COLLIERS INTERNATIONAL MARKET INDICATORS Melbourne CBD Office SPRING 2006 Record Net Absorption 181 William Street, Melbourne Pre-commitment According to the latest Property Council of Australia Dawson Waldron (8,800m²), AXA (28,700m²), Ericsson by IAG (27,100m²) and data (July 2006), the Melbourne CBD recorded a (10,000m²), Lend Lease (5,000m²), Australian Customs Blake Dawson Waldron (8,800m²). staggering net absorption figure in the last six Services (10,000m²) and National Foods (12,000m²). months of 173,121m², bringing the total absorption Forecast for the last twelve months to 213,159m². These are Further pre-commitments and speculative development the highest six and twelve month net absorption figures is expected to provide measured new supply over (6 months) for Melbourne since PCA records began in 1990. the next 36 months, but in the next twelve months the market will tighten significantly. Overall Performance: ➔ Melbourne has now had solid and sustained net Supply: ➔ absorption over the past three years totalling 465,000m². Incentives have generally reduced across precincts and office grades and are expected to continue to Tenant Demand: ➔ The data reveals the overall vacancy rate has fallen ➔ from 8.3% in January to 7.5% in July. Vacancy in tighten for the remainder of 2006 resulting in increases Vacancy: ➔/ ➔ Premium and A Grade properties decreased while B in effective rentals. Incentives: Grade vacancy increased slightly indicating a flight Investment activity has provided several significant Effective Rents: ➔/ ➔ to quality from tenants in B Grade buildings to A and Premium Grade buildings. transactions during the last twelve months, including ➔ Capital Values: ➔ the sale of 321 Exhibition Street for $120 million and Yields: Most of the positive absorption in the first half of 2006 a 50% interest in 101 Collins Street for $285 million. occurred in A Grade with the completion of two new buildings, the Southern Cross East Tower and The Other recent sales included, 380 Lonsdale Street Key Facts: Urban Workshop, both of which have been occupied ($30.5 million), 399 Lonsdale Street ($30 million) • Overall vacancy rates by the State Government. and 380-390 LaTrobe Street, which sold for $88 decreased to 7.5% million. Yields have tightened a further 25 basis points Major pre-commitment deals in the last twelve months on average over the last 12 months and now average • Incentives reduced in included ANZ (83,000m²), IAG (27,100m²), Blake 6.25% - 7% for prime properties. Prime Grade market • New construction Melbourne CBD Office Market Indicators – Spring 2006 cycle underway Grade Stock Vacancy Average Average Average Average Average • Yields tightened (m2) Rate Net Face Incentive Outgoings Capital Yield 2 2 2 further by 25 points % Rent ($/m pa) (%) ($/m pa) Values ($/m ) (%) Total 3,584,627 7.5% Low High Range Low High Low High Premium 605,050 5.6% 315 485 10%-15% 113 5,000 7,000 6.25% 6.75% A Grade 1,379,988 6.9% 290 370 12%-18% 97 3,500 5,000 6.50% 7.00% B Grade 929,108 8.8% 230 255 15%-20% 82 2,250 3,200 7.00% 8.00% NB-1 Rentals are based on high rise and low rise net rents of a basket of buildings as at Q3 2006. NB-2 Incentive is rent free or fit-out equivalent as at Q3 2006. Source: Colliers International Research. RESEARCH M arket Indicators Report 1 COLLIERS INTERNATIONAL MARKET INDICATORS Melbourne CBD Office SPRING 2006 Economic Update Global Economic Overview problem the economy is facing. The commodity boom Global economic activity remains strong overall, with has been the key impetus behind Australia’s economic global growth of 4.6% in 2005 forecast to continue at activity driving strong business investment, particularly a similar level of 4.7% in 2006 according to the ANZ in mining and related infrastructure, and providing a large Economic Outlook for the September Quarter 2006. increase in domestic income through high commodity Elevated commodity prices and tightening labour markets, prices and high terms of trade. however, have caused inflation to lift internationally. CPI headline inflation across the G7 countries has risen to Inflationary Pressures 2.7% in 2006, above the trend of 2.5%. Rising inflation is Continue to Build increasing the risk that interest rates will be raised in the Higher prices for energy, heavy commodities and base current tightening cycle. ANZ predicts the September metals have pushed up input costs for businesses. A quarter of 2006 heralds a synchronous cycle of interest sharp lift in output prices in the March quarter may rate rises across the major developed economies. indicate that cost pass-through is now taking place. The lift in core CPI inflation in the March quarter to Australian Economic Outlook 2.75% indicated that these rising costs are now being Developments in the global economy are being mirrored transferred into retail inflation. Inflation has lifted even domestically, resulting in a pick-up in core inflation and a more strongly over 3% during the June quarter of 2006 corresponding increase in interest rates in 2006. Growth which has propelled a hike in interest rates. has picked up from a period of softening in 2005 but is unlikely to exceed 3-3.25% in 2006 with the economy Interest Rates Rise and now facing capacity constraints. According to the ABS, quarterly GDP growth has slipped marginally since June Further Rise Pending 2005, down to 0.6% growth for the December 2005 quarter The Reserve Bank of Australia (RBA) responded to and the March 2006 quarter and 0.5% for the June 2006 emerging inflationary pressures in early May by lifting quarter. The Government has released an expansionary the cash rate 25 basis points to 5.75%. After a surge budget for 2006/07 with personal tax cuts and benefits in inflation during the June quarter, interest rates were payments to add 1.2% to household disposable income lifted again by a further 25 basis points to 6.00% in which is expected to drive consumer demand. Overall, August. If the current inflation pressure continues, though, the picture points to the fact that rate rises predictions are for a further rate rise before the end of and tax cuts aren’t addressing capacity which is the real the year. Australian Key Economic Indicators GROSS DOMESTIC PRODUCT - TREND Percentage Change in GDP Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 0.7 0.8 0.7 0.6 0.6 0.5 Source: Australian Bureau of Statistics 2006 INTEREST RATES Oct-01 Dec-01 May-02 Jun-02 Nov-03 Dec-03 Mar-05 May-06 Aug-06 4.50% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% Source: Reserve Bank of Australia 2006 CONSUMER PRICE INDEX All Groups - Percentage Changes (from corresponding quarter of previous year) Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Melbourne 1.7 2.3 2.0 2.1 3.1 2.7 2.8 3.9 Source: Australian Bureau of Statistics 2006 LABOUR FORCE Australian Job Growth Figures 2006 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 1,800 25,900 27,000 -3,200 56,000 52,000 50,700 23,400 Australian Unemployment Rate 2006 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 5.2% 5.2% 5.1% 5.1% 5.0% 4.9% 4.8% 4.8% Source: Australian Bureau of Statistics 2006 Market Indicators Report 2 COLLIERS INTERNATIONAL MARKET INDICATORS Melbourne CBD Office SPRING 2006 Employment Trends VIC Employer’s Sentiment VIC Permanent Employment Expectations Rebounds (July - September 2006): By Industry The Hudson Employment Expectations Report Professional Services Infomation Technolog Utilities provides quarterly findings on permanent employment Resources Construction/Property expectations amongst Australia’s employers. The report Transport Financial Services/Insurance delivers a key socio-economic indicator based on Government Telecommunications The Melbourne CBD Retail the premise that companies expecting to increase All Industries recorded positive Non profit or decrease their staffing levels reflects their likely Advertising/Marketing/Media net absorption of Healthcare (Govt) demand for office accommodation. Healthcare (Excl. Govt) 213,000m² (approx.) Wholesale Distribution Education in 12 months Tourism/Hospitality Hudson surveyed 7,614 employers across Australia for FMCG to July 2006 up from Manufacturing the September quarter 2006. They found employer 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 164,237m² (approx.) in 12 months sentiment remained healthy after a second quarterly Net Effect to July 2005. increase in employment expectations. Employers are expecting to increase their staffing levels in the July Source: Hudson Report Employment Expectations & HR Trends (July - September 2006) – September 06 quarter up 0.2 percentage points to +30.8%. All states and territories recorded positive net effects with increases shown in Victoria, South Melbourne CBD Net Absorption v Employment Expectations Australia and Queensland offset by declines in the ACT, Western Australia and New South Wales. 100,000 35.00 80,000 25.00 60,000 ) The information technology industry recorded the 15.00 40,000 highest level of employer sentiment nationally at 5.00 20,000 +45.4%, followed by the professional services Absorption m 0.00 0 Expectations (% Net -5.00 ment industry with +45.3%. The telecommunications -20,000 oy industry demonstrated the highest surge in sentiment, -40,000 -15.00 Empl up 15.9% over the previous quarter to a net effect -60,000 -25.00 of +37.9%. l-01 l-02 l-03 l-04 l-05 Ju Ju Ju Ju Ju Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Net Absorption m Employment Expectations (%) Employer sentiment in Victoria rebounded from two consecutive periods of decline in sentiment to a net Source: PCA, Hudson Report & Colliers International Research effect of +30.6%.