Australian Office Investment Market Review and Outlook · PDF fileCBD office market net...

Strong activity was recorded in the Sydney and Melbourne CBDs, while capital flowed at an unprecedented level into decentralised office markets.

Transaction volumes reached an all-time record high in 2014.

March 2015

Australian Office Investment Market Review and Outlook

$17.1Billion

6.00% 7.4%

40.6%

2014 Highlights

CAPITAL VALUES INCREASE BY

7.4%

OFFSHORE INVESTORS ACCOUNT FOR

40.6% OF TRANSACTIONS BY VALUE

RECORD YEAR FOR TRANSACTION VOLUMES

$17.1 BILLION

YIELDS MOVED BELOW

6.00% IN SYDNEY & MELBOURNE

Australian Office Investment Market Review and Outlook – March 2015 | 3

Contents

04 Executive summary

08 Investment market themes for 2015

11 Investment market risks for 2015

12 Major transactions 2014

26 The physical market outlook

30 The investment market outlook

34 Summary

35 2014 office transactions

1 The AUD 3 billion price reflects the book valuation of the assets acquired by DXS / CPPIB

4 | Australian Office Investment Market Review and Outlook – March 2015

Decentralised office markets also record high levels of investment activity. Non-CBD office market transaction volumes were AUD 5.3 billion in 2014 – 77% higher than 2013. Volumes, similar to 2013, were inflated by a number of large transactions in North Sydney, Parramatta, South Brisbane and Macquarie Park. Offshore investors were the largest buyer cohort of office assets in Australia in 2014. Offshore investors acquired AUD 7.0 billion in 2014, representing 40.6% of total volume. The level of offshore investment has accelerated since 2012, with 2014 representing an all-time high for offshore participation in Australian office markets. A number of offshore investors increased their allocation to Australia in 2014. The Canada Pension Plan Investment Board (CPPIB) formed a strategic partnership with DXS to acquire CPA for AUD 3.0 billion1 in 2014. CPPIB is one of a number of large pension funds that have increased their allocation to real estate post the financial crisis. In 2007, CPPIB had a 4.9% allocation to real estate and has subsequently increased its allocation to the sector to 11.6% in 2014.

• Transaction volumes surpassed AUD 17.0 billion for the first time across the Australian office markets in 2014. The Sydney CBD was the most active office market with volumes just below AUD 5.0 billion.

• Investor demand for core product was strong – new pricing benchmarks were achieved in Sydney and Melbourne. As a result, the tighter end of the prime equivalent yield range moved below 6.00% for the first time in this cycle.

• Yield compression was evident across a number of office markets. Our weighted average CBD office market prime equivalent yield compressed by 32 basis points over 2014 to 6.99%. Yield compression was the main factor in pushing average capital values 7.4% higher in 2014.

• A dichotomy emerged in office leasing markets with Sydney and Melbourne recording positive net absorption, while a further contraction in tenant demand was recorded in the resource-dependent markets of Brisbane and Perth. However, there are signs of organic growth across parts of corporate Australia and CBD office market net absorption is forecast to be 155,000 sqm in 2015.

• A number of office markets are recording average prime equivalent yields tighter than their respective 10 year average. Nevertheless, there is scope for further yield compression in 2015. The spread between property yields and the real risk-free rate is wider than historical benchmarks, while the low cost of debt will allow investors to use tactical leverage to meet equity IRR hurdles.

• Transaction volumes are expected to be lower in 2015. At the same time, there is unsatisfied investor demand for core product. Investors will look to explore opportunities further up the risk curve and we will see greater interest in office markets with softer short-term leasing market fundamentals.

Transaction volumes surpass AUD 17 billion in 2014The office investment market recorded a third successive year of record transaction volumes in 2014 (AUD 17.1 billion). All buyer cohorts for core product were active in 2014 with benchmark transactions recorded in Sydney and Melbourne. The competition for assets and a re-assessment of return expectations for core real estate resulted in yield compression across a number of major markets. In Sydney and Melbourne, prime equivalent yields, at the tighter end of the range, moved below 6.00% for the first time since 2008.

EXECUTIVE SUMMARY

No 1 Sydney, NSW – transacted by JLL & CBRE on behalf of Valad Funds Management to Dalian Wanda for AUD 425 million


No 1 Sydney, NSW – transacted by JLL & CBRE on behalf of Valad Funds Management to Dalian Wanda for AUD 425 million

Figure 1: Total office transactions, CBD & non-CBD

Source: JLL Research

AUD (Billion)

02468

181614

2013 20142012201120102009200820072006200520042003200220012000CBD Non-CBD

1210

New capital sources emerged in 2014. TIAA-CREF and Henderson Global Investors formed a real estate joint venture in April to pursue core and value-add opportunities in all major sectors of global commercial real estate. TIAA Henderson acquired a 50% stake in 101 Miller Street, North Sydney for AUD 305.2 million. The sale price reflected a fully-leased initial of 6.51% and sets a new benchmark in this cycle for the North Sydney office market.

Private equity firms have become more active in Australia. The Blackstone Group has USD 80 billion in total assets under

management and USD 13.1 billion of capital to invest into global real estate markets. Blackstone was an active investor in the direct real estate markets in 2014, acquiring a 50% stake in 275 Kent Street, Sydney for AUD 435 million and a portfolio of seven assets from Mirvac for AUD 391.4 million. Another private equity firm – KKR – made its first direct acquisition in 2014. KKR formed a joint venture with Abacus Property Group to purchase a 70% stake in the World Trade Centre complex, Melbourne for AUD 120.4 million.

Figure 3: Buyer and seller types in 2014


0% 10% 20% 30% 50%40%

Offshore Investors

Unlisted Funds

Private Investors & Companies

Superannuation Funds

Developers & PropertyCompanies

A-REIT

Syndicates

Others*

Vendors Purchasers

Figure 2: Office transaction volumes (offshore buyers and sellers), 1990 to 2014


–3,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

8,0007,0006,0005,000

–1,000–2,000

01,0002,0003,0004,000

AUD (Millions)

SellersBuyers


A-REITs concentrated on corporate activity or capital management strategies in 2014. Well-rated A-REITs were able to reduce overall debt costs and extend tenor through the domestic corporate bond market or US Private Placement market. Nevertheless, A-REITs accounted for 18.4% of transactions by value. However, this figure was inflated by the DXS involvement in the acquisition of CPA. Outside of this transaction, A-REITs only acquired AUD 1.67 billion or 9.7% worth of assets in 2014.

Unlisted funds were the third largest buyer cohort accounting for 18.1% of transactions by value. A number of wholesale funds raised capital over 2014 to deploy into the direct real estate market. Portfolio diversification was the main investment strategy for wholesale funds. Although most of the large wholesale funds hold an over-weight position to the Sydney CBD, only 11.7% of the acquisitions by value made by unlisted funds occurred in the Sydney CBD in 2014.

Assessing the appropriate asset allocation strategy“Fund managers will be reviewing acquisition opportunities and identifying assets which can be classified as non-core to the investment objectives of the fund. Strategic acquisitions and disposals should be made with regard to the overall asset allocation strategy and diversification of the portfolio which challenges legacy asset allocations to provide superior risk-adjusted returns.

Diversification is the cornerstone of modern portfolio theory and reduces the unsystematic risk events in a portfolio. However, diversification only occurs if the performance of the assets in the portfolio display low positive correlation. The unsystematic risk factors in real estate are location, asset characteristics, WALE, rental profile, covenant quality and capital expenditure requirements.

We estimate that a fund manager following a strictly value-weighted asset allocation strategy would have a 42% weighting to the Sydney CBD. Most fund managers are, therefore, over-weight to the Sydney CBD.

While market capitalisation-weighted investment strategies have limitations they tend to perform strongly through the cycle. We believe that fund managers should also explore the potential of an economy weighted portfolio, which provides exposure to all sectors of the Australian economy or a minimum volatility asset allocation strategy to enhance risk-adjusted returns and outperform their peers.”

Richard Lawrie, National Director – Investment & Advisory Group


Sovereign wealth funds will be competitive for core product: The Sovereign Wealth Fund Institute states the top 10 largest sovereign wealth funds have close to USD 5.41 trillion in assets under management (Table 1). If we extend the list to include sovereign wealth funds with assets in excess of USD 10 billion, there are 41 monitored funds with assets of USD 6.93 trillion.

Real estate has a low correlation with other asset classes and therefore offers investors diversification across a multi-asset portfolio. The Preqin Sovereign Wealth Fund Review (2014) noted that 67% of sovereign wealth funds have at least a 5% allocation to real estate. A number of sovereign wealth funds have publicly announced higher allocations to the sector increasing the investment pool of capital to be invested in real estate.

However, a correction in the crude oil price is a risk to sovereign wealth fund investment intentions. Table 1 highlights the fact that the origin of capital for a high proportion of sovereign wealth funds is crude oil revenue. The spot price for the benchmark West Texas Intermediate (WTI) has fallen from USD 107/barrel (mid-June) to under USD 50/barrel in early 2015. The sustained correction in crude oil prices would reduce inflows into sovereign wealth funds and reduce the underlying demand for real estate.

Private equity firms will acquire at both ends of the investment spectrum: Private equity firms have historically been on the value-add to opportunistic end of the real estate investment spectrum. Increasingly, a number of private equity firms will adopt a barbell investment strategy and participate in the market for core assets. Blackstone, the world’s largest private-equity real estate investor, is seeking to raise up to USD 15 billion of equity for the Blackstone Real Estate Partners VIII fund. The new fund would have the ability to deploy USD 45 billion into real estate.

Increased activity from Chinese investors: Chinese investors have become more active cross-border real estate investors. Real Capital Analytics reported that Chinese investors acquired USD 6.7 billion of office product outside of China in 2014, marginally below the USD 7.0 billion acquired in 2013, but significantly higher than 2012 (USD 2.1 billion) and 2011 (USD 1.4 billion). Investment activity is concentrated in global cities with 74% of the cross-border investment in five cities in 2014 (London, Sydney, Manhattan, Tokyo and Brussels).

In 2014, Chinese investors acquired in excess of AUD 1 billion worth of commercial office product in Australia for the first time. We believe that 2014 represents the tip of the iceberg for Chinese investment in the Australian office sector. China has multiple sovereign wealth funds targeting real estate in offshore markets, while a number of Chinese insurance firms – China Life Insurance, Ping An Insurance

Table 1: Sovereign wealth funds

Source: Sovereign Wealth Fund Institute

Country Fund Assets (USD Billion) Origin

Norway Government Pension Funds – Global 893 Oil

UAE (Abu Dhabi) Abu Dhabi Investment Authority 773 Oil

Saudi Arabia SAMA Foreign Holdings 757 Oil

China China Investment Corporation 653 Non-Commodity

China SAFE Investment Company 568 Non-Commodity

Kuwait Kuwait Investment Authority 548 Oil

China (HK) Hong Kong Monetary Authority 400 Non-Commodity

Singapore Government of Singapore Investment Corporation 320 Non-

Commodity Qatar Qatar Investment Authority 256 Oil & Gas

China National Social Security Fund 240 Non-Commodity

INVESTMENT MARKET THEMES FOR 2015and Taikang Life Insurance have acquired office assets in offshore markets, but are yet to make their first acquisition in Australia.

Tactical disposals by offshore investors: Offshore investors have been active participants in Australian real estate markets since 2006. A number of investors acquired prime grade assets on attractive pricing metrics in 2008 and 2009. Average prime grade office capital values have risen by 28.4% since the trough in 4Q09. We expect to see an acceleration of offshore investors’ disposal

Generational investors – a new cohort of buyer“The generational investor is an emerging buyer cohort in Australia. Forbes is currently tracking 1,645 billionaires across the world with 25% of this population based in Asia. Forbes estimate the number of billionaires in China has grown from 66 in 2007 to 152 in 2014. A high proportion of Chinese billionaires are familiar with real estate as an asset class and Australia as an investment destination.

While a number of generational investors have different investment goals from institutional investors, our experience shows they are very knowledgeable of commercial property as an asset class and undertake extensive due diligence on major acquisitions.”

Simon Storry, Head of International Investments – Australia


programmes with some investors taking the opportunity to realise gains and recycle capital into new opportunities in Australia or within the Asia Pacific region.

Superannuation funds lower return expectations: The Australian superannuation sector surpassed AUD 1.5 trillion in 2014. Current government policy is for the compulsory superannuation levy on wages and salaries to increase in stages. From July 2014, the Superannuation Guarantee rate increased to 9.5%. Based on new laws, the Superannuation Guarantee will remain at 9.5% for seven years, increasing to 10% from July 2021 and eventually to 12% from July 2025. Some estimates have the superannuation sector reaching AUD 3 trillion by 2020. Assuming superannuation funds maintain an 8% allocation to real estate (Figure 4), it implies the underlying demand for real estate is AUD 114 billion.

Superannuation funds will be competitive for core assets in 2015. Superannuation funds have adjusted return expectations to reflect the outlook for a lower reference rate. One large superannuation fund has set its investment objective for property to outperform the Mercer/IPD Australian Unlisted Property Fund Index (adjusted for tax) and CPI + 300 basis points over the medium to long-term.

Global hunt for yield: The yield spread between global office markets; New York, London, Paris and Tokyo and Sydney and Melbourne is wider than historical benchmarks (Figure 5). While the hunt for yield is not a new theme, it will remain relevant in 2015. New York, London and Paris recorded a further tightening in pricing in 2014. As a result, the yield spread between Sydney and New York widened to 270 basis points – 155 basis points wider than the long-term average of 115 basis points recorded between 2000 and 2014.

8.00

7.00

6.00

5.00

4.00

3.00

2.002004 2005 2006 2007 20092008 2010 2011 2012 2013 2014

(%)

New York Paris London Tokyo Sydney Melbourne

The yield spread between Sydney and Melbourne and other gateway cities is explained by the difference in interest rate structures and liquidity. Nevertheless, an adjustment for both these factors still highlights a positive spread between Sydney and Melbourne and other global markets. As an illustration, if we were to take the yield setting in New York and apply the historical spread to Sydney it would imply prime grade yields in Sydney would be between 4.40% and 5.40%.

The domestic hunt for yield: Sydney and Melbourne are priced attractively relative to other global cities. However, yield compression in both markets has widened the spread between Sydney and Melbourne and other CBD office markets. Figure 6 shows the spread between the mid-point of the prime grade yield in Brisbane, Perth, Adelaide and Canberra relative to the Sydney CBD.

Equities51%

Fixed Income20%

Property8%

Infrastructure4%

Others4%

Cash13%

Figure 4: Superannuation asset allocation, 2014

Source: APRA, JLL Research

Figure 5: Global office yields



The average yield spread between the Brisbane CBD and Sydney was approximately 60 basis points between 2004 and 2014. The current spread is 40 basis points higher at 100 basis points.

A number of investors will seek to capitalise on widening spreads and make strategic acquisitions outside of Sydney and Melbourne. In the short-term, the management of idiosyncratic risk factors, especially WALE and rental profile, will be critical to maintain occupancy and income growth. However, yield spreads in office markets are cyclical and JLL projects the spread between Brisbane/Perth and Sydney will start to narrow in 2017 as vacancy moves past the cyclical peak and starts to compress in the resource-dependent markets.

Stronger leasing fundamentals provide an additional ingredient to the B Grade investment proposition: A move up the real estate risk curve will be a theme in a number of global office markets in 2015. Australian CBD office markets will be participants in this global thematic. The investment proposition for core+ assets is firmer, in a number of markets, stronger leasing activity, low vacancy and the expectation of positive effective rental growth.

Secondary grade assets are more sensitive to changes in market fundamentals. Table 2 shows the correlation between yield and the vacancy rate over the past 20 years. With the exception of Sydney, the correlation co-efficient is higher for secondary grade assets. As a result, there is scope over the medium-term for more significant secondary grade yield compression, in the office markets where fundamentals are stronger, over the medium-term.

Figure 6: CBD office markets prime grade yield spreads (to Sydney)


Table 2: CBD office markets, yield & vacancy correlation (1994 to 2014)

* Melbourne CBD prime grade analysis is from 2000 Source: JLL Research

Market Prime SecondarySydney 0.32 0.18Melbourne 0.16* 0.85Brisbane 0.55 0.74Perth 0.55 0.83Adelaide 0.40 0.80Canberra 0.32 0.40

300

250

200

150

100

50

02005 2006 2007 20092008 2010 2011 2012 2013 2014

Basis Points

Brisbane Perth Adelaide Canberra

World Trade Centre, Melbourne (70%) – transacted by JLL on behalf of Asset 1 to Abacus and KKR for AUD 120.4 million


Protracted slowdown in the domestic economy: The outlook for business investment spending has been revised down for 2015. Non-mining sectors of the economy remain cautious in committing to capital works, while the resource sector investment is slowing faster than expected due to weaker commodity prices. The recent cut in the official cash rate to 2.25% by the RBA is partly designed to stimulate business investment decision-making and exert downward pressure on the AUD to support exchange rate sensitive sectors of the domestic economy. While the RBA has scope to further ease monetary policy in 2015, a protracted slowdown in the domestic economy will impact the demand for office space.

The asset creation cycle has moved ahead of market fundamentals: Supply is typically a late cycle phenomenon in Australian office markets. New development is stimulated by tightening vacancy rates, rising rents and capitalisation rate compression. However, asset creation has moved ahead of fundamentals in this cycle with completions (Figure 7) forecast to be above trend in 2015 (558,700 sqm) and 2016 (468,100 sqm). While stock withdrawals will partly offset new supply, any deterioration in tenant demand over 2015 would result in upward pressure on vacancy rates.

Figure 7: CBD office market completions


INVESTMENT MARKET RISKS FOR 2015

0

700,000

2000 20132012201120092007200520032001 2002 2004 2006 2008 2010 201620152014

100,000

300,000

400,000

500,000

600,000

(SQM)

Forecast

Conservatism in under-writing assumptions: Real estate investors have to model a number of assumptions to determine value or return expectations. IRR forecasts can be elevated by adopting a more aggressive set of assumptions. Market rent projections and terminal values are two variables where investors could adopt more conservative assumptions. In a low economic growth environment, inflation and interest rates are expected to be lower, implying that the growth rate for risk assets, such as real estate, will be lower. Furthermore, the terminal value estimate will be lower if investors take a more conservative approach to terminal yield assumptions and assume a long-term mean reversion of property yields.

Early rise in bond yields: Real estate generates an excess return above the risk-free rate. In a low treasury yield environment, the excess return has been higher than historical benchmarks and resulted in some investors reducing nominal return expectations for core real estate. While bond yields are projected to remain low in the short-term, and be supportive of lower real estate returns, the potential for bond yields to rise earlier and faster would impact pricing models and return expectations for risk assets.

Australian Office Investment Market Review and Outlook – February 2015 | 11

MAJOR TRANSACTIONS IN 2014

CBW comprises two office towers (181 William Street and 550 Bourke Street), Goldsborough Lane Retail Plaza and car parking for 416 vehicles. Goldsborough Lane separates the two office towers and provides a retail plaza for tenancies totalling 5,312 sqm. The commercial office towers provide A Grade accommodation with typical floorplates of 1,900 sqm at 181 William Street and 1,500 sqm at 550 Bourke Street.

52 Martin Place was constructed in 1985 and comprises a 36 level A Grade office tower providing a modern standard of finish. The former banking chamber extends from Levels 1-5 and is currently occupied by Channel Seven as studio and production, office, storage and ancillary space. Level 6-10 feature an atrium and floorplates vary from 953 sqm to 1,214 sqm. Levels 12–36 offer typical office accommodation with floorplates of between 1,050 sqm and 1,100 sqm. The building has undergone a recent refurbishment programme totalling AUD 38 million incorporating office floor improvements to the majority of office levels, a new lobby and concierge, end of trip facility upgrades in addition to lift upgrades and plant & equipment improvements.

Location 181 William Street & 550 Bourke Street, Melbourne

Sale Date September 2014Sale Price AUD 608.1 millionNLA (sqm) 81,402Rate (AUD/sqm) 7,470Initial Yield (Fully Leased)

6.08%

IRR 8.00%Vendor CBUSPurchaser GPT & GPT Wholesale Office Fund

(GWOF)

Location 52 Martin Place, SydneySale Date July 2014Sale Price AUD 555 millionNLA (sqm) 39,281Rate (AUD/sqm) AUD 14,129Initial Yield (Fully Leased)

5.58%

IRR 7.63%Vendor QIC Global Real EstatePurchaser REST Industry Super

CBW, Melbourne

52 Martin Place, Sydney

12 | Australian Office Investment Market Review and Outlook – February 2015

700 Bourke Street was constructed in 2014 and is located in the Melbourne Docklands. The 14 level office building is purpose built for the National Australia Bank. The building is constructed to A Grade standard and provides campus style accommodation with 5,000 sqm floorplates and a large centrally located open atrium.

Location 700 Bourke Street, MelbourneSale Date September 2014Sale Price AUD 433.5 millionNLA (sqm) 65,611Rate (AUD/sqm) 6,607Initial Yield (Fully Leased)

5.74%

IRR 7.99%Vendor CBUSPurchaser AMP (AWOF)

The Village at NAB, Melbourne

No.1 Sydney in the heart of the Circular Quay precinct offers spectacular views across Sydney Harbour. The asset is an existing commercial tower comprising 21,511 sqm of office accommodation, 1,964 sqm of ground floor retail space, and 118 on-site parking spaces. Planning approval has been granted by the City of Sydney for demolition of the existing building, excavation of eight basement levels and construction of two mixed use buildings of 15 and 55 storeys, to accommodate 196 apartments, 924 sqm of retail / commercial space, 279 car parking spaces and public domain improvement works.

Location 1 Alfred Street, SydneySale Date December 2014Sale Price AUD 425.0 millionNLA (sqm) 23,475Rate (AUD/sqm) 18,100Initial Yield (Fully Leased)

4.00%

Vendor Valad Property Group / Stichting Pensioenfonds

Purchaser Dalina Wanda Group

No.1 Sydney


cv

QV1 was designed by Harry Seidler and completed in 1991. QV1 comprises a 38 storey office tower at 250 St Georges Terrace. The building is one of Perth’s Premium Grade assets and has typical floorplates of 1,600 sqm. Facilities in the tower include a gymnasium, tennis courts, 80 seat theatre, conference rooms and basement parking for 155 cars.

Location 250 St Georges Terrace, PerthSale Date July 2014Sale Price AUD 388.5 million (50%)NLA (sqm) 63,672Rate (AUD/sqm) AUD 12,203Initial Yield (Fully Leased)

7.54%

IRR 8.47%Vendor Investa Property GroupPurchaser Investa Commercial Property Fund (ICPF)

QV1 , PerthLocation 275 Kent Street, SydneySale Date April 2014Sale Price AUD 435 million (50%)NLA (sqm) 77,125Rate (AUD/sqm) 11,280Initial Yield (Fully Leased)

6.72%

IRR 8.09%Vendor Mirvac Group (MGR)Purchaser Blackstone Real Estate Asia

Westpac Place, Sydney

Westpac Place at 275 Kent Street is a prime grade commercial office complex within the Western Corridor of Sydney’s CBD. Construction of the complex was completed in 2006 and comprises two levels of basement parking providing 214 parking spaces, ground floor lobby and 32 levels of high quality office accommodation spread across two interconnected office towers and a three level podium with frontage to Sussex, Kent and Napoleon Streets.


The 101-103 Miller Street and Greenwood Plaza Shopping Centre complex comprises a 27 level Premium Grade office tower, a three level retail complex and a multi-level basement car park for 547 vehicles. Construction of the complex was completed in 1992 and the office tower underwent refurbishment and renovation works in 2008, including marble floor and wall cladding to the atrium style lobby.

Location 101-103 Miller Street, North SydneySale Date October 2014Sale Price AUD 305.15 million (50%)NLA (sqm) 43,320Rate (AUD/sqm) 13,176Initial Yield (Fully Leased)

6.51%

IRR 8.31%Vendor Eureka Funds ManagementPurchaser TIAA Henderson

101-103 Miller Street, North Sydney


The property is located at 1 Charles Street in the heart of the Parramatta CBD and benefits from excellent transport links and local amenities. The property is located close to the Parramatta Transport Interchange (rail and bus) as well as Westfield Parramatta and Church Street Mall. 1 Charles Street is also positioned close to the AUD 1.6 billion Parramatta Square redevelopment precinct, which will comprise a six stage development of residential apartments, commercial buildings and community facilities.

Location 1 Charles Street, ParramattaSale Price AUD 241.1 millionNLA (sqm) 31,954Rate (AUD/sqm) 7,546Initial Yield (Fully Leased)

7.52%

IRR 8.81%Vendor Australian SuperPurchaser Growthpoint Properties (GOZ)

1 Charles Street, Parramatta

175 Liverpool Street is a significant commercial asset with a 60 metre frontage to Liverpool Street and panoramic views across Hyde Park to Sydney Harbour. The asset comprises 48,890 sqm of NLA over 31 levels and end of trip facilities including a bike cage, shower and locker facilities. The building comprises 1,048 sqm of ground floor retail space, four levels of secure basement parking for 423 vehicles and a generous outdoor terrace café / restaurant for staff and visitor convenience. The building has been extensively refurbished over recent years including a new lobby, mid-rise plant room conversion and office floor upgrades to a total value of approximately AUD 99 million.

Location 175 Liverpool Street, SydneySale Date November 2014Sale Price AUD 392.0 millionNLA (sqm) 49,765Rate (AUD/sqm) 8,018Initial Yield (Fully Leased)

7.36%

Vendor GIC Real EstatePurchaser Shimao Property

175 Liverpool Street, Sydney


The property is located at 275 Grey Street, within the Near City suburb of Southbank, approximately two kilometres south-west of the Brisbane General Post Office. The property forms part of the Southpoint Development, which on completion will comprise three office towers that provide hotel, residential and commercial accommodation. 275 Grey Street is scheduled for completion in 2016 and will comprise a 14 level A Grade office building and include 4,690 sqm of retail floorspace over three levels. The complex will provide car parking for 179 vehicles and 13 motorcycles.

Location 275 Grey Street, Southbank, BrisbaneSale Date April 2014Sale Price AUD 200.62 millionNLA (sqm) 28,218Rate (AUD/sqm) 7,109Initial Yield (Fully Leased)

7.63%

IRR 8.76%Vendor Anthony John GroupPurchaser Union Investment Real Estate

321 Exhibition Street was constructed in 1990 and was fully refurbished in 2011 including the extension of floor areas, substantial foyer upgrades and some new mechanical services. 321 Exhibition Street comprises a 20 level office building with three ground floor retail premises and undercover car parking for 32 vehicles.

Location 321 Exhibition Street, MelbourneSale Date July 2014Sale Price AUD 208.0 millionNLA (sqm) 30,200Rate (AUD/sqm) 6,887Initial Yield (Fully Leased)

6.78%

IRR 7.98%Vendor CromwellPurchaser Invesco

321 Exhibition Street, Melbourne

Southpoint, Brisbane


The Optus Centre, Macquarie Park

The Optus Centre comprises a campus style A Grade office complex of six buildings and was completed in 2007. Buildings A-D are interconnected via service cores, as are Building E & F. A secure central courtyard featuring extensive landscaping, water features, paved areas, basketball court and cafés comprise exclusive use areas. The complex has been designed for a single tenant, but has the ability for the landlord to segregate the buildings to allow for multiple tenant use in the future through the simple introduction of additional security devices.

Location 1-5 Lyon Park Road, Macquarie ParkSale Date February 2014Sale Price AUD 184.425 million (49%)NLA (sqm) 84,194Rate (AUD/sqm) 4,470Initial Yield (Fully Leased)

7.25%

IRR 8.91%Vendor Stockland Direct Office Trust No. 2Purchaser AIMS AMP Capital Industrial REIT

Civic Tower at 66 Goulburn Street was completed in 2004. The property is an A Grade building comprising column free floorplates of approximately 950 sqm and a total office area of 22,000 sqm, retail accommodation of approximately 250 sqm and basement car parking for 54 vehicles. The building’s structure is predominately made of steel with cantilever beams at the base to carry the tower. Civic Tower is fully supported on a central lift core without the use of continuous perimeter columns extending down to footing levels and is the first building of its kind constructed in Australia.

Location 66-68 Goulburn Street, SydneySale Date June 2014Sale Price AUD 136.0 millionNLA (sqm) 23,176Rate (AUD/sqm) 5,868Initial Yield (Fully Leased)

10.67%

IRR 8.91%Vendor Charter Hall Group (PFA Diversified

Property Trust) & Australand (ALZ)Purchaser GDI Property Group (GDI)

Civic Tower, Sydney


818 Bourke Street was constructed in 2007 and is a campus-style office building located in Melbourne’s Docklands. The building comprises 21,900 sqm of office space over six levels, 1,400 sqm of retail space and 175 car parking spaces. The campus-style floorplate allows for a connected and integrated working environment. The open atrium provides each floor with increased natural light.

Location 818 Bourke Street, MelbourneSale Price AUD 152.5 millionNLA (sqm) 23,300Rate (AUD/sqm) 6,545Initial Yield (Fully Leased)

7.14%

IRR 8.08%Vendor GPTPurchaser Hines

AM60 comprises a modern A Grade commercial office building that was completed in 2009. The property is located at the intersection of Albert and Margaret Streets, within Brisbane’s CBD. Improvements comprise three basement levels of car parking, ground floor retail tenancies and foyer, a mezzanine level, two podium levels, and 17 levels of A Grade accommodation. The property provides 21,263 sqm of office and retail NLA and basement parking for 120 vehicles, which reflects a ratio of 1 bay per 177 sqm of NLA.

Location 40-60 Albert Street, BrisbaneSale Date January 2014Sale Price AUD 161.3 millionNLA (sqm) 21,263Rate (AUD/sqm) 7,586Initial Yield (Fully Leased)

9.30%

IRR 8.81%Vendor LaSalle Australia Core Plus FundPurchaser DEXUS Property Group (DWPF)

AM60, Brisbane

818 Bourke Street, Melbourne


6 O’Connell Street, Sydney

6 O’Connell Street is a B Grade asset and was constructed in 1970. It comprises a 26 level office building, a ground floor retail arcade accessed via Bligh and O’Connell Streets and basement parking for 108 vehicles. The property is well located in the financial precinct of the Sydney CBD and is conveniently positioned for private and public transport.

Location 6 O’Connell Street, SydneySale Date June 2014Sale Price AUD 134.95 millionNLA (sqm) 16,349Rate (AUD/sqm) 8,255Initial Yield (Fully Leased)

7.97%

IRR 8.66%Vendor Blackrock Property AustraliaPurchaser Investa Office Fund (IOF)

40 Market Street is a 10 level office building comprising ground floor retail, nine upper levels of office accommodation together with a two level basement car park featuring 85 car spaces. The building was completed in 1988, with upper levels being refurbished in 1998 and the foyer in 2005. Full height glazing to all four alignments provides good levels of natural light with views to the Yarra River and Southbank from the Southern elevation of the upper levels.

Location 40 Market Street, MelbourneSale Date September 2014Sale Price AUD 105.0 millionNLA (sqm) 11,915Rate (AUD/sqm) 8,812Initial Yield (Fully Leased)

6.69%

IRR 8.12%Vendor DEXUS Property Group (DXS)Purchaser MTAA

40 Market Street, Melbourne


World Trade Centre, Melbourne

The World Trade Centre (WTC) is a major 49,534 sqm office complex comprising three office towers (Towers 2, 3 and 4) constructed in 1983. The asset is configured across towers ranging from eight to twelve levels interlinked by a central concourse. The property comprises 43,023 sqm of office space, a retail component on the concourse levels and ground floor of 4,684 sqm and car parking for 310 vehicles.

Location 18-38 Siddeley Street, MelbourneSale Date August 2014Sale Price AUD 120.4 million (70%)NLA (sqm) 49,534Rate (AUD/sqm) N/AInitial Yield (Fully Leased)

9.68%

IRR 8.91%Vendor Asset 1 Purchaser Abacus and KKR

QBE House is an office complex comprising an eight storey podium to Bourke Street and a 16 storey office tower to Little Bourke Street. The complex includes ground floor office/retail tenancies to either side of the building entry, central foyer-atrium with glass cabin lifts and a roof top entertainment area with tennis courts. Basement parking for 125 vehicles is provided with driveway access to Little Bourke Street. The building was completed in 1989 and has been refurbished at various times in the intervening period. The typical floorplate is around 1,300 sqm with levels 5 and 6 significantly larger at 2,400 sqm.

Location 628 Bourke Street, MelbourneSale Date May 2014Sale Price AUD 130.6 millionNLA (sqm) 24,674Rate (AUD/sqm) 5,293Initial Yield (Fully Leased)

7.45%

IRR 8.28%Vendor Investa Office Fund (IOF)Purchaser M&G Real Estate

QBE House, Melbourne


70 Eagle Street comprises a modern A Grade commercial office building, which was completed in November 2008. Adjoining Central Plaza Two, the property provides a total NLA of 11,476 sqm with three basement levels of car parking for 64 vehicles. The building is currently configured to provide ground floor retail accommodation of 407 sqm and 13 upper levels or 11,069 sqm of A Grade accommodation.

Location 70 Eagle Street, BrisbaneSale Date April 2014Sale Price 122.7 millionNLA (sqm) 11,476Rate (AUD/sqm) 10,692Initial Yield (Fully Leased)

6.41%

IRR 8.03%Vendor APPF & Harina CompanyPurchaser Pembroke Real Estate

70 Eagle Street, Brisbane


The PwC building will be constructed at 2 Riverside Quay. The finished development will comprise ground floor retail, car parking to the basement level, ground floor and seven podium levels, and 11 upper levels of office accommodation. A lift and service core is to be erected to both the east and west elevation of the existing car park to provide access to the office accommodation. The car park is to be clad in a new contemporary façade to blend in with the development.

Location 2 Riverside Quay, SouthbankSale Date December 2014Sale Price AUD 106.0 million (50%)NLA (sqm) 39,998Rate (AUD/sqm) 21,040Initial Yield (Fully Leased)

6.12%

IRR 8.42% (9.15% - including stamp duty savings)Vendor Mirvac (MGR) Purchaser ISPT

2 Riverside Quay, Southbank

The State Law Building comprises three regular-shaped allotments, situated to the north-western alignment of Ann Street, at its intersection with George Street, approximately 500 metres west of the Brisbane General Post Office. The property is improved with a 30 storey commercial office building with a NLA of 25,519 sqm over 25 upper levels of commercial office accommodation and ground floor retail accommodation. The property provides secure car parking for 119 vehicles over three basement levels.

Location 50 Ann Street, BrisbaneSale Date July 2014Sale Price AUD 131.8 millionNLA (sqm) 25,519Rate (AUD/sqm) 5,165Initial Yield (Fully Leased)

6.99%

IRR 8.27%Vendor Harburg Investments Pty LtdPurchaser CIMB Capital Trust Advisors (AOF2)

State Law Building, Brisbane


NAB House at 255 George Street comprises a modern A Grade office complex. Completed in 1985, the tower offers ground floor retail accommodation including a banking chamber, 29 upper levels of office accommodation and 192 basement car spaces. The building was internally refurbished in 2010 at an estimated cost of AUD 45 million which included the refurbishment of the foyer and a general upgrade of facilities. Typical floorplates range between approximately 1,370 sqm and 1,500 sqm.

Location 255 George Street, SydneySale Date February 2014Sale Price AUD 116.0 million (25%)NLA (sqm) 39,998Rate (AUD/sqm) 11,601Initial Yield (Fully Leased)

7.30%

IRR 8.24%Vendor Brookfield Office Properties Purchaser AMP (AWOF)

NAB House, Sydney

Location 133 Castlereagh Street, SydneySale Date February 2014Sale Price AUD 194.25 million (50%)NLA (sqm) 47,270Rate (AUD/sqm) 8,219Initial Yield (Fully Leased)

7.79%

Vendor Stockland (SGP)Purchaser Purchaser: Investa Office Fund (IOF)

Piccadilly Tower, Sydney

The Piccadilly complex is located in the Midtown precinct of the Sydney CBD with dual street frontage to Pitt and Castlereagh Streets. The Piccadilly complex comprises three components – 133 Castlereagh Street (The Tower), 222 Pitt Street (The Court) and 210 Pitt Street (The Retail). The two office assets are connected by a two level retail mall. The three components are serviced by a total of 230 parking spaces.

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Figure 8: Sydney CBD net absorption & US GDP

Source: JLL Research, Oxford Economics


Lower interest rates to support the transition in the domestic economyThe global economy is estimated to have grown by 3.2% in 2014. Oxford Economics forecasts the global economic recovery will gather momentum with growth increasing to 3.4% in 2015 and 3.8% in 2016. The US economy is expected to be a locomotive of growth in 2015. Oxford Economics projects that the US economy will grow by an above trend 3.3% in 2015 and 2.9% in 2016. An improvement in the US economy is positive for Australian office markets. Historically, net absorption in the Sydney CBD has tracked the US economy (Figure 8). This observation reflects the high proportion of multi-national corporations based in Sydney and Sydney’s role as a global city.

Australia’s economy has yet to make a successful transition from mining investment to the domestic sector. However, resource sector exports were a key driver of growth in 2014 and Oxford Economics estimates that the domestic economy grew by 2.8% over 2014. The Australian economy is forecast to grow at a below trend 2.7% in 2015, before returning towards trend growth in 2016 (3.0%). Risks to growth are on the downside with lower commodity prices, resulting in a downward revision to business investment spending in 2015.

THE PHYSICAL MARKET OUTLOOKThe RBA left the official cash rate unchanged at 2.50% over 2014, but moved to ease monetary policy in early 2015 (2.25%). The current setting for monetary policy is supportive for the domestic economy, but there remains scope for the RBA to cut in 2015 if the transition to domestic growth drivers remains tardy.

Accommodative monetary policy is supporting rising house and apartment prices and stimulating new residential construction activity. Deloitte Access Economics projects private sector housing investment will increase by 9.2% in 2015 and by 6.0% in 2016. The residential sector has historically led economic recoveries in Australia. Most of the CBD office markets in Australia show some form of lagged relationship with housing investment cycles. Increased residential activity flows through to improved household confidence and spending and increased demand for household credit and insurance-related financial services products.

Table 1: Australia – Key economic indicators

Source: Oxford Economics, JLL Research

2013 2014 2015 2016 2017GDP 2.1 2.8 2.7 3.0 2.9CPI 2.4 2.7 2.8 3.0 2.5Population Growth 1.7 1.8 1.8t 1.8 1.8Unemployment Rate 5.6 6.0 5.9 5.5 5.610-year Bond Rate 4.23 2.81 3.91 5.32 5.75

Figure 9: CBD base office demand

Source: Deloitte Access Economics, JLL Research


Signs of organic growth across corporate AustraliaAustralian CBD office markets recorded -10,400 sqm of net absorption in 2014. The headline number masks the divergence between the service-orientated markets of Sydney (70,000 sqm) and Melbourne (48,300 sqm) and the resource-dependent states of Brisbane (-27,600 sqm) and Perth (-68,600 sqm). Nevertheless, sub-lease availability declined over the second half of 2014 in Brisbane (3.28% of total stock) and Perth (3.63% of total stock). While sub-lease availability remains at elevated levels, the reduction in sub-lease is a sign that the bulk of the downsizing in the resource and resource-related sectors has already occurred.

Canberra recorded negative net absorption in 2014 (-31,500 sqm) for only the third time since JLL started detailed monitoring of the Canberra office market in 1978. The Federal Government announced in the Federal Budget that a number of departments and agencies would be restructured. The overall impact is a short-term reduction in public sector headcount. However, the private sector is expected to grow. The last significant downsizing of the Federal Government occurred following the 1996/97 budget and led to a corresponding rise in professional services white collar employment across Canberra. Deloitte Access Economics projects a similar observation in the next few years with professional services employment in Canberra forecast to increase by 2.1% per annum between 2014 and 2017.

Corporate Australia has repaired its balance sheet and had a positive 2013/14 reporting season. AMP noted that 54% of reporting companies surpassed analyst profit expectations – the highest figure since 2005. However, the transition in the domestic economy from mining sector investment growth to more broad-based economic drivers has not yet occurred.

The mixed picture in the domestic economy is reflected in business surveys. The NAB Business Survey (January) showed that business confidence remains below long run averages. The ANZ Job Advertisement Series (January), however, moved higher over the course of 2014 – job advertisements have trended higher for 15 successive months and were up 10.0% over the 12 months to January 2015. The improvement in job advertisements is a precursor to stronger leasing enquiry and activity in 2015.

Nevertheless, the rate of CBD employment growth is forecast to be lower than the historical average (2.1% per annum) over the medium-term. Deloitte Access Economics projects CBD base office demand will increase by 1.8% per annum between 2014 and 2017.

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The technology sector is supporting office space demand

“Professional Services is a growth sector of the Australian economy. The growth, however, is not coming from the traditional sub-sectors of Professional Services – legal firms and accountancy firms.

The technology and technology related sectors are responsible for a high proportion of headcount growth in the Professional Services sector. What the ABS terms ‘Computer System Design & Related Services’ has increased by 38,800 workers or 33% between 2007 and 2014.

The technology sector is competing with investment banks, private equity firms and management consultancies for highly skilled labour. As a result, technology firms are leasing space in prime grade assets in central locations close to public transportation networks and amenities.

However, workplace design is a visual element of culture and technology firms are looking to adopt innovative fit-outs to support multiple work patterns, drive innovation and differentiate themselves from competitors.”

Tim O’Connor, Head of Leasing – Australia


44 Waymouth Street, Adelaide - transacted by JLL on behalf of IBA to Aretzis Group for AUD 14.15 million

Vacancy remains elevated in most CBD office marketsJLL recorded an increase in the national CBD office market vacancy rate to 12.5% in 2014. Vacancy is at the highest rate since 2Q97 across CBD office markets. However, vacancy diverged by market and grade over 2014. Sydney recorded a reduction in vacancy to 9.5% over 2014, while Brisbane (16.8%), Perth (15.8%) and Canberra (15.1%) all recorded a sharp increase in vacancy. A number of tenants have taken the opportunity to capitalise on elevated levels of incentives and upgrade their space requirements. As a result, the occupancy rates for prime and secondary grade assets have diverged. JLL recorded a prime grade vacancy rate of 11.4% in 2014 – 2.3 percentage points lower than the secondary grade vacancy rate (13.7%).

The globalisation of real estate as an asset class makes it a more relevant exercise to benchmark vacancy rates for major office markets in Asia Pacific, North America and Europe. Figure 10 shows the vacancy rate comparison between Australian CBD office markets and a number of major markets. The vacancy rate in Sydney and Melbourne is tighter than most major North American markets and is comparable with office markets in Asia Pacific and Europe.

The vacancy rate for non-CBD office markets (10.8%) is lower than the CBD office market vacancy rate (12.5%). Nevertheless, there is a significant divergence between markets with Parramatta (6.7%) recording the lowest vacancy rate in Australia, and Brisbane Near City (14.7%) and West Perth (12.8%) recording vacancy above equilibrium. A high proportion of vacancy is concentrated in secondary grade stock (Figure 11). Aggregated non CBD office market prime grade vacancy is 8.9%, while secondary grade vacancy was 12.2% in 2014.

Figure 11: Non-CBD office markets vacancy rate by grade, 2014


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Figure 10: Global office markets vacancy rate, 2014

Source: JLL

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Higher completions over 2015 and 2016Net supply additions across CBD office markets were 121,200 sqm in 2014 – the lowest level since 2002. However, completions will increase in 2015 (558,700 sqm) and 2016 (468,100 sqm). Approximately 63% of the development pipeline (assessed as projects under construction) is under-written by tenant pre-commitment. As a percentage of existing stock, Perth (9.0% of stock), Brisbane (8.7% of stock) and Sydney (7.7% of stock) have the largest development pipelines (Figure 12).

Completions are only one variable in the supply equation. Our supply addition projections make an assessment of stock withdrawals. Australia’s building stock is ageing. Approximately 40% of product across CBD office markets is in excess of 30 years old. Increasingly, the office markets reflect the design and characteristics of the 1980s or earlier. A proportion of stock is becoming functionally obsolete and will be withdrawn for refurbishment or conversion to an alternative use. A number of office assets were acquired in 2014 by developers with the potential for conversion to residential by 2020.

Completions are projected to total 1.24 million sqm between 2014 and 2017. However, the increasing rate of obsolescence of Australia’s building stock and the potential for residential conversions is expected to result in stock withdrawals of 557,200 sqm over the same period. As a result, net supply additions will average 226,900 sqm per annum between 2014 and 2017.

The rental outlook is starting to firm in Sydney and MelbourneRents were under downward pressure in 2014. Across the CBD office markets average prime gross effective rents fell by 3.6%, as incentives moved higher in Perth, Brisbane and Melbourne. The sharpest correction in prime gross effective rents occurred in Perth (-23.4%) and Brisbane (-7.0%). Despite the slight increase in leasing incentives in Melbourne, face rents continued to grind higher and prime gross effective rents increased by 2.9% in the Melbourne CBD - the highest rate of growth for a CBD office market.

The market fundamentals of a number of the non-CBD office markets are stronger than CBD office markets. Both Parramatta (7.1%) and Melbourne Fringe (3.0%) recorded stronger effective rental growth than CBD office markets in 2014.

The medium-term rental outlook for a number of office markets is firmer. JLL Research forecasts average prime gross effective rents to increase by 5.4% between 2014 and 2017. Over this period, prime gross face rents are forecast to increase by 2.2% per annum with the bulk of growth derived from a forecast decline in leasing incentives. Figure 13 shows the market-by-market rental growth outlook. We expect that the Sydney CBD (6.9% per annum) and the Melbourne CBD (6.1% per annum) will record the strongest growth between 2014 and 2017. The hierarchy changes over the medium-term, as Brisbane and Perth are forecast to record peak vacancy by

Figure 12: Office markets – development pipeline*

* The development pipeline is defined as projects under constructionSource: JLL Research

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2016. An expectation for a reduction in leasing incentives supports our forecast of prime gross effective rents rising by 7.3% per annum in Brisbane and 5.3% per annum in Perth between 2017 and 2020.

Figure 13: Office markets – prime gross effective rents


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A customer-centric approach to property managementWe have turned the traditional property management model for commercial office buildings on its head, by providing a different approach to customer service. A significant point of difference has been established, through the creation of a unique ‘office-hotel’ concept, and the embracing of a new philosophy introducing new standards and expectations into the traditional property environment.

Tenants are treated as ‘customers and guests’ and whilst this new approach may be ground-breaking within our industry, our quest is to create ‘beautiful, fun and efficient workplace environments for our customers, guests, clients and employees.’

The objective of any initiative is to increase the stickiness of tenants and improve tenant retention rates within an individual asset or across a portfolio.

Richard Fennell, Head of Property and Asset Management – Australia


Yields tighten below 6.00% for core assets in Sydney and MelbourneThe demand for office assets was strong in 2014. Strong investor demand generated pricing tension and yield compression across CBD office markets. JLL Research recorded 32 basis points of yield compression across the CBD office markets. The area-weighted average prime equivalent yield compressed from 7.31% to 6.99%.

Multiple buyer cohorts were active for core assets with strong covenants, long WALEs with fixed increases above 3.75% stipulated in the lease and minimal capital expenditure requirements. At the tighter end of the prime equivalent yield range, we recorded a move below 6.00% in Sydney (5.75%) and Melbourne (5.75%). Melbourne is now back the level recorded in 2007. A significant shift in yield was recorded for secondary grade assets. The average secondary equivalent yield range compressed by 25 basis points in Sydney (7.00% to 7.75%) and by 37 basis points in Melbourne (7.00% to 9.00%).

The yield profiles for the Brisbane, Perth and Adelaide office markets were similar for long dated lease assets. We recorded 25 basis points of yield compression at the tighter end of the range for each of those markets over 2014. The market fundamentals, however, are weaker and the compression for lower quality A Grade or secondary grade assets was less pronounced than in Sydney or Melbourne. The spread between the tighter end of the Brisbane CBD prime equivalent yield range and the softer end of the secondary yield range is 150 basis points – 30 basis points wider than the average between 2004 and 2014.

Table 2 and Table 3 show the current prime and secondary equivalent yield ranges for all monitored office markets, as well as the mid-point recorded over the past ten years. Yield compression recorded over 2014 has resulted in most of prime grade markets recording an average yield tighter than the 10 year average. However, a positive spread between the current setting and 10 year average still exists for secondary grade assets across a number of non-CBD office markets.

THE INVESTMENT MARKET OUTLOOKTable 2: Office Markets – Prime equivalent yields

* The time series for this market is less than ten yearsSource: JLL Research

Prime Equivalent Yields

Market Current (%) Ten-year Average (%) Spread (bp)

Sydney CBD 5.75–6.75 6.50 -25North Sydney 6.50–7.50 7.40 -40Parramatta 6.75–8.50 8.05 -40Chatswood 8.25–8.75 8.45 -7.5St Leonards 8.25–8.50 8.00 25Macquarie Park 7.50–8.25 7.80 10Sydney Fringe* 7.25–7.75 7.90 -40Melbourne CBD 5.75–7.50 7.10 -45Melbourne Fringe 7.25–7.75 7.85 -35Melbourne Suburban 7.50–8.00 8.15 -35Brisbane CBD 6.25–8.25 7.10 15Brisbane Near City 7.25–9.00 8.10 5Perth CBD 6.75–8.25 7.65 -15West Perth* 7.75–8.50 8.25 -12.5Adelaide CBD 7.25–8.50 8.25 -37.5Canberra 7.00–9.50 8.00 25

Table 3: Office Markets – Secondary equivalent yields

* The time series for this market is less than ten yearsSource: JLL Research

Prime Equivalent Yields

Market Current (%) Ten-year Average (%) Spread (bp)

Sydney CBD 7.00–7.75 7.50 -12.5North Sydney 8.00–9.00 8.50 0Parramatta 8.75–10.50 9.35 30Chatswood 9.25–9.75 9.40 10St Leonards 9.00–9.75 9.00 37.5Macquarie Park N/A N/A N/ASydney Fringe* 7.75–9.00 8.70 -35Melbourne CBD 7.00–9.00 8.20 -20Melbourne Fringe 7.25–9.00 8.70 -55Melbourne Suburban 7.50–9.00 8.85 -60Brisbane CBD 8.00–9.50 8.30 45Brisbane Near City 8.75–10.00 8.90 50Perth CBD 8.25–9.75 8.75 25West Perth* 8.75–9.50 8.85 30Adelaide CBD 8.50–10.50 9.45 5Canberra 9.50–12.50 10.15 85


Spreads remain wider than historical benchmarksThe spread between the national CBD office prime equivalent yield and the benchmark reference rate for commercial property—the inflation-indexed bond rate—widened over the latter part of 2014. The widening spread was explained by a shift down in bond yields. The inflation-indexed bond rate compressed from 2.07% in 2013 to 0.93% in 2014 with a further downward shift in early 2015 (0.62%).

As a result, the spread widened between the average prime equivalent yield and inflation-indexed bond rate is 605 basis points – 175 basis points wider than the 20-year average of 430 basis points (Figure 14).

On this simple valuation metric, the above-average spread between the property yield and inflation-indexed bond rate, implies that the pricing for office assets is the cheap-side of fair value. This valuation metric is heavily influenced by the ultra-low treasury yield. Deloitte Access Economics forecasts the inflation-indexed

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Figure 14: Office markets – prime equivalent yield and inflation-indexed bond rate spread

Source: JLL Research, Reserve Bank of Australia

New pricing benchmarks will be set in 20152014 was the year for large single asset acquisitions in Sydney and Melbourne. Strong results were achieved in both markets and new pricing benchmarks were set at sub 6.00% for core assets.

Significant unsatisfied capital remains in the market. Furthermore, the correction in the AUD will make Australia attractive to an even wider group of offshore investors. The challenge will be matching capital with investment product in 2015. As a result, a number of investors will develop a targeted strategy to investment and we will see an increase in the number of offmarket purchases.

Investors have also taken note of the improved leasing market fundamentals in Sydney and Melbourne. Stronger leasing activity and the prospect of rental growth and lower incentives provides an additional ingredient to the investment proposition for core+ assets in 2015.

bond rate will remain below 2.0% through 2018. While a rise in the reference rate will narrow the spread between office yields and the real risk-free rate, in a low treasury yield environment there remains scope for further yield compression in 2015.

The weighted average prime grade office yield is forecast to compress by 15 basis points in 2015 to 6.84%. Yield compression is expected to be more significant in Sydney and Melbourne. The Sydney CBD is forecast to record 25 basis points at both ends of the prime grade yield range to 5.50% to 6.50%, while the Melbourne CBD is projected to compress by 25 basis points at the tighter end of the range in 2015 to 5.50% to 7.50%.

Further contraction in tenant demand was recorded in the resource driven market of Brisbane

Rob Sewell, Head of Office Investments – Australia


A divergent profile for valuesThe JLL Research Capital Value Indicator (CVI), which tracks prime grade office values, increased by 7.4% in 2014 and has now risen by 26.6% since the cyclical low was recorded in values (4Q09). However, values are 3.6% lower than the previous peak recorded in 2007 in nominal terms and 19.6% lower in real (inflation-adjusted) terms.

Capital values are projected to rise by an average of 2.9% per annum between 2014 and 2019. Figure 15 shows capital value growth in 2014, as well as the five year average outlook for capital value growth across CBD office markets and select non-CBD office markets. Sydney and Melbourne are projected to record the strongest capital value growth over 2015 and 2016. The profile changes over the middle part of the forecast period with Brisbane and Perth forecast to record a recovery in values over 2017 to 2019.

Low debt costs support yield compressionA number of banks increased their exposure to the commercial property sector in 2014. While lenders’ were disciplined in the assessment of creditworthiness, for well-rated borrowers there was no difficultly accessing debt finance on attractive terms. Furthermore, we engaged with a number of debt providers looking to participate in the Australian commercial property market in 2015. The cost of debt fell over 2014 with lending margins compressing to 120 to 140 basis points for high-quality investment grade assets in 2014. With the five-year swap rate at 2.45%, the current margins imply a cost of debt between 3.65% and 3.85% in Australia. Historically, senior debt for commercial property was provided on a three to five year term. Increasing, well-rated borrowers are able to secure senior debt for seven years with LVRs of 50%.

Canberra recorded negative net adsorption in 2014 for only the third time since JLL started monitoring this office market in 1978

Figure 15: Office markets – capital values

Figure 16: Corporate bond yields (five-year maturity)


Source: Reserve Bank of Australia, Bloomberg, UBS, JLL Research

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The current cost of senior debt is comparable to the pricing in the corporate bond market. In January 2015, the BBB-rated corporate bond yield was 3.83% with a three-year maturity and 4.17% with a five-year maturity (Figure 16). Pricing in the corporate bond market has become more relevant as A-REITs and unlisted funds diversified their funding sources and are less reliant on the domestic banking sector.

Figure 17 highlights the compression in the spread between corporate bond yields and government-backed securities. Margins have compressed significantly from 2009. Nevertheless, the margin for an A-rated entity and a BBB-rated entity remains 60 and 110 basis points wider than mid-2007. While debt costs will move higher over the medium-term, part of the rise in the swap rate will be absorbed by further margin rate compression.

Figure 17: Corporate bond spreads (relative to australian government bonds, five-year maturity)

Source: Reserve Bank of Australia, Bloomberg, UBS, JLL Research

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Lower interest rates have enabled investors to use tactical leverage to support cash-on-cash returns and increase equity IRRs even in an environment of lower real estate returns. Assume a core unleveraged real estate return of 7.75% and debt finance at 3.95%. An investor can achieve a 10% return on equity by using leverage of between 35% and 40%.

Capital environment to stimulate further M&A activityFurther consolidation in the A-REIT sector is expected in 2015 as the competition for assets in the direct markets remains high and managers look for creative ways to grow earnings and their platforms. The capital environment remains conducive to transactions with listed equity pricing strong and the scope for transactions further enhanced for those REITs that have access to the deep pool of private capital seeking Australian investment. REIT balance sheets are also in good shape and debt markets are both liquid and offering attractive all-in pricing.

Chris Key, Head of Corporate Finance – Australia


The demand for office product with core investment characteristics will remain strong in 2015. While we expect to see fewer core investment opportunities come to market in 2015 than 2014, investors will remain cognisant of risk and disciplined in pricing assets. Average prime grade yields in most CBD office markets and a number of CBD office markets moved below the 10 year average in 2014. On this simplistic measure, these markets have moved from fair value towards expensive territory. However, the long-term average only provides one insight into relative valuation. The spread between CBD office yields and the real risk-free rate was 606 basis points in 2014 – 135 basis points wider than the long-term average of 475 basis points. While a medium-term rise in bond yields will narrow the spread, there remains scope for yield compression in Australia.

Offshore investor will remain active participants in Australia in 2015. New sources of capital will emerge in 2015 and the competition for prime grade assets will result in new pricing benchmarks being set in Sydney and Melbourne. However, the recent volatility of the AUD will limit the participation of those investors looking to hedge currency risk.

SUMMARY

Transaction volumes are likely to be lower in 2015. The supply of product will come through M&A activity in the listed sector, the restructuring of portfolios and recycling of assets, while vendor motivation will be stimulated by strong results and new pricing benchmarks being set. Nevertheless, there will be a shortage of core product and few investment opportunities in excess of AUD 250 million compared with 2013 and 2014.

As are result, there will be a move up the risk curve in 2015. The yield spread between prime and secondary assets is wider than historical benchmarks, while the spread between CBD and non CBD office markets across the eastern seaboard also appears attractive. Nevertheless, the ability to manage the idiosyncratic risk of secondary grade or suburban product provides the incentive for well-respected core plus managers to structure investment products to meet this latent demand.

Authors

Andrew is the Head of Capital Markets Research at JLL. He has over 14 years’ experience in industry research in the commercial and residential property as well as the transportation and logistics sectors. A well-respected industry commentator, Andrew is regularly quoted in the national press and property journals. He is responsible for the production of thought-leadership papers, the office market research portfolio and the management of the overall Strategic Research team. Andrew holds an MA in Applied Research and BA (Hons) in Business Economics.

Rob has responsibility for leading JLL’s Office Investments team across Australia, managing a team of over 20 specialists with extensive experience in the disposal of investment grade property. Rob works across borders to offer strategic market advice and by leveraging his relationships with major investors, maximising potential realisation.

Rob re-joined JLL as Head of Office Investments – Australia in 2013. Over the last 10 years, Rob has transacted in excess of $5 billion worth of property across Australia and New Zealand.

Andrew Ballantyne National Director, Strategic Research +61 2 9220 8412 [email protected]

Rob Sewell Head of Office Investments – Australia +61 2 9220 8315 [email protected]

2014 OFFICE TRANSACTIONS IN AUSTRALIA (OVER AUD 20 MILLION)Property Name Address Suburb Date Sale Price

(AUD)Share Initial Yield

(Passing) NLA (SQM) Price/m² Vendor Buyer

New South Wales52 Martin Place Sydney Jul $555,000,000 100.00 5.23% 39,281 $14,129 QIC Global Real Estate REST Industry Super275 Kent Street Sydney Apr $435,000,000 50.00 6.72% 77,125 $11,280 Mirvac Group (MGR) Blackstone Real Estate Asia

No.1 Sydney 1 Alfred Street Sydney Dec $425,000,000 100.00 4.00% 23,475 $18,100 Valad Property Group / Stichting Pensioenfonds Dalian Wanda Group175 Liverpool Street 175 Liverpool Street Sydney Nov $392,000,000 100.00 5.95% 48,890 $8,018 GIC Real Estate Shimao Property HoldingsGreenwood Centre 101 Miller Street North Sydney Oct $305,150,000 50.00 6.40% 46,326 $13,174 Eureka (Core Property Fund 3 / Core Property

Fund 1)TIAA Henderson Real Estate

1 Charles Street Parramatta Jun $241,118,000 100.00 7.56% 32,500 $7,419 Australian Super Growthpoint Properties Australia (GOZ)Piccadilly Tower 133 Castlereagh Street Sydney Feb $194,250,000 50.00 7.30% 47,720 $8,219 Stockland (SGP) Investa Property Group (IOF)Optus Centre 1 Lyon Park Road Macquarie Park Feb $184,425,000 49.00 7.25% 84,194 $4,470 Stockland (Direct Office Trust No.2) AIMS AMP Capital Industrial REIT

160 Marsden Street Parramatta Dec $170,100,000 100.00 - 20,700 $8,217 NSW State Government Eureka Funds ManagementEnergy Australia Building 570 George Street Sydney Mar $151,800,000 100.00 5.60% 21,930 $6,922 Ausgrid Far East OrganizationCivic Tower 66-68 Goulburn Street Sydney Jun $136,000,000 100.00 8.15% 23,176 $5,868 Australand (ALZ) / Charter Hall (PFA Diversified

Property Trust)GDI Property Group (GDI)

6 O'Connell Street Sydney Jun $134,950,000 100.00 6.99% 16,349 $8,255 BlackRock Investa Property Group (IOF)10 Shelley Street Sydney May $130,600,000 50.00 9.60% 27,936 $9,350 Commonwealth Property Office Fund (CPA) Brookfield Asset Management

50 - 58 Park Street Sydney Feb $127,000,000 100.00 6.00% 21,153 $6,004 Kyko Group Far East OrganizationNAB House 255 George Street Sydney Feb $116,000,000 25.00 6.00% 39,998 $11,601 Brookfield Asset Management AMP Capital Investors (AWOF)Charter Grove 29-57 Christie Street St Leonards May $96,400,000 100.00 9.02% 14,350 $6,718 Charter Hall (CHOT) Australasian Property Investments Ltd /

Wingate Group50 Pitt Street Sydney Feb $94,000,000 100.00 7.72% 9,897 $9,436 Hawaiian Property Group CIMB Trust Capital (AOF1)

59 Goulburn Street Sydney Apr $90,200,000 100.00 - 19,721 $4,574 Charter Hall (CHOT) Roxy-Pacific Holdings LtdFujitsu House 15 Blue Street North Sydney Apr $90,000,000 100.00 - 16,869 $5,335 Brookfield Asset Management Denwol Group

100 Harris Street PYRMONT Nov $90,000,000 100.00 - 20,000 $4,500 Citilease Property Group Pty Ltd EG Funds Management50 Carrington Street Sydney Jul $88,000,000 100.00 7.22% 11,231 $7,836 DEXUS Property Group (DXS) Brookfield Office Properties

67 Albert Avenue Chatswood May $84,370,000 100.00 8.98% 15,664 $5,386 Eureka Funds Management CorValThe Octagon 110 George Street Parramatta Oct $83,000,000 100.00 - 19,308 $4,299 PFA Diversified Property Trust / Westlawn

Property TrustLongbow Holdings

Kimberley Clark House 52 Alfred Street South Milsons Point Feb $82,000,000 100.00 - 10,219 $8,024 Leda Holdings Bridgehill55 Pyrmont Bridge Road Pyrmont Oct $80,000,000 100.00 - 15,959 $5,013 BlackWall BlackWall Pyrmont Bridge Trust

National Measurement Institute 105 Delhi Road, Julius Avenue

North Ryde May $67,400,000 100.00 6.32% 9,857 $6,483 Goodman Australia Industrial Fund (GAIF) Delhi 105 Pty Ltd

Atanaskovic Hartnell House 75 Elizabeth Street Sydney Oct $64,000,000 100.00 - 6,164 $10,383 Uniting Church Property Trust Kingold495 Harris Street Ultimo Feb $63,000,000 100.00 6.90% 9,643 $6,533 AMP Capital Investors (AWOF) Auswin TWT Development

234 Sussex Street Sydney Apr $61,000,000 100.00 - 10,020 $6,088 Clipper Property Group Meriton50 Miller Street North Sydney Apr $60,000,000 100.00 9.76% 9,980 $6,012 Abacus Property Group (ABP) Prime Super

225-235 Pacific Highway North Sydney Mar $58,000,000 100.00 - 1,740 $33,333 Ford Land Company Greenland Holding GroupFairfax House 19 Pitt Street Sydney Feb $55,000,000 100.00 - 5,561 $9,890 Fairfax Media Ltd AXF Group / Everbright Group

151 Macquarie Street Sydney Jun $52,800,000 100.00 5.82% 4,532 $11,474 Lambardi CorVal285A Crown Street Surry Hills Oct $50,250,000 100.00 - 2,500 $20,100 EG Funds Management Clipper Property Group

148 Pacific Highway 144-154 Pacific Highway North Sydney Jan $50,000,000 100.00 - 1,700 $29,412 Strand Estates Fu Ji Pty Ltd280 George Street Sydney Jun $50,000,000 100.00 5.70% 4,900 $10,204 Arena Investment Management (AOF) Toga Far East Hotels

36 The Bond 36 Hickson Road Sydney Feb $45,500,000 100.00 - 1,200 $37,917 W Projects (No.31) Miller Commercial Group Pty LtdSignature Tower 2-10 Wentworth Street Parramatta Dec $45,050,000 100.00 7.91% 10,767 $4,118 Charter Hall (CHOT) Centuria Capital (2 Wentworth Street Fund)

299 Elizabeth Street Sydney Jun $45,000,000 100.00 6.62% 5,974 $7,533 Bircher Property Group 299 Elizabeth Street Pty LtdElizabeth Plaza 2 Elizabeth Plaza North Sydney Nov $45,000,000 100.00 - 7,002 $6,427 Altis Property Partners Marprop

261-265 Chalmers Street Redfern Jul $45,000,000 100.00 - 9,196 $3,894 Trivest / South Sydney Rabbitohs Salvation Army965 Bourke Street Waterloo May $42,500,000 100.00 - 11,084 $3,834 Challenger SC Capital RECAP III Fund699 George Street Sydney Nov $41,000,000 100.00 - 3,500 $11,714 Unknown Unknown

Wharf 10 50-52 Pirrama Road Pyrmont Nov $42,000,000 100.00 7.23% 4,346 $9,663 Abacus Property Group (ABP) / Heitman MarksHenderson1-3 Munn Street Millers Point Jul $38,000,000 100.00 6.50% 3,843 $9,888 Unknown Unknown

Unidata House 132 Arthur Street North Sydney Nov $36,750,000 100.00 - 8,835 $4,160 Valad Property Group Centennial Property GroupMacquarie Park Business Park 15 Talavera Road Macquarie Park Jul $34,088,000 100.00 9.08% 11,578 $2,566 AMP Capital Investors PropertyLinkAstra Pharmaceuticals 66-82 A & B Talavera Road North Ryde Jan $32,000,000 100.00 3.19% 9,600 $3,333 Astra Zeneca Holdmark Property GroupReaders Digest 26-32 Waterloo Street Surry Hills Feb $30,000,000 100.00 - 8,639 $3,473 Centennial Property Group Intrasia Oxley REEnterprise House 1-3 Fitzwilliam Street Parramatta Jul $29,000,000 100.00 - 9,908 $2,927 Chandru Property Investments Pty Ltd Raffles Education Corporation




Towns Place East (Walsh Bay) 8 Windmill Street (28 Hickson Road) Walsh Bay

Sydney Jul $28,000,000 100.00 7.50% 3,900 $7,179 Meat Industry Employee Fund MarksHenderson

88 Cumberland Street Sydney Jun $27,000,000 100.00 8.00% 4,595 $5,767 Cumberland Street Developments Pty Ltd Intrasia Oxley RE33-35 Herbert Street St Leonards Mar $25,000,000 100.00 9.97% 6,148 $4,066 AMP Capital Investors Altis Property Partners

119 Kippax Street Surry Hills Mar $24,475,000 100.00 - 6,752 $3,625 Unknown Cornerstone Property Group621 Pacific Highway St Leonards Oct $22,460,000 100.00 - 2,982 $7,532 Legacy Property Undisclosed

19 Foster Street Surry Hills Dec $22,123,000 100.00 - 3,249 $6,809 Unknown Security Capital63 Miller Street Pyrmont Dec $20,000,000 100.00 - 7,500 $2,667 Avevo EG Funds Management

VictoriaCBW & Goldsborough Lane 181 & 550 William Street

& Bourke & Goldsborough Lane

Melbourne Sep $608,100,000 100 6.00% 76,090 $7,470 CBUS Property GPT Group (GPT & GWOF)

South East Stadium Precinct (North Tower)

700 Bourke Street DOCKLANDS Sep $433,500,000 100 5.74% 61,000 $7,107 CBUS Property AMP (AWOF)

321 Exhibition Street Melbourne Aug $208,000,000 100 6.78% 31,000 $6,710 Cromwell Property Group (CMW) InvescoVictoria Harbour - Ericsson 818 Bourke Street Melbourne Nov $152,500,000 100 7.03% 21,700 $6,602 GPT Group (GPT) Hines Global REITKTS House 350 Queen Street Melbourne Oct $137,500,000 100 22,408 $6,136 Unknown UnknownQBE House 628 Bourke Street Melbourne Jun $129,600,000 100 7.36% 25,071 $5,169 Investa Property Group (IOF) M&G Real EstateWorld Trade Centre 605 Flinders Street Melbourne Aug $120,400,000 70 8.42% 62,500 n.a. Asset 1 KKR (52.5%)

Abacus Property Group (ABP) (17.5%)PWC Southbank 2 Riverside Quay SOUTHBANK Nov $106,000,000 50 20,000 $12,326 Mirvac Property Group (MGR) ISPT

40 Market Street Melbourne Sep $105,000,000 100 6.30% 12,333 $8,514 DEXUS Property Group (DXS) MTAA484 St Kilda Road Melbourne Jul $94,000,000 100 7.71% 20,396 $4,609 Heitman (75%)

Abacus Property Group (ABP) (25%)UBS Grocon

509 St Kilda Road Melbourne Nov $90,000,000 100 19,600 $4,592 Calibre Capital John Beville600 St Kilda Road 600-602 St Kilda Road Melbourne Nov $83,100,000 100 17,161 $4,842 Arena Investment Management (AOF) UnknownATO Moonee Ponds 6-20 Gladstone St Moonee Ponds Oct $83,000,000 100 21,034 $3,946 Charter Hall (CHOT) Private Investor

441 St Kilda Road Melbourne Nov $82,100,000 100 7.03% 16,175 $5,076 Centuria Capital (CPF) John ForsythOCBC House 565 Bourke Street Melbourne Nov $81,175,000 100 16,258 $4,993 Shakespeare Property Group Challenger

555 Collins Street Melbourne Jun $78,000,000 100 n.a. 22,273 $3,502 Stamoulis Property Group Fragrance Group710 Collins Street Docklands Dec $76,500,000 100 9,700 $7,887 Equiset Abacus Property Group (ABP)

AGL Energy 699 Bourke Street Docklands May $73,000,000 50 18,000 $8,111 Mirvac Property Group (MGR) TIAA-CREFVantage 109-133 Burwood Road Hawthorn Mar $63,000,000 100 8.00% 13,000 $4,846 First State Developments GPT Group (GMF)

495 Blackburn Road Mount Waverley

Nov $63,000,000 100 8.60% 24,000 $2,625 AMP EG Core Plus Fund

Sun Building 60 Albert Road Melbourne Sep $50,400,000 100 5.35% 14,300 $3,524 Wharf Street Investments Shakespeare Property Group459 Little Collins Street Melbourne Sep $45,500,000 100 7.76% 9,383 $4,849 Uniting Church Property Trust Julliard Group

Illoura Plaza 424-426 St Kilda Road Melbourne Feb $45,000,000 100 12,365 $3,639 Julliard Group Lixin Chen553 St Kilda Road Melbourne Mar $45,000,000 100 10.46% 10,950 $4,110 Rosalia International Healthway Corporation

66-68 & 70 Southbank Boulevard

Southbank Feb $42,300,000 100 2,828 n.a. Unknown Aspial Corporation Limited

200 Victoria Street Carlton Jul $42,300,000 100 8,000 $5,288432 St Kilda Road Melbourne Dec $41,600,000 100 9,300 $4,473 Prime Value Asset Management Standard Life50 Queen Street Melbourne May $40,700,000 100 5.60% 9,651 $4,217 Centuria Capital (CPF) Fidinam Australasia Real Estate

293 Camberwell Road Camberwell Oct $39,350,000 100 7.56% 7,147 $5,506 Bennelong Group Private Investor456 Lonsdale Street Melbourne Mar $37,550,000 100 7.00% 8,123 $4,623 Peachtree Capital Finniam

20 Queens Road Melbourne Mar $35,000,000 100 4,180 $8,373 Unknown Unknown2 Luton Lane Hawthorn Oct $34,050,000 100 7.40% 5,661 $6,015 Bennelong Group Private Investor

401-403 Collins Street Melbourne Mar $32,000,000 100 7.80% 6,334 $5,052 Roy Morgan The Impact Investment Group25-29 Queensbridge Street Southbank Feb $31,000,000 100 4,600 $6,739 Suleman Property Group Unknown

63 Exhibition Street Melbourne Mar $28,000,000 100 6,048 $4,630 Suleman Property Group Castledon Partners54-68 Kavanagh Street Southbank Jun $27,000,000 100 3,137 $8,607 Evergreen Central Equity

11 Queens Road Melbourne Jul $27,000,000 100 10.49% 8,400 $3,214 Denison Vantage Property Investment54-56 A'Beckett Street Melbourne May $26,800,000 100 525 n.a. Evergreen Aspial Corporation Limited

231-235 Swanston Street Melbourne Sep $25,300,000 100 2.71% 1,911 $13,239 Unknown Glorious Sun




Victoria University Of Technology 301-311 Flinders Lane Melbourne Nov $23,600,000 100 5.36% 4,800 $4,917 Victoria University KLW Holdings LimitedThe Atrium 290 Burwood Road Hawthorn Oct $23,350,000 100 7.76% 4,400 $5,307 Bennelong Group Zagame Corporation

158 City Road Southbank Mar $22,500,000 100 4,000 $5,625 Unknown Unknown22-32 William Street Melbourne Sep $21,600,000 100 5.78% 6,070 $3,558 Ronald Investments Pty Ltd Unknown450 St Kilda Road Melbourne May $20,000,000 100 3.50% 4,905 $4,077 The Carter Group Golden Age

QueenslandSouth-Point - Building B 275 Grey Street South Brisbane Apr $200,615,000 100 7.63% 22,000 $9,199 Anthony John Group Union Investment Real EstateAM60 40-60 Albert Street Brisbane Jan $161,300,000 100 9.30% 21,000 $7,681 LaSalle Australia Core Plus Fund DEXUS Property Group (DWPF)State Law Office 50 Ann Street Brisbane Jul $131,800,000 100 6.99% 25,519 $5,165 Harburg Investments CIMB Trust Capital (AOF1)Central Plaza Three 70 Eagle Street Brisbane Apr $122,700,000 100 6.40% 11,100 $11,054 Australian Prime Property Fund (50%)

Harina Company Limited (50%)Pembroke Real Estate

Ausenco HQ 144 Montague Road South Brisbane Nov $95,000,000 100 8.97% 14,216 $6,444 Hines Global REIT Mapletree InvestmentsVirgin Village 56 Edmondstone Road Bowen Hills May $65,876,000 100 8.55% 12,427 $5,301 Virgin Australia Charter Hall (VA Trust)

757 Ann Street Fortitude Valley Jul $65,500,000 100 8.55% 7,700 $8,506 OPD Lennon / Vanreit Investec Australia Property FundCitilink Office Building 153 Campbell Street Bowen Hills Nov $62,000,000 100 8.35% 9,798 $6,328 Centuria Capital (Centuria Office Fund No 2) Sentinel Property Group

60 Edward Street Brisbane Dec $60,000,000 100 7.41% 10,500 $5,714 AMP Life RACQ443 Queen Street Brisbane Aug $49,000,000 100 n.a. 5,560 $8,813 Brice Family CBUS Property

55 Little Edward Street Spring Hill May $46,000,000 100 8.25% 8,197 $5,612 Bennelong Group Generation HealthcareOxley House 25 Donkin Street South Brisbane Jul $24,650,000 100 n.a. 7,424 $3,320 DEXUS Property Group (DXS) PointcorpMondial House 74 High Street Toowong Dec $21,500,000 100 9.50% 4,500 $4,778 IOOF Jane Darveniza

16 Marie Street Milton Nov $20,750,000 100 8.50% 3,997 $5,128 Private Investor TrinityWestern AustraliaQV1 250 St Georges Terrace Perth Jul $388,500,000 50 7.40% 60,800 $12,290 Investa Property Group Investa Property Group (ICPF)Septimus Roe Square 256 Adelaide Terrace Perth Apr $91,000,000 100 11.00% 16,000 $5,688 Aspen Group (APZ) Far East Organization

130 Stirling Street Perth Feb $90,000,000 100 8.27% 11,863 $7,288 Charter Hall (CHIF7) Hiap Hoe Limited374-394 Murray Street Perth Jul $40,000,000 100 n.a. n.a. n.a. Undisclosed Fragrance Group

220 St Georges Terrace Perth Dec $35,000,000 100 n.a. 9,212 $3,828 220 St Georges Terrace Pty Ltd Undisclosed14-16 Parliament Place West Perth Oct $22,600,000 100 8.30% 2,989 $7,561 Primewest Management MHPHA West Perth Pty Ltd

South AustraliaSachsenfonds Portfolio 60 Flinders Street

80 Flinders Street61-67 Wyatt Street

Adelaide Sep $153,000,000 100 n.a. 15,35012,000

n.a. Sachsenfonds Australian Prime Property Fund

City Central Tower 8 12-26 Franklin Street Adelaide Mar $99,500,000 50 7.25% 36,215 $5,495 Aspen Group (APZ) Charter Hall (CPOF)Westpac House 91 King William Street Adelaide Sep $74,000,000 50 8.00% 29,700 $4,714 Arena Investment Management (AOF) Abacus Property Group (ABP)KPMG 151 Pirie Street Adelaide Sep $72,000,000 100 n.a. 11,588 $6,213 Real I.S. Padman Commercial Holdings Pty LtdNational Bank House 22-28 King William Street Adelaide Jun $41,800,000 100 8.60% 9,803 $4,264 MWQ Properties Southern Cross Equity

100 Pirie Street Adelaide Jul $28,610,000 100 n.a. 9,015 $3,174 Korda Mentha 100 PS Pty Ltd60 Light Square Adelaide Sep $22,000,000 100 11.87% 7,070 $3,112 Sachsenfonds Primewest

Australian Capital TerritoryNewActon East 21-23 Marcus Clarke Street City Aug $45,010,000 100 7.50% 6,824 $5,520 Acton Developments Placer PropertyManning Clarke Building 186 Reed Street GREENWAY May $25,805,000 100 7.90% 5,407 $4,773 ACT Long Service Leave Authority Investec Australia Property Fund14 Moore Street 14 Moore Street CITY Jan $23,000,000 100 n.a. 11,100 $2,072 DEXUS Property Group (DXS) Quintessential Equity (QE028 Trust)

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Jones Lang LaSalle© 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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Brisbane Level 33, Central Plaza One 345 Queen Street Brisbane QLD 4000 tel +61 7 3231 1311

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Gold Coast Level 5C 64 Marine Parade Southport QLD 4215 tel +61 7 5558 6400

Mascot Level 3, Sydney Airport Centre 15 Bourke Road Mascot, NSW, 2020 tel +61 2 9693 9800

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North Sydney Level 27, North Point 100 Miller Street North Sydney NSW 2060 tel +61 2 9936 5888

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