Market Commentary Brisbane CBD Office

Market Commentary Brisbane CBD Office May 2016 Executive Summary There was a relatively soft start to the year for the CBD office leasing market with net absorption of 2,614 sqm recorded in 1Q16. Just one of the three major office projects is still to be completed (1 William Street). Prime gross effective rents have declined by 2.3% y-y to 1Q16 and are currently at $394. Incentives edged up slightly to just under 36% on a 10 year lease. The upper end of the prime yield range moved in 50bps over the last 12 months to 5.75%. This is only 25bps away from Brisbane CBD s historical peak achieved in 2007. There were five office transactions in the CBD during 1Q16, totalling $325.3 million. Brisbane CBD: Key Indicators Total Stock (million sqm) New Supply (sqm) (last 12 months) End-Mar 2016 2.25 115,000 Net Absorption (sqm) (last 12 months) 22,100 Vacancy 18.2% Rents (AUD per sqm p.a) Prime Gross Effective $394 Secondary Gross Effective Yields $286 Prime 5.75% - 8.00% Secondary 7.00% - 9.50% 12-Month Outlook Brisbane CBD Office Update May 2016 1

Economic Overview Despite some macro-economic difficulties, the Australian economy has been relatively robust with quarterly GDP growth of 0.6% q-q and 2.5% y-y in December 2015. Risks around the economic slowdown of China and falling commodity prices continue, however, the lower Australian dollar is providing support to trade exposed industries. In Queensland, the past 12 months has been challenging with construction of the major gas projects wrapping up. On the surface, Gross State Product growth seems to be reasonable at 1.5% for the year to December 2015, however, this is a result of a rise in exports. The domestic Queensland economy has struggled with State Final Demand (SFD) growth at -1.7% y-y in December 2015. George Street and 443 Queen Street to alternative uses. 310 Ann Street was withdrawn in 2Q15 for refurbishment and is scheduled to come back to the market in 1Q17 (18,400 sqm). 300 George Street Retail spending growth in Queensland has been sluggish at 1.6% y-y in December 2015, below the national average of 3.0%. Residential construction has been a strong sector for the Queensland economy, particularly in the south-east. This construction has been underpinned by significant growth in high density residential projects. The major slowdown in mining construction has largely past with the bulk of the work for the three gas projects completed. As a result, the Queensland economy is expected to record moderate growth as the transition to a broader based economy continues. In 2016, the forecast is for 4.0% growth in GSP ( effectively due to increased gas exports) and growth in SFD of 1.8%. Supply Two office projects have completed this quarter in the Brisbane CBD. Most notable is Grocon s development at 480 Queen Street (owned by Dexus) within the Golden Triangle precinct. The project measuring 55,400 sqm has been leased to major tenants including BHP Billiton, PWC, Herbert Smith Freehills, DLA Piper and HWL Ebsworth. Grocon has leased the remaining 8,350 sqm of the project and will sub-lease this space. ISPT s development at 170 Queen Street also completed in 1Q16, adding 2,754 sqm to the market. No tenants have been signed for the office component of this building as yet. Over the past 12 months, approximately 117,700 sqm of new office space has been completed in the Brisbane CBD. Daisho s 180 Brisbane project was completed in 4Q15 (57,465 sqm) with just 18% of the space leased at present to CBA. However, Tatts Group has signed a heads of agreement to take 18,000 sqm in the building. ISPT s 155 Queen Street also completed in 4Q15 adding 2,117 sqm; Brisbane City Council has leased the entire space for their The Capital innovation hub. There is one remaining building to complete in the Brisbane CBD during 2016. 1 William Street is a 75,000 sqm office tower due to complete in 3Q16 and will be fully leased by the Queensland Government. The project is being developed by Cbus who sold a 50% stake in the building to ISPT. There were no withdrawals of office stock in 1Q16. Over the past 12 months there has been a total of 44,358 sqm withdrawn from the CBD office market including the conversions of Boeing House, 171 300 George street is a mixed use project on the site of the former Supreme Court. The development is proposed to include a 6-star W hotel, an 82 level residential tower and a 47,700 sqm office building to be developed by Shayher Group. The hotel and retail component are currently under construction whilst work on the office building is not expected until early 2017. It is possible that the office component will be built speculatively without a significant commitment. A decision on this is expected later in the year. There are currently two planned projects for the Brisbane CBD office market. 300 George Street is a mixed use development with a 47,700 sqm office component included. The other office development planned in Brisbane is a proposed tower behind the Regent Theatre at 163-167 Queen Street, owned by ISPT. This project is proposed to be 35,000 sqm, yet is unlikely to proceed unless there is a significant pre-commitment. The trend of refurbishments of office stock is expected to continue due to the elevated vacancy in the Brisbane CBD market. This is forcing owners to be increasingly aggressive to attract tenants. Major refurbishments in Brisbane are 310 Ann Street (currently underway) and 333 Adelaide Street (circa 1Q17). Brisbane Office Update May 2016 2

Market Balance: Brisbane CBD However, there are currently several large briefs in the market. These include: - Origin Energy seeking between 15,000 and 18,000 sqm which is required by mid-2018. - QIC has a requirement of 8,000 sqm with their lease at Central Plaza Two expiring in late 2018. - Cooper Grace Ward Lawyers are looking at options for 4,000-4,500 sqm with their current lease expiring in 3Q19. Staying in their existing building is a likely option. - Requirements for 1,000-3,000 sqm include Expedia, Arcadis and Red Hat. There is currently just one withdrawal expected in 2016 at 240 Margaret Street, which will make way for Aspial s 91-storey residential tower. A large amount of space is due to be withdrawn in 2017 as a result of the Queens Wharf project. In total there are six state government buildings to be withdrawn in 1Q17 due to the $3 billion project, taking approximately 58,000 sqm of space out of the CBD office market. Demand There has been a relatively soft start to the year for the CBD office leasing market, recording net absorption of 2,614 sqm in 1Q16. This follows an above average result in 2015 with 26,600 sqm net absorption. The continuing contraction of the mining industry in Queensland is holding back net absorption whilst also impacting on overall business confidence in the state. Net absorption: Brisbane CBD Two of the three major office projects in the CBD have now completed, resulting in a rise of total vacancy to 18.2%. The relatively weak economy has contributed to the elevation in vacancy as demand has not kept up with the almost 118,000 sqm of new office stock. Prime vacancy has risen to 17.0% in Brisbane due the new supply, particularly the addition of 180 Brisbane which remains largely unoccupied. Secondary vacancy has also crept higher to 19.3% as the flight to quality continues for tenants who want to take advantage of the high incentives currently available. Sub-lease vacancy has significantly increased over the quarter to 63,936 sqm (2.8% of stock) compared with 31,517 sqm (1.4% of stock) at the end of 4Q15. This is a result of the completion of 480 Queen Street. Overall net absorption for 2016 is expected to be below the long term average. The move by Tatts into the CBD provides some relief, however, this is partly offset by Flight Centre moving to the fringe. As a result, vacancy is expected to rise this year due to a lack of business confidence limiting company s expansion intentions and the completion of 1 William Street. Vacancy: Brisbane CBD by Quality Grade Brisbane Office Update May 2016 3

Rents High vacancy continues to impact on rents as owners are having to be increasingly aggressive to compete for tenants. Face rents have remained relatively stable with owners preferring to increase incentives to attract tenants. Incentives for prime stock have increased further and are currently at almost 36% for an average 10 year lease. Accordingly, effective rents have fallen further and now sit at $394/sqm (gross). Gross face rents for prime stock currently average $698/sqm. The spread between effective rents of prime and secondary office space is at the lowest level for almost a decade meaning that motivation for tenants to upgrade is particularly high. Rents: Brisbane CBD Prime Rents Major sales for the quarter include: - Mineral House at 41-59 George Street, which sold for approximately $159.0 million to Singapore s AEP Investment Management. - Lend Lease s Australian Prime Property Fund Commercial has purchased the remaining 50% share in the Brisbane Transit Centre at 151 Roma Street for $62.6 million. Prime Yield Range: Brisbane CBD In the secondary market incentives have risen slightly to 37.5% in 1Q16, increasing by about 1.5 pps from a year earlier. Secondary gross face rents have declined slightly and are now at $538/sqm whilst gross effective rents have fallen 2.7% for the year and are $284/sqm as of 1Q16. Yields & Sales Despite the recent subdued economic performance of Queensland, investor demand for office stock has been relatively strong. There have been a total of 13 transactions over the past 12 months totalling $1.472 billion. A combination of low interest rates pushing investors towards higher yielding real estate investments and increased capital flows from overseas have contributed to the high transaction activity. There were five transactions that occurred in 1Q16 totalling $325.3 million. Over the past 12 months there has been significant yield compression in the CBD office market as a result of increased investor interest. The average prime yield has compressed by 50 basis points (bps) from this time last year. The upper end of the prime yield range is 5.75%, only 25bps away from Brisbane CBD s historical peak achieved in 2007. However, the spread between the upper and lower limits are far greater than the previous peak. In the secondary market, the yield range between upper and lower is 250 bps which is a historic high. This shows the considerable disparity between secondary assets as a result of the vacancy risk in the market. Currently the upper and lower secondary yields are at 7.00% and 9.50% respectively. Outlook The Queensland economy is expected to improve over the next 12 months. The lower Australian dollar should help trade exposed industries, particularly tourism. As a result, tenant demand should be positive in 2016, however, net absorption will likely be below the long term average. The state government has slowly been expanding to a point where total employment is above the level prior to the job cuts experienced in 2013 under then Premier Campbell Newman. Brisbane Office Update May 2016 4

The final project of the current development pipeline, 1 William Street, is expected to complete in 3Q16. Therefore, there is likely to be upward pressure on the overall CBD office vacancy which is expected to reach just over 19% by the end of 2016. There is still some unknown about which specific state government departments are moving into 1 William Street which could impact upon vacancy moving forward. The recent rise in premium grade vacancy will likely begin to fall as tenants take advantage of very competitive rents being offered in this space. The risk is still in the secondary stock which is suffering from the flight to quality trend and lack of underlying economic activity driving business growth. The trend of refurbishments, withdrawals and conversions is likely to continue for the secondary market, although the existing residential development pipeline and tighter lending from the banks may reduce demand for development sites. There is uncertainty about the construction pipeline for office in the CBD with the possibility of a development at 300 George Street and The Regent Tower to bring an additional 81,200 sqm to the CBD market. Clearly this will further impact upon future vacancy whilst both project will likely rely on their ability to attract a major anchor tenant. For further information, please contact Carol Hodgson Director Strategic Research tel +61 7 3231 1445 carol.hodgson@ap.jll.com Tom Broderick Senior Research Analyst Strategic Research tel +61 7 3231 1802 tom.broderick@ap.jll.com With vacancy edging towards 20%, incentives are expected to remain elevated for some time and will likely move higher by the end of the year. Effective rents are therefore expected to decline further in the short term. The investment market is expected to remain strong whilst interest rates are low and foreign buyers continue to see the Australian market as good place to diversify their portfolios. In addition, the spread between average prime yields in Brisbane compared to Sydney has risen significantly, meaning that some buyers may be priced out the southern markets. It is likely that the yield compression trend over the past 12 months will ease with moderate tightening expected over the next year. This outlook for pricing is based on the assumption that there are no global macro-economic shocks adversely impacting the availability of capital or pricing. A gradual recovery in the world economy is anticipated with a very gradual increase in interest rates. JLL Brisbane Level 33, 345 Queen Street Brisbane QLD 4000 Australia +61 7 3231 1311 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 Brisbane Office Update May 2016 5