Portfolio deals drive transaction volume message (maximum two

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1 INVESTMENT MARKET UPDATE Portfolio deals drive transaction volume message (maximum two Australia Q /1/215 Contents Investment Volume 2 Investor type 3 Foreign investment activity 3 Investment by location 5 Outlook 5 Investment activity in Australian commercial real estate has continued to build momentum. A total of $8.5bn was invested during Q3 215, an increase of over 3% on the $8.2bn invested in Q2. The main driver of the increase in volume was the transaction of two significant national portfolios. Together they accounted for $3.5bn or 4% of the total volume (Figure 1). Although offices was the most traded asset class, activity continued to increase in the retail sector, with $1.9bn invested over the quarter. This is approximately 15% higher than the rolling three-year quarterly average of $1.6bn. There was considerable activity across the whole spectrum of retail assets. Sub-regional and neighbourhood centres proved most popular with unlisted vehicles, while private investors focussed on high street shops and supermarkets. As a result of the large portfolio transactions, foreign investment volume exceeded that of domestic entities for the first time since Q A total of $6.bn was committed by offshore investors, accounting for 7% of the quarterly volume. Furthermore, not only were Chinese investors the most significant offshore investors into Australia, but also their volume exceeded that of domestic entities. Abundant capital continues to drive intense competition for assets. As a result we have seen yield compression across the majority of markets and across a broad spectrum of asset types from institutional-grade core offices to smaller assets preferred by local investors. The outlook remains biased towards further yield compression, especially in Sydney and Melbourne CBD office markets. In contrast we forecast little movement in Brisbane and Perth CBD office markets, with the latter at greater downside-risk of yield decompression. Figure 1 Major investment activity as proportion of total investment volume (AUDbn) 12 Author Dominic Brown Head of South East Asia / Australia & New Zealand Research +61 () dominic.brown@cushwake.com Contacts Nigel Almond Head of Research +44 () nigel.almond@cushwake.com Major Transactions (>$4m) Remainder cushmanwakefield.com INVESTMENT MARKET UPDATE 1

2 Australia Q3 215 Investment Volume Quarter-on-quarter growth in volume and deal size After a slow start to the year, investment activity in Australian commercial real estate has continued to build momentum. A total of $8.5bn was invested during Q3 215, an increase of over 3% on the $8.2bn invested in Q2 (Figure 2). At the threequarter point in the year, investment volume stands at $2.6bn compared to $24.6bn in 214. The main driver of the quarterly increase in volume was the transaction of two significant national portfolios, which served to increase average deal size, notwithstanding a decline in the number of transactions. Over Q3 214, 14 transactions were recorded which was down on the 124 recorded in Q2, while average deal size increased from $66m to $82m (Figure 3). As highlighted above, this was underpinned by CIC, the Chinese sovereign wealth fund, purchasing the Investa office portfolio for $2.45bn. In addition, Ascendas purchased an industrial portfolio from Singaporean sovereign wealth fund GIC and Frasers Australand for $1.1bn. Both portfolios transacted at sharp yields of circa 5.5% and 6.5% respectively, highlighting the level of competition in the market for large portfolio and quality assets. As well as the Investa portfolio, a further $2.3bn was invested in the office sector to lift the quarterly volume to $4.8bn. This was the strongest quarterly result since Q3 214 in which $5.3bn was invested. The single largest office asset to transact was the purchase of 222 Exhibition Street by LaSalle Investment Management from AMP Capital's Wholesale Property Fund. The asset was acquired for $231m at an initial yield of 5.9%. Momentum also continued to build in the retail sector, with $1.9bn invested over the quarter. This is approximately 15% higher than the rolling three-year quarterly average of $1.6bn. There was considerable activity across the whole spectrum of retail assets, with 4 transactions occurring over the quarter. Sub-regional and neighbourhood centres proved most popular with unlisted vehicles, while private investors focussed on high street shops and supermarkets. Blackstone were active in the sector, purchasing three significant assets. The largest of these was Westfield Strathpine, from Scentre Group, for $287m. Investment in industrial assets over Q3 215 was dominated by the Ascendas portfolio purchase, which accounted for $1.1bn of the $1.5bn invested in the quarter. Outside of this, Singaporean-based Mapletree Logistics Trust purchased a Coles distribution centre from Goodman, for $253m at an initial yield of approximately 5.6%. The growth in the transport and logistics sector over the past few years has seen increased competition between institutional investors to acquire these assets. As a result, yields have contracted sharply over this period. Figure 2 Total real estate investment purchasing activity (AUDbn) Figure 3 Total purchasing activity by lot size (AUDm) 1% 8% 6% 4% 2% Figure Total purchasing activity by sector (AUDbn) % Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Under 2m 2-5m 5-1m 1-2m 2-5m 5-1,m 1bn+ Average deal size (RHS) Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Other Q4 Q3 Q2 Q Industrial Retail Offices cushmanwakefield.com INVESTMENT MARKET UPDATE 2

3 Australia Q3 215 Investor type Portfolio deals dominate activity Private vehicles, comprising unlisted funds and private property companies, returned to the red in Q3 215 by net divesting of $2.5bn in commercial real estate. While they were active purchasers in the retail sector, they divested heavily ($4.4bn) of office stock through Morgan Stanley exiting Investa Property Trust; also explaining the net position of the public sector as a result of CIC s purchase. Aside from Blackstone s trio of retail purchases for a combined total of 4655m, Sentinel Property group also acquired three centres in three separate transactions. However, this was at an order of magnitude lower totalling $76m. Similarly, Ascendas large industrial purchase was the main driver of listed vehicles net position. Without this deal, they would have ended as net divestors over the quarter. Federation Centres and Scentre group were both particularly active, selling non-core assets. Between them, they sold 1 assets totalling $1.bn (Table 1). Although ending the quarter marginally in the black at $354m, private investors showed above average deal activity, both in respect to the number of purchasers and average deal size. Their focus was predominantly on smaller office and retail assets, with an average deal size of $22m. Foreign investment activity China exceeds domestic activity through CIC As a result of the large portfolio transactions, foreign investment volume exceeded that of domestic entities for the first time since Q A total of $6.bn was committed by offshore investors, accounting for 7% of the quarterly volume (Figure 6). This is the largest amount in a single quarter in the post-gfc era. Disaggregating investment volume by source country reveals that not only were Chinese investors the most significant offshore investors into Australia, but their volume exceeded that of domestic entities. As well as the CIC transaction, Chinese investors committed a further $22m over the quarter to total $2.67bn. For comparison, domestic entities acquired $2.53bn of assets. Investors with an international platform, including Blackstone, Credit Suisse and LaSalle Investment Management transacted over $92m over the quarter. Offshore investors continue to focus on the largest and more mature states of New South Wales and Victoria, with $984m and $893m in volume respectively (Map 1). Their focus was predominantly on office and retail assets, when excluding the portfolio purchases. Average deal size was approximately $7m, however this was the result of several deals of less than $2m combined with a smaller number of deals of over $1m. Figure 5 Net purchasing activity by investor type (AUDbn) 2, 1,5 1, , -1,5-2, -2,5-3, Figure 6 Domestic vs. foreign purchasing activity (AUDbn) Figure 7 A-REITS Other Listed Vehicles Private Vehicles Foreign purchasing activity by country compared to Australia, Q3 215 (AUDbn) Private Institution Investor Public Sector Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Domestic Foreign % Foreign Corporate Australia China Singapore International Germany 8% 6% 4% 2% % cushmanwakefield.com INVESTMENT MARKET UPDATE 3

4 Australia Q3 215 Map 1 Domestic and foreign investment by state/territory, Q3 215 Table 1 Significant investment transactions, Q3 215 PROPERTY TOWN/CITY PURCHASER VENDOR SECTOR PRICE Office Portfolio Australia-wide CIC Morgan Stanley Office $2,45m Industrial Portfolio Australia-wide Ascendas GIC / Frasers Australand Industrial $1,73m Westfield Strathpine Strathpine Blackstone Real Estate Scentre Group Retail $287m Coles Distribution Ctre Eastern Creek Mapletree Logistics Trust Goodman Australia Industrial Fund Industrial $253m 222 Exhibition Street Melbourne LaSalle Investment Mngmnt AMP Capital Wholesale Property Fund Office $231m 215 Adelaide Street Brisbane Challenger Life Pramerica Office $224m cushmanwakefield.com INVESTMENT MARKET UPDATE 4

5 Australia Q3 215 Investment by location New South Wales non-cbd preferred Figure 8 Investment activity by State/Territory (AUDm), Q3 215 New South Wales continues to be the preferred investment destination, for both domestic and offshore investors as it offers the greatest range of opportunities (Figure 8). A further $1.9bn was invested in the state over Q3, to bring the year-todate figure to $7.9bn more than the next two state, Victoria and Queensland, combined. As a result of core office assets becoming more scarce, investors are increasingly turning to non-cbd locations. Of the $1.9bn invested in New South Wales, $1.7bn was in non-cbd locations. This is further explained by the focus on retail assets, which accounted for $853m and almost half of the number of transactions. After a comparatively slow start to the year so far, investment in Victoria increased further quarter-on-quarter in Q3 to reach $1.4bn. The predominant focus was on CBD office assets, which accounted for a third of the state s investment volume for the quarter. In contrast, given the weak fundamentals in the office market, activity in Queensland remains focussed on retail assets in near-fringe suburbs of Brisbane. Over $41m was invested in such assets, including Westfield Strathpine, equivalent to 37% of the $1.1bn invested over the quarter. Office transactions totalled $6m with $224m coming from the acquisition of 215 Adelaide Street by Challenger Life (Table 1). Outlook Further yield compression expected Figure 9 Australian prime office yields 9% 8% 7% 6% 5% 4% 3% Others $17 WA $359 Australia Wide $3,523 NSW $1,935 QLD $1,14 VIC $1,399 Forecast At the three-quarter mark, the year is unfolding largely as forecast. Investment volumes at the national level are down year-on-year but abundant capital is driving intense competition for assets. Sydney Melbourne Brisbane Perth As a result we have seen yield compression across the majority of markets and across a broad spectrum of asset types from institutional-grade core offices to smaller assets preferred by local investors. The key exception to this has been in the Perth and Brisbane CBD office markets, where little movement in yields has been evidenced over the past year to 18 months. Looking to the remainder of the year we expect CBD office yields to compress further in Melbourne and Sydney, driven by high competition between domestic and foreign entities as well an improving office market in both cities. In contrast we forecast little movement in Brisbane and Perth CBD office markets, with the latter at greater downside-risk of yield decompression. cushmanwakefield.com INVESTMENT MARKET UPDATE 5

6 Research Nigel Almond Head of Research +44 () Chief Executive James Patterson Chief Executive Australian & New Zealand +61 () David Lyons Head of Sales and Investments +61 () Sashi Makkapati Senior Director, National Retail Investments +61 () Michael Callow Director, Industrial +44 () Valuations John Waugh Head of Valuations +61 () Research Fergus Hicks Head of Forecasting +44 () Glen Wright Managing Director, Queensland +61 () Nick Potter Senior Director, National Retail Investments +61 () Tim Cassidy Director, Head of Industrial +44 () Nick Spiro Director, Commercial +44 () Asset Services Sam Cuccurullo Head of Asset Services, Asia Pacific +61 () Research Dominic Brown Head of South East Asia / Australia & New Zealand Research +61 () dominic.brown@cushwake.com Richard O Callaghan Head of Agency, Victoria +61 () richard.ocallaghan@cushwake.com Peter Seeto Director, Sales and Retail Leasing +61 () peter.seeto@cushwake.com Patrick O Callaghan Director, +61 () patrick.ocallaghan@cushwake.com Gary Hollis Managing Director, Head of Asia Pacific gary.hollis@cushwake.com Disclaimer This report has been produced by Cushman & Wakefield for use by those with an interest in commercial property solely for information purposes. It is not intended to be a complete description of the markets or developments to which it refers. The report uses information obtained from public sources which Cushman & Wakefield believe to be reliable, but we have not verified such information and cannot guarantee that it is accurate and complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained herein and Cushman & Wakefield shall not be liable to any reader of this report or any third party in any way whatsoever. All expressions of opinion are subject to change. The data contained in this report is based upon that collected by DTZ. Our prior written consent is required before this report can be reproduced in whole or in part. 215 Cushman & Wakefield. To see a full list of all our publications please go to cushmanwakefield.com or download the Research App Level 22 1 O Connell Street Sydney, New South Wales, 2 Australia phone +61 () cushmanwakefield.com