Briefing West Perth Office - August 2018

Briefing West Perth Office - August 2018

Briefing West Perth Office - August 2018

Briefing West Perth Office August 2018 Savills Research Highlights  Re-centralisation remains a feature in West Perth, with a number of tenants relocating from suburban locations to West Perth, contributing to the drop in the vacancy rate to June 2018;  The reduction in the vacancy rate was predominantly a result of a withdrawal of stock, the fifth highest in recorded history, and improved confidence levels for the long-term performance of the market;  Institutional investment has driven a upswing in overall transactional volumes over the last 12 months;  Investment enquiry has predominantly been led by opportunistic investors operating under a counter- cyclical strategy.

A Grade Averages Latest Yr Change Outlook Rental – N.F. ($/sq m) 325 +0.0%  Incentives 45.5 +325bps  Rental – N.E ($/sq m) 180 -5.3%  Yield – Market (%) 7.65 -35bps  IRR (%) 8.00 -40bps  Capital Values 4,100 +0.0%  Demand & Supply Latest PCP* Vacancy 15.8 15.0  Net Absorb. (‘000 sq m) -3.6 -3.1  Stock U/C (‘000 sq m)  - % of market  - % committed  *PCP = Previous Corresponding Period

Briefing West Perth Office - August 2018

August 2018 savills.com.au/research 2 Savills Research | Briefing Notes – West Perth Office Executive Summary The West Perth office market generally includes the areas bounded by the Mitchell Freeway, Kings Park Road, Thomas Street and the railway line.

The precinct is the seventh largest fringe market nationally (out of 17), with approximately 423,920 square metres of office floor space. The area has traditionally had high occupancy rates due to its fringe location and ease of access. Recentralisation to the CBD remains a feature in West Perth, despite the drop in the vacancy rate over the past six months. On the upside, suburban market tenants are relocating back or into West Perth for the first time and there are a number of relocations occurring from within the precinct, suggesting a continuation of the ‘flight to quality’ trend. Traditionally, few major assets above $25 million change hands in West Perth, reflective of the tightly held nature of this market.

In the last 12 months, two significant investment transactions have occurred, including the $91.325 million trade of 836 Wellington Street between Investa Office Fund and Growthpoint Properties Australia, and the $33.55 million sale of 42-46 Colin Street between Dexus and Centuria Metropoltian REIT. The sale of these two properties between active institutional investors is indicative of returning confidence in Perth office on the back of improving leasing fundamentals being seen in the CBD market.

PCA Summary Table – West Perth (as at Jun-18) Prime Secondary Total Aus Non CBD Total Stock (‘000) 138.5 285.5 423.9 7,256.4 Total Vacancy (‘000) 21.6 45.5 67.1 650.2 Vacancy (%) 15.6 (6.6) 15.9 (10.4) 15.8 (9.2) 9.0 (9.2) Net Absorption (‘000) -1.4 (1.1) -2.2 (-2.6) -3.6 (-1.5) 29.9 (48.1) Net Absorption - 1.1 (1.0) -0.9 (-1.0) -1.0 (-0.4) 0.5 (0.8) Net Additions (‘000) 4.0 (3.3) -4.1 (2.0) -.1 (5.3) -10.6 (73.5) - Stock Additions (‘000) 4.0 .8 4.8 154.1 - Stock Withdrawals (‘000) 0.0 0.0 4.9 164.7 Net Additions * 3.0 (2.8) -1.4 (0.7) 0.0 (1.3) -0.1 (1.1) Report Contents Vacancy 3 Supply 3 Leasing Activity & Demand 4 Sales Activity 5 Rents 6 Outlook 7 Development Map 8 Key Indicators 10 Key Contacts 10 Source: Savills Research (10yr Averages shown in brackets); NB: Secondary Rents shown are for B grade; All rents equivalent to whole floor mid-rise *As a percentage of occupied stock; **As a percentage of total stock Associate Director ­­— Research Katy Dean kdean@savills.com.au For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please email research@savills.com.au Research Analyst — Research Nicholas Volk nvolk@savills.com.au

August 2018 savills.com.au/research 3 Savills Research | Briefing Notes – West Perth Office The impact of favourable market conditions and elevated tenant enquiry in 2017 has materialised into a reduction of headline vacancy in the first half of 2018, dropping from 16.7% in December 2017 to 15.8% in June 2018. The recent decline in vacancy can be attributed to a large withdrawal of stock from the market. 4,944 square metres was withdrawn, the fifth highest recorded since vacancy data has been tracked. There were no additions to the market, which maintained the gap between occupied and vacant stock.

Conversely, 4,803 square metres was returned to the market six months prior following the redevelopment of 66 Kings Park Road, while there were no withdrawals of stock. This neutral net effect means the ‘flight to quality’ theme is the contributor to the vacancy reduction, as evident in the positive six month net absorption for B and C grade assets.

This ‘flight to quality’ trend underpinned tenant demand for space in the area, with tenants seeking to upgrade within the precinct, as well as suburban migration, particularly from nearby precincts, including Subiaco and Osborne Park. Secondary stock was the driver behind the vacancy reduction, with B grade dropping to 12.9% in June 2018 from 13.9% in December 2017, absorbing close to 1,500 square metres in the six month period. C grade stock decreased 200 basis points to 20.3% in June 2018, absorbing nearly 1,000 square metres.

The A grade market was impacted the most as a result of tenants seeking higher quality space at a similar or cheaper rate, recording negative absorption for the first time in 18 months.

Vacancy has increased to 15.6% in June 2018, up from 12.1% a year earlier, a testament to the ‘flight to quality’ trend as the CBD headline vacancy reduces. As the current cycle continues, the technical vacancy in West Perth is anticipated to normalise in line with historical averages. Throughout the last decade, the West Perth office market has had very few sites available for development. However, over the last two years, there have been sales driven by repositioning strategies that will potentially lead to an increase in building refurbishment and site redevelopment in the future.

A mixed-use project at 957-959 Wellington Street has been given development approval, however the project remains mooted and is unlikely to go ahead without a degree of pre-commitment. Plans include the construction of an eight level mixed-use building with four commercial tenancies covering approximately 1,414 square metres of office space. Having undergone extensive refurbishment in the latter half of 2017, 66 Kings Park Road has been recently reintroduced to the market as at May 2018 with circa 4,500 square metres of A grade space.

Historic Vacancy (West Perth) Net Supply Savills Research | Briefing Notes – West Perth August 2018 savills.com.au/research 3 Vacancy The impact of favourable market conditions and elevated tenant enquiry in 2017 has materialised into a reduction of headline vacancy in the first half of 2018, dropping from 16.7% in December 2017 to 15.8% in June 2018.

However, on a year-on-year basis, the vacancy rate is 200 basis points higher than the five year historical average of 13.2%. The decrease in the vacancy rate over the six months to June 2018 can be attributed to a large withdrawal of stock from the market. Approximately 4,944 square metres worth of space was removed, the fifth highest withdrawal figure recorded since vacancy data has been tracked. There was no addition of space to the market, which maintained the gap between occupied and vacant stock. Conversely, there was 4,803 square metres returned to the market in the six months prior, as a result of the completion of 66 Kings Park Road’s redevelopment, while there were no withdrawals of stock.

This neutral net effect means the ‘flight to quality’ theme is another contributor to the vacancy reduction, as evident in the secondary grade assets.

This ‘flight to quality’ trend underpinned tenant demand for space in the area, with tenants seeking to upgrade within the precinct, as well as suburban migration, particularly from nearby precincts, including Subiaco and Osborne Park. Secondary stock was the driver behind the vacancy reduction, with B grade dropping to 12.9% in June 2018 from 13.9% in December 2017, absorbing close to 1,500 square metres in the six month period. C grade stock decreased 200 basis points to 20.3% in June 2018, absorbing nearly 1,000 square metres.

The A grade market was impacted the most as a result of tenants seeking higher quality space at a similar or cheaper rate, recording negative absorption for the first time in 18 months.

Vacancy has increased to 15.6% in June 2018, up from 12.1% a year earlier, a testament to the ‘flight to quality’ trend as the CBD headline vacancy reduces. As the current cycle continues, the technical vacancy in West Perth and to some extent the suburban, is anticipated to normalise in line with historical averages.

Historic Vacancy Source: PCA / Savills Research Net Supply by Year Source: PCA / Savills Research Supply Throughout the last decade, the West Perth office market has had very few sites available for development. However, over the last two years, there have been sales driven by repositioning strategies that will potentially lead to an increase in building refurbishment and site redevelopment in the future. A mixed-use project at 957-959 Wellington Street has been given development approval, however the project remains mooted and is unlikely to go ahead without a degree of pre-commitment. Plans include the construction of an eight level mixed-use building with four commercial tenancies covering approximately 1,414 square metres of office space.

Having undergone extensive refurbishment in the latter half of 2017, 66 Kings Park Road has been recently reintroduced to the market as at May 2018 with circa 4,500 square metres of A grade space.

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Prime Secondary Total (30,000) (20,000) (10,000) ‐ 10,000 20,000 30,000 40,000 Historic Net Additions Savills Forecast 15yr Avg Source: PCA / Savills Research Savills Research | Briefing Notes – West Perth August 2018 savills.com.au/research 3 Vacancy The impact of favourable market conditions and elevated tenant enquiry in 2017 has materialised into a reduction of headline vacancy in the first half of 2018, dropping from 16.7% in December 2017 to 15.8% in June 2018. However, on a year-on-year basis, the vacancy rate is 200 basis points higher than the five year historical average of 13.2%.

The decrease in the vacancy rate over the six months to June 2018 can be attributed to a large withdrawal of stock from the market. Approximately 4,944 square metres worth of space was removed, the fifth highest withdrawal figure recorded since vacancy data has been tracked. There was no addition of space to the market, which maintained the gap between occupied and vacant stock. Conversely, there was 4,803 square metres returned to the market in the six months prior, as a result of the completion of 66 Kings Park Road’s redevelopment, while there were no withdrawals of stock. This neutral net effect means the ‘flight to quality’ theme is another contributor to the vacancy reduction, as evident in the secondary grade assets.

This ‘flight to quality’ trend underpinned tenant demand for space in the area, with tenants seeking to upgrade within the precinct, as well as suburban migration, particularly from nearby precincts, including Subiaco and Osborne Park. Secondary stock was the driver behind the vacancy reduction, with B grade dropping to 12.9% in June 2018 from 13.9% in December 2017, absorbing close to 1,500 square metres in the six month period. C grade stock decreased 200 basis points to 20.3% in June 2018, absorbing nearly 1,000 square metres.

The A grade market was impacted the most as a result of tenants seeking higher quality space at a similar or cheaper rate, recording negative absorption for the first time in 18 months.

Vacancy has increased to 15.6% in June 2018, up from 12.1% a year earlier, a testament to the ‘flight to quality’ trend as the CBD headline vacancy reduces. As the current cycle continues, the technical vacancy in West Perth and to some extent the suburban, is anticipated to normalise in line with historical averages.

Historic Vacancy Source: PCA / Savills Research Net Supply by Year Source: PCA / Savills Research Supply Throughout the last decade, the West Perth office market has had very few sites available for development. However, over the last two years, there have been sales driven by repositioning strategies that will potentially lead to an increase in building refurbishment and site redevelopment in the future. A mixed-use project at 957-959 Wellington Street has been given development approval, however the project remains mooted and is unlikely to go ahead without a degree of pre-commitment. Plans include the construction of an eight level mixed-use building with four commercial tenancies covering approximately 1,414 square metres of office space.

Having undergone extensive refurbishment in the latter half of 2017, 66 Kings Park Road has been recently reintroduced to the market as at May 2018 with circa 4,500 square metres of A grade space.

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Prime Secondary Total (30,000) (20,000) (10,000) ‐ 10,000 20,000 30,000 40,000 Historic Net Additions Savills Forecast 15yr Avg Source: PCA / Savills Research Vacancy Supply

August 2018 savills.com.au/research 4 Savills Research | Briefing Notes – West Perth Office In the 12 months to June 2018, Savills identified approximately 12,009 square metres of leasing activity (>500 square metres) in the West Perth office market. Leasing volumes are below the previous 12 months, however not dissimilar to average annual volumes over the last decade when looking exclusively at activity above 500 square metres.

There was circa 4,200 square metres of leasing transactions in the sub 500 square metre market over the same reporting period.

Of the 12,000 square metres (>500 square metres in size) reported leased in the 12 months to June 2018, ‘Finance and Insurance’ remains the most dominant of industries, accounting for 58% of transactions by volume, or 6,967 square metres. ‘Mining’ accounted for the second largest proportion of deals, at 31% or 3,715 square metres. Centuria Metropolitan REIT acquired the leasehold interest of 42-46 Colin Street West Perth from Dexus for $33.55 million in July 2017. Insurance Australia Group (IAG), who had been a long-term tenant in the building, renewed terms with Dexus for 6,967 square metres at the time of the sale.

The renewal is the largest transaction in the last 12 months.

In February 2018, in another large renewal, CHC Helicopters extended its lease by five years for 1,072 square metres within IBM Centre at 1060 Hay Street. Western Areas, a Western Australian nickel producer, is also understood to have renewed terms for their tenancy in 2 Kings Park Road. The renewal follows Mount Gibson Iron resigning in the same building for another term from June this year. Recent Notable Leases (by Area Leased) Tenant Property Date | NLA Type | Rent | Term IAG 42-46 Colin St, West Perth Jul-17 | 6,967 r | n.a | 5 Western Areas 2 Kings Park Rd, West Perth Mar-18 | 1,440 d | n.a | 4 Mount Gibson Iron 2 Kings Park Rd, West Perth Sep-17 | 1,203 r | n.a | 4 CHC Helicopters 1060 Hay St, West Perth Feb-18 | 1,072 r | n.a | 5 BC Prosthodontics, Core Dental Ceramics 143 Colin St, West Perth Nov-17 | 812 d | n.a | 10 LWP Property Group 1060 Hay St, West Perth Nov-17 | 515 d | n.a | 5 Savills Research | Briefing Notes – West Perth August 2018 Leasing Activity & Demand In the 12 months to June 2018, Savills identified approximately 12,009 square metres of leasing activity (>500 square metres) in the West Perth office market.

Leasing volumes are below the previous 12 months, however not dissimilar to average annual volumes over the last decade when looking exclusively at activity above 500 square metres. There was circa 4,200 square metres of leasing transactions in the sub 500 square metre market over the same reporting period.

Of the 12,000 square metres (>500 square metres in size) reported leased in the 12 months to June 2018, ‘Finance and Insurance’ remains the most dominant of industries, accounting for 58% of transactions by volume, or 6,967 square metres. ‘Mining’ accounted for the second largest proportion of deals, at 31% or 3,715 square metres. Metropolitan REIT acquired the leasehold interest of 42-46 Colin Street West Perth from Dexus for $33.6 million in July 2017. Insurance Australia Group (IAG), who had been a long-term tenant in the building, renewed terms with Dexus for 6,697 square metres at the time of the sale.

The renewal is the largest transaction in the last 12 months. In February 2018, in another large renewal, CHC Helicopters extended its lease by five years for 1,072 square metres within IBM Centre at 1060 Hay Street. Western Areas, a Western Australian nickel producer, is also understood to have renewed terms for their tenancy in 2 Kings Park Road. The renewal follows Mount Gibson Iron resigning in the same building for another term from June this year.

Leasing Activity by Size (> 500 sq m) Source: Savills Research Leasing Activity by Tenant Type (> 500 sq m) Source: Savills Research Top Recent Leases (by Area Leased) Property Tenant Date | NLA Type | Rent | Term 42-46 Colin St IAG Jul-17 | 6,967 r | n.a | 5 2 Kings Park Rd Western Areas Mar-18 | 1,440 d | n.a | 4 2 Kings Park Rd Mount Gibson Iron Sep-17 | 1,203 r | n.a | 4 1060 Hay St CHC Helicopters Feb-18 | 1,072 r | n.a | 5 143 Colin St BC Prosthodontics Pty Ltd, Core Dental Ceramics Pty Ltd Nov-17 | 812 d | n.a | 10 1060 Hay St LWP Property Group Nov-17 | 515 d | n.a | 5 Source: Savills Research Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 10,000sqm Fin & Ins ‐ 58.0% Mining ‐ 30.9% W'Sale & Retail ‐ 6.8% Prop & Bus Serv ‐ 4.3% Savills Research | Briefing Notes – West Perth August 2018 Leasing Activity & Demand In the 12 months to June 2018, Savills identified approximately 12,009 square metres of leasing activity (>500 square metres) in the West Perth office market.

Leasing volumes are below the previous 12 months, however not dissimilar to average annual volumes over the last decade when looking exclusively at activity above 500 square metres. There was circa 4,200 square metres of leasing transactions in the sub 500 square metre market over the same reporting period.

Of the 12,000 square metres (>500 square metres in size) reported leased in the 12 months to June 2018, ‘Finance and Insurance’ remains the most dominant of industries, accounting for 58% of transactions by volume, or 6,967 square metres. ‘Mining’ accounted for the second largest proportion of deals, at 31% or 3,715 square metres. Metropolitan REIT acquired the leasehold interest of 42-46 Colin Street West Perth from Dexus for $33.6 million in July 2017. Insurance Australia Group (IAG), who had been a long-term tenant in the building, renewed terms with Dexus for 6,697 square metres at the time of the sale.

The renewal is the largest transaction in the last 12 months. In February 2018, in another large renewal, CHC Helicopters extended its lease by five years for 1,072 square metres within IBM Centre at 1060 Hay Street. Western Areas, a Western Australian nickel producer, is also understood to have renewed terms for their tenancy in 2 Kings Park Road. The renewal follows Mount Gibson Iron resigning in the same building for another term from June this year.

Leasing Activity by Size (> 500 sq m) Source: Savills Research Leasing Activity by Tenant Type (> 500 sq m) Source: Savills Research Top Recent Leases (by Area Leased) Property Tenant Date | NLA Type | Rent | Term 42-46 Colin St IAG Jul-17 | 6,967 r | n.a | 5 2 Kings Park Rd Western Areas Mar-18 | 1,440 d | n.a | 4 2 Kings Park Rd Mount Gibson Iron Sep-17 | 1,203 r | n.a | 4 1060 Hay St CHC Helicopters Feb-18 | 1,072 r | n.a | 5 143 Colin St BC Prosthodontics Pty Ltd, Core Dental Ceramics Pty Ltd Nov-17 | 812 d | n.a | 10 1060 Hay St LWP Property Group Nov-17 | 515 d | n.a | 5 Source: Savills Research Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 10,000sqm Fin & Ins ‐ 58.0% Mining ‐ 30.9% W'Sale & Retail ‐ 6.8% Prop & Bus Serv ‐ 4.3% Leasing Activity by Precinct (> 500 square metres) Source: Savills Research Leasing Activity by Tenant Type (> 500 square metres) Source: Savills Research Leasing Activity & Demand Source: Savills Research Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal

August 2018 savills.com.au/research 5 Savills Research | Briefing Notes – West Perth Office In the 12 months to June 2018, Savills has identified approximately $145.1 million worth of office transactions (greater than $5 million) in the West Perth. Investment volumes are well-above average, underpinned by the sale of 836 Wellington Street for $91.325 million in June 2018 and Centuria’s acquisition of 42-46 Colin Street for $33.6 million in July last year. Growthpoint Properties Australia acquired the A grade asset at 836 Wellington Street from Investa Office Fund at a 20% premium to its December 2017 book value.

This is the first Perth office acquisition for Growthpoint, who has previously only been active in Perth industrial, having acquired four industrial properties at Perth Airport last year for $46 million. 836 Wellington Street is fully leased to the Federal Government’s Department of Home Affairs. Investa cut a new 10-year lease in 2017 with the Government, who have been long-term tenants in the building. The sale price reflects a market yield of 6.19% and is due to settle in October 2018.

87 Colin Street exchanged hands between two private parties for $8.50 million in June 2018. The new owner is undertaking a refurbishment program to upgrade the office accommodation and the end of trip facilities after purchasing the property with vacant possession. In July 2017, Centuria Metropolitan REIT announced that it had made its first foray into Perth’s office market, acquiring two assets, including the Hatch Building at 144 Stirling Street, Perth for $58.2 million from Charter Hall, and the leasehold title of 42-46 Colin Street in West Perth for $33.55 million from Dexus. The five level building is located on land that is owned by The Perth Diocesan Trustees and has been the home to Insurance Australia Group (IAG) since 2002.

IAG continue to occupy approximately 6,967 square metres over four floors, and recently reset market lease terms with Dexus, resulting in a WALE of 4.5 years at the time of sale. The sale price reflects a market yield of 7.57%.

Sales Activity by Price Savills Research | Briefing Notes – West Perth August 2018 savills.com.au/research 5 Sales Activity In the 12 months to June 2018, Savills has identified approximately $145.1 million worth of office transactions (greater than $5 million) in the West Perth. Investment volumes are well-above average, underpinned by the sale of 836 Wellington Street for $91.325 million in June 2018 and Centuria’s acquisition of 42-46 Colin Street for $33.6 million in July last year. Growthpoint Properties Australia acquired the A grade asset at 836 Wellington Street from Investa Office Fund at a 20% premium to its December 2017 book value.

This is the first Perth office acquisition for Growthpoint, who has previously only been active in Perth industrial, having acquired four industrial properties at Perth Airport last year for $46 million. 836 Wellington Street is fully leased to the Federal Government’s Department of Home Affairs. Investa cut a new 10-year lease in 2017 with the Government, who have been long-term tenants in the building. The sale price reflects a market yield of 6.19% and is due to settle in October 2018.

87 Colin Street exchanged hands between two private parties for $8.50 million in June 2018. The new owner is undertaking a refurbishment program to upgrade the office accommodation and the end of trip facilities after purchasing the property with vacant possession. In July 2017, Centuria Metropolitan REIT announced that it had made its first foray into Perth’s office market, acquiring two assets, including the Hatch Building at 144 Stirling Street, Perth for $58.2 million from Charter Hall, and the leasehold title of 42-46 Colin Street in West Perth for $33.6 million from Dexus. The five level building is located on land that is owned by The Perth Diocesan Trustees and has been the home to Insurance Australia Group (IAG) since 2002.

IAG continue to occupy approximately 6,967 square metres over four floors, and recently reset market lease terms with Dexus, resulting in a WALE of 4.5 years at the time of sale. The sale price reflects a passing yield of 8.70%.

As of August 2018 it is understood that the sale of 1 Havelock Street is close to being finalised, with a price in the order of approximately $30 million. The circa 5,000 square metre asset was fully leased as at 30 June. Sales Activity by Size (West Perth) Source: Savills Research Vendor & Purchaser Type Source: Savills Research Capital Values vs. Market Yield Source: Savills Research $0m $50m $100m $150m $200m $250m $300m $5m ‐ $50m $50m ‐ $100m >$100m 0% 20% 40% 60% 80% 100% Purchasers Vendors Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other ‐ 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Capital Value ‐ West Perth Market Yield (RHS) Savills Research | Briefing Notes – West Perth August 2018 Sales Activity In the 12 months to June 2018, Savills has identified approximately $145.1 million worth of office transactions (greater than $5 million) in the West Perth.

Investment volumes are well-above average, underpinned by the sale of 836 Wellington Street for $91.325 million in June 2018 and Centuria’s acquisition of 42-46 Colin Street for $33.6 million in July last year.

Growthpoint Properties Australia acquired the A grade asset at 836 Wellington Street from Investa Office Fund at a 20% premium to its December 2017 book value. This is the first Perth office acquisition for Growthpoint, who has previously only been active in Perth industrial, having acquired four industrial properties at Perth Airport last year for $46 million. 836 Wellington Street is fully leased to the Federal Government’s Department of Home Affairs. Investa cut a new 10-year lease in 2017 with the Government, who have been long-term tenants in the building. The sale price reflects a market yield of 6.19% and is due to settle in October 2018.

87 Colin Street exchanged hands between two private parties for $8.50 million in June 2018. The new owner is undertaking a refurbishment program to upgrade the office accommodation and the end of trip facilities after purchasing the property with vacant possession. In July 2017, Centuria Metropolitan REIT announced that it had made its first foray into Perth’s office market, acquiring two assets, including the Hatch Building at 144 Stirling Street, Perth for $58.2 million from Charter Hall, and the leasehold title of 42-46 Colin Street in West Perth for $33.6 million from Dexus. The five level building is located on land that is owned by The Perth Diocesan Trustees and has been the home to Insurance Australia Group (IAG) since 2002.

IAG continue to occupy approximately 6,967 square metres over four floors, and recently reset market lease terms with Dexus, resulting in a WALE of 4.5 years at the time of sale. The sale price reflects a passing yield of 8.70%.

As of August 2018 it is understood that the sale of 1 Havelock Street is close to being finalised, with a price in the order of approximately $30 million. The circa 5,000 square metre asset was fully leased as at 30 June. Sales Activity by Size (West Perth) Source: Savills Research Vendor & Purchaser Type Source: Savills Research Capital Values vs. Market Yield Source: Savills Research $0m $50m $100m $150m $200m $250m $300m $5m ‐ $50m $50m ‐ $100m >$100m 0% 20% 40% 60% 80% 100% Purchasers Vendors Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other ‐ 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Capital Value ‐ West Perth Market Yield (RHS) Savills Research | Briefing Notes – West Perth August 2018 Sales Activity In the 12 months to June 2018, Savills has identified approximately $145.1 million worth of office transactions (greater than $5 million) in the West Perth.

Investment volumes are well-above average, underpinned by the sale of 836 Wellington Street for $91.325 million in June 2018 and Centuria’s acquisition of 42-46 Colin Street for $33.6 million in July last year.

Growthpoint Properties Australia acquired the A grade asset at 836 Wellington Street from Investa Office Fund at a 20% premium to its December 2017 book value. This is the first Perth office acquisition for Growthpoint, who has previously only been active in Perth industrial, having acquired four industrial properties at Perth Airport last year for $46 million. 836 Wellington Street is fully leased to the Federal Government’s Department of Home Affairs. Investa cut a new 10-year lease in 2017 with the Government, who have been long-term tenants in the building. The sale price reflects a market yield of 6.19% and is due to settle in October 2018.

87 Colin Street exchanged hands between two private parties for $8.50 million in June 2018. The new owner is undertaking a refurbishment program to upgrade the office accommodation and the end of trip facilities after purchasing the property with vacant possession. In July 2017, Centuria Metropolitan REIT announced that it had made its first foray into Perth’s office market, acquiring two assets, including the Hatch Building at 144 Stirling Street, Perth for $58.2 million from Charter Hall, and the leasehold title of 42-46 Colin Street in West Perth for $33.6 million from Dexus. The five level building is located on land that is owned by The Perth Diocesan Trustees and has been the home to Insurance Australia Group (IAG) since 2002.

IAG continue to occupy approximately 6,967 square metres over four floors, and recently reset market lease terms with Dexus, resulting in a WALE of 4.5 years at the time of sale. The sale price reflects a passing yield of 8.70%.

As of August 2018 it is understood that the sale of 1 Havelock Street is close to being finalised, with a price in the order of approximately $30 million. The circa 5,000 square metre asset was fully leased as at 30 June. Sales Activity by Size (West Perth) Source: Savills Research Vendor & Purchaser Type Source: Savills Research Capital Values vs. Market Yield Source: Savills Research $0m $50m $100m $150m $200m $250m $300m $5m ‐ $50m $50m ‐ $100m >$100m 0% 20% 40% 60% 80% 100% Purchasers Vendors Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other ‐ 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Capital Value ‐ West Perth Market Yield (RHS) Source: Savills Research Capital Values ($/sq m) vs.

Market Yield (%) Vendor & Purchaser Type Source: Savills Research Source: Savills Research Sales

August 2018 savills.com.au/research 6 Savills Research | Briefing Notes – West Perth Office Property Price ($m) | Date | NLA Yield | Type | $/sq m 836 Wellington St, West Perth 91.33 | Jun-18 | 11,973 6.19 | e | 7,628 42-46 Colin St, West Perth 33.55 | Jul-17 | 8,439 7.57 | e | 3,982 87 Colin St, West Perth 8.50 | Jul-18 | 2,746 n.a | v | 3,095 As at June 2018, net face rents in West Perth typically range from $275 to $375 per square metre per annum for A grade. B grade rents remained unchanged, ranging from $225 to $275 per square metre per annum. Incentives have been gradually rising over the last three years, resulting in a decline in net effective rents of close to 40% over the same period.

Similar to CBD trends, incentive levels vary by building grade, with A grade buildings now averaging 45%, or above in some cases. This is compounded due to the differing ownership profile that West Perth is known for when comparing to the CBD, with private investors resistant to adjusting incentives on offer to prospective tenants. As at June 2018, net effective rents typically range from $150 to $205 per square metre per annum for A grade and between $125 and $150 per square metre per annum for B Grade.

Savills Research | Briefing Notes – West Perth August 2018 Top Sales Property Price | Date | NLA Yield | Type | $/sq m 836 Wellington St, West Perth 91.33 | Jun-18 | 11,973 6.19 | e | 7,628 42-46 Colin St, West Perth 33.55 | Jul-17 | 8,439 7.57 | e | 3,982 87 Colin St, West Perth 8.50 | Jul-18 | 2,746 n.a | v | 3,095 Source: Savills Research; ;i = Initial, r = Reported, e = Equated, v = Vacant, dev = development Rents As at June 2018, net face rents in West Perth typically range from $275 to $375 per square metre per annum for A grade. B grade rents remained unchanged, ranging from $225 to $275 per square metre per annum.

Incentives have been gradually rising over the last three years, resulting in a decline in net effective rents of close to 40% over the same period. Similar to CBD trends, incentive levels vary by building grade, with A grade buildings now averaging 45%, or above in some cases. This is compounded due to the differing ownership profile that West Perth is known for when comparing to the CBD, with private investors resistant to adjusting incentives on offer to prospective tenants. As at June 2018, net effective rents typically range from $150 to $205 per square metre per annum for A grade and between $125 and $150 per square metre per annum for B Grade.

Net Effective Rents by Grade ($/sq m) Source: Savills Research Net Face & Net Effective Rents (as at Jun-18) Source: Savills Research ‐ 100 200 300 400 500 600 700 Grade A Grade B 325 250 180 140 44.7 44.8 44.9 45 45.1 45.2 45.3 45.4 45.5 45.6 ‐ 50 100 150 200 250 300 350 Grade A Grade B Net Face Rent Net Effective Rent Net Incentive % ‐ rhs Savills Research | Briefing Notes – West Perth August 2018 Top Sales Property Price | Date | NLA Yield | Type | $/sq m 836 Wellington St, West Perth 91.33 | Jun-18 | 11,973 6.19 | e | 7,628 42-46 Colin St, West Perth 33.55 | Jul-17 | 8,439 7.57 | e | 3,982 87 Colin St, West Perth 8.50 | Jul-18 | 2,746 n.a | v | 3,095 Source: Savills Research; ;i = Initial, r = Reported, e = Equated, v = Vacant, dev = development Rents As at June 2018, net face rents in West Perth typically range from $275 to $375 per square metre per annum for A grade.

B grade rents remained unchanged, ranging from $225 to $275 per square metre per annum. Incentives have been gradually rising over the last three years, resulting in a decline in net effective rents of close to 40% over the same period. Similar to CBD trends, incentive levels vary by building grade, with A grade buildings now averaging 45%, or above in some cases. This is compounded due to the differing ownership profile that West Perth is known for when comparing to the CBD, with private investors resistant to adjusting incentives on offer to prospective tenants. As at June 2018, net effective rents typically range from $150 to $205 per square metre per annum for A grade and between $125 and $150 per square metre per annum for B Grade.

Net Effective Rents by Grade ($/sq m) Source: Savills Research Net Face & Net Effective Rents (as at Jun-18) Source: Savills Research ‐ 100 200 300 400 500 600 700 Grade A Grade B 325 250 180 140 44.7 44.8 44.9 45 45.1 45.2 45.3 45.4 45.5 45.6 ‐ 50 100 150 200 250 300 350 Grade A Grade B Net Face Rent Net Effective Rent Net Incentive % ‐ rhs Net Effective Rents by Grade ($/sq m) Net Face & Net Effective Rents (as at Jun-2018) Source: Savills Research Source: Savills Research Recent Notable Sales (by Sale Price) Rents Source: Savills Research; ;i = Initial, r = Reported, e = Equated, v = Vacant, dev = development

August 2018 savills.com.au/research 7 Savills Research | Briefing Notes – West Perth Office There have been a number of improvements in the state economy. Growth in office job advertisements is now the highest nationally and the market is now characterised by more stable commodity prices. The fall in mining investment numbers has mostly run its course and confidence levels have lifted as noted by the demand improvements being seen in the CBD market. In the short-term, expect a continuation of tenants migrating from other inner suburban locations to West Perth, and the migration of some tenants to the CBD.

The gap between Prime (A grade) and Secondary space is likely to remain as a result. However, on the back of improvement in confidence levels, the market may see an increase in speculative refurbishment activity as owners, new and existing, look to capitalise on tenant demand for Prime grade stock. While the vacancy rate has increased on a 12 months basis, no major shifts in the headline rate are expected in the short- term as has happened in the past. On that note, expect incentives to hold a similar range, however, due to the ownership profile of the market, it will remain a building-by-building proposition.

Recent transactional activity has generally represented investors operating under counter-cyclical strategies. In light of current vacancy levels and the low volume of A grade stock competing in the market, West Perth may see a continuation of this type of activity in the short-term. Outlook

August 2018 savills.com.au/research 8 Savills Research | Briefing Notes – West Perth Office C O L I N S T M I T C H E L L F W Y H A V E L O C K S T THO M AS ST S U T H E R L A N D S T MURRAY ST ARTHUR ST MURRAY ST MARKET ST WELLINGTON ST HAY ST ORD ST KINGS PARK RD ROE ST RAILWAY ST WEST PERTH West Perth LEGEND Development Map Building Address Dev Stage NLA Exp.

Comp Tenant 957-959 Wellington St Mooted 1,414 Mooted 1 1

August 2018 savills.com.au/research 9 Savills Research | Briefing Notes – West Perth Office

August 2018 savills.com.au/research 10 Document type | Briefing Notes - West Perth Office West Perth Key Indicators (as at Jun-18) A Grade B Grade Low High Low High Rental - Gross Face ($/sq m) 450 550 365 415 Rental - Net Face ($/sq m) 275 375 225 275 Incentive Level Net 40% 50% 40% 50% Rental - Net Effective ($/sq m) 150 205 125 150 Outgoings - Operating ($/sq m) 80 90 50 55 Outgoings - Statutory ($/sq m) 75 100 75 100 Outgoings - Total ($/sq m) 155 190 125 155 Typical Lease Term 3 5 3 5 Yield - Market (% Net Face Rental) 7.50 8.25 8.25 9.25 IRR (%) 8.00 8.50 8.00 9.75 Cars Permanent Reserved ($/pcm) 250 250 200 250 Cars Permanent ($/pcm) 325 350 300 325 Office Capital Values ($/sq m) 2,950 5,300 2,400 3,300 Key State Contacts Savills is a leading global property service provider listed on the London Stock Exchange.

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