Sydney CBD Office Investment Market Review 2010

Sydney CBD Office Investment Market Review 2010

2010 Market Performance After a sluggish 2008 and 2009, transaction volumes in the Sydney CBD have returned to pre-gfc levels in 2010 with AUD 2.5 billion in sales greater than AUD 20 million. Among these include the sale of one of Sydney s tightly held Premium Grade office towers RBS Tower @ Aurora Place (88 Phillip Street Sydney) for AUD 685 million. The number of sales has returned to where it was in 2007, with approximately AUD 1-billion worth of additional volume for the same amount of deals. This is reflected in the high dollar value sales for the year, which include RBS Tower @ Aurora Place (AUD 685 million), 320 Pitt Street (AUD 192 million), 161 163 Sydney CBD Historical Sales Volume (2007-2010) Greater than $20 Million Total Sales Value $3,000,000,000 $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $0 2007 2008 2009 2010 Annual Sales Volume ($AUD) Castlereagh Street (50% share for AUD 380 million and 25% share for AUD 170 million), 77 King Street (AUD 116 million) and 233 Castlereagh Street (AUD 102.5 million). No.of Annual Sales 25 20 15 10 5 0 No. of Sales While time will tell exactly where we are in the cycle, it is now general consensus that property values in the Sydney CBD have already reached the bottom of the cycle and appear to be moving upwards. 2 Jones Lang LaSalle Sydney CBD Office Investment Market Review

2010 Sydney CBD Sales Greater than $20 Million by Purchaser Profile ($AUD Volume) 3% Government 4% Syndicates 2% Listed Property Trust Three of the above transactions were offered for sale at very attractive prices due to the vendors being highly motivated to transact within the 2010 calendar year and were willing to meet the market to do so. 12% Private Investors 22% Unlisted Property Trust There was a shift in purchaser profile in 2010 as offshore groups dominated in terms of volume of sales (see chart above). Unlisted property trusts and private investors were still active during the year. However, unlike in 2008 and 2009 where they were the major players, institutional money may have crowded out private investor purchasers in some cases in 2010. While the data highlights the market s improvement in 2010, it was evident that purchasers exercised caution towards the end of 2010. Leasing risk, debt finance challenges and unrealistic vendor expectations for secondary assets were listed by purchasers as their key reasons for restraint. This caution was reflected by; the opportunistic style returns achieved in sales that were completed at year-end; the continued wide yield spread between prime and secondary grade assets and the number of properties that remained unsold after being marketed during 2010. Listed below are transactions in the market that are indicative of this: 350 George Street to opportunistic domestic REIT (strata play) 57% Offshore 171 Clarence Street to opportunistic domestic REIT (investment with medium term strata play) 4-14 Martin Place to opportunistic domestic REIT and offshore group (value-add with possible strata play) 55 Clarence Street to domestic REIT (core-plus opportunity) Sydney CBD Core Prime Yields Q4/05 to Q4/10 Yield 10% 9% 8% 7% 6% 5% 4% Q4/05 Q2/06 Q4/06 Q2/07 Source: As at Q4/2010 Jones Lang LaSalle Research Two other properties were actively marketed in the second half of 2010 but remained unsold 309 George Street for circa AUD 75 million and 149 Castlereagh Street for circa AUD 52 million. The considerable leasing risk associated with these properties has made competitive finance difficult to obtain for purchasers. However, several parties are negotiating on these properties, and both are expected to sell in the first half of 2011. By contrast, investment demand for prime-quality properties with strong lease covenants and good rental profiles remains robust, particularly from offshore groups. The sale of 320 Pitt Street for AUD 192 million in December 2010, which reflected an initial yield of 7.5%, is indicative of this. As such, we have witnessed further firming of prime-grade yields in late-2010, while secondary yields have stabilised. Q4/07 Q2/08 Q4/08 Q2/09 Q4/09 Q2/10 Q4/10 Jones Lang LaSalle Sydney CBD Office Investment Market Review 3

2011 Capital Growth or Delusions of Grandeur? Approximately 140,000 sqm of new construction and refurbishments are due this year, with varying pre-commitment levels There is significant supply coming online in 2011. Major projects that will be completed in 2011 and have significant office space yet to lease are the 20 Bond Street refurbishment (26,746 sqm available from 30,189 sqm of total NLA) and the high-rise levels in 1 Bligh Street (14,800 sqm available from 37,500 sqm of NLA). 2011 marks the high point of this supply cycle. Demand is expected to exceed supply in 2012 and 2013, resulting in a sharply declining total vacancy rate. Existing vacancy within prime grade stock leased well in 2010, with prime grade vacancy declining to 7.7% in Q4 2010. We expect there to be supply side constraints for major tenants as early as the second half of 2011, before the next supply cycle begins from around 2014 (see chart opposite). Market balance Square Metres ('000s) 160 120 80 40 0-40 -80-120 12% 10% 8% 6% 4% 2% 0% 07 08 09 10* 11* 12* 13* Net Absorption Completed Under Construction Vacancy Rate [RHS] Source: As at Q4/2010 Jones Lang LaSalle Research Total Vacancy Rate Projects entering the market in 2011: Darling Walk, Harbour Street 1 Bligh Street 20 Bond Street NLA: 58,000 sqm Pre commitment: 100% (58,000 sqm) Comments: Commonwealth Bank have committed to the entire office component. NLA: 37,500 sqm Pre commitment: 61% (23,000 sqm) Comments: Clayton Utz have committed to 23,000 sqm. NLA: 30,189 sqm Pre commitment: 11% (3,443sqm) Comments: Refurbishment of whole building. It has a low pre-commitment rate starting 2011. 4 Jones Lang LaSalle Sydney CBD Office Investment Market Review

Lender caution continues Debt financiers will continue to be cautious about lending at high gearing ratios or on secondary assets with leasing risk. We expect the Big 4 to steer clear of most properties without a WALE of greater than three years. While some non-bank lenders are seeking to expand their loan book in the secondary grade asset space, mortgagors can expect to pay a significant premium for debt if they can source it at all. Most lenders will take a wait-and-watch approach and wait for headline vacancies to fall and total returns to improve before loosening lending hurdles and competing on price. Secondary grade asset vendors make an adjustment Buyer feedback and offers at the end of 2010 showed that purchasers were pricing risk accordingly. However, some vendors of secondary grade assets were not willing to sell at this risk adjusted level. The impact of factors such as leasing risk, development timeframe and overestimation of development upside will be re-evaluated by owners, which will urge them to price their property closer to how purchaser groups perceive it. Additionally, banks and receivers will adopt a more aggressive approach to the disposal of non-performing assets, leading to the release of more secondary product. Strong leasing activity in the post-gfc environment to drive solid effective rental growth We expect overall leasing enquiry and activity to build on the back of the strong recovery witnessed in 2010. Vacancy is starting this upswing of the cycle at a very low 7.8% as of the end of 2010. Tenants targeting premium and A-Grade space will be offered lower average incentives by landlords and will find greater competition for space going forward. This competition will drive solid effective rental growth in the next three years. Offshore investors continue to direct capital into the Australian commercial real estate market While the sale of Aurora Place skewed the volume of sales to offshore groups in 2010, after adjusting for this offshore buyers still represented 41% of transaction volume in the Sydney CBD. Australia s strong economic performance, real estate fundamentals, market transparency, ability to offer characteristics other Asia Pacific markets don t necessarily offer and the flow on effects of the Managed Investment Trust withholding tax reduction to 7.5% will continue to support offshore capital seeking Australian direct property. We expect offshore groups to remain a large investor group in 2011. However, offshore groups are expected to face more competition from domestic institutional investors in 2011, particularly superannuation funds and other equity investors. Increased superannuation fund investment in direct property As the overall wealth levels of Australians continue to improve and superannuation fund cash inflows increase, superannuation funds will likely begin allocating a greater proportion of their funds to growth assets. According to Commsec Securities, Australian superannuation funds are holding almost double the normal proportion of investment in defensive assets like cash and bank deposits. As a result, they remain heavily underweight in growth assets. While we expect that a large allocation of funds will be directed at the equities markets, it is also expected that greater allocations will be given to property compared to the previous two years. With superannuation fund managers remaining cautious of the Australian-listed property sector, we expect more superannuation funds to participate in the direct real estate market in 2011. Jones Lang LaSalle Sydney CBD Office Investment Market Review 5

77 King Street, Sydney Price: AUD 120 million Date of sale: July 2010 Yield: 4.90% / 6.60% subject to income support NLA: 13,680 sqm (approx) Site Area: 1,284sqm Rate per sqm: $8,772 Purchaser: K-REIT Vendor: Kingvest Pty Ltd The vendor will be covering all leasing costs and incentives until settlement with further income support and rental guarantees provided post settlement of up to $6,000,000. 233 Castlereagh Street, Sydney Price: AUD 100 million Date of sale: July 2010 Yield: 9.70% NLA: 19,892 sqm (approx) Site Area: 2,639 sqm Rate per sqm: $5,152 Purchaser: GDI Vendor: Orchard The vendor has provided a two-year rental income support for the vacant areas. 35 Clarence Street, Sydney Price: AUD 99.25 million Date of sale: July 2010 Yield: 8.18% NLA: 15,224 sqm (approx) Unconditional purchase of a building completed in 2001. Site Area: 1,355 sqm Rate per sqm: $6,519 Purchaser: AMP on behalf of SunSuper Vendor: Orchard 179 Elizabeth Street, Sydney Price: AUD 95 million Date of sale: July 2010 Yield: 7.89% NLA: 14,927 sqm (approx) Site Area: 1,814 sqm Rate per sqm: $6,363 Purchaser: LaSalle Investment Management Vendor: GPT Funds Management Limited The sale includes the stratum interest part level 4, level 5 and levels 7 16 plus car parking for 107 cars, four ground floor retail tenancies and storage facilities. 333 Kent Street, Sydney Price: AUD 41.5 million Date of sale: August 2010 Yield: 9.39% NLA: 8,938 sqm (approx) Site Area: 1,814 sqm Rate per sqm: $4,699 Purchaser: Private Investor Vendor: Stockland Group The property was sold 100% leased to the Central Queensland University. At the time of sale the lease had a break clause with an 18-month notice period that may be exercised on or after 30 April 2012. This break clause has been subsequently rescinded. 343 George Street, Sydney Price: AUD 78 million Date of sale: September 2010 Yield: 7.36% NLA: 10,004.8 sqm (approx) Site Area: 1,169 sqm Rate per sqm: $7,796 Purchaser: City of Sydney Vendor: Abacus The property transacted last year for AUD 55 million, and since then, Burberry has leased office and retail space in the building. 350 George Street, Sydney Price: AUD 27.2 million Date of sale: September 2010 Yield: 6.60% NLA: 3,697 sqm (approx) Site Area: 866 sqm Rate per sqm: $7,357 Purchaser: Abacus & W Property Vendor: Kador The property was sold on a tight yield of 6.6% due to the property being considered as a strata-conversion project in the future targeting a mid-20s equity IRR. The outgoings in the property are relatively high due to the age of the building, and it is expected that Abacus and W Property will try to reduce those costs. 6 Jones Lang LaSalle Sydney CBD Office Investment Market Review

171 Clarence Street, Sydney Price: AUD 29.5 million Yield: 9.00% NLA: 6,519 sqm (approx) Site Area: 722 sqm Rate per sqm: $4,525 Purchaser: Abacus Vendor: Roderick Holdings The property is a 15-level office building on the corner of Clarence and King Street, was sold 89% occupied. Property slated as a future strata-development opportunity. 320 Pitt Street, Sydney Price: AUD 192 million Yield: 7.50% NLA: 29,159 sqm (approx) Site Area: 1,838 sqm Rate per sqm: $6,585 Purchaser: Macarthur Cook Industrial Fund Vendor: Investa The property was sold on a yield of 7.5% with a ten-year lease to Telstra for 99% of the property. The Telstra lease has 4.25% annual increases. The property has a 4.5 NABERS rating. 14 Martin Place, Sydney Price: AUD 95 million Yield: 7.18% Fully Leased: 8.20% NLA: 13,130 sqm (approx) Site Area: 1,103 sqm Rate per sqm: $7,235 Purchaser: Abacus Property and The Kirsh Group Vendor: Private Abacus and The Kirsh Group acquired the property as tenants in common in equal shares to purchase the eightlevel heritage façade building. The property is 97% occupied and has a WALE of approximately 2.8 years. The sale was conditional on the acquisition being approved by the FIRB. 4 Martin Place, Sydney Price: AUD 58.5 million Yield: 4.53% Fully Leased: 7.45% NLA: 6,431 sqm (approx) Rate per sqm: $9,097 Purchaser: The Kirsh Group Vendor: Private The Kirsh Group purchased the adjacent property in a 50% interest with Abacus. The tight initial yield is due to an occupancy rate of 62%. A fully leased yield would equate to around 7.45%. 17 19 Bridge Street, Sydney Price: AUD 24 million Yield: 2.25% Fully Leased: 6.25% NLA: 2,711.5 sqm (approx) from an external party. Occupancy: 61% Rate per sqm: $8,851 Purchaser: Bridge Lane Holdings Vendor: FKP Property Group The purchase consolidates the building into one ownership. At the time of sale, there was significant interest 50 Park Street, Sydney Price: AUD 15.25 million Yield: 5.70% Fully Leased: 7.50% NLA: 2,310 sqm (approx) Site Area: 236 sqm sqm Rate per sqm: $6,602 Purchaser: AMP Capital Partners Vendor: Private AMP acquired 50 Park Street as it is adjacent to one of its 2009 acquisitions, 54 Park Street. 50 Park Street has enhanced income potential and offers a future consolidation opportunity with 54 Park Street. 55 Clarence Street, Sydney Price : AUD 83.2 million Yield: 8.40% NLA: 14,961 sqm (approx) Site Area: 1,376 sqm Rate per sqm: $5,681 Purchaser: Eureka Vendor: Allianz The property was sold with only 3% vacancy and represents a fully leased yield of approximately 8.66%. Jones Lang LaSalle Sydney CBD Office Investment Market Review 7

www.joneslanglasalle.com.au Contacts For more information, please contact the following: Australia John Talbot Head of Capital Markets, Australia tel +61 2 9220 8486 john.talbot@ap.jll.com Simon Storry Director, International Investments tel +61 2 9220 8439 simon.storry@ap.jll.com Sales and Investments, NSW James Aroney Head of Sales and Investments, NSW tel +61 2 9220 8591 james.aroney@ap.jll.com Ian Triganza Manager tel +61 2 9220 8390 ian.triganza@ap.jll.com Robert Harris Director tel +61 2 9220 8408 robert.harris@ap.jll.com Rowan Russell Senior Analyst tel +61 2 9220 8643 rowan.russell@ap.jll.com COPYRIGHT JONES LANG LASALLE 2011 All rights reserved.