URBIS.COM.

AU
MELBOURNE CBD OFFICE MARKET UPDATE
AUGUST 2013
A GRADE 12 MONTH OUTLOOK
Net Face Rents ($ per m
2
NLA) $400 - $500
Net Incentives (%) 20% - 30%
Market Yields (%) 6.75% - 7.50%
Internal Rate of Return (IRR) 9.00% - 9.50%
Capital Values (per m
2
NLA) $5,000 - $7,000
Outgoings - Excluding Tenancy Cleaning (per m
2
NLA) $110 - $120
Vacancy (July 2013) 9.8%
Total Stock (m
2
, July 2013) 4,341,542
Net Supply (m
2
, 12 mths to July 2013) 191,549
Net Absorption (m
2
, 12 mths to July 2013) -2,973
8 EXHIBITION STREET, MELBOURNE
Cbus recently sold two 50% shares to GPT
Wholesale Property Fund and Keppel REIT
for $160.05 million and $160.20 million
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OVERVIEW
Australian property markets continue to draw a high level of investment
underpinned by attractive yields and relatively stable economic conditions.
Whilst leasing conditions in most Australian CBD oce markets have sofened,
there continues to be strong investment activity for prime oce assets, particularly
along the eastern seaboard including the Melbourne CBD.
Over the period from January 2013 to
December 2015, a total of some 303,000m
2

of oce accommodation will be completed.
While approximately 75% of this space is
precommitted, the majority of tenants will be
relocating from existing buildings leading to a
substantial increase in the availability of back
ll space.
The Melbourne CBD recorded negative net
absorption for the rst time since July, 2009.
Net absorption of approximately -3,000m
2
over
the 12 months to July, 2013, is signicantly below
the annual average of approximately 53,000m
2

achieved over the past ve years. Net absorption
is expected to continue below trend over the next
12 months while tenant demand remains weak.
On the back of negative net absorption and
considerable new supply coming online, the
vacancy rate has climbed from 6.9% in January,
2013 to 9.8% in July, 2013.
Vacancy rates are expected to continue on this
trend in the short term on the back of further
new supply and continued weak tenant demand.
Growth in net face rents has been subdued
for the last 12 months, while incentives have
generally increased causing net eective rents
to decline. Net face rentals are expected to
remain static in the near term.
Despite weak leasing fundamentals, the
strong appetite for prime oce assets in the
Melbourne CBD from both local and foreign
investors has resulted in prime yields tightening
by approximately 25 basis points over the past
6 months. Further prime yield compression is
anticipated, underpinned by strong investment
demand from domestic wholesale funds,
superannuation funds, A-REITS and oshore
investors.
KEY MARKET INDICATORS
Source: Property Council of Australia (PCA), Urbis
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MELBOURNE CBD OFFICE MARKET UPDATE
AUGUST 2013
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0 sqm
20,000 sqm
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60,000 sqm
80,000 sqm
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Remaining Precommitted
2013
2014

2015
COMPLETED
NEW SUPPLY
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699 BOURKE STREET, DOCKLANDS
Mirvac recently secured a 15,000m
2

precommitment from AGL for a proposed
18,500m
2
building at the northern end of a
development deck above Southern Cross
Station. The building is expected to be
completed in mid-2015.
The completion of the ATO building at 747
Collins Street, Docklands (40,000m
2
) and
Melbourne Water building at 990 Latrobe Street,
Docklands (13,000m
2
) in mid 2012 signied the
commencement of the current commercial
construction phase in the Melbourne CBD.
Following these buildings, other recent major
completions include Aurecon at 850 Collins
Street, Docklands (16,000m
2
), 171 Collins Street,
Melbourne (31,500m
2
) and Marsh Mercer at 717
Collins Street, Docklands (39,000m
2
). There has
been some 192,000m
2
of net supply added to the
Melbourne CBD over the past 12 months.
While net supply for the 12 months to July,
2013, was considerably above the long-term
average, the Melbourne CBD oce market
continues to be demand-led with signicant
pre-commitments required prior to
commencement of construction.
There are currently 8 major commercial projects
under construction totalling approximately
233,000m
2
, summarised as follows:
33% (76,000m
2
) of the new supply is
expected to be completed in the remainder
of 2013, with 38% (88,000m
2
) in 2014 and
29% (68,000m
2
) in 2015.
68% (159,000m
2
) of the new supply is in the
Docklands precinct;
34% (78,000m
2
) of the new supply is in
Collins Street.
Whilst leasing conditions remain weak and
new stock continues to come online between
2013 and 2015, lumpy amounts of backll
accommodation vacated by pre-committed
tenants will likely put pressure on the
performance and presence of some secondary
stock.
SUPPLY & DEVELOPMENT ACTIVITY
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MELBOURNE CBD OFFICE MARKET UPDATE
AUGUST 2013
3 URBIS.COM.AU
* Approximate
RECENT LEASING ACTIVITY
360 COLLINS STREET, MELBOURNE
Dexus recently leased 3,690m
2
to UXC over
Levels 17-19 and 1,200m
2
to Beddison Group
on Level 35.

There has been limited leasing activity in the
Melbourne CBD over the past 12 months.
Tenant demand continues to remain subdued
on the back of low business condence and
continued internal pressures to minimise
business costs. These leasing conditions are
expected to remain in the near term.
The majority of recent leasing activity to
occur relates to opportunistic tenants taking
advantage of favourable leasing conditions to
upgrade to superior quality accommodation
at competitive rents with large inducements.
While many organisations continue to
be hesitant regarding accommodation
requirements, several organisations have
continued to plan for the long-term, with recent
pre-commitments including Corrs Chambers
Westgarth (8,700m
2
), Leighton Contractors
(12,700m
2
) and AGL (15,000m
2
).
The total vacancy rate climbed from 6.9% in
January, 2013 to 9.8% in July, 2013. The vacancy
rate is expected to continue on this trend in the
short term on the back of consistent new supply
coming online and weak tenant demand.
Although a large proportion of the new
accommodation is precommitted, backll
space created from tenants relocating to new
buildings is a major contributor to recent
increases in vacancies, together with reduced
space requirements from the Victorian State
Government.
The rise in vacancy is likely to lead to older stock
being demolished or refurbished for residential
use (i.e. 35 Spring Street, 199 William Street and
potentially 85 Spring Street).
Current leasing conditions have stalled net face
rent growth for both prime and secondary grade
stock, while incentives have generally increased.
Prime incentives are generally in the range
of 20% to 30% which is expected to increase
to 25% to 30% and above for the next 6 to 12
months.
LEASING MARKET
ADDRESS TENANT COMM. DATE RISE NLA (SQM) TERMS (YEARS) NET FACE RENT
($ SQM)
567 Collins Street Corrs Chambers Westgarth Mid-15 Mid 8,708 12 $575
567 Collins Street Leighton Contractors Mid-15 Low 12,701 7 / 12 $539
699 Bourke Street AGL Mid-15 Low 15,000 10 $475 *
313 Spencer Street Victoria Police Dec-14 Low - Mid 27,754 20 $440
360 Collins Street Beddison Group Jan-14 High 1,200 10 $500
360 Collins Street UXC Oct-13 Mid 3,690 5 $430
55 Collins Street Sales Force Oct-13 Mid 1,000 5 $420
55 Collins Street GTA Consultants Oct-13 Mid 1,000 5 $420
55 Collins Street RSM Bird Cameron Oct-13 Mid 1,954 10 $450
35 Collins Street Salta Properties Aug-13 Mid 1,700 10 $530
530 Collins Street Suncorp Jul-13 High 15,443 10 $490
367 Collins Street Sportsbet Mid-13 Mid 6,525 10 $420
8 Exhibition Street ISPT Apr-13 Low 1,619 5.25 $444
90 Collins Street FB Rice Apr-13 Low 1,050 10 $475
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MELBOURNE CBD OFFICE MARKET UPDATE
AUGUST 2013
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567 COLLINS STREET, MELBOURNE
Investa Oce Fund and Investa Commercial
Property Fund purchased on a fund-through
basis for $462.0 million comprising an upfront
payment of $38.0 million.

Despite weak leasing fundamentals, the
Melbourne CBD continues to attract high levels
of domestic and foreign investment, particularly
for prime grade oce buildings.
Recent transactions reect that prime yields
have compressed by approximately 25 basis
points over the last 6 months, with a similar
movement anticipated in the near term
underpinned by strong investment demand from
all types of buyers including domestic wholesale
funds, superannuation funds, A-REITS and
oshore investors.
Prime internal rates of return have also recently
reduced by approximately 25 to 50 basis points.
Given the expectation that the current low
ination and low interest rate environment will
remain, internal rates of return are expected to
decline further.
The gap between prime and secondary grade
yields is expected to continue to widen in the
immediate term until investors are drawn to
risk-adjusted returns for secondary property.
INVESTMENT MARKET
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313 SPENCER STREET, DOCKLANDS
BUILDING DETAILS:
To be completed, a medium rise A Grade oce
complex designed for the requirements of
Victoria Police. Upon completion, the project
will provide oce accommodation over ground
and 12 upper levels, together with ground level
retail and basement car park. The building will
incorporate a dedicated 3 level police station and
has been designed to achieve a 4.5-star NABERS
base building energy rating and 5-star Green
Star rating. Although a low rise oce building,
the design and location with limited surrounding
high-rise buildings, together with curtain wall
glazing is expected to provide adequate natural
light to most levels. The development is due for
completion in December, 2014.
COMMENTS:
Victoria Police, a branch of the Victorian State
Government (AAA credit rating), precommitted
100% of the oce accommodation for an initial
term of 20 years with xed 4% annual reviews
and a market review in Year 16 subject to a
15% cap and collar. As at the date of sale, the
only vacant component was 241m
2
of retail
accommodation on the ground oor. The 50%
share was purchased on a fund-through basis
comprising an upfront payment to acquire
the land plus added value of demolition and
preliminary construction, with the balance of the
purchase price to be paid in periodic instalments
over the construction period. For the purpose our
analysis, we have taken into account the stamp
duty saving of approximately $11.33 million.
SALE DETAILS: FINANCIAL ANALYSIS:
Sale Price: $116,000,000 (50% interest) * Initial Yield: 6.38%
Sale Date: February 2013 Equivalent Market Yield: 6.56%
Purchaser: Invesco Asset Management Aust Internal Rate of Return: 9.32%
Vendor: Australia Post / Cbus Capital Value ($ per m
2
NLA) $8,287
NLA: 27,995m
2
Cars: 300 bays
* Purchased on a fund-through basis
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MAJOR TRANSACTION SUMMARY
313 SPENCER STREET, DOCKLANDS
RECENT TRANSACTIONS
PROPERTY SALE
DATE
SALE PRICE NLA
(SQM)
CAPITAL
VALUE
($ SQM NLA)
MARKET
YIELD (%)
8 Exhibition Street, Melbourne
(50% Interest)
Jun-13 $160,200,000 44,932 $7,131 6.78%
90 Collins Street, Melbourne May-13 $170,000,000 21,255 $7,998 7.10%
8 Exhibition Street, Melbourne
(50% Interest)
Mar-13 $160,050,000 44,932 $7,124 6.78%
567 Collins Street, Melbourne Mar-13 $462,200,000 54,248 $8,516 7.06%
313 Spencer Street, Docklands
(50% Interest)
Feb-13 $116,000,000 27,995 $8,287 6.56%
URBIS.COM.AU 5
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required timeframes.
MELBOURNE
SYDNEY
BRISBANE
ROGER SCRIVENER
DIRECTOR
03 8663 4846
rscrivener@urbis.com.au
TRENT PREECE
ASSOCIATE DIRECTOR
03 8663 4806
tpreece@urbis.com.au
BOBBY DUNIMAGLOSKI
ASSOCIATE DIRECTOR
02 8233 7605
bdunimagloski@urbis.com.au
RUSSEL MCKINNON
DIRECTOR
02 8233 7608
rmckinnon@urbis.com.au
IVAN HILL
DIRECTOR
07 3007 3815
ihill@urbis.com.au
SYDNEY
Tower 2, Level 23, Darling Park
201 Sussex Street
Sydney, NSW 2000
t: 02 8233 9900
MELBOURNE
Level 12, 120 Collins Street
Melbourne, VIC 3000
t: 02 8663 4888
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t: 07 3007 3800
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