Market Commentary Melbourne CBD Office

Market Commentary Melbourne CBD Office November 2016 Executive Summary Six transactions totalling $1.052 billion completed in 3Q16 and four of these are for assets located in Southbank. The Melbourne CBD prime and secondary yield range tightened at the softer end by 25 basis points this quarter to 5.25%-6.50% and 5.75% to 7.00% respectively Vacancy edged up this quarter to 8.9%. Vacancy increased in prime grade assets to 8.7 from 6.7%. Secondary asset vacancy declined from 10.1% to 9.2%. Demand accelerated in 3Q16. The Melbourne CBD office market has recorded its strongest quarterly net absorption figure (67,510 sqm) since 2005. Net absorption has totals 159,100 sqm for the year to date, significantly higher than the long-term average of 60,600 sqm pa.. Expected rental growth is finally working its way through into the market. Prime gross effective rents increased solidly by 4.1% in 2Q16 and by 6.4% over the last 12 months. Secondary gross effective rents also increased solidly this quarter by 4.7% (5.7% over the last 12 months). Melbourne CBD Office: Key Indicators End-September 2016 Total Stock (million sqm) 4.3m New Supply (sqm) (last 3 months) 105,500 Net Absorption (sqm) (last 12 months) 159,100 Net Absorption (sqm) (last 3 months) 67,500 Vacancy 8.9% Rents ($ per sqm p.a) Prime Gross Effective ($per sqm) $430 Secondary Gross Effective ($per sqm ) $316 Yields Prime 5.25% - 6.50% Secondary 5.75% - 7.00% 12 Month Outlook Melbourne CBD Office Market Commentary September 2016 1

Economic Overview Australia s two tier economy is becoming more pronounced. Victoria and NSW continue to surge ahead and have recorded solid state final demand growth of 4% and 3.7% respectively over the year to 2Q16. Meanwhile State final demand growth in WA (-4.6%) and QLD (-1.2%) was negative for the year to 2Q16. Deloitte Access Economics has revised its five year forecasts to reflect an improving economic outlook for NSW and VIC and have downgraded forecasts for QLD, SA and WA. Victoria continues to lead the nation on population growth (1.9%) with an increase by 114,865 people over the year to March 2016 (ABS). The number of overseas migrants (62,785) coming to Victoria continues to increase (7.6% y-o-y, March 2016). In addition Victoria leads in interstate migration which was up by 48.6% to 14,530 people for the year. Victoria also recorded a significant increase in international visitor numbers (13.6%) throughout the year to 2Q16. Significant residential development activity is flowing through to demand for office space from the transactional based industries (bankers, lawyers & real estate agents) and other professional services sector employers. The latest NAB Business Survey (September 2016) reported a slight moderation in business conditions, falling 4 points to +7 index points. Service sectors continue to be the clear outperformers, despite softening a little in Q3. Victoria recorded the strongest business conditions of the states but trails NSW, QLD and SA in business confidence which moderated. ABS Labour Force data (September 2016) shows that job 108,000 jobs were created in Victoria over the last 12 months. ABS data also shows that there were 45,300 jobs vacant in Victoria as at August 2016 which bodes well for Victoria s property markets. State Final Demand, 2015-16 and forecast 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% NSW VIC QLD SA WA 2013-14 2014-15 2015-16 *Forecast Next 5 yrs (Annual %) Period Growth NSW VIC QLD SA WA AUS Economic Growth State Final Demand 2Q2016 Annual % 3.7 4.0-1.2 1.4-4.6 1.2 Gross State Product* 2Q2016 Annual % 3.5 3.4 1.9 1.5 0.9 2.9 Gross State Product (forecast)* Next 5 Yrs Annual % 2.6 2.9 3.6 1.8 2.0 2.8 Household Sector Household Consumption Expenditure* Year to 2Q16 Annual % 3.3 3.3 2.7 2.7 1.5 3.0 Private Dwelling Investment* Year to 2Q16 Annual % 10.8 11.2 14.3-0.5 1.0 9.1 Retail Spending 2Q2016 y/y % 3.4 3.8 0.6 2.3 0.2 2.5 Business Sector Private eng and comm investment* Year to 2Q16 Annual % 1.7 3.5-30.7-10.6-18.6-16.0 Private Equipment Investment* Year to 2Q16 Annual % 2.1 5.5-16.5-9.7-22.3-7.5 Demographics Population Year to 2Q16 Annual % 1.4 1.9 1.3 0.6 1.1 1.4 International Visitor Numbers* Year to 2Q16 Annual % 9.4 12.9 9.9 1.7 6.5 9.7 Labour Market Employment Aug-16 Annual % 1.8 4.2 0.2 0.7-1.5 1.5 Unemployment Aug-16 % 5.0 5.5 6.2 6.8 6.3 5.6 Sources: ABS, *Deloitte Access Economics, JLL Research

Square Meters Supply Two major office asset completed this quarter adding 105,540 sqm to the Melbourne CBD office market. Building 2 (65,540 sqm) and Building 4 (40,000 sqm) of, 735 Collins St, Docklands completed. By quarter end both assets were fully leased with the exception of a single floor leaving 2,300 sqm vacant in building 2 and 2,600 sqm vacant in building 4. The assets were 95.3% absorbed on completion. Three assets in the CBD are under construction. The Rialto extension and refurbishment will add 6,000 sqm in early 2017. The Bank of Melbourne has preleased half of the space. PwC is the anchor tenant for 2 Riverside Quay which is scheduled for completion in early 2017. Mirvac secured the pre-commitment of Pitcher Partners (8,900 sqm) to 664 Collins Street (26,100 sqm) this quarter. Construction has started on site and the development is scheduled to complete in mid-2018. A number of major pre-commitment requirements have finalised this quarter and /or are close to finalising which will start the next development cycle. Five projects with planning approval (totalling 212,300 sqm) are expected to commence construction in coming months. The first phase of Lendlease s Melbourne Quarter project (21,000 sqm) has secured pre-commitments from Arup (6,000 sqm) and Lendlease (6,000 sqm) and is expected to complete in late 2018. Walker Corporation is expected to finalise an agreement with Transurban (15,000 sqm) for Tower Five (45,000 sqm) in coming months. The project it expected to complete by July 2018. Market Balance: Melbourne CBD Office Vacancy % 200,000 12% 160,000 10% 120,000 8% 6% 80,000 4% 40,000 2% 0 0% -40,000-2% -80,000-4% 2008 2009 2010 2011 2012 2013 2014 2015 2016 * Net Absorption Completions Sources: JLL Research *As of September * 2016 as at Mirvac s development at 477 Collins Street has secured leading professional services firm Deloitte. The largest pre-commitment this quarter was ANZ s (28,000 sqm) commitment to 78% of Lendlease s Y3 project at 839 Collins Street (38,300 sqm). We are tracking a further three major projects with planning approval (totalling 123,000 sqm) that are seeking pre-commitment and have the ability to add to the supply pipeline over the next five years. Supply pipeline: Melbourne CBD Office Building Name T ower 5, 727 Collins St One Melbourne Quarter Y3, 839 Collins St T he Olderfleet, 477 Collins St Collins Arch, 447 Collins St Demand / Vacancy Completion Date Office Area sqm Anchor Tenant(s) Area absorbed (sqm) Mid 2018 45,000 T ransurban* 15,000 Late 2018 24,000 ARUP, Lendlease 12,000 Early 2019 38,300 ANZ 30,000 Mid 2020 54,000 Deloitte 22,000 Mid 2020 51,000 King & Wood Mallesons 8,300 * to be finalised 212300 87300 Demand accelerated in 3Q16. The Melbourne CBD office market has recorded its strongest quarterly net absorption figure (67,510 sqm) since 2005. Net absorption totals 159,100 sqm for the year to date, significantly higher than the long-term average of 60,600 sqm pa. As expected with the completion of major projects larger tenants 1,000 sqm contributed 44,830 to the strong net absorption figure. Since 2015 the 60% of take up has been in the smaller <1,000 sqm market. This pattern has reversed this quarter with approximately 33.5% of the strong net absorption figure provided by small tenant moves. However small tenants accounted for 22,680 sqm of positive net absorption this quarter and this is substantially above the annual average normally recorded in the small tenant market (19,660 sqm pa since 2007). 14 tenants moved into the new assets at this quarter and absorbed 105,300 sqm in this project. The resulting back fill space totalled just 63,720 sqm as expansion and relocations into larger space was the dominate theme. Centralisation remains a driver as illustrated by Tabcorp (9,213 sqm) relocating from the fringe market to Tower 2. Melbourne CBD Office Market Commentary November 2016 3

Percentage of stock Square Metres The largest take-up, outside of the moves, was from Maurice Blackburn who leased 8,164 sqm at 380 La Trobe Street. Government tenants were active in 3Q16 with a number of government departments in expansionary mode. NBN Co Ltd continues to emerge as an ever-expanding tenant, taking AMP s sub-lease space (5,000 sqm) at 750 Collins Street, and an additional 1,357 sqm available for sub-lease at 380 Docklands Drive. Vacancy edged up this quarter to 8.9%. Vacancy increased in prime grade assets to 8.7 from 6.7%. Secondary asset vacancy declined from 10.1% to 9.2%. There was 4,900 sqm of vacancy added to the market in the recently completed towers. Vacancy was negatively impacted by refurbished space at Collins Wales House, 360 Collins Street entering stock. 20,000 sqm of space was added back into JLL s numbers, 16,938 sqm is now vacant. Net absorption: Melbourne CBD Office 200,000 150,000 100,000 50,000 0-50,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 * Major Transaction Twenty8 Freshwater Place, SOUTHBANK Melbourne NLA: Office: 33,865 sqm / Retail 146 sqm A 26-level commercial office building comprising two retail shops on ground level, a seven level car park with 250 individual parking bays and 19 upper levels of office accommodation. Each office floor has a typical floor plate of around 1,780 sqm, the building has a NABERS Energy rating 5.0 stars WALE (by income): 3.96 years Major Tenants: The property was 100% leased at the time of sale. Well regarded companies and institutions including CPA Australia ( CPA ), MMG Australia and Parsons Brinckerhoff lease 58% of the building. Vacancy: Melbourne CBD Office by Grade 16% 14% 12% 10% 8% 6% 4% 2% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152016* Prime Secondary Sale Details Twenty8 Freshwater Place Date of sale August 2016 Price: $286 mil Price / sqm NLA: $8,409 Initial Yield: 6.59% Equivalent Yield: 6.29% Vendor Purchaser GPT Group & Frasers JP Morgan The Property was offered for sale by way of expressions of interest closing 30 June 2016. We understand that initial price expectations were above $300 million however the lease expiry profile (with a number of expiries around 2020) slightly dampened investor demand. Melbourne CBD Office Market Commentary November 2016 4

$/square meters p.a. AUD (Millions) Rents Expected rental growth is finally working its way through into the market. Prime gross effective rents increased solidly by 4.1% in 2Q16 and by 6.4% over the last 12 months and are now at $431 per sqm p.a. Outgoings have increased by 5.0% over the year to average $136 per sqm. Secondary gross effective rents also increased solidly this quarter by 4.7% (5.7% over the last 12 months) to an average of $316 per sqm. Outgoings have increased by 4.3% over the year to average $102 per sqm. Landlords appear to have gained the upper hand in some markets and Prime and secondary incentives edged down to average 38 months rent free (32% on a ten year lease) and 37 months rent free (31%). Rents: Melbourne CBD Office by Quality Grade $450 $400 $350 $300 $250 $200 $150 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Yields & Sales Prime Gross Effective Secondary Gross Effective 2016 is likely to be a fourth consecutive year of strong transaction activity. Year to date transaction volumes for 2016 total $1.4 billion already outperforming the long term annual average for Melbourne s CBD office market ($1.25 billion pa since 2000). Six transactions totalling $1,052,100,000 completed in 3Q16 and four of these are for assets located in Southbank. Overseas capital flowed into Melbourne s Southbank Riverside precinct in 3Q16. USA based unlisted property trust J P Morgan (CalPERS) bought both 50% shares in Twenty8 Freshwater place from Frasers Property Group and GPT Wholesale Office Fund (GWOF) for $286 million. (See Major Transaction) million) and a car park ($32.6 million). Sale subject to FIRB approval. These sales represent 49.2% of the total precinct (by NLA) transacting over a single quarter. Currently JLL is marketing 12 Riverside Quay; if this transacts just under 60% of the total stock will have transacted in 2016. Overseas investors have dominated purchase activity (66% by transactions volume) over the last 12 months investing nearly AUD $2 billion in Melbourne CBD office assets. The Melbourne CBD prime yield range tightened at the softer end by 25 basis points this quarter to 5.25%-6.50%. Yields at the lower end for secondary grade assets also tightened by 25 basis points to a range of 5.75% to 7.00% Transaction Volumes: Melbourne CBD Office Prime Yield Range: Melbourne CBD Office 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 2002 2004 2006 2008 2010 2012 2014 2016* 5.00% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Singaporean Listed Property Trust, ARA Asset Management bought the entire Southgate complex, Southbank for $578 million. The complex comprises of 60 City Road, IBM ($244.9 million), 60 City Road, HWT ($194.2 million), a retail component ($106.5 Melbourne CBD Office Market Commentary November 2016 5

Major Development: Towers Two, Four and Five, 727-735 Collins Street DOCKLANDS The precinct comprises five towers of over 210,000 sqm with a 2 minute walk to Southern Cross Station. Four of the five buildings have been developed with Towers 2 and 4 completing this quarter. Outlook Positive business conditions in Victoria are expected to stimulate leasing enquiry activity. The professional services sector in addition finance and insurance, IT and education are expected to continue to be active participants in the leasing environment. The market has now entered an 18 month period of extremely limited new office supply. In addition two assets are expected to be withdrawn from the CBD office market by the end of 2016 totalling 16,450 sqm. Mirvac s Southbank project for PWC (21,040 sqm) and the Rialto extension (6,000 sqm) which is 50% pre-committed to Bank of Melbourne are expected to complete early in 2017. Developer: Completed / Development stage Total Office NLA: Tower Four Walker Corporation 3Q2016 Tower Two Walker Corporation 3Q2016 Tower Five Walker Corporation Planning Approved 40,000 sqm 65,544 sqm 45,000 sqm Floor Plate: 2,600sqm 2,300sqm 1,800 sqm Vacancy Remaining: Major Tenants: 2,600 sqm 2,300 sqm 45,000 sqm Link Financial Services, BDO, DeakinPrime KPMG, Maddocks, AECOM, MLC Seeking Precommitments Key Design Features & Differentiators: Atrium, stairs, pods, vertical gardens & fresh air Broad retail offering due to project scale (butcher, deli, cobbler, etc.) catering, in-house catering kitchen, full service to tenants floors and specific events Wellness centre with boutique gymnasium ( The Retreat) Business Centre (conferencing etc.) Kindergarten & childcare Signature art pieces / sculptures community events Blue-chip Corporate Office neighbours Vacancy in the CBD is expected to continue to trend downwards and to reach a sub 8% cyclical low in 2017. Supply picks up in 2018 through to 2020 with the completions of projects to have recently secured pre-commitments. However even with three years of above average supply 2018-2020, total supply over the next five years is likely to be below the ten year average (91,200 sqm pa). Declining vacancy will start to create downward pressure on incentives and upward pressure on effective rents over the next 18 months. Strong medium term gross effective rental growth is expected through to 2017 before moderating as new supply comes onto the market. JLL projects that average prime yields are approaching a cyclical trough, but will remain at or near record low levels for longer than previous cycles. Any further yield compression is expected to be at the lower range as investors focus on noncore asset opportunities. Construction of Tower Five is expected to begin before the end of this year with completion expected in July 2018. A number of major tenants including Transurban (15,000 sqm) are at heads of agreement stage to pre lease a number of top floors. Transurban s expansion will see it give up approximately 5,000 sqm in the Marsh Mercer building (Tower One). Melbourne CBD Office Market Commentary November 2016 6

For further information, please contact: Annabel McFarlane Associate Director Strategic Research, Victoria +61 3 9672 6683 annabel.mcfarlane@ap.jll.com 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. Melbourne CBD Office Market Commentary November 2016 7