Quarter Time National Office Q4/2019 · 2020-03-30 · savills.com.au/research Quarter Time...

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Quarter TimeNational Office Q4/2019

Savills Research Australia

Highlights

• Office remains the preferred asset class supportedby a chase for high quality assets, strong tenantdemand, scarcity and foreign capital.

• Vacancy in Sydney and Melbourne remains below4% highlighting a tight market.

• Sales volumes over the last 12 months wereabove historical averages, driven by strong investordemand with international investors making up 28%of transactions greater than $5 million.

Sales Activity(last 12 mo)

$24.90 billion

238 Sales ($5m+)

Leasing Activity(last 12 mo)

1.38 million sq m

264 Leases (1,000 sq m+)

Employment12.996 million ppl

2.02% annual growth

Trend details

Source: Savills Research, ABS

Q4/2019

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Savills Research | Quarter Time – National Office

Report Contents

Key Highlights 3National Indicator Summary 4Office Economic Drivers 7National Sales Activity 8National Leasing Activity 9

State Indicators and Major ActivityNew South Wales 10Victoria 17Queensland 24Australian Capital Territory 30Western Australia 35South Australia 40

About Savills 45Disclaimer 46

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Executive SummaryThe following report discusses the Australian office market as a whole and the individual States with commentaries, metrics and statistics outlined.

The Australian economy remains defined by continued low inflation at 1.8%, a stubborn unemployment rate of 5.2% and a worryingly high underemployment rate of 8.6%, resulting in an underachieving GDP growth rate of 1.7%. As such business and consumer sentiment remains weak, with business investment below trend. With this back drop (one that is similar to other western economies), the Reserve Bank of Australia has continued to pump prime the economy with lower interest rates, easing again on 1 October 25bp to an all-time low of 0.75%.

2019’s easing in Monetary Policy are arguably yet to be fully felt through the economy, but it’s clear the RBA is trying to kick-start activity to address an underachieving economy. The RBA is trying to stimulate manageable inflation to spark business confidence and investment that would in turn deliver income growth and hence consumer confidence and spending. Easing monetary policy is not yet having its desired impact. It appears the RBA cannot do this alone, and there are growing calls for greater government intervention via infrastructure spending into regional and metropolitan areas, as well as personal income tax cuts reform to encourage spending.

The unintended consequence of the resulting low for longer interest rate environment, is that investors (domestic and international) are aggressively chasing income producing assets, particularly property assets with strong lease covenants, long WALE and low maintenance capex requirements meaning demand for quality A grade and Premium assets is high. In addition, investors continue to seek assets with future development and value add potential.

Office remains our preferred asset sector from an income and capital appreciation perspective, supported by high quality, tenant demand and scarcity. Sydney and Melbourne CBD markets are the preferred locations for capital, however there is growing interest in North Sydney and Parramatta markets as Sydney tenants look to diversify their locations and move back office functions out of the CBD. Office returns remained the strongest of the three sectors, with total returns in the 12 months to December 2019 being recorded at 11.5% (latest available MSCI data), followed by Industrial at 11.3% and Retail at 2.0%. Melbourne was again the best performing CBD giving a total return of 13.3%. Returns in Parramatta have fallen drastically over the last 12 months, with total returns now stabilizing at 9.7% (down from highs of 20% earlier in the year) which has been driven by falls in capital returns now at 4.0% (down from 13.5% in March 2019). We attribute this to these asset prices stabilising and returning to more sustainable capital growth levels.

With interest rates low for longer, investors have remained confident in the office market. Supporting our view, is the yield differential to bonds, where the National CBD A Grade office yield is 4.98% versus 10yr bond at 1.20%. A margin of circa 4% remains a trigger signal where in September 2012, we saw similar margins having moved out to 4.4% triggering the reflation of the office market, albeit it was also supported by the global economy coming out of the GFC impact. Post September 2012, bond rates did rise, yet office yields continued to compress.

The risk remains that with interest rates low, developers will again look to commence speculative builds, with the view to sell on completion. However financing still remains difficult to secure for higher risk ventures. We believe this structural discipline will restrict the flood of Office assets onto the market, restrict vacancy expansion and as such underwrite further capital appreciation and yield compression in 2020.

Global investors were very active in the office market in 2019, accounting for 28% or $7 billion of all transactions (over $5 million), and are expected to increase their profile in 2020, supported by relatively higher asset yields, low cost of debt and a near low Australian exchange rate.

Q4/2019



Key Highlights

• Savills expect that further cap rate compression canoccur in Office (from both a capital and income growth perspective) as global interest rates remain low for longer. With office assets demonstrating a superior yield margin of around 4%, whilst also providing income and capital growth outcomes, we expect to see ongoing demand for this asset class from domestic and foreign investors.

• The cost of debt curve highlights the flatness of the bondand swap yield curves. The total cost of debt curve depicts swap plus margin payable by corporate property borrowers. Average borrower term is 5 years or 2.52%, which reflects favourable to asset yield conditions. We refer to this as accretive borrowing.

• On a national basis, sales volumes were recorded athistorically high levels. Savills tracked $24.91 billion ofoffice transactions (>$5 million) over the 12 months to December 2019, with 52 assets greater than $100 million transacting (totaling $19 billion), demonstrating investor demand for high lease covenant quality office assets.

• NSW, Victoria and Queensland are the main destinationsof capital.

• The yield compression cycle continues on a nationalbasis, with firm demand supported by limited supply andaccretive yields. We expect to see this continue in 2020particularly for quality assets in Sydney and Melbourne, aswe believe that office is not yet deemed ‘expensive’ whencomparing to historically low 10 year bond rates and majorglobal Office markets.

• Vacancy rates trended downwards throughout 2019across all CBD’s, with Sydney and Melbourne sitting wellbelow the Australian CBD average. Overall national CBDvacancy reduced from 8.3% to 8.0% year on year toDecember 2019.

Source: Savills Research

Total Vacancy by Market

A Grade Market Yield - Average

Source: PCA, Savills Research

Asset Class & Bond Yields

Australian Cost of Debt Curve

Note: Average Retail Yield includes NSW, Vic, Qld, WA & SA Regional, Sub-Regional & Neighbourhood Centres; Average Office Yield: A grade East Coast exc. Canberra; Industrial Average includes Prime yields Syd West, Mel West, Bri Southside, Per Core & Adl North West Precincts Source: Savills Research/RBA

Q4/2019



National CBD Average Yield vs 10yr Bond Rate

Note: Average CBD East Coast Yield (exc. Canberra) Source: RBA, Savills Research

CBD Averages – A Grade

National Office

N.F. Rent N.E. Rent Market Yield IRR Cap. Value

Sydney CBD 1,140 (4.6%) 905 (4.0%) 4.70 (-05bps) 6.45 (-20bps) 20,300 (-)

Melbourne CBD 640 (8.5%) 470 (8.0%) 4.75 (-45bps) 6.50 (-25bps) 12,500 (25.0%)

Brisbane CBD 580 (7.4%) 320 (12.3%) 5.50 (-40bps) 6.55 (-20bps) 10,800 (8.0%)

Perth CBD 600 (4.3%) 310 (5.1%) 6.50 (-40bps) 7.15 (-35bps) 9,000 (12.5%)

Adelaide CBD 410 (10.8%) 255 (4.1%) 6.25 (-100bps) 7.50 (-75bps) 5,800 (16.0%)

Canberra Civic 390 (5.4%) 290 (-) 5.50 (-75bps) 6.75 (-100bps) 7,400 (1.4%)

855 (1.8%) 665 (2.3%) 5.25 (-) 6.50 (-30bps) 16,300 (6.5%)

385 (4.1%) 280 (3.7%) 5.50 (-25bps) 6.75 (-25bps) 7,300 (4.3%)

550 (0.9%) 455 (1.1%) 5.25 (-25bps) 6.65 (-25bps) 10,800 (4.9%)

480 (4.3%) 390 (4.0%) 5.00 (-90bps) 6.40 (-50bps) 8,800 (18.9%)

520 (11.8%) 425 (10.4%) 5.40 (-110bps) 6.65 (-60bps) 9,500 (39.7%)

510 (8.5%) 280 (14.3%) 5.90 (-25bps) 6.75 (-50bps) 9,300 (5.7%)

330 (-) 260 (-) 7.65 (-) 9.75 (-) 4,000 (-)

360 (2.9%) 265 (8.2%) 7.50 (-65bps) 9.50 (-) 4,800 (-)

340 (-) 185 (-) 7.40 (-) 7.75 (-25bps) 5,500 (10.0%)

360 (4.3%) 290 (11.5%) 6.65 (-85bps) 7.40 (-125bps) 5,300 (20.5%)

365 (2.8%) 235 (-11.3%) 6.00 (-90bps) 7.50 (-75bps) 6,300 (-)

Fringe Market Averages – A Grade

National Office

N.F. Rent N.E. Rent Market Yield IRR Cap. Value

North Sydney 855 (1.8%) 665 (2.3%) 5.25 (-) 6.50 (-30bps) 16,300 (6.5%)

North Ryde 385 (4.1%) 280 (3.7%) 5.50 (-25bps) 6.75 (-25bps) 7,300 (4.3%)

Parramatta 550 (0.9%) 455 (1.1%) 5.25 (-25bps) 6.65 (-25bps) 10,800 (4.9%)

St Kilda Rd 480 (4.3%) 390 (4.0%) 5.00 (-90bps) 6.40 (-50bps) 8,800 (18.9%)

Melbourne Suburban 520 (11.8%) 425 (10.4%) 5.40 (-110bps) 6.65 (-60bps) 9,500 (39.7%)

Brisbane Fringe 510 (8.5%) 280 (14.3%) 5.90 (-25bps) 6.75 (-50bps) 9,300 (5.7%)

Sunshine Coast 330 (-) 260 (-) 7.65 (-) 9.75 (-) 4,000 (-)

Gold Coast 360 (2.9%) 265 (8.2%) 7.50 (-65bps) 9.50 (-) 4,800 (-)

West Perth 340 (-) 185 (-) 7.40 (-) 7.75 (-25bps) 5,500 (10.0%)

Adelaide Fringe 360 (4.3%) 290 (11.5%) 6.65 (-85bps) 7.40 (-125bps) 5,300 (20.5%)

Canberra non-Civic 365 (2.8%) 235 (-11.3%) 6.00 (-90bps) 7.50 (-75bps) 6,300 (-)

Note: 12 month change shown in brackets, NC = No Change. Please note there have been material changes to this report and some methodologies.

Q4/2019



National Face Rents, Effective Rents and Incentive Comparison – A Grade Average

12 Month Net Effective Rental & Capital Growth – A Grade Average



Yield and IRR Spread to Bond Rates – A Grade Average

Source: RBA, Savills Research

Q4/2019



Typical Capital Value Range ($/sq m) – A Grade Average

Capital Value CAGRs by Period – A Grade Average Net Effective Rental CAGRs by Period – A Grade Average


Note: CAGR = Compound Average Growth Rate


Note: CAGR = Compound Average Growth Rate


Q4/2019



Office Sector Economic Drivers

NAB Business Conditions

Source: RBA, ABS, NAB

Annual Growth in Employment

Annual Growth in Professional Job Advertisements - % (to Nov-19)

0.04

0.97

1.50

1.60

2.02

2.28

2.82

3.52

3.55

SA

NT

WA

NSW

AUS

QLD

VIC

TAS

ACT

Source: DEEWR

0.04

0.97

1.50

1.60

2.02

2.28

2.82

3.52

3.55

SA

NT

WA

NSW

AUS

QLD

VIC

TAS

ACT

0.04

0.97

1.50

1.60

2.02

2.28

2.82

3.52

3.55

SA

NT

WA

NSW

AUS

QLD

VIC

TAS

ACT

Source: ABS

Annual Growth in Employment by State - (% to Jan-20)

0.04

0.97

1.50

1.60

2.02

2.28

2.82

3.52

3.55

SA

NT

WA

NSW

AUS

QLD

VIC

TAS

ACT

Summary of State Economic Indicators

Key State Indicators (%) Latest NSW VIC QLD WA SA ACT AUS

SFD / GDP Growth Sep-19 1.4 (2.8) 2.8 (3.3) 1.1 (1.9) -0.8 (1.2) 0.9 (1.9) 2.8 (2.6) 1.8 (2.6)

Population Growth Jun-19 1.4 (1.4) 2.1 (2.1) 1.7 (1.6) 1.1 (1.6) 0.9 (0.9) 1.5 (1.9) 1.5 (1.6)

Employment Growth Jan-20 1.6 (1.9) 2.8 (2.4) 2.3 (1.5) 1.5 (1.4) 0.0 (0.6) 3.6 (1.4) 2.0 (1.8)

Unemployment Rate Jan-20 4.5 (5.2) 4.8 (5.6) 6.2 (6.0) 5.8 (5.3) 6.1 (6.2) 3.3 (3.9) 5.2 (5.5)

CPI (Inflation) Dec-19 1.6 (2.2) 2.0 (2.2) 2.0 (2.1) 1.6 (1.8) 2.1 (2.1) 1.7 (2.0) 1.8 (2.1)

Source: ABS, RBA. Note: 12 month change shown in brackets.

Source: ABS

Q4/2019



National Sales Activity

Reported Transaction Activity – Sales $5m+


Top Sales by Value ($m)


Q4/2019



National Leasing Activity

Reported Leasing Activity by CBD – Leases 1,000sq m+

Leasing Composition by Type – Leases 1,000sq m+ Leasing Composition by Grade – Leases 1,000sq m+

Top Leases by Area Leased (sq m)





Q4/2019



New South Wales

December quarter was somewhat uneventful in terms of transactional activity but was highlighted by further yield compression, strong rental uplift and continuing low vacancies. However the overarching theme of the quarter was a lack of sales activity, as owners held onto their assets as capital values continue to rise. The other aspect to this theme is by holding onto assets, replacement and upgrade properties are scarce, exacerbating the problem of turnover.¬

We saw this issue emerging in the September quarter and has continued in the December quarter, where Sydney CBD (and Melbourne CBD) assets have become “core” and have been “buried” into portfolios. This has added to the scarcity factor and hence contributed to further yield compression. The driving factor behind this remains low for longer interest rates, both domestically and globally, with low cost of capital investors continuing to look for quality Australian property assets, supported by the weak Australian dollar.

Net Face rents for Premium and A Grade increased approximately 2% over the quarter and 9.8% and 4.4% respectively year on year, reflecting the strong market and tight vacancy. North Sydney and Parramatta were flat over the quarter reflecting pre-committed developments underway. Incentives remained unchanged at 20% for Premium and 18% for A Grade in the CBD, however we anticipate that these may increase over the next 12 months.

We are beginning to see examples of speculative developments being discussed as capital values appreciate and yields compress. 2020 will be an interesting year for this form of development, but it still stands that development sites in Sydney CBD are scarce and development in North Sydney and Parramatta are perhaps in equilibrium.

Typical to all the States has been the growth in statutory outgoings as land tax charges and land values continue to increase. The December quarter has seen this growth rate stabilize however year on year growth stands at approximately 20%. Operating outgoings have increased year on year, however at more sustainable levels.

Overall the December quarter was a consolidating one with sales turnover low versus recent levels and evident rent growth. Incentives are showing signs of increasing balanced by stable rates for renewals, while new tenants into existing buildings and tenants into new developments are often getting higher rates above the average. This trend is expected to be more evident in 2020.

PCA OMR Statistics (Dec-19)

Sydney CBD North Sydney Parramatta Macquarie Park AUS CBD

Total Stock 4,952,281 821,132 768,421 859,034 17,899,767

Total Vacancy 195,563 62,516 24,228 37,753 1,436,129

Vacancy (%) 3.9 (6.8) 7.6 (8.3) 3.2 (6.3) 4.4 (7.9) 8.0 (9.4)

Net Absorption (12m) -47,747 (42,127) 3,823 (2,031) 46,523 (12,993) 4,361 (13,188) 34,164 (176,578)

Net Absorption (%) -1.0 (0.9) 0.5 (0.3) 6.7 (1.9) 0.5 (1.8) 0.2 (1.1)

Stock Additions 78,828 43,156 62,174 - 360,703

Stock Withdrawals 135,780 31,454 13,300 - 378,561

Net Additions -56,952 (22,993) 11,702 (-1,510) 48,874 (8,677) (7,371) -11,248 (189,802)

Net Additions (% of tot) -1.1 (0.5) 1.4 (-0.2) 6.8 (1.2) 0.0 (0.9) -0.1 (1.1)

Source: PCA, Savills Research. Note: 10yr Average shown in brackets.

Q4/2019



Key Highlights

• The Sydney CBD market continues to lead record neteffective rental growth supported by tight office space supply. Interestingly, Sydney CBD rental growth is yet to positively influence the other major Sydney sub markets with capital value growth leading.

• Total vacancy in Sydney CBD rose marginally to 3.9% inDec 2019 (PCA) from 3.7% in June 2019. This was onthe back of an increase in sublease vacancy (from 0.2%to 0.5%). The fringe markets followed the lead with NorthSydney and Macquarie Park falling to 7.6% and 4.4%respectively. Parramatta, albeit still very tight, increasedto 3.2% (from 2.8% in June) which was largely attributedto the delivery of 4 Parramatta Square.

• Vacancies across Sydney remain well below the10yr average with Sydney CBD at 3.9% vs 6.8% and Parramatta 3.2% vs 6.3%. This is sparking more development consideration for future delivery.

• Parramatta development supply is largely pre-committedwhich will support rental growth and capital value growthgoing forward.

• Leasing activity increased meaningfully to equate to near2012 levels as tenants roll into new premises and expand their footprint.

• Incentives, while flat in the quarter at 20% for Premiumand 18% for A Grade, there are signs that they will beginto increase in the next 12 months.



Sydney Office Markets - Net Effective Rent (A Grade $/sqm)

Sydney CBD Leasing Volumes (1,000sqm+)

Sydney Office Markets - Total Vacancy Rate


Q4/2019



Key Highlights

• Capital values across Sydney’s CBD and fringe marketswere flat in the quarter although cap rates did compressmarginally from 4.75% in September to 4.70%

• Average capital values in Sydney CBD were recordedat $26,250/sqm for Premium and $20,250/sqm for AGrade.

• Yield compression continued in the fourth quarter, inparticular for Macquarie Park falling 25bps. North Sydneyremained flat although a number of transactions forredevelopment occurred. Notably, Stockland purchased118 & 122 Walker Street (adjacent to their building at110 Walker Street) for $121 million with the potential toredevelop 60,000 square metres of office space.

• Transaction volumes reached record highs across 2019with over $8 billion of transactions recorded ($5m+) inSydney CBD. In June, Blackstones acquisition fromScentre Group of 100 Market St, 85 Castlereagh St and77 Castlereagh St for $1.52 billion realised an initial yieldof 4.58%. 100 Market St was then divested in Decemberfor $683 million (initial yield 3.94%) to Hong Kong basedinvestor Link REIT.

• Within the Sydney CBD, North Sydney and Parramattamarkets we expect to see further yield compression onthe back of sustained rental growth and strong demandfundamentals, supported by disciplined developers.

• An emerging thematic is that owners are faced with thedilemma that if they sell, how do they replace the assetand can they upgrade the asset quality in their portfolio?As such high demand for A Grade and Premium Officeremains, with more global investors looking for assets.



Sydney CBD Capital Value & Market Yield (A Grade $/sqm)

Sydney CBD Annual Sales Volumes ($5m+)

Average Market Yield by Market (%)


Q4/2019



Sydney CBD Key Indicators

Premium A Grade B Grade

Low High Low High Low High

Rental - Gross Face ($/sq m) 1,430 1,830 1,200 1,475 970 1,240

Rental - Net Face ($/sq m) 1,200 1,600 1,000 1,275 800 1,070

Incentive Level – Gross (%) 18 21 15 20 15 20

Rental - Net Effective ($/sq m) 920 1,240 790 1,015 630 855

Outgoings - Operating ($/sq m) 140 160 120 135 90 115

Outgoings - Statutory ($/sq m) 70 90 60 80 55 75

Outgoings - Total ($/sq m) 210 250 180 215 145 190

Typical Lease Term (yrs) 5 10 5 10 3 6

Yield - Market (% Net Face Rental) 4.25 4.75 4.38 5.00 4.50 5.25

IRR (%) 6.25 6.50 6.25 6.63 6.25 6.75

Cars Permanent Reserved ($/pcm) 990 1,080 900 1,070 720 790

Office Capital Values ($/sq m) 22,500 30,000 18,500 22,000 13,500 20,000

Source: Savills Research NB: All rents equivalent to whole floor mid-rise

North Sydney Key Indicators

A Grade B Grade

Low High Low High

Rental - Gross Face ($/sq m) 935 1,075 835 925

Rental - Net Face ($/sq m) 785 925 695 785

Incentive Level – Net (%) 20 25 20 28

Rental - Net Effective ($/sq m) 610 715 530 600

Outgoings - Operating ($/sq m) 95 115 85 105

Outgoings - Statutory ($/sq m) 40 45 40 45

Outgoings - Total ($/sq m) 135 160 125 150

Typical Lease Term (yrs) 3 7 3 5

Yield - Market (% Net Face Rental) 4.75 5.75 5.25 5.75

IRR (%) 6.38 6.63 6.63 7.00

Cars Permanent Reserved ($/pcm) 675 775 550 650

Cars Permanent ($/pcm) 600 700 500 600

Office Capital Values ($/sq m) 14,500 18,000 12,000 14,500


Q4/2019



Parramatta Key Indicators

A Grade B Grade

Low High Low High

Rental - Gross Face ($/sq m) 650 705 575 615









IRR (%) 6.50 6.75 6.63 7.13


Cars Permanent ($/pcm) 250 300 225 275



Macquarie Park Key Indicators

A Grade

Low High

Rental - Gross Face ($/sq m) 445 555

Rental - Net Face ($/sq m) 330 440

Incentive Level – Net (%) 25% 30%

Rental - Net Effective ($/sq m) 240 320

Outgoings - Operating ($/sq m) 65 85

Outgoings - Statutory ($/sq m) 35 45

Outgoings - Total ($/sq m) 100 130

Typical Lease Term (yrs) 5 8

Yield - Market (% Net Face Rental) 5.25 5.75

IRR (%) 6.50 7.00

Cars Permanent Reserved ($/pcm) 225 275

Office Capital Values ($/sq m) 6,750 7,750


Q4/2019



Sydney CBD Notable Sales

Property Price ($m) | Date | NLA (sq m) Yield | Type | $/sq m

Scentre Portfolio – 100 Market, 85 Castlereagh and 77 Castlereagh St 1,520.00 | Jun-19 | 74,457 4.58 | i | 20,346

Chifley Tower, 2 Chifley Sq, Sydney (50.0% Leasehold) 922.00 | Aug-19 | 68,867 3.86 | e | 26,776

100 Market St 683.00 | Dec-19 | 28,385 3.94| i | 24,062

Darling Park Towers 1 and 2, 201 Sussex St (25%) (office only) 496.25 | Jun-19 | 103,601 5.21 | i | 19,160

Liberty Place, 161 Castlereagh St (25%) 410.00 | Oct-19 | 60,391 4.08 | i | 27,828

323 Castlereagh St 325.00 | Sep-19 | 26,295 2.72 | i | 12,161

10-20 Bond St, Sydney (50%) 325.00 | Apr-19 | 38,271 4.37 | i | 16,980

6 O’Connell St 315.00 | Oct-19 | 16,088 4.60 | i | 19,580

Piccadilly Complex 133 Castlereagh St & 250.00 | Nov-19 | 27,252 4.17 | i | 18,367

222 Pitt St (50%) (office only) 307.50 | Aug-19 | 44,705 5.35 | r | 14,604

135 King St, Sydney (50.0%) (office only) 250.00 | Nov-19 | 27,252 4.17 | i | 18,367

Sydney Fringe Markets Notable Sales


Zenith, 821 Pacific Hwy, Chatswood 438.18 | Jun-19 | 44,102 6.21 | i | 9,936

Jessie Street Centre, 2-12 Macquarie St, Parramatta 415.00 | Sep-19 | 53,902 6.3 | e | 7,699

118 Mount St, North Sydney 353.00 | Nov-19 | 20,515 5.0 | r | 17,207

99 Walker St, North Sydney 311.300 | Nov-19 | 19,295 5.0 | r | 16,134

Northpoint, 100 Millet St, North Sydney 300.00 | Jul-19 | 26,966 4.73 | r | 22,250

Workshop, 21 Harris St, Pyrmont 297.00 | Jul-19 | 18,888 5.5 | r | 15,724

111 Pacific Hwy, North Sydney 273.00 | May-19 | 18,668 5.16 | i | 14,624

11 Talavera Rd, Macquarie Park 231.200 | Feb-19 | 35,830 6.3 | e | 6,453

Glasshouse, 45-61 Waterloo Rd, Macquarie Park (50%) 165.67 | Aug-19 | 34,947 5.0 | i | 9,481

118 & 122 Walker St, North Sydney 121.00 | Nov-19 | n.a n.a | n.a | n.a

Yield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development


Q4/2019



Sydney CBD Notable Leases

Property Tenant NLA (sq m) | Type

180 George St, Sydney Salesforce 34,836 | P

100 Market St, Sydney Australian Securities and Investments 12,295 | R

388 George St, Sydney QBE 11,950 | P

320 Pitt St, Sydney WeWork 11,000 | D

100 Market St, Sydney Scentre Group Limited 9,910 | D

126 Phillip St, Sydney Allens Operations Pty Ltd 8,423 | D

60 Margaret St, Sydney JustCo 2,697 | D

30-34 Hickson Rd, Sydney Ioof 2,661 | D

580 George St, Sydney Property NSW 1,837 | D

Sydney Fringe Markets Notable Leases


1-5 Lyonpark Rd, Macquarie Park Optus 84,194 | R

6 Parramatta Sq, Parramatta NSW Government 43,800 | P

1 Charles St, Parramatta NSW Police 32,356 | R

1 Denison St, North Sydney Nine Entertainment 25,000 | P

118 Mount St, North Sydney Zurich Financial Services 13,440 | P

1 Denison St, North Sydney Microsoft 10,655 | P

21 Harris St, Pyrmont Publicis Groupe 10,100 | P

73 Miller St, North Sydney oOh!Media 6,858 | P

Source: Savills Research; Rental Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal

Major Construction Projects

The table below summarises some of the major upcoming and planned development projects in the Sydney CBD.

Building Address Dev Stage NLA (sq m) Exp. Comp Precinct Tenants

10 Carrington St UC 58,626 2021 Core NAB, Allianz

1 Carrington St UC 9,400 2021 Core NAB

275 George St UC 7,200 2021 Core IWG

210-220 George St UC 18,331 2022 Core Poly

50 Bridge St UC 83,700 2022 Core AMP, Deloitte

180 George St DA 55,000 2022 Core Salesforce

65-77 Market St DA 12,000 2023 Midtown

Sydney Metro - South Tower UC 29,884 2024 Core

Pitt St Metro (252 Pitt St) PS 47,480 2024 Midtown

1-6 Hickson Rd, Millers Point UC 50,000 2024 Walsh Bay - The Rocks

Sydney Metro - North Tower UC 60,000 2024 Core Macquarie

55 Pitt St PS 45,000 2024 Core

133 Liverpool St PS 24,000 2025 Midtown

133 Castlereagh St EP 60,000 2025 Midtown

33 Bligh St (Kindersley) DA 26,000 2025 Core

201 Sussex St (DP4) DA 75,000 2025 Western

Source: Savills Research, Cordells; UC = Under Construction, DA = Development Approved, EP = Early Planning, PS = Plans Submitted

Q4/2019



Victoria

Melbourne CBD Office, as with Sydney CBD, remains very strong driven by the lowest vacancy rate nationally at 3.2% versus the national CBD rate of 8.0%. A Grade assets are highly sought after by tenants and investors, driving rental rates and capital values higher and continued yield compression. Supply has been limited over the last two years however the next wave of developments will begin to come to completion from 2020 with speculation of more projects that will be announced.

Rental growth in the quarter was somewhat benign as the market consolidated. Year on year growth was strong with net effective rents for CBD Premium and A Grade growing 10.8% and 8.0% respectively as Melbourne plays catch up to Sydney.

Victoria’s population growth is also supporting Melbourne’s CBD and fringe markets office space demand, growing 2.1% in the 12 months to June 2019 (latest available ABS data), above the national average of 1.5% and New South Wales at 1.4%. Adding to this, is Victoria’s superior economic growth of 3.3% vs 2.6% nationally to September 2019 and employment growth of 2.8% vs 2% nationally to January 2020.

The strength in the Office market demand fundamentals has continued to drive asset values, with further yield compression evident. In the CBD, Premium Grade yields compressed 25 bps 4.63%, A Grade 45bps to 4.75% and B Grade 35bps to 5.0%. In the fringe markets of St Kilda Rd & Suburban Average A Grade yields were 5.0% and 5.4% respectively,

Interestingly, incentives have remained high which we attribute to strong competition between institutional landlords, particularly for pre-commitment deals in new developments. The high levels of upcoming supply is likely to have raised concerns that pre-leasing should be completed prior to its arrival to minimise rental voids in large portfolios.

While the CBD and St Kilda Road markets consolidated in the quarter, Melbourne’s Fringe markets were strong playing catch-up. The Fringe including Cremorne to South Yarra, Richmond to Carlton and South Melbourne recorded strong capital growth and yield compression. This reflects demand for suburban office solutions by tenants not requiring CBD location but CBD amenities. The future delivery of Melbourne’s metro rail will only add to this demand. Fringe A Grade yields compressed 110bps to 5.4%, with B grade yields compressing 55bps to 6.0%.


Melbourne CBD St Kilda Rd Southbank East Melbourne AUS CBD

Total Stock 4,608,924 644,157 446,869 177,111 17,899,767

Total Vacancy 148,865 55,893 43,466 4,225 1,436,129

Vacancy (%) 3.2 (6.3) 8.7 (10.4) 9.7 (7.4) 2.4 (2.8) 8.0 (9.4)

Net Absorption (12m) -2,908 (73,370) -13,504 (-7,932) 12,566 (3,586) 2,185 (-429) 34,164 (176,578)

Net Absorption (%) -0.1 (1.8) -2.2 (-1.3) 3.2 (0.9) 1.3 (-0.2) 0.2 (1.1)

Stock Additions 77,123 3,386 12,645 2,700 360,703

Stock Withdrawals 80,154 15,677 3,206 350 378,561

Net Additions -3,031 (61,704) -12,291 (-10,842) 9,439 (3,404) 2,350 (-667) -11,248 (189,802)

Net Additions (% of tot) -0.1 (1.4) -1.9 (-1.5) 2.2 (0.8) 1.3 (-0.4) -0.1 (1.1)

Source: PCA, Savills Research. Note: 10yr Average shown in brackets

Q4/2019



Key Highlights

• Melbourne rental rates were steady in the December quarter, with slowed volumes a result of a lack of available options. Melbourne CBD and St Kilda Road rental growth was flat in the period, while the fringe continued to grow as tenant demand for space in the Richmond/Cremorne and Southbank locations increases.

• A Grade Net face rents increased year on year by 8% in the CBD reflecting the demand for CBD locations, while St Kilda Road locations grew 3.8%. Rental growth was more prominent in Melbourne’s fringe, with Net Face rents growing 2% in the quarter and 12.4% year on year for A Grade space.

• This rental growth for fringe office is kick starting viable development projects and is expected to drive capital prices higher and compress yields lower into 2020.

• Incentives in the CBD (26% for A Grade), St Kilda Rd (18%) and the Fringe (19%) remained stable in the quarter.

• Melbourne CBD’s vacancy rate was the lowest recorded CBD nationally, at 3.2% as at December 2019 which equated to just under 150,000 square metres of available stock.

• The lack of options, low net absorption and resultant pent up demand is forecast to assist with soaking up the new supply due in Melbourne from 2020.

• As with Sydney CBD, the current low vacancy climate in Melbourne CBD saw total leasing volumes down on the previous three years, however demand for office space remains high which has driven rental growth.



Net Effective Rent (A Grade $/sqm)

Melbourne CBD Vacancy & Net Absorption

Melbourne CBD Leasing Volumes (1,000sqm+)


Q4/2019



Key Highlights

• Over the 12 month period to December 2019, total sales volumes in Melbourne CBD were recorded at $3.38 billion, however as with Sydney the number of transactions fell. This highlights the increased liquidity of asset transaction value.

• Capital values for CBD A Grade continued to rise commensurately with further yield compression experienced as Melbourne continue to play catch-up and provided more cost effective office space to Sydney. The average A Grade yield for Melbourne CBD was recorded at 4.75%, now approximating Sydney at 4.70%, with capital values at $12,000/sqm vs Sydney at $20,000/sqm.

• Market yields in both the CBD and fringe markets have continued to compress as demand for quality assets remains strong. In the CBD, Premium Grade yields compressed 25 bps 4.63%, A Grade 45bps to 4.75% and B Grade 35bps to 5.0%. In the fringe markets of St Kilda Rd & Suburban Average A Grade yields were 5.0% and 5.4% respectively.

• According to latest MSCI data (December 2019), Melbourne CBD office market again recorded the highest CBD return nationally, at 13.3% (above the 15 year CAGR of 11.2%) which was largely a result of strong capital returns of 7.9%. Melbourne’s non CBD office markets also performed well, in comparison to the other fringe markets nationally, returning 12.8% over the 12 month period.

• Capital values in Melbourne CBD & fringe markets recorded significant growth over the 12 months to December 2019. In the CBD, Premium grew on average by 16% to range between $13,000 to $19,500 whilst A Grade recorded 25% growth to range from $11,000 to $14,000 per square metre.

• In the St Kilda Road precinct, capital values grew by 18.6% for A Grade assets with an average rate of $8,750, while Melbourne’s Fringe of Cremorne, Richmond and Southbank appreciated 40.7% year on year to average $9,500 per square metre for A Grade.


Melbourne CBD Total Sales Volumes ($5m+)

Average A Grade Yield by Market (%)

Melbourne CBD Capital Values & Market Yield (A Grade)



Q4/2019



Melbourne CBD Key Indicators



Rental - Gross Face ($/sq m) 840 1,140 720 895 595 715

Rental - Net Face ($/sq m) 650 950 550 725 440 560

Incentive Level – Net (%) 22.5 30 22.5 30 23 27

Rental - Net Effective ($/sq m) 480 700 405 535 330 420






IRR (%) 6.25 6.75 6.25 6.75 6.50 7.00

Cars Permanent Reserved ($/pcm) 550 800 550 650 550 600

Cars Permanent ($/pcm) 450 650 450 600 450 550



Melbourne – St Kilda Rd Key Indicators

A Grade B Grade

Low High Low High










IRR (%) 6.25 6.50 6.50 6.75




Q4/2019



Melbourne – Fringe Key Indicators

A Grade B Grade

Low High Low High










IRR (%) 6.25 7.00 6.50 7.50



Source: Savills Research NB: All rents equivalent to whole floor mid-rise; includes Cremorne, Richmond, Burnley, South Yarra, Collingwood, South Melbourne, Carlton, Abbotsford, North Melbourne

Q4/2019



Notable Sales


80 Collins St, Melbourne 1,476.00 | Jun-19 | 105,000 n.a | n.a | 43,619

242 Exhibition St, Melbourne 830.00 | Jun-19 | 105,000 4.50 | r | 43,647

2 Southbank Blvd, Southbank (50%) 342.00 | Jul-19 | 63,398 4.73 | i | 43,521

31 Queen St, Melbourne 204.00 | Feb-19 | 55,000 4.34 | i | 43,566

737 Bourke St, Docklands 192.00 | Apr-19 | 19,234 4.87 | i | 43,497

85 Spring St, Melbourne 112.50 | Feb-19 | 18,589 n.a | n.a | 43,510

Building 1, 254 Wellington Rd, Mulgrave 111.00 | Feb-19 | 10,700 5.80 | i | 43,747

420 St Kilda Rd, Melbourne 98.00 | Oct-19 | 17,393 5.31 | e | 43,586

120 Harbour Esplanade, Docklands 81.30 | May-19 | 10,452 5.27 | e | 43,592

520 Collins St, Melbourne 78.00 | May-19 | 8,341 4.50 | r | 43,504

Yield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development Source: Savills Research

Notable Leases

Property Tenant NLA (sqm) | Type

611-697 Elizabeth St, Melbourne CSL 35,000 | P

130 Lonsdale St, Melbourne Australian Super 16,200 | P

611-697 Elizabeth St, Melbourne Toyota 15,000 | P

425 Smith St, Fitzroy Kahlon Group 11,000 | D

447 Collins Street, Melbourne ESuperFund 10,500 | P

80 Collins St, Melbourne Herbert Smith Freehills 10,300 | P

525 Collins St, Melbourne Public Transport Victoria 10,000 | P

611-697 Elizabeth St, Melbourne Trinity College 9,500 | P

120 Harbour Esp, Docklands Bendigo Bank 8,342 | R

452 Flinders Street, Melbourne VLine 5,972 | D


Q4/2019




The table below summarises some of the major upcoming and planned development projects in the Melbourne CBD.


130 Lonsdale St UC 58,500 2020 North EasternAustralian Financial Complaints Authority, Cbus

Vanguard, Telstra Super, Uniting Church, Australian

477 Collins St UC 58,000 2020 Western CoreDeloitte (22,000) & Norton Rose (6000), FB Rice, Urbis, Lander & Rogers, ServiceNow, WorkClub

447 Collins St UC 48,500 2020 Western CoreKing & Wood Mallesons, HWL Ebsworth Lawyers,

Gadens, Minter Ellison

80 Collins St UC 43,000 2020 Eastern CoreMacquarie Group (6000) , Savills (1400), Mckinsey

(1720), DLA Piper (4000) & Ashurst, Mitsubishi

180 Flinders St UC 15,900 2020 Western Core John Holland (7700)

750 Collins St UC 38,933 2020 Docklands Monash University

697 Collins St (2 Melbourne Quarter)

UC 49,000 2020 DocklandsEnergy Australia (22000) Spaces (4000) & IWG, IDP

Education (2050), Datacom (4000), Infosys (8200)

311 Spencer St UC 65,000 2020 Docklands Victorian Police/ACC

637 Flinders St - World Trade Centre (B 2 & 3)

EP 25,716 2021 Docklands

405 Bourke St UC 66,000 2021 Western Core NAB

World Trade Centre (Bldg 1)

EP 25,000 2021 Docklands

691 Collins St (Tower 3) DA 70,000 2021 Docklands

100 Queen St UC 30,353 2021 Western Core

99 Franklin St UC 10,400 2021 Civic

77 Waterfront Way DA 8,000 2022 Docklands

435 Bourke St DA 59,000 2022 Western Core

364-378 Little LonsdaleSt

DA 24,000 2022 Flagstaff

140 Lonsdale St UC 16,500 2022 North Eastern

1000 La Trobe St UC 33,000 2022 Docklands

555 Collins St DA 45,000 2022 Spencer

17 Bennetts Ln DA 12,000 2022 North Eastern

300 Londsale St DA 19,400 2022 Civic

52 & 60 Collins St EP 35,000 2023 Eastern Core

55 King Street EP 35,000 2024 Spencer


Q4/2019



Queensland

Brisbane CBD, as with Sydney and Melbourne, saw further capital valuation uplift and yield compression as investors continued to seek Office assets over other asset classes. In the December quarter, there were over $1.4 billion in asset sales in the CBD and Fringe, representing over 150,000sqm of NLA. Domestic buyers represented approximately 35%, highlighting strong international investor interest in the Brisbane market.

Traditionally, Brisbane has been a developers market, but as interest rates eased further in 2019 and Office capacity began to be reached, the number of development projects has slowed with 125,000sqm currently under construction. CBD vacancy is at 12.7% (PCA Dec 2019) versus 8.0% nationally and 8.3% total Australian Office.

The Brisbane Fringe competes strongly against the CBD, however, tenants are finding value and amenity in the CBD. Tenants are continuing to look for CBD locations, creating demand-push rental growth. Gold Coast (12.8% vacancy) and Sunshine Coast (16.7% vacancy) markets remain problematic and will continue to languish.

Gross rents grew over the quarter, with Premium and A Grade growing 2.1% and 2.8% respectively. For the year to December 2019, gross rents for A Grade grew a meaningfully 5.7%. Incentives were stable over the quarter at 35%.

Yields compressed further, as Brisbane followed the Sydney and Melbourne leads. Premium yields compressed 12bps to 5.13% in the quarter and average A Grade yields remained flat at 5.50%. The Fringe markets also reflected compression with A Grade yields range between 5.50% to 6.25% and B Grade 6.75% to 7.50%.


Brisbane CBD Brisbane Fringe Gold Coast Sunshine Coast AUS CBD

Total Stock 2,260,280 1,224,099 469,394 189,906 17,899,767

Total Vacancy 287,253 167,543 60,127 31,674 1,436,129

Vacancy (%) 12.7 (12.8) 13.7 (12.4) 12.8 (16.3) 16.7 (13.6) 8.0 (9.4)

Net Absorption (12m) 32,528 (17,124) 29,241 (13,401) -6,760 (5,292) 10,038 (4,677) 34,164 (176,578)

Net Absorption (%) 1.7 (0.9) 2.8 (1.4) -1.6 (1.4) 6.8 (3.6) 0.2 (1.1)

Stock Additions 50,958 11,880 - 765 360,703

Stock Withdrawals 17,695 6,275 1,059 582 378,561

Net Additions 33,263 (22,338) 5,605 (18,494) -1,059 (1,093) 183 (5,658) -11,248 (189,802)

Net Additions (% of tot) 1.5 (1.0) 0.5 (1.7) -0.2 (0.2) 0.1 (3.6) -0.1 (1.1)

Source: PCA, Savills Research Note: 10yr Average shown in brackets

Q4/2019



Key Highlights

• Gross face rents in Brisbane CBD have remained relatively flat over the last 2-3 years. However we are now beginning to see some growth, with A Grade rents growing 2.8% in the December quarter and 5.7% year on year to $737/sq m. Net effective rents also grew in the quarter by 6.8% and year on year 12.3%, which was largely attributed to a small contraction in incentives.

• Incentives remain relatively high, reflecting no change in the quarter but some change year on year with Premium up 2.9% to range between 33% to 37% while A Grade contracted 1.4% to range between 33% and 38% and B Grade were down 4.7% to range between 38% to 43%. We believe these rates are now beginning to stabilize.

• As with all the States, statutory outgoings grew meaningfully over the year as government sought greater revenue sources.

• Vacancy in Brisbane CBD has somewhat stabilised after trending down over the last 3 years as tenant demand strengthens, but supply has come on. The PCA recorded total Vacancy at 12.7%, while A Grade was 13.7% at December 2019. Total supply additions were recorded at 50,958sqm.

• Premium grade vacancy tightened significantly over the second half of 2019, from 8.7% down to 3.2% (December 2019).

• Brisbane CBD leasing activity was significantly higher than the previous few years, with Savills tracking 162,000sqm of office leasing activity.



Brisbane CBD - Gross Face Rents (by Grade $/sqm)

Brisbane CBD Leasing Volumes (1,000sqm+)

Brisbane CBD Vacancy by Market


Q4/2019



Key Highlights

• The yield compression cycle is evident within Brisbane’s office markets, with average Premium yields in the CBD compressing 12bps to 5.13% in the quarter and average A Grade yields remained flat at 5.50%. The Fringe markets also reflected compression with A Grade yields ranging between 5.50% to 6.25% and B Grade 6.75% to 7.50%.

• CBD capital values also grew in the December quarter by 1.9% for Premium, 2.4% for A Grade and 3.3% for B Grade. Year on year growth was 1.9%, 7.5% and 14.8% respectively.

• Brisbane CBD and the Fringe sales activity was strong with over $1.4 billion in sales recorded in the quarter and $3.8 billion throughout the year. Brisbane has been seen as an alternative to Sydney and Melbourne given its yield differential.

• With demand for Prime Australian office assets growing stronger (from both foreign and domestic investors), we will expect to see capital values and in turn valuations of these assets increase in 2020.



Brisbane CBD Capital Values & Market Yield (A Grade)

Brisbane CBD Total Sales Volume ($5m+)

Brisbane CBD Market Yield by Grade (%)


Q4/2019



Brisbane Key Indicators



Rental - Gross Face ($/sq m) 850 880 690 775 550 625


Incentive Level - Gross (%) 33 37 33 38 38 43







IRR (%) 6.25 6.50 6.25 6.88 6.88 7.25




Brisbane Fringe Key Indicators

A Grade B Grade

Low High Low High

Rental – Gross Face ($/sq m) 565 685 425 500


Incentive Level – Gross (%) 35 40 35 42







IRR (%) 6.50 7.00 7.25 7.75




Q4/2019



Gold Coast/Sunshine Coast Key Indicators

Gold CoastA Grade

Sunshine CoastA Grade

Low High Low High










IRR (%) 8.00 9.00 9.50 10.00

Cars Permanent Reserved ($/pcm) 120 180 - -



Notable Sales


400 George St, Brisbane 524.75 | Aug-19 | 43,493 5.43 | e | 12,065

141 Queen St & 140 Elizabeth St, Brisbane 395.00 | Oct-19 | 31,708 6.13 | e | 12,457

66 Eagle St, Brisbane 380.00 | Nov-19 | 31,896 5.21 | e | 11,914

140 Creek St, 295 Ann St & 232 Adelaide St 425.00 | Jul-19 | 52,268 6.47 | e | 8,131

470 St Pauls Tce, Fortitude Valley 180.00 | Sep-19 | 17,594 5.50 | r | 10,231

313 Adelaide St, Brisbane 155.80 | Dec-19 | 14,592 5.68 | e | 10,677

239 George St & 15 Adelaide St 223.00 | May-19 | 35,539 6.67 | e | 6,275

201 Charlotte St, Brisbane 126.70 | May-19 | 13,291 5.90 | e | 9,533

757 Ann St, Fortitude Valley 94.00 | Dec-19 | 9,008 6.07 | e | 10,435

348 Edward St, Brisbane 89.00 | Oct-19 | 11,067 6.33 | e | 8,042

Source: Savills ResearchYield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development

Q4/2019



Notable Leases


163 Charlotte St, Brisbane Rio Tinto 20,000 | P

339 Coronation Drive, Milton CPB Contractors (Cross River Rail) 8,079 | D

470 St Pauls Tce, Fortitude Valley International Workplace Group 4,885 | P

25 King St, Bowen Hills WeWork 4,800 | D

260 Queen St, Brisbane WeWork 4,600 | D

123 Eagle St, Brisbane WeWork 4,429 | D

180 Ann Street, Brisbane City ARTC 3,842 | S

25 Montpelier Rd, Bowen Hills Ladbrokes 3,431 | D

144 Montague Road, South Brisbane Dialog IT 3,322 | D

275 George St, Brisbane Victory Corporate Serviced Offices (VCSO) 2,602 | D



The table below summarises some of the major upcoming and planned development projects in the Brisbane CBD.


288 Edward St (refurb) UC 20,055 2020 Uptown

12 Creek St - Annex UC 7,200 2020 Financial

155 Charlotte St UC 44,000 2021 Government Rio Tinto

320 George St DA 9,100 2022 Legal

62 Mary St PS 38,000 2022 (TBC) Government

80 Ann St UC 72,540 2022 Uptown Suncorp

360-380 Queen St* DA 50,000 2023 Financial

150 Elizabeth St* DA 48,000 2023 Retail Precinct

205 North Quay* Mooted 50,000 2023 Legal

Source: Savills Research, Cordells; UC = Under Construction, DA = Development Approved, EP = Early Planning, PS = Plans Submitted.

*subject to pre-committment

Q4/2019



Australian Capital Territory

Canberra continues to benefit from government bond-like leases, that make these office assets an attractive investment option. Quality A Grade office properties remain in demand by investors (both domestic and international) and tenants. As with Sydney and Melbourne, asset owners are reticent to sell as they have the dilemma of how to replace the asset for similar or better metrics.

Yield has continued to compress, supported by low for longer interest rates and a lack of supply. Interestingly the 5% cap rate yield is somewhat of a psychological barrier in 2019, however with Reserve Bank and global central banks rhetoric around interest rates expected to remain low, investors will become more confident as they raise longer term debt sub 3%.

Incentives have stabilised to average 20% for A Grade and 25% for B Grade, approximating that of Sydney (18%) but below Melbourne (26%). This highlights the tightness in the Canberra market and also the tenant pool being more government.

Vacancies continue to trend lower with the total vacancy now at 10.3% and A Grade a low 6.9%, down from 10% in 2017. The tightening of the Canberra market is also dragging B Grade vacancy down to now 12.3%, although this segment of the market is difficult. Canberra Civic vacancies are higher at 12.0%, however A Grade remains sought after at 8.4% vacancy.

Whilst a number of new projects are nearing completion, the likely supply of new office buildings in Canberra beyond 2020 remains thin. Mooted projects without a substantial Government pre-commitment are unlikely to go ahead, despite the tight A Grade vacancy rate, and developers pivoting to residential or mixed-use projects is the forecast outcome on vacant blocks.


Canberra Aus CBD

Total Stock 2,269,365 17,899,767

Total Vacancy 233,813 1,436,129

Vacancy (%) 10.3 (12.5) 8.0 (9.4)

Net Absorption (12m) -27,520 (18,545) 34,164 (176,578)

Net Absorption (%) -1.3 (1.0) 0.2 (1.1)

Stock Additions 53,077 360,703

Stock Withdrawals 101,622 378,561

Net Additions -48,545 (24,556) -11,248 (189,802)

Net Additions (% of tot) -2.1 (1.2) -0.1 (1.1)


Q4/2019



Key Highlights• A Grade Net effective rents in Canberra Civic and Barton

consolidated despite growth in incentives of 14.3% to 20%. Net effective rents are averaging $290/sqm.

• The total vacancy for Canberra was recorded at 10.3% (December 2019 PCA data) versus 11% 12 months prior and the 10yr average of 12.5%. According to PCA, Civic A Grade vacancy expanded from 6.6% in July 2019 to 8.4% in Dec 2019.

• Capital values in Canberra stabilised, however this was more to do with a lack of supply as demand from investors remains buoyant. The bond like characteristics of long WALE and government lease covenants continues to be sought after by investors. Capital value growth grew 1.7% for A Grade and 4.0% for B Grade in the year to December 2019.

• Yield compression in Canberra continues as capital values adjust following the relative strength of Sydney and Melbourne. We are now seeing increased interest in Canberra from interstate buyers and offshore groups that are reconsidering their investment criteria for Australia (moving up the risk curve and looking outside Sydney and Melbourne).

• Average A Grade yields in Canberra Civic recorded a 75 basis point compression over the 12 months to December 2019 to be 5.50%. Average B Grade yields were recorded at 7.0%.



Civic & Barton - Net Effective Rents (by Grade $/sqm)

Civic & Barton Capital Values & Market Yield (A Grade)

Canberra Vacancy by Grade


Q4/2019



Key Highlights• Over the last 12 months there has been several significant

transactions as owners look to capitalise on tighter yields. The most notable transaction for 2019 was the sale of the Nishi Building at 2 Phillip Law St, for $256mil on an initial yield of 5.1%, to Centuria Metropolitan REIT (renamed Centuria Office REIT) in December. At their half year report, Centuria valued it at a 5.13% cap rate.

• Charter Hall purchased the A Grade building located at16-18 Mort Street for $108.5 million from Investa on anequated yield of 5.85%. The property had a WALE of6.65 years and reflected a capital value of $7,665 persquare metre.

• Japanese investor NTT Urban Development purchaseda 50% stake in 121 Marcus Clarke Street for $102.9 million. The sale reflected an equated yield of 5.55% and a capital value of $8,003 per square metre. The investor was attracted to the security of the asset as it had a WALE of 4.83 years and was 99% occupied at the time of the sale.


Civic & Barton - Market Yield by Grade (%)


Canberra Total Sales Volumes ($5m+)

Q4/2019



Canberra Civic & Barton Key Indicators

A Grade B Grade

Low High Low High










IRR (%) 6.25 7.25 7.50 9.00

Cars Permanent Reserved* ($/pcm) 350 400 320 385


Source: Savills Research NB: All rents equivalent to whole floor mid-rise, *Canberra Civic only

Canberra Non-Civic Key Indicators

A Grade B Grade

Low High Low High










IRR (%) 6.75 8.25 8.00 10.00




Q4/2019



Notable Sales

Property Price | Date | NLA Yield | Type | $/sq m

2 Phillip Law St, Canberra 255.75 | Dec-19 | 27,411 5.3 | i | 9,330

16-18 Mort St, Canberra 108.50 | Jun-19 | 14,155 5.85 | e | 7,665

121 Marcus Clarke St, Canberra (50%) 102.90 | Apr-19 | 25,714 5.55 | e | 8,003

Garema Ct (140-180 City Walk), Canberra 71.50 | Dec-19 | 11,438 6.50 | r | 6,251

1 Constitution Ave, Canberra 62.00 | May-19 | 28,519 n.a | n.a | 2,174

14 Moore St, Canberra 59.00 | Mar-19 | 11,047 6.30 | e | 5,341

11 Farrer Pl, Queanbeyan 35.00 | Oct-19 | 6,300 6.00 | i | 5,556

10 Moore St, Canberra 35.00 | May-19 | 6,709 6.65 | e | 5,217

24 Wormald St, Symonston 29.75 | Mar-19 | 4,628 6.35 | e | 6,428

40 Allara St, Canberra 23.00 | Jul-19 | 5,861 n.a | dev | 3,924

Source: Savills Research; Yield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development

Notable Leases


16 Marcus Clarke St, Canberra National Health and Medical Research Council 4,020 | D

224 Bunda St, Canberra Cisco Systems Australia 980 | D

17 Moore St, Canberra Xero 979 | D

8-10 Hobart Pl, Canberra Wildbear Entertainment 676 | D

121 Marcus Clarke St, Canberra JLL 660 | D

17 Moore St, Canberra Hudson 649 | D

64 Northbourne Tce, City Cushman & Wakefield 450 | D



The table below summarises some of the major upcoming and planned development projects in Canberra.


ACT Gov. Offices (Cnr of Constitution and London Circuit)

UC 24,000 2020 Civic ACT Government

Constitution Place (Stage 2) UC 12,000 2020 CivicMinter Ellison, KPMG, Dixon Advisory,

Kingwood Mallesons

London Cct, cnr Ediburgh Av (Section 100)

DA 40,000 2022 Civic

70 Northbourne Avenue DA 11,700 2025 Civic


Q4/2019



Western Australia

Perth remains a problematic Office market, however it is showing signs of reflation as it grows into its office space. The gradual improvement in the WA economy breeds confidence and expanding tenants are evidenced by a stronger employment growth rate of 1.5% and an improving unemployment rate of 5.8%.

Tenant enquiry levels are increasing as developments come on line. Driving demand are tenants preferring large floor plates so as to minimise the number of floors and maximise efficiencies. An interesting thematic that is emerging is that tenants are using the current environment to upgrade or seek higher quality space while pricing remains somewhat subdued relative to Eastern states. This in turn is likely to restrain development, allowing the market to reflate itself in 2020. Investors and tenants alike are beginning to notice the yield and rental pricing gap versus the eastern states, with enquiry increasing.

Rents remained stable in the quarter, in a similar trend to what we have seen nationally. Net effective rents grew 7.0% in Premium Grade buildings to $380/sq m and 4.2% in A Grade to $308/sq m over the last 12 months. Incentives currently range between 42% and 53% across Premium and A Grades.

Developers are remaining rational at this point, with 306,658sqm of projects identified between now and 2029, however only 85,428sqm under construction and with pre-commitments. This will be the test for the Perth CBD to enable the reflation in rents, contraction in incentives and compression in cap rates. The downside to low for longer interest rates will be if speculative developments kick start from the list identified.

While high vacancies are still problematic, we continue to expect speculative developments remain muted in 2020. A reflation in the Resources and Mining sectors and hence West Australia’s local economy will bring business confidence.


Perth CBD West Perth Aus CBD

Total Stock 1,799,554 424,487 17,899,767

Total Vacancy 317,422 74,381 1,436,129

Vacancy (%) 17.6 (14.0) 17.5 (10.9) 8.0 (9.4)

Net Absorption (12m) 48,661 (22,318) -11,913 (-1,585) 34,164 (176,578)

Net Absorption (%) 3.4 (1.6) -3.3 (-0.4) 0.2 (1.1)

Stock Additions 63,463 3,059 360,703

Stock Withdrawals 23,155 3,712 378,561

Net Additions 40,308 (42,787) -653 (3,465) -11,248 (189,802)

Net Additions (% of tot) 2.3 (2.8) -0.2 (0.9) -0.1 (1.1)


Q4/2019



Key Highlights

• As a result of increased incentives over the last three years, we have seen significant falls in net effective rental rates.However, we are now beginning to see signs of recoverywith net effective rents growing 7.0% in Premium Gradebuildings to $380/sq m and 4.2% in A Grade to $308/sq m over the last 12 months. Incentives currently rangebetween 42% and 53% across Premium and A Grades.

• Savills forecast that incentives will continue to trenddownwards, in line with a falling vacancy rate, as the localeconomy recovers and developers take a “wait and see”approach.

• We have identified 306,658sqm of developmentsin the pipeline or mooted, however there are only 3developments totaling 85,428sqm under constructionthese are supported by pre-commitments. Developersare constrained by bank lending practices, requiring pre-commitments before commencing. This is a positive foran Office market that has suffered from oversupply inrecent years.

• CBD vacancies are showing signs of improvement,contracting further in the quarter from 18.4% in June to17.6% at December 2019. A Grade is leading the wayfalling to 16.2% from 18.5% in June (PCA data), as theWA economy begins to reflate with improving resourcesand LNG industries.

• Leasing volumes were somewhat stable in 2019,reflecting activity with incentives stable in the quarter butlower over the year. Incentives for Premium averaged45% and A Grade 49%.

• As with all Office markets nationally, outgoings werestable in the quarter, after growing meaningfully throughthe year driven by statutory charges, up 9.1% year onyear.



Perth CBD - Net Effective Rents (by Grade $/sqm)

Perth CBD Leasing Volumes (1,000sqm+)

Perth CBD Vacancy by Grade


Q4/2019



Key Highlights

• Capital values continue to consolidate, with yield for Perth CBD averaging 6.50% across all grades. A Grade yield was flat in the quarter at 6.50% with a range of 5.75% to 7.25% highlighting the diverse CBD market.

• Lower A Grade and B Grade properties will continue to lag higher A Grade from a yield compression perspective, as tenants and investors focus on the quality end of the market. This “flight to quality” is resulting in a 2-speed incentives market, with lower quality incentives expected to remain high in 2020.

• Premium Grade yields in Perth CBD ranged from 5.25% to 6.00% as at December 2019, compressing 62bps (on average) year on year to December. A Grade market yields were recorded at 6.50%, compressing 40bps on average over the 12 month period to December.

• If pre-commitment requirements are not met and supply is limited, along with ongoing tenant demand, there is capacity for valuation uplift and yield compression. This will be the challenge for Perth given it’s a developer market, however we are seeing this emerging in 2020 and expect discipline to allow compression and capital value uplift through the year.



Perth CBD Capital Values & Market Yield (A Grade)

Perth CBD Total Sales Volume ($5m+)

Perth CBD Market Yield by Grade


Q4/2019



Perth CBD Key Indicators





Incentive Level – Net (%) 42 48 45 53 48 58







IRR (%) 6.50 7.00 6.75 7.50 7.00 8.00




West Perth Key Indicators

A Grade B Grade

Low High Low High

Rental – Gross Face ($/sq m) 485 560 400 470









IRR (%) 7.50 8.00 7.50 8.50




Q4/2019



Notable Sales


235 William St, Northbridge 189.5 | Sep-19 | 23,006 6.4 | r | 8,237

28 The Esplanade, Perth 100.0 | Oct-19 | 15,264 n.a | n.a | 6,551

2 Mill St, Perth 79.0 | Nov-19 | 11,486 8.86 | r | 6,878

34-50 Stirling St, Perth 24.0 | Mar-19 | 6,657 n.a | n.a | 3,605

179 St Georges Tce, Perth 18.3 | Feb-19 | 4,340 n.a | n.a | 4,205

93 Francisco St, Belmont 18.0 | Nov-19 | 7,800 7.5 | i | 2,308

180 Hay St, Perth 12.6 | Oct-19 | 4,925 n.a | n.a | 2,556

Source: Savills Research; Yield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development

Notable Leases

Adress Tenant NLA (sqm) | Type

Lot 7 & 8 Elizabeth Quay, Perth Chevron 40,000 | P

256 St Georges Tce, Perth Chevron 14,699 | R

240 St Georges Tce, Perth Worley 10,706 | D

152-158 St Georges Tce, Perth WeWork 7,900 | D

95 William St, Perth Hammersley Iron 6,784 | R

197 St Georges Tce, Perth Jacobs 2,600 | D

240 St Georges Tce, Perth ANZ 2,367 | D

140 St Georges Tce, Perth Dampier Bunbury Natural Gas Pipeline 2,200 | D

140 St Georges Tce, Perth AngloGold 2,110 | D

2 The Esplanade, Perth Accenture 1,096 | D



The table below summarises some of the major upcoming and planned development projects in the Perth CBD.


28 St Georges Tce UC 1,028 2020 East CBD RSL

98 Mounts Bay Rd UC 32,400 2022 West CBD Santos, BDO

207 Murray St DA 20,000 2023 Mid CBD

141 St Georges Tce DA 10,000 2023 West CBD

Chevron HQ, Lots 7 & 8, EQ UC 52,000 2023 Mid CBD Chevron

Plus Tower, Lot 5, EQ EP 15,000 2024 Mid CBD

942-950 Hay St & 33 Milligan St Mooted 10,000 2025 West CBD

QV3 North Tower, 250 St Georges Tce Mooted 20,565 2025 West CBD

QV2 South Tower, 250 St Georges Tce Mooted 7,365 2025 West CBD

Esplanade Busport, 1 & 21 Mounts Bay Rd DA 20,000 2025 West CBD

Cnr Murray St & Milligan St Mooted 10,000 2025 West CBD

Tower 2, Lot 6, EQ EP 35,000 2027 Mid CBD

480 Hay St & 15-17 Murray St Mooted 34,000 2029 East CBD

Bishops See Stage 2, 239 St Georges Tce Mooted 46,000 2029 West CBD


Q4/2019



South Australia

The Adelaide Office market continued the national thematic of stable property metrics, supported by a low interest rate regime and developer discipline. Tenant demand remained steady with incentives flat to the December quarter and down year on year to 30% across the building grades.

The Adelaide market has seen modest improvement dominated by A Grade buildings, with tenant demand driving pricing metrics. Development has occurred at a measured pace with the largely committed GPO Exchange of approx. 25,000sqm being recently completed and a 14,000sqm building at 108 Wakefield Street due for completion in Q3, 2020.

Adelaide tenant makeup is largely government dominated, and whilst the private sector is somewhat subdued, Federal government expenditure in the defense sector is buoying the big end of town and initiatives by the state government in the space and education industries are having a positive impact on the office market and state economy.

Investment yields followed the Eastern States, trending down in the quarter and the year. A Grade CBD yield averaged 6.25%, but is over a wide range of 5.75% to 6.75% reflecting the diversity of the grade. Global and domestic investment is looking at Adelaide as it continues to trade at a discount to the Eastern states. While not Office, the recent sale of Lendlease’s 50% stake in in Westfield Marion to Singapore Press Holdings reflects a willingness for capital to invest into the city. Savills identified $589.8mil in Office transactions in 2019, diversified across domestic and international buyers.

Adelaide Office will continue to benefit from East Coast yield compression, as investors chase yield in 2020. The variable, as always, will be business confidence and tenant space expansion, although we foresee further positive absorption to come.


Adelaide CBD Adelaide Fringe Aus CBD

Total Stock 1,438,531 220,013 17,899,767

Total Vacancy 201,974 32,340 1,436,129

Vacancy (%) 14.0 (12.4) 14.7 (9.3) 8.0 (9.4)

Net Absorption (12m) 15,714 (4,524) -3,537 (-560) 34,164 (176,578)

Net Absorption (%) 1.3 (0.4) -1.8 (-0.3) 0.2 (1.1)

Stock Additions 31,048 2,161 360,703

Stock Withdrawals 16,220 800 378,561

Net Additions 14,828 (14,841) 1,361 (1,990) -11,248 (189,802)

Net Additions (% of tot) 1.0 (1.1) 0.6 (1.0) -0.1 (1.1)


Q4/2019



Key Highlights• As with the other state capital city CBD’s, office rents in

Adelaide were stable in the December quarter. However,over the last 12 months, net effective rental growth hasbeen experienced due to easing incentives, with growth of10.9% in Premium and 4.1% growth in A Grade.

• Vacancy within the Adelaide CBD office market expandedin the 6 months to December 2019 to 14.0% (from 12.8%in June) on the back of the new GPO building coming to market in November.

• CBD incentives for Premium reduced to average 30% andto align with A and B Grade.

• Leasing volumes have begun to increase as South Australia begins to expand somewhat. We would expect to see positive absorption throughout 2020.

• The Defense, Information Technology, Education andMining sectors expansion is helping to keep demand forquality office space healthy.

• Tenants have been attracted to the market by the TenGigabit high speed internet network which provides the fastest and most cost effective internet connectivity in Australia, public transport and competitive rental rates.

• The Walker Corporation development at Festival Plazaand the Cbus development at 73-85 Pirie Street Adelaideare likely to be the next buildings to come out of theground with 2 active lease requirements from the StateGovernment and Commonwealth DHS likely to trigger anew office project.


Adelaide CBD - Net Effective Rents (by Grade $/sqm)

Adelaide CBD Leasing Volumes (1,000sqm+)

Adelaide CBD Vacancy by Grade


Q4/2019



Key Highlights

• Yields for CBD A Grade compressed further in Decemberas lower interest rates drove asset valuations higher. Yieldsfell 100bp to 6.25% year on year to December, reflectingrelative pricing of the eastern seaboard markets.

• In keeping with the national thematic, developers remaineddisciplined with no new meaningful projects identified fromwhat was already known.

• As with other states, statutory outgoings increasesstabilised, however reflect 11% growth year on year, whileoperating outgoings were flat for the year.

• Sales activity in Adelaide CBD has traditionally beendominated by private investors and high net worthindividuals however over the last 12 – 24 month institutional investors have become more active in the market. Adelaide saw $669.3 in Office transactions in 2019. Transactionalevidence includes:

• BlackRock acquired 151 Pirie Street for $92.5million in late 2019 in an off market transaction, theproperty previously sold in December 2014 for $72million.

• Centuria acquired two A Grade assets over the last18 months – 80 Flinders Street ($127m) & a 50%interest in the Bendigo Bank building at 80 GrenfellStreet with Paul Lederer ($184.6m).

• Singaporean REIT Soilbuild purchased GrenfellCentre at 25 Grenfell Street for $134.22 fromvendor Credit Suisse in August 2019. Credit Suissepurchased the asset for $125m in 2016.

• Suntec REIT purchased the Allianz Centre at 55Currie Street in July 2019 for $148.3 million, makingit their first purchase outside of Sydney & Melbourne.



Adelaide CBD Capital Values & Market Yield (A Grade)

Adelaide CBD Total Sales Volume ($5m+)

Adelaide CBD Market Yield by Grade


Q4/2019



Adelaide CBD Key Indicators





Incentive Level – Gross (%) 25 35 25 35 30 35







IRR (%) 6.50 7.25 7.00 8.00 8.00 8.75




Adelaide Fringe Key Indicators

A Grade B Grade

Low High Low High



Incentive Level – Net (%) 15% 25% 18% 25%







IRR (%) 7.00 7.75 7.75 8.75




Q4/2019



Notable Sales


55 Currie St, Adelaide 148.30 | Jul-19 | 25,726 8.00 | i | 5,765

25 Grenfell St, Adelaide 134.22 | Jul-19 | 25,221 6.70 | e | 5,322

80 Flinders St, Adelaide 127.00 | Jul-19 | 12,154 6.10 | i | 10,449

151 Pirie St, Adelaide 92.50 | Dec-19 | 12,529 5.90 | r | 7,383

100 Waymouth St, Adelaide 85.00 | Oct-19 | 12,305 6.20 | e | 6,908

121 King William St, Adelaide 82.25 | May-19 | 12,550 6.50 | r | 6,554

172-180 Grenfell St, Adelaide 13.00 | Oct-19 | 2,526 6.00 | r | 5,146

Source: Savills Research; Yield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development; *

Notable Leases

Address Tenant NLA (sqm) | Type

11 Hindmarsh Sq, Adelaide South Australia Health 13,750 | R

80 Flinders St, Adelaide Beach Energy 4,000 | D

80 Flinders St, Adelaide BAE Systems 3,500 | D

30 Pirie St, Adelaide Boeing 3,000 | S

30 Currie St, Adelaide Red Cross 2,616 | D

25 Grenfell St, Adelaide Aurecon 2,564 | D

91 King William St, Adelaide Veteran Affairs 2,164 | D

30 Pirie St, Adelaide BAE Systems 2,000 | S

11 Waymouth St, Adelaide SA Government - Attorney Generals 1,452 | D

58-76 Franklin St, Adelaide Indigenous Land Corporation 1,235 | D

121 King William St, Adelaide Jacobs Engineering 1,100 | D



The table below summarises some of the major upcoming and planned development projects in the Adelaide CBD.


73-85 Pirie Street DA 2021 Core

200 North Terrace DA 2021 Core Le Cordon Bleu

108 Wakefield St UC 2021 Core

Precinct GPO, Tower 1, 145-149 King William St DA 2022 Core

42-56 Franklin St DA 2023 Core

185 Pirie Street PS 2023 Core

Festival Plaza, Station Rd UC 2023 Core


Q4/2019



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