Savills Research Queensland Briefing Brisbane CBD Office February 2018 Highlights A Grade Averages Latest 12mo Diff Outlook There was a clear turnaround in Queensland across all Rental – N.F ($/sq m) 540 +10.2% key economic indicators in the latter half of 2017, on the 46.0 -100bps back of a rebound in the Mining sector; Net Incentives (%) Rental – N.E ($/sq m) 290 +11.5% The overall vacancy rate for Brisbane CBD was 16.2% Yield – Market (%) 6.65 -25bps as at December 2017, up from 15.3% in December 2016; IRR (%) 8.00 -15bps Capital Values ($/sq m) 9,000 +12.5% Total net absorption was recorded at -40,879 square metres in the 12 months to December 2017; Demand & Supply Latest PCP* Grade capital values grew 12.5% over 2017, with Vacancy (%) 16.2 15.3 an increase in interest from both foreign and local institutional investors; Net Absorb. (‘000 sq m) -40.9 94.6 Stock U/C (‘000 sq m) 47.7 75.9 Investors are turning their attention to Brisbane, as strengthening demand and a limited supply profile over - % of market 2.1 3.4 the next 12-18 months point to a pick-up. - % committed - - *PCP = Previous Corresponding Period Savills Research | Briefing Notes – Brisbane CBD February 2018 Report Contents Senior Analyst — Research Vacancy & Availability 3 Leasing Activity & Demand 4 Shrabastee Mallik Sales Activity 6 [email protected] Supply & Development 8 Rents & Outlook 9 Key Indicators 10 For our latest national reports, visit savills.com.au/research Key Contacts 10 To join Savills Research mailing list, please email [email protected] Executive Summary Looking at the significant change in the Brisbane CBD story over the last 10 years provides a good explanation of current market conditions and dynamics. 10 years ago Brisbane’s vacancy rate sat close to 1%, rents were at record highs and tenants de-centralised from the market due to both cost constraints and a lack of options; which subsequently led to a strong oversupply from developers. This, coupled with a mining and government contraction, led vacancy rates to now sit close to a record high of 16.2%. Following a year of materially high net supply coming onto the market in 2016, the Brisbane CBD appears to be at a point where a recovery is evident. Not only is stock under construction limited over the next 3 years (representing 2.0% of current stock in Brisbane CBD compared to 3.4% a year ago), demand drivers are much stronger than they were 12 months ago, with a recovery in the mining sector, positive net interstate migration and government expansions, likely to provide a much needed boost to Brisbane CBD’s leasing market. Whilst 12 month net absorption was negative in December 2017, a turnaround is evident, with an increase in expressions of interest for space above 10,000 square metres are becoming evident, driven by expansions from the Government sector and Finance & Insurance firms. There has been a clear pick-up in investment activity in Brisbane CBD, led by foreign investors. With a notable spread still evident between Brisbane CBD and Sydney and Melbourne CBDs, Brisbane CBD is proving to be an attractive alternative with investors. PCA Summary Table – Brisbane CBD (as at Dec-17) Premium A Grade Prime Secondary Total AUS CBD Total Stock (‘000) 335.5 936.6 1,272.1 983.3 2,255.4 17,9 3 6.8 Total Vacancy (‘000) 40.2 123.3 163.5 202.3 365.8 1,763.3 Vacancy (%) 12.0 (8.6) 13.2 (9.0) 12.9 (9.0) 20.6 (14.1) 16.2 (11.6) 9.8 (8.9) Net Absorption (‘000) 0.9 (15.6) 4.3 (20.7) 5.2 (36.2) -46.1 (-22.3) -40.9 (13.9) 142.3 (171.8) Net Absorption (%)* 0.3 (7.8) 0.5 (3.0) 0.5 (4.0) -5.6 (-2.5) -2.1 (0.8) 0.9 (1.1) Net Additions (‘000) 0.0 (19.5) 18.3 (32.9) 18.3 (52.5) -43.0 (-3.1) -24.7 (49.3) -49.4 (303.2) – Stock Additions (‘000) 0.0 18.3 18.3 0.0 18.3 254.4 – Stock Withdrawals (‘000) 0.0 0.0 0.0 0.3 43.0 3 07.9 Net Additions (%) 0.0 (9.1) 2.0 (4.4) 1.5 (5.5) -4.2 (-0.3) -1.1 (2.5) -0.3 (1.9) Source: PCA / Savills Research (10yr Averages shown in brackets); * As a percentage of occupied stock; NB: Secondary Rents shown are for B Grade; All rents equivalent to whole floor mid-rise savills.com.au/research 02 Savills Research | Briefing Notes – Brisbane CBD February 2018 Vacancy The overall vacancy rate for Brisbane CBD was 16.2% as at December 2017, up from 15.3% in December 2016. A flight to quality was evident with businesses taking up space in Premium grade buildings, over lower-grade office space. Whilst the Premium grade vacancy rate recorded a marginal fall over 2017, it was not enough to offset higher vacancy rates across Grade A and Grade B office buildings. However, it is important to note that Grade A vacancies remained elevated at 13.2% in December, largely as a result of the refurbishment of 310 Ann Street, which was completed on a largely speculative basis. Positively, vacancy rates look to have reached a peak, with an increase in tenant expressions of interest likely to aid vacancy rates downwards. New tenant demand looks positive for 2018, with a number of enquiries from tenants in the Financial & Insurance Services (Suncorp – 40,000 square metres) and the Government & Community sectors (ATO – 24,000 square metres). Historic Vacancy Rate Full Floor Availability by Period 25% 25% PrimePrime SecondarySecondary TotalTotal 120120 PremiumPremium (No (No of Floors)of Floors) A GradeA Grade (No (No of Floors)of Floors) 20%20% 100100 8080 15%15% 6060 10%10% 4040 5%5% 2020 0%0% 0 0 In 6In Mths 6 Mths 6 -126 -12 Mths Mths 1 - 12 -Yrs 2 Yrs > 2> Years 2 Years Source: PCA / Savills Research Source: Savills Research Full Floor Availability The Savills Prime Full Floor Availability Report assesses the state of the leasing market in a different manner to standard vacancy surveys. The report shows each Premium and A Grade building in the city on a floor-by-floor basis highlighting which floors are available for lease, now and in the near future, including those under construction and refurbishment. The Brisbane CBD office market currently has a total supply of 259,472sqm available across 279 floors, which represents a total of 13.1% of full floors available to the market across all building grades. Premium grade buildings currently have the least full floors available, with 19 full floors available to market. A Grade buildings have 93 full floors available whilst B Grade buildings currently has the greatest full floors available to market, with 167 floors. By Grade By Precinct Premium A Grade B Grade Financial Uptown Govt. Retail Legal Total Prime Floors (No) 170 810 898 602 499 376 203 198 Total Prime NLA (sq m) 259,852 973,889 742,359 643,530 474,221 400,176 207,619 250,554 Prime Floors Available (No) 19 93 167 76 94 41 17 51 Prime Full Floor Avail. (sq m) 26,931 105,664 126,877 76,635 86,892 30,357 15,108 50,480 Prime Full Floor Avail. (%) 10.4 10.8 17.1 11.9 18.3 7.6 7.3 20.1 Max Contiguous Floors (No) 6 11 17 6 10 17 6 12 Max Contiguous Area (sq m) 7,3 42 12,673 12,163 7,3 42 8,191 9,747 7,6 9 8 12,673 Source: Savills Research savills.com.au/research 03 Savills Research | Briefing Notes – Brisbane CBD February 2018 250,000 Financial Government Legal Retail Uptown Leasing250,000 ActivityFinancial by PrecinctGovernment (> 1,000Legal squareRetail metres)Uptown Leasing Activity & Demand 200,000 In the 12 months to December 2017, Savills Research 250,000 200,000 Financial Government Legal Retail Uptown identified 126,929 square metres of leasing activity. This 150,000 is down 12.7% on the 12 months prior and in line on the 200,000 150,000 10 year average (128,225 square metres). The majority of 100,000 these leases (approximately 30.6% of total space) occurred 150,000 100,000 in the Uptown precinct. 50,000 100,000 50,000 Looking at leasing volume by grade, Prime grade leases - were the most numerous with 112,272 square metres 50,000 leased over the year to December 2017, accounting for - close to 90% of total leasing activity in Brisbane’s CBD office market. ‘Direct’ leases (74,168 square metres) accounted - for the majority of office space leased, comprising 58% of the market. As expected, with little supply due to come on board over the next 2 years, pre-commitment activity remained muted, with only 1 pre-commitment lease signed Source: Savills Research in 2017. Leasing Activity by Tenant Type (> 1,000 square metres) Mining - 24.4% Of the total area leased in Brisbane CBD over the last 12 Mining - 24.4% months, tenants from the Mining & Utilities industry were the Fin & Ins - 21.2% most dominant, leasing 24.4% of total stock from a total of MiningFin & Ins - 24.4% - 21.2% 7 transactions (30,577 square metres). Smaller tenants in IT & Comm - 20.1% the Property & Business Services sector were more evident FinIT & & Comm Ins - 21.2% - 20.1% with over 60 leases signed in the sub 1,000 square metre Govt & Community - 16.2% leasing market.