Rental growth and the bottom line

Presentation to CFO Symposium Justin Kean

Director of Research & Consulting

- Economic drivers

- Where are we in the cycle?

- Occupier conditions

- Investor conditions

What’s happening in the real estate market?

Occupier conditions are very tight

• Economic conditions have driven occupational trends

• In many markets vacancy is at all time lows

• Post GFC supply reduced or stopped all together

Capital conditions are very tight

• Investors are eager to commit capital to the market

• Investors are chasing yield / re-pricing assets

• Cost of debt is low and likely to stay low for some time

2

The perfect storm?

- The Economy

Push me pull you Economy

Overall recovery has produced sound momentum

Economic headwinds are here

Dairy / Commodities

Housing market

Christchurch rebuild stalling

Global risks remain

Capital markets remain strong – firming yields and rising asset prices

Development is back - industrial pipeline in full swing

Retail coming out of the darkness

4

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Retail Sales Growth Unemployment GDP Growth

Economic Outlook

5

Economy remains in good shape

Source: NZIER & JLL Research

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Capital Return Income Return Total Return All Property

NZ Total Returns

6

The Momentum continues

Cycle is about 9-10 years 6-7 years into current

cycle

About 3 years to go

Q2 2015 Q2 2014

LTM Last 3

Months LTM

All Property Capital Ret 9.3% 2.2% 7.4%

Income Ret 8.0% 1.7% 8.4%

Total 17.3% 3.9% 15.8%

- Occupier Conditions

Auckland Vacancy Downward Trend

Auckland Vacancy 4.9%

o As low as it will go

Prime 1.6% - at a floor

Secondary 7.2% - 500 basis points in the

LTM

Secondary and fringe precincts are

improving and will continue to

Refurbished space and new builds to

make an appearance Q1 2015

8

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jun-15 Jun-14

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14

Jun

15

Dec

15

Jun

16

Dec

16

Jun

17

Dec

17

Jun

18

Dec

18

Jun

19

Dec

19

Jun

20

Additions to Supply Central Office Market Vacancy

Office Supply

9

Things are tight but not for long

Auckland Central Office – Anticipated Supply and Vacancy

170,000 sqm

$300

$350

$400

$450

$500

$550

Net Face Prime Rents (LHS) Net Effective Prime Rents (LHS)

Source: JLLResearch

Prime Office Rents Auckland CBD

10

Wellington Vacancy Flattening Trend

Wellington Vacancy 6.9%

o No change

Prime 0.8% - one third of a football field

Secondary 9.1% - about ten football fields

Wellington office may have hit its

structural floor

New builds are on the way

1

1

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

CBD Vacancy Prime Secondary Thorndon Te Aro

Jun-15 Jun-14

400

420

440

460

480

500

520

540

Gross Face Gross Effective

Prime Office Rents Wellington CBD

12

13

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Sq m

Supply (New & Refurbishment) Absorption Overall Vacancy Rate

Auckland Industrial Supply, Absorption & Vacancy

Source: JLL Research

Sector Forecasts 2015

14

Secondary moves up the hierarchy

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

PrimeRetail

PrimeIndustrial

CommunityMalls

RegionalMalls

SecondaryRetail

SecondaryIndustrial

PrimeOffice

SecondaryOffice

Capital Return Income Return

12 Month Forecast – Total Returns by Sector

So what’s your strategy?

The next two years are likely to see significant rental growth

• Go early on rent reviews or postpone where possible

• Leverage your covenant and term

• Plan for 2019-2022 expiration and or renegotiation

• Long term remove volatility by fixing growth

- don’t lock in inflation

• Get advice

15

Planning for the downturn

- Investor Conditions

The Capital Stack Transaction levels are elevated

1

7

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2010 2011 2012 2013 2014 2015 H1

Rest of NZ Christchurch Wellington AucklandSource: Jones Lang LaSalle Research

($millions)

Note: Office, Industrial, Retail and Other

18

Seven is the new eight Auckland Office Yield Forecasts

5%

6%

7%

8%

9%

10%

11%

12%

Premium Grade A Grade B Grade C Grade D

Auckland CBD Office Yields by Quality Grade

Forecast

19

Pricing is at historically high levels Auckland Office Yields and Spread Over Government 10 Year Bond

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

6%

7%

8%

9%

10%

11%

12%

13%

Prime Yields over Interest Rates (RHS) Prime Yields Secondary Yields

Direct Commercial Real Estate Investment 2006-15

20

Volumes are accelerating

Yields continue to firm across the globe

21

Property is getting more expensive

So what’s your strategy?

The next 12-18 months are likely to present excellent pricing opportunities

• Market is paying for quality – so create it

- Covenant

- Fixed growth

- Long term leases

• Very little sales stock available – fully marketed properties create significant interest

• Move quick – volatility is on its way

• Size creates interest

- $20-30 million

- $100 million plus

22

Maximising the upturn

COPYRIGHT © JONES LANG LASALLE IP, INC. 2015

Thank you

Justin Kean

Director of Research and Consulting

Auckland