce pressure on vacancyFollowing the nearing completions, only two projects are identified in the outer year projections for Brisbane. Both 300 George Street and Regent Tower (totalling an estimated 82,000sqm) are unlikely to be completed before the end of the decade.

In the meantime it is expected that pressure will continue to mount for the withdrawal for redevelopment or conversion of existing secondary stock. As a result of the break in the development pipeline and withdrawal of stock vacancy rates are expected to decline after peaking at around 18 per cent in January 2017.

Development on the edgeFrom a whole of CBD perspective, the most interesting element of the stock to be delivered is the location of each development. All three buildings are located at the edge of what may be considered the boundary of the CBD; 1 William Street to the extremity of the Gardens Point end of the Government Precinct, 180 Ann Street at the Spring Hill extremity of the CBD and 480 Queen Street at the Fortitude Valley extremity. The development of such a magnitude of prime office space in areas removed from the traditional Eagle Street and Queen Street Mall areas are expected to trigger activation of previously underutilised areas of the CBD.


After experiencing significant downward pressure over most

of 2015, Perth CBD office rents looked to have stabilised in the

December 2015 quarter. Vacancy climbed to 16.6 per cent in July

2015 and has subsequently risen to 19.2 per cent by the end of

December 2015.

The jump in vacancy over the first three quarters of 2015,

combined with soft demand encouraged landlords to offer

attractive terms to fill existing vacancies and pre-sign or re-sign

existing tenants with pending expiries, in response to projected

lacklustre leasing conditions. Despite the sharp contraction in

rents over the past twelve months, new leasing activity remains

subdued as net space demand remained low - a function of a

general moderation in economic conditions.

Non resource sector occupiers to increase CBD footprint

According to the Property Council of Australia (PCA), net absorption in the six months to January 2016 was 40,387sqm. The strong net absorption was a result of pre-committed space in newly completed buildings. At the time of writing however, not all pre-committed tenants had physically occupied this space, with some buildings still being fitted out. Notwithstanding this, some of these tenants are expected to occupy more space than they had previously within the CBD and this expansion in footprint is the main driver of the strong net absorption result.

Previously Colliers International had noted a flight to quality that had resulted in the emptying out of B Grade space in July 2015. This shift looks to be continuing, however, net demand remained weak and the addition of new stock over the second half of 2015 has contributed to B Grade vacancy rising to 103,955sqm or 23.7 per cent of B Grade stock, according to PCA data published in January 2016.

During the second half of 2015, a total of 113,463sqm of office space reached practical completion in the Perth CBD. This is the second highest level of completions on record for a six month period for the Perth CBD - the highest ever recorded being the first half of 2012. Colliers International estimates that 19,471sqm of this new supply was speculative. This was added to existing stock vacancies in addition to 7,150sqm of sub-lease space that tenants may have pre-committed in excess of current requirements. This new stock vacancy, together with some tenants vacating existing stock, resulted in an additional 62,517sqm of vacant space added to the Perth CBD market by the end of 2015.

The contraction in space occupied by resource-related tenants, along with an increase in stock, vacancy and a subsequent moderation in rents is making the CBD attractive to non-resource sector tenants. Colliers International expects this shift in tenants should assist in reducing the vacancy rate over coming years, as these sectors expand their footprint within the CBD.

PERTH CBD OFFICE

First Half 2016


140 St Georges Terrace, PerthLeased on behalf of AMP Capital



Notwithstanding the difficult leasing market, assets with relatively strong lease profiles continue to be in demand, attracting strong interest from both domestic and foreign investors, when available. Demand for good yielding assets with strong future cash flow, and/or redevelopment prospects are particularly robust. This has led to continued market yield compression as institutional and foreign capital chase investments that are expected to provide reliable rental returns and comparatively attractive yields.

Leasing marketDespite the expected improvements in CBD and West Perth white collar employment, overall WA unemployment is expected to edge higher and peak at 6.82 per cent in 2016-17. This is likely to be attributed to the completion of major investment project in combination with an extended period of low commodity price, and the gradual pace of economic transition. The emptying out of office space is moderating, and vacancy is expected to edge up marginally in 2016, then stabilise, before a gradual decline over following years as leasing demand recovers.

The Perth CBD office market continues to be a tenants market; with vacancy expected to hover above 20 per cent, the status quo is likely to persist through 2016. Colliers International maintains the view that the majority of correction in rents has occurred. However, as vacancy is not expected to fall below 20 per cent this year; further moderation can be expected as building owners compete to improve or maintain occupancy levels. Should landlords implement further net face rent reductions to attract tenants, there is the likelihood incentives levels may start to moderate in response.

Notwithstanding the relative stability over December 2015, average net effective rents have now contracted over 50 per cent since mid-2012; with the worst affected being A Grade effective rents which have fallen 56.5 per cent over that time. This is representative of the large volume of vacancy within this grade of stock – which Colliers International estimates accounts for 36.5 per cent of total CBD vacancy as at the end of 2015

Level 26, 197 St Georges Terrace, PerthProject managed by Colliers International Project Management

PERTH CBD OFFICE MARKET AVERAGE NET FACE RENTS

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Jun-

12

Dec-

12

Jun-

13

Dec-

13

Jun-

14

Dec-

14

Jun-

15

Dec-

15

Jun-

16

Dec-

16

Jun-

17

Dec-

17

Jun-

18

Premium A Grade B Grade

Forecast


Investment marketThere were no major CBD transactions settled in 2015. However, a number of buildings were on the market and possibly in the final stages of negotiation and due diligence. Primewest emerged as a potential new owner of the Colonial First State Asset Management’s (Private Property Syndicate) 50 per cent leasehold stake of Exchange Plaza at 2 The Esplanade. At time of writing, it

PERTH CBD OFFICE

INDICATOR CURRENT 12 MONTHS

A Grade Net Face Rental Growth $580 $552A Grade Net Effective Rental Growth $310 $281A Grade Incentives 46.5% 49%A Grade Yields 7.4% 7.6%A Grade Capital Values $7,864 $7,233Total Market Vacancy Rate 19.2% 21.8%Total Supply Additions (m²) 113,463 31,171


Net f

ace

rent

s ($

/m²)


remained in due diligence. Also in due diligence is 81 St Georges Terrace, having been put to market following the re-signing of the State Government to a new 10-year lease over 95 per cent of the buildings floor space.

At time of writing, two other assets were understood to have been sold - with settlement expected in 2016. These were 190 St Georges Terrace (recently settled) and Alinta Plaza (12-14 The Esplanade). We understand these were sold for $64.2 million and $51 million respectively.

The three Insurance Commission of WA office assets, brought to market in the first half of 2015, are also in negotiations with shortlisted bidders and an announcement is expected during the first quarter of 2016.

The hunt for yields continued and interest for quality leased assets and prime developable sites in the Perth market remained robust. The fall in the Australia dollar over the past sixteen months looks to have made Australian and Perth commercial assets significantly more attractive. As such, expected yields for Perth CBD assets with good lease profiles remained relatively tight over the December 2015 quarter.

PERTH CBD A GRADE YIELD (%)

5%

6%

7%

8%

9%

10%

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

Sep-

15

Dec-

15


Supply, vacancy and demandAccording to revised data from Deloitte Access Economics (DAE), Perth and West Perth white collar employment continued to contract over the second half of 2015, falling 0.43 per cent. However, DAE expects this to change, with modest growth projected over 2016.

Demand for space is expected to be led by non-resources sector businesses; as WA’s population grows and the economy transitions from a heavy reliance on resources sector investments to consumer and business services. We should see these occupiers increase their footprint within the CBD office market.

The second half of 2015 saw 113,463sqm of space reach practical completion in the CBD market as a result of the delivery of three

256 Adelaide Terrace, Perth Leased on behalf of Far East Riverside Perth

Kings Square buildings (KS2,KS3,KS4), Brookfield Place 2, Old Treasury Tower and 999 Hay Street.

Of the 113,463sqm completed, an estimated 87,569sqm was being fitted out for occupancy. Another 6,428sqm was occupied, leaving 19,471sqm of uncommitted or vacant sub-lease that was delivered to market and available for lease.

Our prior reports have stated that the delivery of this uncommitted new space to market would push the CBD vacancy rate higher, should demand remain weak and existing vacancy remain unabsorbed. The addition of this uncommitted space was likely to result in vacancy peaking as tenants migrate and additional vacancy emerges in the form of backfill space. As a large portion of the new space is still being fitted, most of the impact of backfill has yet to materialise. This is expected to occur during the first half of 2016, meaning vacancy could peak during the middle of the year.

According to the PCA, Perth CBD vacancy was 19.2 per cent as at January 2016, up from 16.6 per cent six months earlier. Net absorption over the first half of 2015 was -21,344sqm, while second half net absorption was 42,387sqm. This meant that total net absorption over 2015 was a robust 21,043sqm.




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

14-16 Victoria Avenue, PerthLeased on behalf of Kensington Real Estate Portfolio

While the strong net absorption result appears at odds with the escalating vacancy rate, it has been driven by leasing pre-commitments, particularly where those tenants are expanding their CBD footprint.

Most of these pre-commitments were signed prior to the moderation in economic conditions, so there is a chance some tenants have committed in excess of current requirements.

In addition, Colliers International believes there is a possibility some backfill accommodation resulting from these tenant moves has yet to be accounted for and these are expected to eventually come to market and reflect on vacancy data.

Vacancy increased across all grades barring D Grade during the second half of 2015. Premium vacancy increased 26,619sqm, while A Grade vacancy increased 23,397sqm. This was largely a result of the uncommitted and available sublease space from the new stock.

B Grade space saw some increase in vacancy. However, in general, vacancy was comparatively stable in secondary (B, C & D) grade space over the second half of 2015.

PERTH CBD SUPPLY, NET ABSORPTION & VACANCY RATE

-6%-4%-2%0%2%4%6%8%10%12%14%16%18%20%22%24%26%28%30%

-60,000-40,000-20,000

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000220,000240,000

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Vaca

ncy

Rate

Supp

ly &

Net

Abs

orpt

ion

(sqm

)

Total Supply 6 mth Net Absorption (sqm) Total Vacancy Rate (%)

Forecast


PERTH CBD OFFICE SUPPLY

0

10,000

20,000

30,000

40,000

50,000

60,000

Tota

l offi

ce s

pace

(sqm

)

2015 2018

Completed - 128,790sqm

Mooted - 209,117sqm

Under Construction - 86,171sqm

2016



The Adelaide CBD office market is now reaching the end of the

current construction cycle with the completion of 50 Flinders

Street in the last quarter of 2015. This construction cycle has

seen just under 200,000sqm of supply additions added to the

Adelaide market over the last five years with circa 220,000sqm

of space added in the five years prior. The significant boost

in supply over the last five years has not however seen a

corresponding lift in demand. Average six month net absorption

over the last five years was just under 8,400sqm. The preceding

five years however saw average six month net absorption of

over 18,000sqm. There are several reasons for the differences

in demand with a combination of lower than average white collar

employment growth and the movement of many of the larger

businesses to activity based work models. This has meant less

space is required further dampening the demand and growth

in office space. The combination of high supply and lower than

average demand has contributed in an increasing vacancy rate in

the Adelaide CBD market.

Most of the increase in vacancy is the result of back fill space left

when a tenant moves to a new building. Most new developments

over the last 5 years have had more than 70 per cent pre-

commitment prior to construction. We have however witnessed

the last two major developments of 80 Grenfell and 50 Flinders

both having anchor tenants offering significant sublease space.

Bendigo Bank sublet circa 6,000sqm at 80 Grenfell Street with

Santos subleasing 7,000sqm at 50 Flinders Street. Both of these

factors have impacted on net absorption and therefore vacancy.

Also contributing to the higher vacancy rate is the Adelaide CBD

office market has consistently had a higher level of secondary

grade stock when compared to other capital cities. In Adelaide the

combination of C and D grade stock (secondary stock) accounts

for 31.9 per cent of the total stock. Compare this to Sydney (15.1

per cent), Melbourne (15.2 per cent), Brisbane (13.0 per cent)

and Perth (2.7 per cent). This is important to note as in most CBD

office markets secondary grade stock has a much higher

vacancy rate.

The analysis would not be complete without considering stock

which has been withdrawn from the market. Over the last five

years just under 149,000sqm of space was withdrawn from the

market, with just over 100,000sqm of this space being secondary

grade. Many of the prime grade space buildings were withdrawn

for refurbishment and then returned to stock. Most of these

buildings were backfill space, with the refurbishment undertaken

to attract large tenants. Despite the fact the Adelaide market has

the highest level of secondary grade stock, Adelaide also saw

the highest per centage of secondary grade stock removed from

supply over the last five years.

Most other CBD markets have seen secondary space withdrawn

and either redeveloped to a new commercial building or

increasingly in the Sydney and Melbourne markets a conversion

Current construction pipeline coming to a close

ADELAIDE CBD OFFICE

First Half 2016


55 Currie Street, AdelaideLeased on behalf of AEP Currie Pty Ltd AEP 55 Currie Street Office Trust



of use. This could be through either the refurbishment of the current building or demolition to make way for new high rise residential towers. Melbourne, Sydney and Brisbane all have significant pipelines of new supply of residential apartments. At this stage this trend of converting commercial to residential or hotel use by withdrawing commercial stock is not particularly evident in the Adelaide market.

It is however worth noting that the Adelaide residential apartment market is seeing a significant boom in construction. There are currently circa 1,700 apartments currently under construction in the Adelaide CBD with most projects due to complete in 2016 or 2017. The state government has been able to stimulate this demand through a combination of changes to planning and the stamp duty exemptions for off the plan purchasers.

The reason there is limited impact on the withdrawal of older commercial stock is because Adelaide still has a significant supply of development ready sites within the CBD that do not require multi storey demolition. Through tracking development site sales, there is also still a significant pipeline of development ready sites which are more cost effective to develop than some of the older grade office stock. Unless some of the lower grade building are excluded from the stock list, Adelaide is likely to have a structurally higher vacancy rate than other capital cities.

Leasing marketDemand remain subduedDemand in the Adelaide market has remained subdued over the last half with below average net absorption recorded. Annually there was 2,493sqm absorbed which is below the 10 year average of circa 16,000sqm. Current white collar employment forecasts from Deloitte Access Economics suggest that there is limited improvement during the year. It is however forecast that 2017 will see a higher rate of growth in white collar employment which will improve demand and in turn net absorption. The current six month net absorption in the Adelaide CBD was recorded at -1,577sqm.

ADELAIDE CBD OFFICE

INDICATOR JULY 2015 JANUARY 2016

Grade A Gross Face Rental Growth 0% 0.6%Grade A Net Effective Rental Growth 0% 0%Prime Incentives 30% 30-35%Total Market Vacancy Rate 14% 15.1%Grade A Yields 7-8% 6.7-7.75%Grade A Capital Values $5075-$5350 $5,200-$5,600New Supply Additions (m²) 21,183 0


Limited new construction in the pipelineWith the completion of 50 Flinders Street in the second half of 2015, new construction remains quite limited with only one project under construction. This project is Frome+Flinders which is located on the corner of Frome and Flinders Streets. This is a four level building with ground level retail, first level carpark and second and third levels office space. This building is under construction and due to complete during the year. There is a current pre- commitment from Grant Thornton (1,466sqm) who will move from Greenhill Road in the Fringe market on completion. This is in contrast to the residential apartments market which is experiencing a construction boom. There are currently 1,700 apartments currently under construction in the Adelaide CBD with a further 2,400 apartment in the pipeline.

There are still several mooted projects in the CBD such as the GPO and Riverbank, but it is unlikely that construction will commence without a significant pre-commitment. It is unlikely that the Adelaide market will see any new supply before 2018.

100 Waymouth Street, AdelaideSold on behalf of Crowmwell


167 Flinders Street, AdelaideLeased on behalf of Satac Pty Ltdd

State government to take space in 81 Waymouth StreetThe South Australian State Government has signed a lease for 11,000sqm in the former ATO building at 81-95 Waymouth Street. This building is currently under refurbishment which has seen this building withdrawn from stock in the first half of 2016. This refurbishment is due to complete in March 2016 ahead of the lease commencement in April 2016. The elevated vacancy rate will result in restrained rental growth over the next 12 months, with incentives forecast to remain at current levels during 2016.

ADELAIDE CURRENT AND MOOTED COMMERCIAL DEVELOPMENT

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

80 G

renf

ell S

t

2 Ki

ng W

illia

m

169

Pirie

St

1 Ki

ng W

illia

m

50 F

linde

rs S

t

From

e +

Flin

ders

2-20

Flin

ders

St

102-

120

Wak

efie

ld S

t

42-5

6 Fr

ankl

in S

t

51 P

irie

St

50 F

rank

lin S

tree

t

200

Nort

h Te

rrac

e

City

Cen

tral

Tow

er 7

Rive

rban

k

sqau

re m

etre

s

New or U/C Vacant Refurb/Backfill Leased Refurb/Backfill Vacant Possible space

Mooted2016


Investment marketSales volumes expected to hit highs in 2016Transaction volumes for Adelaide office CBD markets in 2015 were below average with $150 million of assets changing hands

in 2015. However signs are looking good for 2016, with several major assets listed for sale last year which are likely to transact this year. Institutional investors remain predominant purchasers, and it is expected that this trend will continue well into 2016.

Already this year the sale of 80 Grenfell & Rundle Mall Plaza has been announced. This is a single transaction which includes both the retail component of Rundle Mall Plaza, a carpark and the office building at 80 Grenfell Street. The whole development was purchased by Blackstone for $400 million with a reported yield of circa 6.5 per cent. The office component is expected to be circa $150 million. 30 Flinders street has also sold for $65 million. Prime value sold to a private investor with a reported yield of 7.8 per cent. Other sales which are likely to occur this half include 30 Currie Street, MAC portfolio (99 Gawler Place and 121 King William Street), Tower 8 and 19 Grenfell Street. Also on the market is Westpac House, 91 King William Street, which is a premium grade asset in the Adelaide market.

Price yields expected to tighten first half of 2016This increase in activity has resulted in a tightening in A Grade yields which are currently quoted between 7-8 per cent in the December quarter. It is however expected that the lower end of this range will tighten in the March quarter as there will be further evidence in the market that prime yields are sub seven per cent. Grade B yields have also tightened on the previous year and are currently quoted at 8.2 per cent. The scope for tightening yields in grade B is however less likely. This is due to B Grade stock having high vacancy with many buildings having shorter WALEs. The combination of both these factors are therefore accounted for in the yield.




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

State Administration Centre Precinct, Victoria Square, AdelaideValued on behalf of Department of Treasury & Finance

ADELAIDE CBD OFFICE SALES VOLUMES

0

100

200

300

400

500

600

700

800

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mill

ions


Supply, vacancy and demandVacancy forecast to remain high Vacancy has increased in the most recent Property Council of Australia, Office market report from 13.5 per cent in July 2015 to 14.1 per cent in January 2016. There were several major withdrawals in the half (19,924sqm) which included 81-95 Waymouth Street and 74 Pirie Street. Also not all of the space at

1 King William Street was added back into stock in January 2016. If all of this space was returned back into stock mid 2016 vacancy is likely to reach above 15 per cent. The Adelaide market has seen significant supply additions over the last five years, which when combined with below average net absorption and limited withdrawals of lower grade stock and resulted in the current vacancy rate. Prime vacancy will remain tighter than secondary grade vacancy, but as discussed earlier in the report, the Adelaide CBD market has a structurally higher vacancy rate due to the amount of secondary grade space in the market.

CBD PRIME AND SECONDARY VACANCY

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

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

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Jan-

19

Jul-1

9

Jan-

20

Vaca

ncy

%

Prime Grade (premium A&B grade) Source: Colliers Edge


The Canberra office market finished 2015 with four major asset sales and several new lease deals completed in the final quarter. Investor confidence was strong during all 2015 with over $630 million in sales including $400 million during the last quarter. Colliers International facilitated most transactions including the off market sale of the Louisa Lawson Building for $224.5 million.

There has been shift in the supply/demand dynamic for the occupier market. Tenant movement to higher quality has favoured

landlords with A Grade assets and some recent deals indicate incentives have started to fall from the record high reached in 2015. The ACT Government has announced it will relocate 3,800 employees and there are indications the federal government will become a net absorber of accommodation. The overall outlook is for an improving occupier market however some localities and asset categories will do better than others.

The Canberra Region is still over-supplied with the vacancy level falling only slightly to 14.9 per cent in January 2016 after recording a record high of 15.4 per cent in January 2015. The market has recorded double digit vacancy since 2010 due to a significant surge in new supply from 2005-2012. The supply surge has now ended and market absorption has a chance to outstrip new supply over the short term. The outlook is for the overall vacancy to trend downward, however remain in double figures for the remainder of the decade.

CANBERRA REGION VACANCY

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Vaca

ncy

(%)

Australia Vacancy Level ACT Vacancy Level


The December unemployment data released by the Australian Bureau of Statistics (ABS) shows the ACT unchanged at 5.2 per cent. The gap between the ACT and the national average is now 0.6 per cent and the last time they were equal coincided with record high vacancy levels in the mid to late 1990’s.

The APS Statistical Bulletin 2014-15 published by the Australian Bureau of Statistics (ABS) dated September 2015 shows the

Market overiew

CANBERRA CBD OFFICE

First Half 2016


20 Allara Street, CanberraLeased on behalf of Allara Nominees



current APS employment at 152,430, which is the lowest since 2006. The ACT has 38.1 per cent of APS workers and 75.1 per cent of the senior executive service.

UNEMPLOYMENT RATE

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

Une

mpl

oym

ent (

%)

ACT Australia


The Department of Employment project employment in the ACT will grow by 19,868 or 9.3 per cent for the five period to November 2019. Strong employment growth is expected for Health & Social Assistance (21.3 per cent), Construction (16.2 per cent and Financial & insurance Services (14.7 per cent), Education & Training (11.7 per cent) and Professional, Scientific & Technical Services (11.3 per cent). We estimate the employment growth will generate new demand for 150,000 to 200,000sqm of office accommodation.

25 Cowlishaw Street, GreenwaySold on behalf of Amalgamated Property Group

Market Snapshot – Canberra RegionMarket appetite for higher quality accommodation has underpinned

a fall in A Grade vacancy from 15.7 per cent in January 2015 to 13

per cent in January 2016. New lease deals in Barton, the CBD, the

Airport, Tuggeranong and Deakin have resulted in tenants trading-

up to better accommodation. The ACT Government announcement

to relocate 3,800 employees to Dickson, City and Woden will also

stimulate tenant demand and the (yet to be made official) ease of

24,000sqm at 1 Canberra Avenue Forrest by the department of

Finance will reduce vacancy in the Parliamentary Precinct.

CANBERRA REGION GRADE

45.1%

21.4%

29.4%

4.1%

A Grade

B Grade

C Grade

D Grade



CANBERRA REGION – VACANCY BY GRADE

12.90% 12.70% 11.90%

20.30%

15.70%

11.40%

17.30%18.50%

13.00%

10.30%

19.30%

30.00%

0.00%

20.00%

40.00%

A Grade B Grade C Grade D Grade

01-Jan-14 01-Jan-15 01-Jan-16


Canberra CBDThe CBD (also known as Civic) accounts for 28.6 per cent of the whole office market and is Canberra’s largest and most robust commercial office market. The overall vacancy level decreased

The quality of accommodation in Canberra continues to improve with A Grade stock now accounting for 45 per cent of the total market. The recent improvement is attributable to the completion of Winyu House at Gungahlin that delivered 9,000sqm of A Grade office accommodation.

It is likely that A Grade accommodation will continue to grow with demand supported by tenant appetite for quality and supply likely to come from new builds and the re-grading of secondary stock after major refurbishment or withdrawal for adaptation to an alternative use. The vacancy level decreased for both A and B Grade stock and rose for C and D Grade stock during the course of 2015.

Secondary accommodation will be the more difficult to lease as demand is directed toward higher quality. Market conditions will make adaptions to alternative uses, a more feasible option for many assets. This has already occurred in Belconnen and Woden and is being considered for owners and potential purchasers of assets in the Canberra CBD.

Canberra House, 40 Marcus Clarke StreetManaged on behalf of Morris Property Group




For further information please contact: Dominic Aungles Research Analyst | Research | Tel +61 2 6225 7343 [email protected]

54 & 60 Marcus Clarke Street, CanberraSold on behalf of Mirvac

in the second half of 2015 to 11 per cent but still remains above the long term average of eight per cent. There was no change to the total amount of stock and new leasing helped the CBD record positive net absorption of over 4,589sqm.

A Grade total vacancy has now fallen to 5.7 per cent (inclusive of 0.8 per cent sub lease vacancy) after spiking at 11.1 per cent in January 2015. Tenant preference for quality and landlord incentives has encouraged migration from secondary to prime assets.

Incentives reached record high levels in 2014/15 as landlords competed for tenants. The decline in vacancy is an indication market dynamics have changed to be more favourable to the landlord and provides scope for incentives to fall.

The CBD market profile has recorded dramatic improvement over the last decade.

CANBERRA REGION – VACANCY BY GRADE

3.80%

19.80%

12.90%11.70%11.10%

17.30%18.50%

13.20%

5.70%

8.70%

20.80%18.10%

0.00%

20.00%

40.00%

A Grade B Grade C Grade D Grade

01-Jan-14 01-Jan-15 01-Jan-16


CBD ComparisonThe Canberra CBD recorded 54.9 per cent growth in the last decade, which is well above Melbourne, the net highest, at 28 per cent for the same period. The vacancy level for all grades remains high at 11 per cent and is well above the long term average of eight per cent.

The Canberra CBD has achieved a Compounded Annual Growth Rate (CAGR) of 4.5 per cent over the last ten years compared to the combined CAGR of 1.9 per cent for all CBDs. Market growth has been significantly higher for Canberra and has obviously contributed to the current high vacancy levels for both the whole market and A Grade. Other CBD markets have recorded significantly less growth and yet many still have higher vacancy levels.


Auckland’s CBD office market is hot. Businesses are confident, growing and increasing in number. Developers are building more space than for almost a decade to catch-up with pent-up demand. Low interest rates and strong fundamentals are attracting investors of all types from a variety of countries. Adding further fuel to the fire is the government’s recent announcement to commit their share of early funding to the $2.5 Billion Auckland City Rail Link (CRL). All of these factors will create the perfect positive storm for the CBD to keep on track for a strong growth period over the medium term.

Leasing marketThe lack of prime space available has limited major leasing activity in existing stock. However, there were many high profile signings for future developments. The secondary sector also experienced a significant number of leases as tenants who couldn’t find additional space in the prime sector look at lower grade alternatives as well as an increasing number of businesses entering the market.

One of the major market announcements late last year was PwC signing for Precinct Properties new high-rise office tower, along with three other major tenants. This enabled pre-commitment to reach 52 per cent of the 39,000sqm of office space surpassing the 50 per cent hurdle rate. Construction will commence from the second half of 2016. Backfill space of PwC’s existing tower is reportedly strong, with an indication that pre-leasing activity has been buoyant.

Major leasing activity for the new builds included Bayleys Real Estate and Mayne Wetherell to the Bayleys House in Wynyard Quarter, leasing over 4,500sqm, and Architecture firm Warren & Mahoney leasing 3,300sqm in Mason Brother’s Wynyard Quarter premises. In the secondary sector, Animation College leased approximately 1,800sqm at University of Otago House.

The government’s announcement to bring forward their funding contribution for the City Rail Link (CRL) by two years to 2018 will promote further activity and could lead to a revival in the mid and southern end of the CBD. This is due to Aotea train station’s placement at the corner of Victoria Street West and Albert St. This may not be an immediate transition given construction of the CRL will take place for five and a half years.

US funds buys NZ propertyOffice sales activity in the CBD received a boost late last year from US-based Morgan Stanley Real Estate Investing (MSREI) purchasing three buildings for a combined value of $91.26 million. The three properties include 34 Shortland St for $44.6 million, 152 Fanshawe Street for $28.1 million and 30-32 Mahuhu Crescent for $18.56 million. The latter two buildings are leasehold properties with yields reportedly around late nine per cent. 34 Shortland St, which is a freehold property in the CBD Core, reportedly achieved a yield near seven per cent.

Other major CBD properties sold recently include Building D at Spark City for $70.15 million at a seven per cent yield, 246 Queen Street for $35 million at 7.7 per cent, 9 City Road for $22.8 million at eight per cent and Lufthansa House for $16.5 million at 7.1 per cent.

Hot in the city

AUCKLAND CBD OFFICE

First Half 2016


11-19 Customs St West, AucklandLeased on behalf of Precinct Properties Ltd



Yields to continue firmingPent-up demand for CBD office property and the record low interest rate environment has kept yields firming over recent months. We project yields to continue firming over 2016 due to the imbalance between occupier demand and supply coupled with institutional, private and syndicators all actively pursuing opportunities. Prime average CBD office yields are at 7.06 per cent, forecast to reach a cyclical low of 6.5 per cent by late 2018.

At this stage, interest rates are forecast to increase in late 2018 which may dampen some investment demand and slow the rate of yield compression. However, given the sensitivity to interest rate changes and purchasing activity at the top end of the market, any change in stance on the interest rate downwards will alter this forecast.

Supply, vacancy and demandVacancy continues to declineOffice vacancy in Auckland reached a new record low of 5.8 per cent, according to the latest findings in Colliers International’s Research survey. This signals the third year in a row that vacancy has been in a steady decline.

Less than 84,000sqm of office space is currently available in the CBD - the lowest since Colliers’ records began in the mid-1990s.

AUCKLAND CBD OFFICE VACANCY

0%

5%

10%

15%

20%

25%

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Dec-

13

Dec-

14

Dec-

15

Vaca

ncy

Rate

Prime Secondary Overall

Source: Colliers International Research New Zealand

Leasing in Auckland has been strong for prime office space (premium and A Grade buildings), but this has been eclipsed by activity in the secondary sector (B-grade buildings and lower).

The lack of prime space, with vacancy of just 1.2 per cent, has left many tenants searching for space in lower grade buildings. This has seen secondary vacant space reduce to less than 77,500sqm - another record low.

A new wave of development activityCurrent development activity has risen in Auckland and a wave of new developments, primarily in the Wynyard and Victoria Quarter precincts, will provide the occupier market with more options. One of the most recent examples completed is Manson TCLM’s building on Victoria Street West which housing NZME and Meredith Connell. There is 3,100sqm of office space still available to lease.

Developments underway or scheduled for completion over the next five years in the Auckland CBD could see an additional 167,000sqm of office space completed. Much of the previously uncommitted space is being leased before completion.

AUCKLAND CBD DEVELOPMENT PIPELINE

28,416 9%

24,000 7%

101,864 32%

40,742 13%

122,514 39%

Completed in 2015

Under Construction -Refurbishment

Under Construction - NewBuilidng

Potential

On-Hold

Source: Colliers International Research New Zealand

The long anticipated addition to Auckland’s CBD - and the leader of a select group of high-rise office towers - will be Precinct Properties development for their existing tenant PwC. Upon completion, 39,000sqm of new premium office space will see a number of existing and new CBD office tenants move to the tower in the renamed Commercial Bay precinct. This will provide tenants looking for new space, much needed leasing alternatives from the decanted space.

Pent-up demand to limit future space availabilityThe forecast rise in office space available will be met with a significant amount of pent-up demand, limiting the rise in office space that may eventually become available. Under current market conditions, we forecast overall vacancy to lift to approximately seven per cent by mid-2020. This is well below the long-term average of 11.4 per cent, providing limited breathing room for tenants looking to escape recent rampant rental rate rises as demand outweighs supply.


For further information please contact: Chris Dibble Director | Research and Consultancy Tel +61 9 359 7919 | [email protected]

Our experience CBD OFFICE


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

IN THE LAST 18 MONTHS

leased Benjamin Offices Belconnen, ACT20,295m² On behalf of Benjamin Nominees

81-95 Waymouth Street Adelaide, SA10,572m²

On behalf of KTS Properties Pty Ltd

1.27 million square metres of CBD office space

managed 20 Allara Street Canberra, ACT13,948m² On behalf of Allara Nominees

117 Clarence Street Sydney, NSW12,500m² On behalf of a private client

460 Lonsdale Street Melbourne, Vic11,700m² On behalf of a private client

143 CBD office assets achieving a 95.6% occupancy rate

sold222 Exhibition Street Melbourne, Vic$231 million

On behalf of AMP Capital

25 Cowlishaw Street Greenway, ACT$224.5 million

On behalf of Amalgamated Property Group

77 King Street Sydney, NSW$160 million

On behalf of Keppel REIT

valuedInvesta/CIC Portfolio353,178m²

Acquisition advice

Darling Park Tower I, Tower II & Cockle Bay Wharf, 201 Sussex Street Sydney, NSW113,059m²

On behalf of GPT RE Limited (GPTREL)

1.8 million square metres totalling over $31.5 billion worth in value

ME Bank Sydney & Melbourne15,000m²

On behalf of ME Bank

Colliers International Sydney NSW, Melbourne Vic & Brisbane Qld6,500m²

On behalf of Colliers International

Mitsubishi Brisbane & Melbourne3,000m²

On behalf of Mitsubishi Brisbane & Melbourne

Projects delivered by our award winning team

Collins Place 35-55 Collins Street Melbourne, Vic103,034m² On behalf of AMP Capital

designed and project managed

Darling Square Sydney, NSW26,120m²

On behalf of Lendlease

$735 million of CBD office assets

Our experience CBD OFFICE AUSTRALIA AND NEW ZEALAND

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

IN THE LAST 18 MONTHS

15-17 William Street Perth, WA 1,228m²

On behalf of Primewest

Levels 17, 18 & 19 69 Ann Street Brisbane, Qld3,274m²

On behalf of Charter Hall

664 Collins Street Melbourne, Vic9,768m²

On behalf of Mirvac Group

1.27 million square metres of CBD office space

8 Spring Street Sydney, NSW6,530m² On behalf of a private client

197 St Georges Terrace Perth, WA3,520m² On behalf of GDI Property Group

143 CBD office assets achieving a 95.6% occupancy rate

41 George Street Brisbane, Qld$159.8 million

On behalf of Queensland Investment Corporation

179 Elizabeth Street Sydney, NSW$150 million

On behalf of LaSalle Investment Management

59 Albany Highway Victoria Park, WA$72.8 million

On behalf of Finbar

ONE ONE ONE Eagle Street Brisbane, Qld64,167m²

On behalf of The GPT Group

QV1 Perth, WA63,850m² On behalf of Commonwealth Superannuation Corporation

567 Collins Street Melbourne, Vic55,084m²

On behalf of Investa Office Fund (IOF)

1.8 million square metres totalling over $31.5 billion worth in value

Amazon Sydney & Melbourne3,000m²

Designed with Information Architects Inc.

1 Macquarie Street Sydney, NSW750m²

On behalf of Pacific Life Re

45 Clarence Street Sydney, NSW500m²

On behalf of MYOB

Projects delivered by our award winning team

116 Adelaide Street Brisbane, Qld6,990m²

On behalf of HCK Australia P/L

$735 million of CBD office assets

How else can we help you?

Speak to one of our property experts today.www.colliers.com.au www.colliers.co.nz

We offer a full range of property solutions...

• Agency Sales & Leasing − Landlord Representation − Tenant Advisory• Capital Markets• Consultancy• Design• Development• Facilities Management• Financial Management• Investment Services• Insolvency Property Services• Lease Administration • Occupier Services• Portfolio Management• Portfolio Marketing• Project Leasing• Project Management • Project Marketing• Property Management• Research• Technology Solutions• Transaction Management • Valuation • Workplace Strategy

Across every property type...

• Healthcare & Retirement Living• Hotels• Industrial• Office• Residential• Retail• Rural & Agribusiness

Everywhere

• 376 offices worldwide throughout 67 countries

• 36 offices throughout Australia and New Zealand

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 2016.


cbd office rfr 2016

Documents