sydney metropolitan office research forecast report second half 2012

SYDNEY METROPOLITAN OFFICERESEARCH & FORECAST REPORT

www.colliers.com.au/research

Quality Assets Remain in Demand

High quality assets have continued to attract strong demand and enquiry from tenants and investors

across Sydney’s metropolitan offi ce markets. This has seen the vacancy rate continue to tighten, falling

by 0.24 percentage points (pp) over the past six months. Positive tenant demand and a lack of vacant

supply entering the market saw the total market vacancy rate decline from 8.4% in Q1 2012 to 8.2% in

Q3 2012.

The ongoing lack of vacant Prime Grade space has led to a number of markets experiencing face rental

growth as well as a tightening of incentives. Renewal activity has continued to remain strong across the

metropolitan leasing market while recent transactions have seen a number of tenants consolidate

multiple offi ces in a single, higher quality tenancy. The lack of large contiguous space options for tenants

above 3,000m² remains an issue and has forced some to consider options within Sydney’s CBD.

Investment sales activity has continued to remain buoyant with 14 sales above $10 million, valued at

circa $427 million, taking place to date in 2012. Investors remain cautious on Prime Grade assets

however, a number of opportunistic buyers have emerged looking for assets with future growth upside

potential. The transactions that have occurred so far in 2012 refl ect a stability of Prime Grade yields

while increased availability and funding issues associated with Secondary Grade assets has seen

yields soften by as much as 50 basis points for such properties.

SECOND HALF 2012 | OFFICE

465 Victoria Avenue, Chatswood

This newly refurbished A Grade offi ce building is

now 100% leased and is currently on the market

for sale.

SYDNEY METROPOLITAN OFFICE MARKET INDICATORS

Region Grade

Average Net

Face Rents

($/m² pa)

Average

Outgoings

($/m² pa)

Average

Incentives

Average

Capital Values

($/m²)

Average

Market

Yield***

LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH

NORTH

SYDNEY

Prime $590 $730 $105 $120 11% 18% $8,100 $8,500 7.25% 7.50%

A $470 $590 $105 $120 16% 20% $6,500 $7,000 7.50% 8.25%

B $350 $460 $105 $120 25% 30% $4,200 $4,600 9.50% 9.75%

ST LEONARDS/

CROWS NEST

A $420 $480 $90 $100 22% 26% $5,000 $6,250 8.25% 9.00%

B $280 $340 $85 $95 25% 30% $2,300 $4,000 9.00% 10.00%

CHATSWOODA $360 $480 $90 $105 25% 33% $4,000 $5,550 8.25% 9.00%

B $280 $320 $85 $95 31% 36% $2,300 $3,500 9.00% 10.00%+

NORTH RYDE/ MACQUARIE

PARK

A $310 $325 $75 $90 24% 28%** $3,750 $4,250 7.50% 8.75%

B $265 $285 $75 $90 30% 35%** $2,300 $2,800 9.00% 10.00%

PARRAMATTA

New A $430 $485 $95 $105 10% 15% $4,750 $6,000 7.50% 8.00%

A $340 $385 $90 $100 15% 20% $3,250 $4,750 8.00% 9.00%

B $295 $320 $90 $100 17% 27% $2,750 $3,500 9.00% 10.50%

SOP# A $340 $375 $70 $85 15% 20% $3,600 $4,950 8.00% 8.75%

RHODES A $340 $385 $70 $85 15% 20% $3,800 $4,750 7.75% 8.75%

NORWEST A $330* $340* $65 $70 25% 30% $3,500 $3,750 8.50% 9.75%

SOUTH SYDNEY

A $300 $400 $70 $90 10% 20% $3,600 $4,500 7.75% 8.75%

B $220 $290 $40 $60 10% 20% $2,300 $3,400 9.00% 10.50%

SYDNEY CBD FRINGE

A $420 $490 $85 $95 20% 25% $4,750 $5,800 7.75% 8.75%

B $330 $400 $75 $90 15% 25% $3,500 $4,500 9.00% 10.25%

*Includes car parking costs at a ratio of 1:25

** Incentive based on net face rent

Source: Colliers International Research

SOP# Sydney Olympic Park/ Homebush Bay

*** Equivalent Reversionary Yield

Data correct as of Q3 2012

MARKET INDICATORS FORECAST - 6 MONTHS

OVERALL PERFORMANCE

NEW SUPPLY

TENANT DEMAND

VACANCY

INCENTIVES

FACE RENTS

EFFECTIVE RENTS

CAPITAL VALUES

YIELDS

• Overall vacancy declined to 8.16% as of Q3

2012.

• A lack of supply additions has led to rental

growth and a tightening of incentives across

some markets.

• Prime Grade yields have remained stable

while Secondary Grade yields have softened

by as much as 50 basis points.

KEY HIGHLIGHTS

20km

10km

Hornsby

Bondi

Botany

Liverpool

Strathfield

Sydney CBD & CBD Fringe

R

Pacific Highw

ay

Pittwater

Roa

d

South Western Motorway

King G

eorges Road

Prince

s High

way

Punch

bowl R

oad

Parramatta Road

Norwest

Parramatta

North Ryde/Macquarie Park

Rhodes

Mascot

North Sydney

St Leonards/Crows Nest

Chatswood

Sydney Olympic Park/Homebush Bay

SYDNEY METROPOLITAN OFFICE MARKETS

Economic Update

GDP GROWTH REMAINS STRONG

The June Quarter 2012 ABS Gross Domestic Product (GDP) data, showed robust growth for the

Australian economy during the quarter. In seasonally adjusted terms, GDP increased 0.6% during

Q2 2012, down from a strong 1.4% in Q1 2012, taking through-the-year GDP growth to a strong

3.7%. The main contributors to expenditure on GDP during the quarter were household fi nal

consumption, general government fi nal consumption and net exports.

RBA CUTS CASH RATE

For the fi fth time in the past 12 months, the Reserve Bank of Australia (RBA) decided to cut the

offi cial cash rate at its monthly board meeting. This saw the RBA reduce the cash rate by 25 basis

points from 3.50% to 3.25%, as of October 2012. This latest fall, has seen the cash rate decline by

150 basis points over the past 12 months, from a high of 4.75% in October 2011. The key driver

behind the board’s decision was the recent deterioration in the outlook for the Australian and global

economy.

AUSTRALIAN DOLLAR REMAINS STRONG

Ongoing uncertainty over European sovereign debt issues combined with the slow pace of economic

growth and recovery in the United States has seen the Australian Dollar remain strong over the past

18 months. After fl uctuating above and below parity with the US Dollar over the fi rst half of 2012,

the recent round of quantitative easing (QE3) announced by the US Federal Reserve has seen the

Australian Dollar recently trade between $US1.02 and $US1.06.

UNEMPLOYMENT FALLS

The August 2012 monthly ABS Labour Force data shows that the Australian employment market

continues to remain tight. The latest results saw the unemployment rate decline by 0.1 percentage

points (pp) from 5.2% in July to 5.1% in August 2012. This saw the number of people employed

decrease by 8,800 to 11,498,100. This saw part-time employment fall by 9,300 people to 3,426,700

while full-time employment increased by 600 people to 8,071,400. Another key component behind

the fall in the overall unemployment rate was a 0.2pp decline in the labour force participation rate

to 65.0% in August 2012.

COLLIERS INTERNATIONAL | P. 2

RESEARCH & FORECAST REPORT | SECOND HALF 2012 | OFFICE | SYDNEY METROPOLITAN

Key Market Indicators

WHITE COLLAR EMPLOYMENT SLOWS

• The latest Deloitte Access Economics

Employment Report showed white-collar

employment growth across the Sydney

Statistical region continued during the fi rst

half of 2012, increasing by 0.4% or 7,282

people during the period.

• In terms of growth, the Professional,

Scientifi c and Technical Services sector

achieved the largest growth in persons

increasing by 11,562 positions or 5%.

This was followed by the Construction

sector increasing by 5% or 5,000 people.

• Forecasts suggest that white-collar

employment growth during the second

half of 2012 will continue to slow with

growth of just 0.07% or 1,300 jobs.

• The largest growth in the second half

of the year is forecast to be in the

Construction sector increasing by

1.7%, followed by Rental, Hiring and

Real Estate Services with 1.5% growth.

Source: Deloitte Access Economics / Colliers International Research

-4,000 -2,000 0 2,000 4,000 6,000 8,000 10,000 12,000

Education and Training

Accommodation and Food Services

Retail Trade

Other Services

Public Administration and Safety

Transport, Postal and Warehousing

Manufacturing

Wholesale Trade

Electricity, Gas, Water and Waste Services

Administrative and Support Services

Agriculture and mining

Arts and Recreation Services

Rental, Hiring and Real Estate Services

Health Care and Social Assistance

Financial and Insurance Services

Information Media and Telecommunications

Construction

Net Change in White Collar Employment

Professional, Scientific and Technical Services

Indust

ry S

ecto

r

SYDNEY METRO WHITE COLLAR EMPLOYMENT GROWTH - BY INDUSTRY FIRST HALF 2012

VACANCY RATE TIGHTENS

• Overall, Sydney’s metropolitan offi ce market

vacancy rate tightened by 0.24pp, from

8.40% in Q1 2012 to 8.16% in Q3 2012.

• High quality Prime Grade space remains in

demand from tenants across Sydney’s

metropolitan offi ce markets, as evident by

tight A Grade vacancy rates of just 2% in

North Sydney, 2.2% in Parramatta and 4.0%

in North Ryde.

• St Leonards experienced the largest decline

in vacancy falling by 2.3pp to 10.7% as of

July 2012, followed by North Ryde with a

1.5pp decline to 6.7%.

• Despite seeing a 4.6pp rise in vacancy to

5.1% Sydney Olympic Park continues to have

the tightest vacancy rate of all markets.

• The completion of two new developments in

Sydney Olympic Park and refurbished space

in Chatswood saw total offi ce stock increase

by 59,164m² over the past six months to

4,894,216m² as of Q3 2012.

SYDNEY METROPOLITAN - STOCK & VACANCY BY REGION & GRADE

Region / Grade Total Market A Grade B Grade

Stock (m²) Vacancy (%) Stock (m²) Vacancy (%) Stock (m²) Vacancy (%)

TOTAL 4,894,216 8.16%

NORTH SYDNEY 861,153 7.4% 186,296 2.0% 431,216 8.4%

ST LEONARDS/CROWS NEST 353,626 10.7% 88,599 7.5% 67,068 9.2%

CHATSWOOD 280,845 13.7% 157,412 16.7% 76,746 11.9%

NORTH RYDE/

MACQUARIE PARK820,411 6.7% 562,308 4.0% 234,812 11.6%

PARRAMATTA 684,400 8.7% 229,967 2.2% 158,656 5.0%

SYDNEY OLYMPIC PARK/

HOMEBUSH BAY156,141 5.1% 102,610 5.2% - -

RHODES 143,927 6.8% 139,998 6.9% - -

NORWEST 272,474 15.1% - - - -

SYDNEY CBD FRINGE 872,422 7.1% 140,385 5.7% - -

SOUTH SYDNEY 448,817 5.3% - - - -

Source: PCA OMR Jul 2012 / Colliers International Research



North SydneyA GRADE VACANCY 2%

• A lack of new supply has seen the North

Sydney offi ce market remain tight with vacancy

increasing by 0.2pp to 7.4% as of July 2012.

• Ongoing tenant demand for quality space has

seen A Grade vacancy remain tight at just 2%

or 3,700m² as of July 2012.

• The majority of vacancy continues to be in

Secondary Grade space with the C Grade

vacancy rate at 10% and D Grade at 18%.

• Colliers International Research forecasts

that vacancy will decline slightly over the

next six months, on the back of similar market

fundamentals, falling to 7.3% as of January

2013 before tightening to 6.3% as of July 2013.

LIMITED LARGE CONTIGUOUS SPACE

• An issue facing the leasing market within

North Sydney is the distinct lack of large

contiguous space options for tenants,

currently there are only two options over

3,000m² available for lease.

• This lack of supply, tight vacancy and ongoing

tenant demand has seen rents continue to rise

for Prime Grade space.

• A Grade face rents increased by 3% over the

past six months while incentives have also

begun to tighten.

• A concern for the market is that the recently

strong rental growth and lack of options

is seeing more tenants consider options in

the CBD.

INVESTMENT ACTIVITY

• Three transactions above $10 million have

taken place over the past six months with

a combined value of $102 million.

• The largest of these was 116 Miller Street

which was purchased by Rifi ci Group and

Property Bank Australia for $59,550,000

in February 2012, refl ecting an equivalent

reversionary yield of 8.92%.

• Despite strong market fundamentals, investor

confi dence continues to hold back higher

transaction volumes. However, opportunistic

buyers have recently begun to enter the market

to identify assets which can be repositioned to

benefi t from the current tight market conditions

and off er future growth potential.

YIELD SPREAD WIDENS

• Sale transactions, off ered and withdrawn

properties and valuations refl ect a softening

of Secondary Grade yields by at least 25 basis.

• The lack of transaction activity and ongoing

positive enquiry levels has led to Prime Grade

yields remaining stable at 7.25% to 7.50%.

116 Miller Street, North Sydney

This 11,350m2 offi ce building sold in February

2012 for $59.55 million, refl ecting an equivalent


St Leonards/Crows NestVACANCY TIGHTENS

• The St Leonards/Crows Nest offi ce market

saw a decline in vacancy across all grades

during the fi rst half of 2012.

• Overall, vacancy fell from 13.0% in January

2012 to 10.7% in July 2012, due to a positive

absorption of 4,638m² during the period.

• The A Grade market was a strong performer

due to the occupation of Cardno to its new

premises at 203 Pacifi c Highway. Leading

to A Grade absorption of 5,665m² for the six

months to July 2012 which saw vacancy

decline from 13.9% to 7.5%.

• The B Grade market also performed well

with steady tenant demand leading to

vacancy falling to 9.2% and absorption

of 2,077 m² during the period.

NEW SUPPLY

• The completion of Building C at Gore Hill

Technology Park in Q 4 2012 is expected

to see a vacancy increase during the second

half of the year.

• Colliers International forecasts the total

vacancy rate to increase to 11.3% in January

2013 before falling to 10.7% by July 2013.

RENTS AND INCENTIVES STABLE

• Despite the decline in vacancy and increased

tenant demand rents and incentives have

remained stable over the past six months.

• This stability has occurred due to vacancy

only just falling below the long-term average

of 10.8%.

• A Grade face rents continue to remain

steady, ranging from $420 to $480 per m²

per annum.

• Incentives continue to range from 22% to

26% for A Grade space and 25% to 30%

for B Grade stock.

INVESTOR ENQUIRY REMAINS ROBUST

• Despite an increase in enquiry levels, there

has been only one major sale within the

market over the past six months, being

154 Pacifi c Highway.

• This property was sold in April 2012 for

$25.5 million to Property Bank Australia

and Security Capital Corp. Refl ecting a

capital value of $3,967 and an equivalent


The Forum

203 Pacfi c Highway, St Leonards

This quality A Grade building straddles the

rail corridor and has recently undergone a

major upgrade.



Chatswood

North Ryde/Macquarie Park

NEW SUPPLY INCREASES VACANCY

• The addition of 465 Victoria Avenue

into the market, after full refurbishment,

led to an increase in vacancy across the

Chatswood offi ce market.

• The total market vacancy rate increased by

3.0pp from 10.7% in January 2012 to 13.7%

in July 2012.

• The introduction of newly refurbished supply

saw A Grade vacancy increase from 11.5%

to 16.7%, as of July 2012.

• Analysis by Colliers International shows

that this rate has now tightened to 7.5%

due, in part, to 465 Victoria Road now been

fully leased.

ABSORPTION REMAINS POSITIVE

• Due to the success of 465 Victoria Avenue,

absorption in the Chatswood offi ce market

recorded its largest level since July 2007.

• Total absorption for the fi rst half of 2012

was 4,326m² taking absorption for the

past 12 months to 5,877m².


• Despite the rise in vacancy, positive

absorption and steady tenant enquiry, rents

remained stable over the fi rst half of 2012.

• A Grade net face rents continue to range

from $360 to $480/m² and B Grade from

$280 to $320/m².

• Incentive levels have also remained stable,

ranging from 25% to 33% for A Grade space

and 31% to 36% for B Grade space.

• Ongoing tenant demand combined with a

forecast decline in vacancy is expected to see

eff ective rental growth begin to occur over

the second half of 2012 and into 2013.

YIELDS AND VALUES STABLE

• An ongoing lack of offi ce sale transactions

has continued within the Chatswood market.

• Based on valuations and investor enquiry levels

yields have remained stable over the past six

months with A Grade ranging from 8.25% to

9.00% and B Grade from 9.00% to 10%+.

STRONG POSITIVE ABSORPTION

• The North Ryde offi ce market experienced

the largest decline in vacant space

(-10,903m²) and largest positive absorption

result (21,293m²) across all metro offi ce

markets nationally for the fi rst half of 2012.

• Overall, vacancy fell by 1.5pp from 8.2%

in January 2012 to 6.7% in July 2012.

• The main driver behind this result was the

ongoing strength of the A Grade market

which saw vacancy decline to a record low

of 4.0% and strong positive absorption of

17,721m², during the six month period.

• B Grade vacancy also tightened, falling by

0.5pp to 11.6%.

LACK OF LEASING ACTIVITY

• Despite the strong decline in vacancy and

the positive absorption result, leasing activity

softened over the fi rst half of 2012.

• Many lease transactions that made up the

strong result were negotiated and signed in

2011. The deals were an owner occupier

taking up space, while two other tenants

required warehouse space attached to their

offi ce limiting their options across the

Sydney market.


• Softer tenant enquiry levels and transaction

volumes, has seen rental growth remain

stable over the course of the year.

• This has seen A Grade net face rents

continue to range from $310 to $325/m²

while net incentives range from 24% to 28%.

• Colliers International forecasts that eff ective

rents will grow over the coming six to 12

months, as incentives begin to decline as

vacancy remains tight and no new supply

enters the market.

INVESTOR ENQUIRY LEVELS INCREASE

• The largest sale to date in 2012 was that of

75 Talavera Road. This A Grade property

sold for $40.5 million to Macquarie

University in March 2012.

• This sales price refl ects an equivalent

reversionary yield of 8.77% and a capital

value of $3,016/m2.

• Transactions, investor enquiry and demand

levels refl ects a stability of A Grade yields with

yields currently ranging from 7.50% to 8.75%.

• A softening of interest for B Grade assets

has seen yields soften by 25 basis points to

9.00% to 10%.

75 Talavera Road, Macquarie Park

This A Grade offi ce building sold to Macquarie

University for $40.5 million in March 2012.

465 Victoria Avenue, Chatswood

After extensive refurbishment this quality A Grade

building has received strong demand from tenants

and is now 100% leased.



Norwest

Parramatta

VACANCY TIGHTENS

• The overall vacancy rate within the Norwest

market has declined slightly over the past six

months, due to a number of smaller leases

transacting and no new supply entering the

market.

• This saw the vacancy rate tighten by 0.8pp

from 15.9% in January 2012 to 15.1% as of

July 2012.

• The largest lease signed over the past

six months was by Caroma, who leased

2,378m2 at 7-9 Irvine Place.

• A number of leases in the Vantage building

at 7-9 Irvine Place is forecast to see vacancy

tighten over the coming six months.

TIGHT VACANCY ATTRACTS TENANTS

• Tight vacancy rates in the surrounding offi ce

markets of Parramatta and Sydney Olympic

Park, has seen tenant enquiry remain buoyant

from tenants looking to relocate to Norwest.


• Despite the recent tightening, vacancy still

remains above the long term average in the

Norwest offi ce market. This has seen rents

and incentives remain stable over the past

six months.

• A Grade net face rents continue to range

from $330 to $340/m², this includes car

parking costs at a ratio of 1:25.

• Average A Grade incentives currently to

range from 25% to 30%.

C3 SELLS TO COUNCIL

• In the largest offi ce building sales within the

Norwest market, the Hills Shire Council

purchased the C3 building for $20.5 million.

• This new A Grade building was bought

with vacant possession, with the council

intending to occupy once development of

the building completes.

A GRADE SPACE REMAINS TIGHT

• After peaking at 10.8% in July 2010, the

Parramatta offi ce market has continued to

experience a tightening of vacancy.

• Declining for the fourth straight six-month

period, the total market vacancy rate fell by

0.4pp to 8.7% as of July 2012.

• The A Grade market continues to remain

tight with a vacancy rate of just 2.2% or

5,171m².

• Tenant demand continued to remain robust

over the fi rst half of the year with 2,726m² of

absorption being recorded.

• However, the majority of tenants are

renewing their leases and staying put due to

the lack of supply options within the current

tight market.

NEW SUPPLY ENTERS MARKET

• The PCA vacancy fi gures are yet to refl ect

the completion of 60 Station Street in Q3

2012. This 19 level A Grade offi ce building

was pre-committed to Deloitte, Landcom and

QBE with only 3,900m² currently available

for lease.

• The move of QBE and Deloitte into their new

premises, is expected to see vacancy rate

increase, however it provides an opportunity

for tenants to fi nd large, existing, space which

currently does not exist in the tight market.

RENTAL GROWTH CONTINUES

• The ongoing tightness of Prime Grade markets

and its fl ow on eff ect into the Secondary Grade

space has seen growth in face rents continue.

• New A Grade rents increased marginally and

now ranging from $430 to $485/m² while A

Grade face rents remained steady from $340

to $385/m².

• B Grade rents also rose, as the tight A Grade

market pushed tenants to compete for

Secondary Grade space, to now range from

$295 to $320/m².

YIELDS AND VALUES STABILISE

• An increase in investor enquiry and

demand has seen two major sales take

place in Parramatta to date in 2012.

• The largest and most recent being 132

Marsden Street which sold for $25.425

million in August 2012.

• The sale of this B Grade building refl ects an

equivalent reversionary yield of 11.64% and

provides evidence of a slight softening of

Secondary Grade yields across Parramatta.

• B Grade yields now range from 9.00% to

10.50% while A Grade yields have remained

stable at 7.50% to 8.00% for new A Grade

and 8.00% to 9.00% for A Grade.

C3

3 Columbia Court, Norwest

Purchased by the Hills Shire Council for $20.5

million in June 2012.

56 Station Street, Parramatta

This building is set to undergo a major

refurbishment due to the relocation of QBE.



Sydney Olympic Park/Homebush Bay

VACANCY RISES

• The Sydney Olympic Park/Homebush offi ce

market experienced an increase in vacancy

over the past six months, on the back of new

supply entering the market and the relocation

of tenants due to lease expiry.

• This saw the vacancy rate increase by 4.6pp

from 0.5% in January 2012 to 5.1% in July 2012.

• Colliers International forecasts vacancy to

begin to tighten over the course of the next

six months. This is due to the absorption of

existing vacant stock from current tenant

enquiry and no new developments currently

under construction.

NEW SUPPLY ENTERS THE MARKET

• Two new offi ce buildings completed

construction over the past six months.

• The fi rst was GPT’s 5 Murray Rose

development which saw 12,200m² of A

Grade offi ce space enter the market during

Q2 2012. This building was 100% leased

to the Lion Group on completion.

• The second was 7 Murray Rose which saw

6,000m² of A Grade space enter the market

in Q3 2012.

RENTS STABLE WHILE INCENTIVES SOFTEN

• The rise in vacancy has seen face rents

remains stable while incentives have

softened by 5% on average as landlords

try to attract tenants.

• Average net face rents continue to range

from $340 to $375/m².

• Incentives continue to remain tight, despite

increasing, to now range from 15% to 20%.

SALE REFLECTS TIGHTENING OF YIELDS

• The sale of 7 Murray Rose refl ects a

tightening of yields for A Grade assets within

the Sydney Olympic Park offi ce market.

• This 6,000m² newly built A Grade offi ce

building sold in July 2012 for $29.25 million,

refl ecting an equivalent reversionary yield of

8.00% and a capital value of $5,973/m².

• This sale, along with the valuations of other

assets in the market, refl ects a tightening of

yields by as much as 25 basis points over

the past six months. To now range from

8.00% to 8.75%.

Rhodes

SUB LEASE SPACE INCREASES

• The amount of direct and sub-lease space

on the market for lease within the Rhodes

offi ce market has increased over the past

six months.

• This saw the vacancy rate increase by 1.6pp

from 5.2% in Q1 2012 to 6.8% in Q3 2012.

• This rise in vacancy was primarily caused

by an increase in sub-lease space due to

the merger of two tenants and therefore

consolidation of space into one offi ce.

Direct vacancy also rose on the back of

lease expires.

NEW SUPPLY TO ENTER MARKET

• Australand’s Building F is set to bring

17,773m² into the market in Q4 2012,

leading to a further increase in vacancy.

However, this will be short lived as this

development represents the last commercial

site within Rhodes, therefore restricting

future supply.

RENTS STABLE AS INCENTIVES INCREASE

• Face rents within Rhodes have remained

stable, despite an increase in vacancy, due

to the below average incentive levels being

off ered by landlords.

• Net face A Grade rents continue to range

from $340 and $385/m².

• Incentives have shown signs of softening

due to the increase in vacancy. Despite

increasing to 15% to 20% incentives still

remain below average levels.

LACK OF INVESTMENT ACTIVITY

• The Rhodes offi ce market continues to be

tightly held by owners with no assets on

the market for sale or being sold off market

over the past six months.

• A Grade yields remain stable at 7.75%

to 8.75%.

7 Murray Rose Avenue, Sydney Olympic Park

This newly built A Grade building sold in July 2012

for $29.25 million refl ecting a yield of 8.00%.

Rhodes Corporate Park, Building F

This new A Grade offi ce building is due for

completion in Q4 2012 and has recently seen

6,000m2 pre-leased to Hewlett Packard.



South Sydney

Sydney CBD Fringe

LEASE ACTIVITY CONTINUES

• Lease transaction and enquiry activity has

increased within the South Sydney market

over the past three month and combined

with a lack of supply additions has seen

vacancy tighten.

• This saw vacancy decline by 0.3pp from

5.9% in Q1 2012 to 5.3% as of Q3 2012.

• The majority of vacancy remains in the B and

C Grade markets with quality A Grade space

continuing to experience low vacancy levels.

RENTS AND INCENTIVES STABILISE

• Despite this increase in leasing activity, face

rents have remained stable over the past six

months.

• A Grade net face rents continue to average

$350/m², ranging from $300 to $400/m².

• B Grade rents also stabilised, ranging from

$220 to $290/m² as of Q1 2012.

DECISION TO DECIDE MARKET DIRECTION

• The upcoming lease expiry of Qantas and

their decision to either stay put or consolidate

into one building is set to decide the direction

of the South Sydney leasing market.

• A move to new premises could see vacancy

rise and circa 20,000m² of backfi ll space

enter the market.

YIELDS AND VALUES REMAIN STEADY

• There has been a lack of major sales

transactions in the South Sydney market

over the past six months.

• A Grade assets continue to range from

7.75% to 8.75%.

• Secondary Grade assets that have been

marketed withdrawn from sale show the

disconnect between vendor and buyer price

expectations and in turn a slight softening of

Secondary Grade yields with B Grade yields

now ranging from 9.00% to 10.50%.

DEMAND FOR QUALITY SPACE REMAINS

• The lack of new supply and ongoing demand

for quality space within the CBD Fringe

market has seen a slight contraction in

vacant space over the past six months.

• This saw vacancy within the CBD Fringe

offi ce market decline by 0.2pp from 7.3% in

Q1 2012 to 7.1% in Q3 2012.

• A Grade vacancy also declined due to an

increase in lease activity, tightening from

6.0% in Q1 2012 to 5.7% in Q3 2012.

RENTS REMAIN STABLE

• Robust tenant demand and enquiry for high

quality space in the CBD Fringe has

continued over the past six months.

• Average A Grade net rents within the CBD

Fringe continue to range from $420 to $490/m².

• B Grade rents have remained stable at $330

to $400/m², due the ongoing availability of

space in the market.

• Incentive levels have stabilised to remain at

20% to 25% for A Grade assets and 15% to

25% for B Grade space.

YIELDS AND VALUES REMAIN STABLE

• Ongoing demand for quality assets has seen

A Grade yields remain stable, ranging from

7.75% to 8.75%.

• Secondary Grade yields have softened as

investors remain risk averse. These investors

are fi nding it hard to get funding for these

assets and are not willing to commit to the

capital expenditure cash fl ow required to

upgrade these properties.

• This has seen B Grade yields soften by as

much as 50 basis points to now range from

9.00% to 10.25%.

INVESTOR ENQUIRY REMAINS SOFT

• Competition from assets on the market in the

CBD and North Sydney has seen investor

enquiry levels remain soft for Secondary

Grade assets across the CBD Fringe market.

• The largest sale to transact was Wharf 10 at

50-52 Pirrama Road, Pyrmont. This property

sold in July 2012 to a joint venture between

Heitman and Abacus for $31.3 million and

represented a yield of 8.78%.

15 Bourke Road, Mascot

Wharf 10

50-52 Pirrama Road, Pyrmont

This fi ve level offi ce building was sold in July 2012

by Charter Hall for $31.3 million.



DEVELOPMENT UPDATE

Address SuburbOffi ce

NLA (m²)Status Completion Project Type Comment

Sydney North

Gore Hill - Building C Artarmon 14,137Under

ConstructionQ4 2012 New Development Currently 50% pre-committed.

Gore Hill - Building D Artarmon 33,375 DA Approved Awaiting Pre-lease New Development New commercial offi ce building

465 Victoria Avenue Chatswood 15,000 Complete Q2 2012 RefurbishmentNew retail arcade and refurbishment

of offi ce space.

100 Mount Street North Sydney 40,980 DA Approved 2015 New DevelopmentNew commercial/ retail building with

public domain improvements

177-199 Pacifi c Highway North Sydney 44,760 (GFA) Part 3A Approved 2016 New Development32 storey mixed use commercial

development. Subject to pre-lease.

77-81 Berry Street North Sydney 45,000 Part 3A Approved 2016 New DevelopmentConstruction of offi ce building and

hotel. Subject to pre-lease.

105 Delhi Road North Ryde 10,270 Complete Q2 2012 New DevelopmentPre-leased to National Measurement

Institute.

Australian Hearing Hub

16 University AvenueNorth Ryde 19,687

Under

ConstructionQ4 2012 New Development Approximately 75% pre-committed

63-71 Waterloo Road Macquarie Park56,000

(over 4 stages)

Stage 1 DA

Approved2014/15 New Development

Stage 1 consists of an 11,000m²

offi ce building.

88 Christie Street St Leonards 29,000 DA Approved 2015 New DevelopmentConstruction of new offi ce building.

Subject to pre-lease.

Sydney West

Eclipse Tower

60 Station StreetParramatta 25,660 Complete Q3 2012 New Development

New 19 level offi ce development.

Pre-committed by QBE, Landcom &

Deloitte. 3,900m² remaining.

105 Phillip Street Parramatta 20,388 DA Approved 2013/14 New DevelopmentConstruction of 13 storey offi ce

tower with retail space.

89 George Street Parramatta 12,000 DA Approved 2015+ New Development New offi ce building

56 Station Street Parramatta 4,000 DA Approved Q2 2013 RefurbishmentRefurbishment of former QBE

tenancy.

169 Macquarie Street Parramatta 22,000 Pre-DA 2015 New Development Design competition completed.

Rhodes Corporate Park, Building F Rhodes 17,736Under

ConstructionQ4 2012 New Development

New A Grade commercial building.

Targeting 5 Green Star and 5

NABERS (Energy) ratings

Murray Rose,

5 Murray Rose Avenue

Sydney Olympic

Park12,306 Complete Q2 2012 New Development

New 5 storey offi ce building. Murray

Rose development will eventually

include three commercial and

two residential buildings.

7 Murray Rose AvenueSydney Olympic

Park6,000 Complete Q3 2012 New Development New A Grade offi ce building.

Prime, Site 4B Herb Elliott AvenueSydney Olympic

Park24,000 DA Approved 2013/14 New Development

New A Grade offi ce and retail,

development.

Sydney CBD Fringe

Central Park Chippendale 68,000 DA Approved 2014/15 New DevelopmentNew commercial, retail and

residential development.

New Supply Pipeline



LEASING ACTIVITY

Address Suburb Grade Start Date Area (m²) Tenant

Sydney North

465 Victoria Avenue Chatswood A May-12 2,900 Lend Lease

465 Victoria Avenue Chatswood A May-12 4,800 Real Insurance

465 Victoria Avenue Chatswood A May-12 983 Tech Mahindra

9 Help Street Chatswood A Apr-12 585 CH2M Hill

9 Help Street Chatswood A Feb-12 655 Hall Consulting

67 Epping Road North Ryde A May-12 1,012 Avnet

113 Wicks Road North Ryde B May-12 2,062 Mine Site Technologies

68 Waterloo Road North Ryde A Mar-12 2,937 Hamlon Pty Ltd

40 Miller Street North Sydney A Aug-12 983 United Group Limited

101 Miller Street North Sydney Premium Aug-12 989 Armstrong Dawson

15 Blue Street North Sydney A Apr-12 582 Standford Brown

40 Mount Street North Sydney A Feb-12 583 Sheldon

170 Pacfi c Highway St Leonards B Aug-12 1,100 Customers 1-1

170 Pacifi c Highway St Leonards B Jun-12 1,022 Mainbrace Constructions

95 Nicholson Street St Leonards B Jun-12 1,898 Hothouse Interactive

657 Pacifi c Highway St Leonards B May-12 1,368 Genesis Fitness

Sydney West

17 George Street Homebush B Apr-12 557 Leaseplan Australia Limited

32 Phillip Street Parramatta A Jun-12 6,759 GE Capital Finance Australasia

17-21 Macquarie Street Parramatta B May-12 835 Countrywide

100 George Street Parramatta B Mar-12 732 NSW Business Chamber

2 Wentworth Street Parramatta A Jan-12 1,189NSW Department of Education

and Training

5 Murray Rose Avenue Sydney Olympic Park A Mar-12 12,300 Lion Group

Sydney South

90 Bourke Road Alexandria A Sep-12 708 Confi dential

247 King Street Mascot B Sep-12 873 Peek Pty Ltd

247 King Street Mascot B Mar-12 1,260 Gate Gourmet Australia

5-13 Rosebery Avenue Rosebery B Sep-12 930 Tabcorp Online

Sydney CBD Fringe

235 Pyrmont Street Pyrmont B Apr-12 1,677 Think Education Services Pty Limited

26-32 Pirrama Road Pyrmont Mar-12 1,202 Veolia Australia Pty Ltd

50-52 Pirrama Road Pyrmont A Jan-12 680 Activision Blizzard Pty Limited

219-241 Cleveland Street Strawberry Hills B Jun-12 1,780 Australia Post

79 Commonwealth Street Surry Hills May-12 675 The Leading Edge Pty Limited

251-253 Riley Street Surry Hills C Jan-12 485 Reach Foundation

7 Kelly Street Ultimo B May-12 1,800 Buchan Group

100 William Street Woolloomooloo B May-12 896 Bunori Pty Ltd

100 William Street Woolloomooloo B Apr-12 896 Henning Harders Pty Ltd

166 William Street Woolloomooloo B Mar-12 5,353 British American Tobacco

Recent Market Transaction Activity




INVESTMENT SALES ACTIVITY

Address Suburb Grade Sale Date* Sale PriceCapital Value

($/m²)Yield** Vendor Purchaser

Sydney North

10 Help Street Chatswood B Jan-12 $23,000,000 N/A N/AOakland Property

HoldingsPrivate

240-244 Beecroft Road Epping B Jun-12 $48,500,000 N/A N/A Abacus Property Group Transport for NSW

12 Waterloo Road Macquarie Park B Apr-12 $9,100,000 $2,266 10.63%Investa Funds

Management LimitedPrivate

75 Talavera Road Macquarie Park A Mar-12 $40,500,000 $3,016 8.77%Challenger Listed

Investments LimitedMacquarie University

51 Berry Street North Sydney B Apr-12 $15,600,000 $4,406 9.79% Private Property Bank Australia

& Security Capital Corp

116 Miller Street & 173

Pacifi c HighwayNorth Sydney A Feb-12 $59,550,000 $5245 8.92% AMP Capital Investors

Rifi ci Group & Property

Bank Australia

211-223 Pacifi c Highway North Sydney Jan-12 $27,000,000 N/A N/AAustralian Institute of

Management NSW

Crown International

Holdings

154 Pacifi c Highway St Leonards B Apr-12 $25,500,000 $3,967 10.61%Charter Hall Direct

Property Fund

Property Bank Australia

& Security Capital Corp

53 Chandos Street St Leonards Mar-12 $4,700,000 N/A N/A Private Private

Sydney West

C3

3 Columbia CourtBaulkham Hills A Jun-12 $20,500,000 $1,358 VP

Ernst & Young

(Receivers)Hills Shire Council

214 Parramatta Road Burwood B May-12 $5,350,000 $3,427 N/A PrivateMotor Traders'

Association

2-4 Old Castle Hill Road Castle Hill B Feb-12 $5,950,000 $3,267 N/A Private Transport For NSW

7 King Street Concord West May-12 $52,000,000 $3,136 8.31%Australian Property

Growth FundAMP Capital Investors

16-18 Wentworth Street Parramatta B Jun-12 $18,000,000 $2,685 10.40% LaSalle InvestmentsChandru Property

Investments No2

132 Marsden Street Parramatta B Aug-12 $25,425,000 $2,597 11.64% Centuria Sandran

7 Murray RoseSydney Olympic

ParkA Jul-12 $29,250,000 $5,973 8.00% Private Developer Folkestone

Sydney South

96-98 Taren Point Road Caringbah B Jan-12 $7,800,000 N/A 9.01% Private Private

234 Coward Street Mascot Feb-12 $2,000,000 N/A N/A Private Private

27 Hurstville Road Hurstville

Grove Aug 12 $2,410,000 N/A 8.4% Private Private

64 Stanley Street Peakhurst Apr-12 $2,091,000 N/A N/AHealth Administration

CorporationPrivate

Sydney CBD Fringe

51-63 O’Connor Street Chippendale Jan-12 $7,975,000 N/A N/A Private Private

72-84 Foveaux Street Surry Hills Jun-12 $7,950,000 N/A N/A Private Private

70-72 Commonwealth Street Surry Hills May-12 $11,300,000 N/A N/A Transgrid Private

485 Wattle Street Ultimo C Mar-12 $6,300,000 $3,428 8.83% Private DeveloperIndependent Education

Union

Wharf 1050-52 Pirrama Road

Pyrmont A Jul-12 $31,300,000 $7,201 8.78% PrivateHeitman & Abacus

Property Group

Recent Market Transaction Activity

* Sale Date is exchange date

**Yields quoted are equivalent reversionary yields




COLLIERS INTERNATIONAL

Level 12, Grosvenor Place

225 George Street

Sydney, NSW, 2000

TEL 02 9257 0222

FAX 02 9347 0710

RESEARCHER

Mathew Tiller

Manager/Research

TEL 02 9257 0348

FAX 02 9347 0848

512 offi ces in 61 countries on 6 continentsUnited States: 135

Canada: 36

Latin America: 18

Asia Pacifi c: 194

EMEA: 117

• $1.5 billion in annual revenue

• 978.6 billion square feet under

management

• Over 12,500 professionals

Colliers International does not give any warranty in

relation to the accuracy of the information contained in

this report. If you intend to rely upon the information

contained herein, you must take note that the

information, fi gures and projections have been provided

by various sources and have not been verifi ed by us. We

have no belief one way or the other in relation to the

accuracy of such information, fi gures and projections.

Colliers International will not be liable for any loss or

damage resulting from any statement, fi gure, calculation or

any other information that you rely upon that is contained

in the material. Copyright Colliers International 2012.

Accelerating success.

MAJOR INFRASTRUCTURE PROJECTS

Project Location StatusCompletion

DateComments

Road

M2 UpgradeNorwest to

Lane Cove

Under

Construction2012

Widening existing motorway and

add four new access ramps.

F5 Freeway

(Hume Highway)

South West

Sydney

Under

Construction2012

Widening Raby Road and Narellan

Road to three lanes in each

direction.

Road Network Upgrade Sydney wideUnder

ConstructionOngoing

Upgrade and expansion of the

M5, M7 and F3 roads

Rail

North West Rail LinkNorth West

Sydney

Concept Plan

Approved

Approximately

8-10 years

The Concept Plan includes a 6

station, 23km line between Rouse

Hill and Epping.

South West Rail LinkSouth West

Sydney

Under

Construction2016

11km twin track rail line

connecting Glenfi eld to Leppington

via Edmondson Park.

Light Rail extension Inner City Approved From 2013

Extending the light rail network

by 10km so passengers can travel

directly between Dulwich Hill,

the Inner West and through the

Sydney CBD.

Infrastructure Update

Outlook

Source: NSW Government / Colliers International Research

Development activity will hold the key for the direction of Sydney’s metropolitan offi ce markets

over the short to medium term. Currently there are only three developments under construction

bringing a total of 51,560m² of new space into the market over the next six months, of which

42% is currently committed. These developments comprise Gore Hill Building C which is 50%

pre-committed, 16 University Avenue in North Ryde which is 75% pre-committed and Rhodes

Corporate Park Building F. After these projects there are no developments that have the

required pre-commitments to start construction to ensure completion over the course of the

2013 calendar year ensuring a lack of new supply continues to remain an issue for metropolitan

offi ce markets.

Ongoing tenant demand and this lack of supply is forecast to see vacancy rates slowly decline

over the second half of 2012, before experiencing larger falls over the course of 2013. This is

expected, in turn to lead to growth in A Grade face and eff ective rents, with the majority of

tenant demand continuing to focus on high quality space. The lack of new supply and tight

vacancy is also expected to see tenants continue to consider and move into suitable options

within the Sydney CBD market. This provides an opportunity for landlords

with Secondary Grade assets to consider upgrading their stock to capture the current tenant

demand in the tight A Grade markets.

Positive market fundamentals are expected to see investment activity remain buoyant over the

next six to 12 months. Transaction volumes are forecast to increase as confi dence returns and

opportunistic buyers move to take advantage of positive market fundamentals. This is expected

to see Secondary Grade capital values and yields begin to stabilise over the coming 12 months,

however those assets with large capital expenditure requirements and short WALEs may

continue to see a softening. A Grade yields and values are expected to remain stable with Core

buyers remaining active across all of Sydney offi ce markets.


www.colliers.com.au/research

sydney metropolitan office research forecast report second half 2012

Documents

prime grade yields

secondary grade assets

secondary grade yields

stability of prime grade

grade office building

sydney b

yields chatswood b

number of markets