Market Commentary Perth CBD Office

Market Commentary Perth CBD Office November 2016 Executive Summary The vacancy rate at 3Q16 is 24.7%, reflecting a quarterly increase of 0.1 percentage points. Two office projects are under construction in the Perth CBD, totalling 49,700 sqm. Investment activity in the Perth CBD has increased, following 24 months of limited transactions. The increasing availability of sub-lease space and rising incentives, are expected to exert further downward pressure on effective rents over the remainder of 2016 and into 2017. Perth CBD: Key Indicators Total Stock (million sqm) New Supply (sqm) (last 12 months) End-Sep 2016 1.77 86,400 Net Absorption (sqm) (last 12 months) -21,600 Vacancy 24.7% Rents (AUD per sqm p.a) Prime Gross Effective 448 Secondary Gross Effective 316 Yields Prime 6.00% - 8.00% 12-Month Outlook Perth CBD Office Update November 2016 1

Economic Overview The Western Australian (WA) economy is in the midst of a challenging transition with limited growth forecast in the short term. As significant resource projects reach completion, iron ore and gas export volumes from Western Australia are increasing. However, given the correction in commodity prices the value of exports has decreased, impacting royalties payments and the revenue of State Government. This has implications for both the State budget as well as the profitability of resource companies. In the medium to longer term, activity in the mining industry may improve as operating mines reach exhaustion and mining companies have to invest in new mines in order to maintain production levels. The low Australian dollar has assisted in driving demand for non-mining exports. Continued development of industries outside of the resource sector will determine the medium-term outlook for Western Australia. While export volume growth is keeping Gross State Product (GSP) positive, the underlying state economy is showing weakness, with State Final Demand (SFD) declining by 4.6% in the 12 months to June 2016. Deloitte Access Economics (DAE) forecast GSP growth of 1.0% for 2016, and 1.5% in 2017. Real Final Demand, which measures state consumption and investment spending by the public and private sector (excludes imports and exports), fell by 3.4% over 2015. Deloitte Access Economics projects State Final Demand to decline by 7.3% in 2016 and by 2.6 % in 2017. In the 2016-17 WA State Budget, infrastructure programs totalling AUD 22.9 billion are planned for the next four years. This includes a strong focus on education and transport infrastructure, including projects such as the Perth Freight Link and the Forrestfield Airport Link. Over the 12-months to March 2016, WA showed population growth of 1.2%. However, net interstate migration over this period was -5,600 people. In the three months to March 2016, WA recorded net interstate migration of -1,900 people. Population growth forecasts have recently been scaled back, with Western Australia expected to record average population growth of 1.4% per annum between 2016 and 2025, marginally above the national average of 1.3% over the same time frame. In September 2016, WA s unemployment rate increased to its highest level since October 2015, rising to 6.3%. WA s unemployment rate remains higher than the national average of 5.6%. Subdued domestic demand and falling mining investment is anticipated to keep wages growth weak in the short to medium term. The residential property market is feeling the effects of lower wages growth and slowing population growth, experiencing higher vacancy for rental stock, declining housing investment, and falling property prices. Perth property prices declined by 4.8% y-o-y in June 2016 (ABS). According to Deloitte Access Economics, real retail turnover in WA (inflation-adjusted) is forecast to show a more substantial recovery from 2017, forecast to increase from a low of 0.2% in 2016, to 3.7% in 2017 and to average 3.7% p.a. between 2017 and 2025. This puts WA above the national average of 3.0% p.a. over the same period (2017-2025). Western Australia: Key Indicators Period Australia WA Economic Growth (y-y%) Jun-16 2.90% 0.90% CPI (year ended %) Sep-16 1.00% 0.50% Real Retail Turnover (s.a. y-y%) Aug-16 3.50% 1.20% Unemployment rate (%) Sep-16 5.60% 6.30% Population (annual %) Mar-16 1.40% 1.20% Official Cash Rate (% p.a.) Oct-16 1.50% n/a Supply Source: ABS, RBA, Deloitte Access Economics There were no CBD office completions in 2016. There are currently two new office projects under construction in the CBD. A six-level, 1,250 sqm development at 3 Pier Street in the Cathedral and Treasury Precinct is under construction, partly pre-committed by the Anglican Diocese. The building is anticipated for completion in the fourth quarter of 2016. Market Balance: Perth CBD 140,000 100,000 60,000 20,000-20,000-60,000-100,000 *As at 3Q16 sqm 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% 10 11 12 13 14 15 16* 17* 18* Completed Under Construction Net Absorption Vacancy Rate [RHS] The Capital Square office building, at 98 Mounts Bay Road (48,484 sqm), the site of the former Emu Brewery, is also under construction. In July 2014, Woodside signed a memorandum of understanding to commit to the majority of the office building, and Perth CBD Office Update November 2016 2

will relocate from their current location at Woodside Plaza, 240 St Georges Terrace. Construction is expected to be completed in 2018. Plans for the site also include a 41 level residential tower, and a 120 room hotel. A number of new office developments have been proposed, but limited information is known on the timeline of these projects, and/or it is likely that pre-commitment is needed before construction begins. Demand The Perth CBD recorded negative net absorption of 2,100 sqm in 3Q16, as additional pockets of vacant space have been added to the market through backfill space from consolidation and downsizing. Overall vacancy increased by 0.1 percentage points to 24.7% in 3Q16, with vacancy increasing largely over secondary stock. Over the last 12 months, net absorption has totalled -21,600 sqm. Vacancy in Perth s prime grade buildings decreased by 0.6 percentage points over the quarter to 23.4%, while secondary grade vacancy increased by 1.2 percentage points to 26.8%. Prime grade vacancy has decreased for a second consecutive quarter, as a number of leasing deals in higher quality buildings have completed. Tenants can achieve favourable deals in good quality buildings, including high quality fit outs and favourable incentives. Meanwhile, vacancy has increased further in poorer quality secondary stock as tenants use tenant-favourable market conditions as an opportunity to upgrade. The Perth CBD continues to have the highest CBD vacancy rate in Australia, above Brisbane (16.3%), Adelaide (16.1%), Canberra (13.0%), Melbourne (8.9%), and Sydney (7.2%). Net absorption: Perth CBD 100,000 50,000 0-50,000-100,000 sqm 10 11 12 13 14 15 16* Sub-lease availability, often regarded as a barometer of business confidence, increased throughout 2015 and into 2016, declined marginally over the September quarter. Nevertheless, sub-lease availability remains high at 5.3% of total stock. Over the last 20 years (1995 to 2015), annual sub lease vacancy has averaged 1.6% of total stock in the Perth CBD. While the headline vacancy statistic was relatively static, there was a steady amount of tenant activity in the Perth CBD. Some of these tenant moves included: - Accounting firm RSM has leased three floors at Exchange Tower, 2 The Esplanade (3,281 sqm). RSM will relocate from their current offices at 8 St Georges Terrace. - CQ University is a new entrant to the Perth market, leasing 2,113 sqm at 10 William Street for their new WA campus. Vacancy: Perth CBD by Quality Grade 28% 24% 20% 16% 12% 8% 4% 0% 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 Prime Secondary Lower rents and higher incentives remain the main drivers of leasing enquiry and activity, with multiple leasing deals and smaller tenant moves (< 1,000 sqm) concluded over the September quarter. Taylor Burrell Barnett leased 600 sqm at 160 St Georges Terrace, relocating from Subiaco; Kinetic IT leased 650 sqm at 66 St Georges Terrace; and The Simulation Group leased 360 sqm at 197 St Georges Terrace. Leasing enquiry remains steady as tenants continue to explore their options and use lease expiry as an opportunity to take advantage of the favourable market conditions to relocate, upgrade their facilities or reduce cost. *As at 3Q16 Net Absorption The Perth CBD has seen a steady amount of leasing activity from tenants moving from suburban office locations to the CBD office market. The decline in rents and increased availability of good quality office space has made centralisation an affordable option for suburban office tenants, who may have previously been priced out of the CBD. JLL has identified over 21,000 sqm of leasing Perth CBD Office Update November 2016 3

activity over the last 2 years from tenants relocating into the CBD from suburbs such as West Perth, Subiaco and South Perth. This trend is anticipated to continue as vacancy remains elevated in the Perth CBD. Rents Prime gross effective rents decreased by 1.1% this quarter to an average of AUD 448 per sqm p.a. Since the most recent peak (2Q12), prime gross effective rents have fallen by 45.4%. The continued rise in incentives has contributed to the further correction in effective rents with average leasing incentives increasing to 48% in 3Q16. Secondary gross effective rents declined in 3Q16 by 2.5% to an average of AUD 316 per sqm p.a. The correction for secondary gross effective rents (-14.8%) is sharper than the correction for prime (-12.2%) over the past 12 months. Rents: Perth CBD by Quality Grade $900 $800 $700 $600 $500 $400 $300 AUD/sqm p.a. $200 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 Prime Gross Effective Secondary Gross Effective Vacancy has increased across most building grades over the past year, with more competition for tenants given softening demand conditions. Secondary stock is coming under increasing competition from prime grade stock, with more good quality space being offered to the market for lease. Given the rising affordability of prime grade office space, landlords of secondary grade stock are having to lower rents and increase incentives in order to attract tenants. Yields & Sales There was one major CBD transaction ( AUD 5.0 million) in the September quarter, with sales over the last 12 months totalling AUD 588.8 million. Five out of the six transactions occurred in the first quarter of 2016, and is a significant increase on the transaction volumes recorded over 2015, where only one sale of AUD 6.6 million was recorded. Transaction Volumes: Perth CBD $1,200 $1,000 $800 $600 $400 $200 AUD million $0 2011 2012 2013 2014 2015 2016* *As at 3Q16 There are minimal opportunities for investment in the Perth CBD, with a small number of assets on the market for sale. The assets at 8 St Georges Terrace and 16 Victoria Avenue were recently marketed for sale. The asset at 226 Adelaide Terrace is being offered for sale as part of the South Australian Motor Accident Commission (MAC) direct property portfolio. Also on the market for sale includes: the seven storey office building at 169 Hay Street, East Perth; the 14 level building at 363 Wellington Street, offering potential for redevelopment or conversion; and on the fringe of the Perth CBD, the A-grade office building known as Work Zone East at 1 Nash Street. Prime grade equivalent yields tightened by 25 basis points at the lower end over the September quarter, ranging between 6.00% and 8.00%. Investment yields for secondary grade assets tightened by 25 basis points at both the upper and lower end, ranging between 8.00% and 9.50%. Both prime and secondary yields have tightened further over 3Q16 despite a rising vacancy outlook, reflecting the number of active syndicates and countercyclical buyers looking to invest in the Perth market. This has been highlighted by the investment levels seen in the first half of 2016. While opportunities are limited, investment interest remains robust from local, national and offshore buyers, looking to invest in the Perth office market. Perth CBD Office Update November 2016 4

Prime Yield Range: Perth CBD 9.5% A Recent Transaction: 167 St Georges Terrace 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 Outlook Despite recent leasing activity and enquiry, the Perth CBD leasing market remains challenging and vacancy elevated. Commodity prices at low levels has led to delays in the commencement of new projects and mine expansions, as resource companies focus on further cost saving strategies. Given the negative net absorption recorded so far in 2016 and the possibility of further tenant contractions, net absorption is forecast to be negative for the year. Given the relatively small increase in vacancy over the September quarter, the Perth CBD market may be close to reaching a cyclical peak for vacancy. However, the current economic environment and iron ore pricing will play a large role in future commitments to space by the resource industry. Vacancy is likely to remain elevated throughout 2017, as there are a number of occupiers who have the capacity to contract further. However, given the favourable conditions for tenants, further upgrades or expansions from firms outside the resource sector may assist the demand recovery, with steady leasing enquiry and activity observed over the September quarter. The Perth CBD may see further activity from tenants moving from suburban office locations to the CBD office market. Deloitte Access Economics forecasts that Perth CBD white collar employment to show growth from 2018, increasing by an average of 1.8% p.a. between 2018 and 2022. Sectors forecast to show growth in white collar employment over this period include Professional, Scientific and Technical Services, Public Administration and Safety, and Health Care and Social Assistance. Transaction Details: In July 2016, Westralia Plaza was sold to Zone Q Investments of Hong Kong. The 13 storey building is fully leased, with major tenants including St George Bank and Fluor Australia. The Insurance Commission is now left with just one asset (141 St Georges Terrace) in its direct office portfolio that was brought to market in 2015. Sale Date: July 2016 Gross sale price: $87.0 million NLA: 10,585 sqm Price per sqm NLA: $8,219 per sqm Equivalent Yield: 7.33% Vendor: Insurance Commission of Western Australia Purchaser: Zone Q Investments Following the record level of completions that were recorded throughout 2015, the supply pipeline over the next 24 months is limited. Woodside s new headquarters at Capital Square is the only major project currently under construction. High vacancy rates and the increased availability of backfill space are likely to slow the number of future pre commitments, and therefore the likelihood of new developments in the short to medium term. Vacancy is not expected to tighten as quickly as previous cycles, with vacancy likely to remain above 20% through 2017. As a result, further downward pressure on rents and upward pressure on leasing incentives is expected throughout the remainder of 2016 and 2017. Favourable conditions for tenants is likely to continue to stimulate activity, as tenants use this opportunity to upgrade their facilities and relocate into higher grade buildings. Secondary rents are expected to decline further in line with potential further increases in secondary vacancy. Perth CBD Office Update November 2016 5

For further information, please contact John Williams Managing Director - WA +61 8 9483 8448 john.williams@ap.jll.com Sophie Fletcher Research Analyst - WA +61 8 9483 8404 sophie.fletcher@ap.jll.com JLL Perth Level 29, Central Park 152-158 St Georges Terrace Perth WA 6000 Tel: +61 8 9322 5111 Fax: +61 8 9481 0107 This document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from Jones Lang LaSalle. This document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. Jones Lang LaSalle accepts no liability for damages suffered by any party resulting from their use of this document. www.jll.com.au Perth CBD Office Update November 2016 6