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IN THIS REPORT
MARKET TRENDS
www.m3property.com.au
Conditions in the CBD remain favourable
to existing and prospective tenants.
Tenants are able to be selective when
making locational decisions, with space
available across all grades of stock in
existing buildings, sub-lease space
available at extremely competitive rental
rates, and new space available in 480
Queen Street and 180 Ann Street.
Affordable rental rates remain the driving
force behind the relocation of some
Fringe and Suburban tenants to the CBD
and the ‘flight to quality’ that we are
currently seeing. Overall, conditions in
the leasing market have remained fairly
stable since our last Comm3ntary report.
Perhaps some of the biggest news that
has occurred since our last report,
however, is the recent announcement by
Tatt’s Group that they will no longer be
developing their new global headquarters
in Newstead. Instead, Tatt’s Group have
announced that they will lease
approximately 18,000 square metres of
space in the new Daisho development at
180 Ann Street.
The decision by Tatt’s Group was
reportedly made on the basis that the
company could be in their new premises
over the next year as opposed to several
years from now. It is significant for the
CBD market as it represents 18,000
square metres of pure net absorption and
will have a considerable positive effect on
vacancy in the CBD.
In addition to the news of Tatt’s Group,
the State Government announced last
year that they will lease the entirety of 1
William Street rather than attempting to
sub-lease 15,000 square metres of space
to the private sector. This is also
significant for the CBD market as sub-
lease vacancy has remained at a high
level over recent years.
Although the CBD is on the verge of
seeing a large amount of new stock
added to the market (which will have a
negative affect on vacancy rates), there
are a number of positives working for the
Brisbane office market at present and
going forward. These include the
development of the Queen’s Wharf
Precinct, which will provide a significant
boost to the local economy (see page 2),
as well as Brisbane’s first building (480
Queen Street) registering for WELL
Building Certification (see page 5).
Brisbane is certainly positioning itself to
become an increasingly important market,
and this is being recognised by investors
who have been showing a strong appetite
for both office and non-office assets in the
CBD over recent years.
Brisbane CBD Office Market
Vacancy remained stable in the Brisbane CBD over the six months
to January 2016, however it is forecast to rise considerably as a
result of the new stock being added to the market this year.
The affordability of the CBD
market is resulting in some
recentralisation of traditionally
Fringe/Suburban tenants as well
as a ‘flight to quality’.
The level of incentives being
offered to tenants has peaked.
Tenants are expecting a high
level of end-of-trip facilities.
The low value of the Australian
dollar has been a driving force
behind strong foreign
investment demand.
Predominantly secondary-grade
assets are being withdrawn from
the market for conversion and
redevelopment.
MARKET TRENDS
Market Overview 1
Key Market Drivers 2
Supply, Net Absorption and
Vacancy 4
Rental Market 7
Investment Market 9
Key Sale 10
Focus Point - TSAs 11
Outlook 12
IN THIS REPORT
KEY INDICATORS – BRISBANE CBD OFFICE MARKET
AUTUMN 2016
Total Stock Vacancy Rate Average Gross
Face Rent
Average
Incentive
Average
Equivalent Yield
2015 Sales Volume*
Premium 204,056 m2 9.6% $840/m2 35% 6.25%
Prime - $941,400,000
Secondary - $436,600,000
Conversion – $47,500,000
A-grade 864,317 m2 11.3% $650/m2 36% 6.90%
B-grade 807,908 m2 19.4% $550/m2 40% 8.75%
Source: Property Council of Australia, m3property
* Approximate. Includes settled sales above $10 million in value that went under contract in 2015. Stock and vacancy rate as at January 2016. Average
rents, incentives and yields as at March 2016.
| P2www.m3property.com.au
PREVAILING ECONOMIC CONDITIONS
• Economic growth in Queensland (Gross State Product) over the year to September
2015 was 1.9%. Recently released data show that national economic growth (Gross
Domestic Product) over the 2015 calendar year was 3.0% (December data not
available for individual states as of yet).
• The official cash rate has remained stable since the Reserve Bank of Australia
lowered it to 2.00% in May 2015. The low cost of debt is resulting in strong investor
demand for office assets.
• Business confidence in Queensland has been consistently higher than the national
level over recent months. During January, national confidence measured two index
points (0 = neutral), while state confidence measured six index points. Confidence is
a driving force behind tenant decisions to relocate / expand / contract etcetera.
• Public infrastructure spending in Queensland has declined considerably since
peaking in 2010. Despite this, there are a number of major projects in the pipeline,
including works for the 2018 Commonwealth Games, which will boost public
infrastructure spending in Queensland going forward. There is also some
uncertainty regarding how the upcoming Council elections will impact on spending.
• The unemployment rate in Queensland has steadily declined since September
2014, and as at January 2016, it was 6.1%. The decline has occurred alongside an
increase in employment in the public sector (discussed on page 3).
• The value of the exchange rate has declined over recent years and has been a
driving force behind strong investment demand from foreign investors.
QUEEN’S WHARF DEVELOPMENT
• The Queen’s Wharf precinct is bordered by the Brisbane River to the south, west
and north-west; Queen Street to the north; George Street to the east; and Alice
Street and the Riverside Expressway to the south-east. The precinct was declared a
Priority Development Area (PDA) in November 2014.
• Star Entertainment Group (formerly Echo Entertainment Group) will relocate its head
office to Brisbane, which will be a positive for net absorption. The firm currently
occupies circa-3,000 square metres of space at 60 Pyrmont Street in Sydney.
• Construction is anticipated to commence in 2017 (after 1 William Street is
completed). The entire project is estimated to be completed in 2024 (the
development will be staged, however, with the Integrated Resort component
scheduled for completion in 2022). A number of office buildings will be withdrawn
from the market to make way for the development.
• At present, the development remains subject to the planning approvals process and
the granting of necessary planning and development approvals. It is anticipated that
Destination Brisbane Consortium will submit a Development Application mid-year.
• It has been estimated that over 2,000 jobs will be created during construction and,
once completed, the development will support over 8,000 jobs. It has also been
estimated that annual tourism to Brisbane will increase by 1.39 million persons and
Queensland’s GSP will receive a $4 billion boost from the development.
‘FLIGHT TO QUALITY’
• The high vacancy rate in the CBD market has allowed tenants to become
increasingly selective when making locational decisions, with space available across
all grades of stock in existing buildings and new space available in buildings
currently under construction.
• The decline in effective rental rates in the CBD over recent years has resulted in a
‘flight to quality’, with firms recognising that now is a good time to upgrade to higher-
quality premises. We have seen a number of firms relocate from Secondary to
Prime accommodation as well as from A-grade to Premium accommodation.
• Tenants are also able to be more critical of the level of amenity provided in buildings,
with an increasingly important driver being a higher level of end-of-trip facilities.
Buildings that provide these amenities are definitely seen as more desirable by
prospective tenants than those that do not. Comm3ntary Autumn 2016
Economic conditions have improved.
The value of the dollar is now more
favourable for foreign investors,
business confidence in Queensland
is the highest of all mainland states
and the unemployment rate in
Queensland has steadily declined.
The Queen’s Wharf Development will
be a major boost to both the
Brisbane and Queensland
economies. The Development will
change the landscape of Brisbane
City and will have many positive flow-
on benefits to the commercial
property market.
BHP Billiton Mitsubishi Alliance will
upgrade from A-grade
accommodation at 12 Creek Street to
Premium-grade accommodation at
480 Queen Street.
480 Queen Street will have extensive
end-of-trip facilities, with 600 bicycle
spaces, 500 lockers, and 45 male
and female shower facilities.
KEY DRIVERS OF THE MARKET
| P3www.m3property.com.au
RECENTRALISATION
• The diminishing price differential between comparable CBD and Fringe space is
having a positive effect on tenant demand in the CBD. With effective rents currently
at the same level they were in 2006, the CBD has become an affordable option for
companies who have traditionally been based in the Fringe or Suburban markets.
As a result, these firms are increasingly looking at the CBD as a potential relocation
option upon lease expiry.
– Tatt’s Group have announced that they will move to 180 Ann Street instead of
developing their new headquarters in Newstead. Tatt’s Group is currently spread
over a number of locations across Brisbane, however not in the CBD.
– ABS relocated from Fortitude Valley to 295 Ann Street during 2015. Although
ABS reduced their office size from 4,400 square metres to 2,000 square metres,
the move was still positive net absorption for the CBD.
– Logicamms is looking to relocate from Spring Hill to, most likely, the CBD. The
company has reduced their office space requirements from 3,000 square metres
to 2,000 square metres, however, as above, it will still be positive net absorption
for the CBD if they proceed to relocate to the CBD.
• There have not been any recent announcements from major firms looking to relocate
from the CBD to the Fringe.
PUBLIC SECTOR EMPLOYMENT
• The chart below plots annual change in the size of the public sector (full-time
equivalent (FTE) positions) against net absorption in the Brisbane CBD office
market. As shown by the chart, any major change to the size of the public sector is
correlated with changes in demand for office space in the CBD.
• The number of FTE positions in the Queensland public sector has grown at an
average annual rate of 1.6% over the past 20 years. Under the previous State
Government, however, the FTE workforce declined by 11,000 positions (5.4%),
having a significant negative effect on vacancy and rental rates in the CBD.
• The public sector typically expands whilst under Labor governance (for example,
Queensland’s FTE public service grew by over 50% under the Beattie / Bligh
Governments), and unsurprisingly, under the current Labor term, the size of the
public service has already grown by just-under 10,000 FTE positions. As shown on
the chart above, this has been correlated with growth in CBD net absorption
(although net absorption still remains negative overall).
• Over the long term, we expect that wider technological advances will eventually
contribute to a downsizing in the public sector. The number of government services
being offered online has increased over recent years, and this trend is expected to
continue, resulting in an increased number of jobs becoming obsolete.
Comm3ntary Autumn 2016
As a result of the high level of
vacancy, the CBD has become more
affordable and accessible for
traditionally non-CBD tenants over
recent years.
There is a moderately strong
correlation between growth in
Queensland’s public-sector
employment and net absorption in
the Brisbane CBD.
Between December 2014 and
September 2015 (latest data
available), the number of full-time
equivalent persons employed in the
Brisbane Inner City Statistical Area
(Level 4) increased by 1,662.
KEY DRIVERS OF THE MARKET
-125,000
-100,000
-75,000
-50,000
-25,000
0
25,000
50,000
75,000
100,000
125,000
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
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Net
Ab
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m2
Pu
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Growth in Public-Sector Employment vs CBD Net Absorption
Growth in Number of FTE Persons
Net Absorption
Source: Queensland Government, m3property
| P4www.m3property.com.au
STOCK AND SUPPLY
• The Property Council of Australia estimates that the Brisbane CBD office market
comprises 2,157,340 square metres of floor space (as at January 2016). This
represents the third largest CBD office market in Australia and 8.6% of total office
space nationwide. The composition of the market by grade of stock is shown on the
following chart.
Additions
• The refurbishment of 155 Queen street was completed in the second half of 2015
(adding 2,800 square metres of Premium accommodation back to the market). It
was recently announced that an innovation hub for start-up businesses known as
‘The Capital’ will be located at 155 Queen Street.
• 480 Queen Street (56,855 square metres), 180 Ann Street (57,465 square metres)
and 1 William Street (75,853 square metres) are currently under construction, and
combined, these developments will add approximately 190,200 square metres of
new accommodation to the CBD over the coming year.
• We estimate the total amount of uncommitted space in the new supply to be
approximately 35,700 square metres. It is also important to note that the completion
of these buildings will result in a large amount of backfill space in the market.
– Over 85% of 480 Queen Street has been pre-committed to tenants including
Herbert Smith Freehills, PwC, BHP Billiton, Allens and HWL Ebsworth.
– 180 Ann Street was undertaken as a speculative development and has secured
commitments from Commonwealth Bank (12,000 square metres) and Tatt’s
Group (18,000 square metres).
– The State Government is no longer attempting to sub-lease 15,000 square
metres at 1 William Street, as previously planned, and will instead occupy the
entire building.
• In addition to the above-noted new developments, 36 Wickham Terrace (18,450
square metres) is currently undergoing a full refurbishment, with completion
expected towards the end of 2017.
• The only other project that we believe is likely to commence in the short-term is
Shayher Group’s 300 George Street. 300 George Street is a proposed three-tower
hotel, residential and office development. The proposed office building has 47,700
square metres of net lettable office accommodation and is likely to be constructed
speculatively. We do not expect the building to be completed until 2019 at the
earliest.
The Brisbane CBD is the third largest
CBD office market in Australia.
A-grade stock accounts for the
largest amount of space in the CBD.
The proportion of Prime- to
Secondary-grade stock will increase
over coming years as a result of the
addition of three Prime buildings to
the market and the expected
withdrawal of a number of Secondary
assets.
180 Ann Street and 480 Queen
Street are expected to be completed
in the near future.
SUPPLY, NET ABSORPTION AND VACANCY
Comm3ntary Autumn 2016
204,056m²10%
864,317m²40%
807,908m²37%
220,202m²10%
60,857m²3%
Stock by Grade
Premium A-grade B-grade C-grade D-grade
Source: Property Council of Australia, m3property
| P5www.m3property.com.au
Withdrawals
• There were two buildings permanently withdrawn from the Brisbane CBD office
market during 2015. 171 George Street (8,260 square metres) was purchased by
Toga Hotels who will convert the building into a hotel, and 363 Adelaide Street
(14,700 square metres) was purchased by Valparaiso Capital Partners who will
convert the building to student accommodation. There were also a number of
buildings/partial buildings withdrawn for refurbishment, the largest being 36
Wickham Street (15,800 square metres) which is due for completion in 2017.
• The trend of office buildings in the private sector being converted or redeveloped into
alternate uses is likely to continue going forward. For example, Cbus sought
approval in 2014 to demolish 443 Queen Street (5,600 square metres) to develop a
residential complex, and Aspial Corporation plan to develop a residential complex at
240 Margaret Street (3,500 square metres). We expect both of these buildings to
be withdrawn from the office market during 2016. Property Development
Systems Australia has also recently lodged a Development Application for a
residential tower at 545 Queen Street (currently a 13,100 square metres A-grade
building).
• There are a number of State Government owned/leased buildings, accounting for
approximately 100,000 square metres of space, that are likely to be withdrawn from
the market from early 2017 onwards. Close to 60,000 square metres of stock (75
William Street, 80 George Street, 100 George Street and 84 William Street) will be
withdrawn upon completion of 1 William Street (late 2016) as part of the Queen’s
Wharf Development. We also expect the Health (13,400 square metres), Forestry
(13,300 square metres) and Primary Industry (14,400 square metres) Houses to be
withdrawn upon expiry of their leases to the State Government in 2017.
.
50 Martin Place in Sydney was the
first project to receive WELL
Certification in Australia.
The Brisbane City Council incentive
scheme to attract new student
accommodation in inner-city
Brisbane has resulted in 23
development applications for
purpose-built student
accommodation over the past year.
At present, eight applications (7,500
beds) have been approved.
SUPPLY, NET ABSORPTION AND VACANCY
Comm3ntary Autumn 2016
Over the past decade, ‘green’ and energy-efficiency ratings have played an increasingly
important role in transforming the office market. More recently, the drive towards creating
a workplace that promotes health and well-being has also started to gain momentum and
has resulted in the International WELL Building Institute designing the WELL Building
Standard. In general, there are two components of the WELL Building Standard, one that
addresses the building and fit-out and one that addresses the tenancy and how
companies treat their staff.
The WELL Building Standard is a global performance-based scale for measuring,
certifying and monitoring the features of the built environment that affect the health and
well-being of persons working in the building. The WELL Building Standard incorporates
ratings on seven scales – air, water, nourishment, light, fitness, comfort and mind.
WELL-certified office environments have been shown to have significant positive impacts
on the productivity and performance of employees.
The current WELL Building Standard is designed for commercial and institutional office
buildings, and categorises projects into three typologies:
New and Existing Buildings Certification: Applies to new and existing buildings and
addresses the full scope of project design and construction as well as aspects of building
operations. It is relevant for office buildings where a minimum of 90% of the total floor
area is occupied by the building owner and is operated by the same management.
New and Existing Interiors Certification: Applies to office projects only occupying a
portion of the space in a building, or those that occupy an entire existing building not
undergoing major renovation.
Core and Shell Compliance: Applies to office building projects seeking to implement
fundamental features into the entire base building for the benefit of future tenants.
Addresses the building structure, window locations and glazing, building proportions, the
heating, cooling and ventilation system, and water quality as it is supplied to the building.
This typology also encourages consideration of the site in relation to amenities and
opportunities for wellness.
There are only a limited number of projects in Australia that have registered for or
received WELL Building Certification at present. The new Dexus-owned development at
480 Queen Street is the only building in Brisbane of which we are aware that has
registered for WELL Building Certification at this point in time.
WELL BUILDING STANDARD
| P6www.m3property.com.au
NET ABSORPTION
• Net absorption has averaged 16,137 square metres per annum over the 10 years
ending December 2015. The strongest net absorption over this period occurred
during 2011 (91,670 square metres), as resource and resource-related companies
took on extra space for future expansion.
• Since 2013, however, annual net absorption has been negative. During 2015, net
absorption was -17,896 square metres. The following chart shows net absorption in
the CBD over the past 20 years.
• We forecast net absorption in the CBD to re-enter positive territory during 2016 and
then remain positive over the foreseeable future. Over the short term, net absorption
will be negatively affected by the relocation of Flight Centre to South Brisbane,
however, will be positively influenced by Tatt’s Group’s move to 180 Ann Street.
VACANCY
• The total vacancy rate in the Brisbane CBD was 14.9% as at January 2016,
representing 321,442 square metres of vacant floor space. The total vacancy rate
remained stable over the six months from July 2015.
• Most of the vacant space in the CBD is in B-grade stock (156,670 square metres).
• The completions of 180 Ann Street, 480 Queen Street and 1 William Street will
contribute to further increases in the vacancy rate, to circa 18.5%, towards the end
of this year / early next year. Despite approximately 85% of 480 Queen Street being
pre-committed, the vacancy rate is likely to increase most significantly in Premium-
grade accommodation because of the large amount of backfill space that will
become available in existing Premium buildings. For example, we estimate that of
the circa 49,000 square metres currently pre-committed in 480 Queen Street,
approximately 30,000 square metres will come from existing Premium buildings.
Net absorption has been negative in
only four of the past 20 years. Three
of these instances have been over
the past three years.
The relocation of Tatt’s Group to the
CBD will provide a significant boost
to net absorption (likely during
2016/17). It will also help prevent the
vacancy rate from reaching the level
it was initially forecast to reach.
We expect that the vacancy rate in
Premium stock will increase
considerably over the coming 18
months.
A number of building withdrawals will
prevent the B-grade vacancy rate
increasing further.
SUPPLY, NET ABSORPTION AND VACANCY
Comm3ntary Autumn 2016
Building GradeTotal Vacancy Sub-lease Vacancy
m2 % m2 %
Premium 19,528 9.6% 3,689 1.8%
A-grade 97,954 11.3% 18,636 2.2%
B-grade 156,670 19.4% 12,410 1.5%
C-grade 36,462 16.6% 140 0.1%
D-grade 10,828 17.8% Nil 0.0%
Total 321,442 14.9% 34,875 1.6%
Source: Property Council of Australia, m3property
Note: Total vacancy includes sub-lease vacancy
-125,000 m²
-100,000 m²
-75,000 m²
-50,000 m²
-25,000 m²
0 m²
25,000 m²
50,000 m²
75,000 m²
100,000 m²
199
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Brisbane CBD Office: Net Absorption
Net AbsorptionLong-term Average10-year Average5-year Average
Source: Property Council of Australia, m3property
| P7www.m3property.com.au
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Brisbane CBD Gross Effective Rents
Premium
A-grade
B-grade
AVERAGE RENTAL RATES AND INCENTIVES
• Average Premium, A- and B-grade rental rates and incentives are shown in the table
below.
• Despite subdued conditions in the rental market, during 2015 we saw some growth
in Premium face rents as a result of deals negotiated in the new office tower at 480
Queen Street, pushing the average rental rate up.
• It is important to note that we have seen some examples of significantly higher
incentives than those shown in the table.
• We expect that face rents will remain flat over the coming 18 months, as shown on
the following chart.
• It is our opinion that incentives have now peaked for all grades of stock. Their
decline will be gradual, however, with large incentives likely to remain over the
foreseeable future. As a result, we believe that effective rents have now reached
their lowest point. Historical and forecast effective rents are shown on the following
chart. As shown by the dotted lines on the chart, effective rents are currently sitting
where they were in mid- to late-2006.
Rental rates achieved in 480 Queen
Street have pushed the average
Premium face rental rate up. For
example, Arrive Wealth Management
and Mitsui Coal have reportedly
leased space at 480 Queen Street for
$896 and $906 per square metre
gross respectively.
Over the coming five years, we
forecast Premium, A- and B-grade
rents to increase by an average of
1.43%, 1.57% and 1.60% per annum
respectively. Despite this relatively
subdued short- to medium-term
outlook, we forecast average growth
in Premium-grade rents of 3.01% per
annum, A-grade of 2.99% per annum
and B-grade of 2.95% per annum
over the coming ten years.
We believe that effective rents have
now reached their lowest point.
RENTAL MARKET
Comm3ntary Autumn 2016
Grade Face $/m2 Incentive Effective $/m2
Premium $840 35% $545
A-grade $650 36% $415
B-grade $550 40% $330
Source: m3property
Source: m3property
Forecast
$300
$400
$500
$600
$700
$800
$900
$1,000
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Brisbane CBD Gross Face Rents
PremiumA-gradeB-grade
Source: m3property
Forecast
| P8www.m3property.com.au
SELECTION OF RECENT MAJOR LEASE DEALS
Deals negotiated in 480 Queen
Street, such as the deal to Mitsui
Coal, have pushed the average
Premium rental rate up.
There were a number of small leases
signed in 100 Edward Street over
2015. Other signing tenants include
Paxus, Fonebox, Air Energi,
Clearview Financial and Knowledge
Flux. Gross face rents for these
leases ranged between $550 and
$570 per square metre and
incentives ranged between 35% and
38%.
The ABS is one of a number of firms
who have relocated from the Fringe
market to the CBD. ABS was
previously located at Homemaker
City in Fortitude Valley.
RENTAL MARKET
Comm3ntary Autumn 2016
100 Edward Street
A semi-modern office building constructed circa-1985, situated within the traditional
‘Government and Residential' precinct of the Brisbane CBD at the corner of Edward
and Mary streets. It comprises 12 levels of B-grade office accommodation with an
average floor plate of 580 square metres, four-ground floor retail tenancies and four
above-ground levels of secure parking for 110 vehicles, providing a ratio of 1:66.
Tenant: Phillips Communication Group
Date: February 2016
NLA: 586 m2
Gross Face Rent: $570/m2
Incentive: 37.01% (fit-out and rental abatement)
Gross Effective Rent: $359/m2
Term: 5 years
480 Queen Street
A new Premium grade office building (currently under construction), situated within
the traditional ‘Financial’ precinct of the CBD. The 33-storey building will comprise
271 parking bays within three basement levels, four podium levels of retail
accommodation, and a further 26 upper levels of office accommodation. It will be
serviced by 21 lifts. The building has two floor plates for the mid-rise and high-rise
components, which are 2,650 to 2,800 square metres and 1,550 to 1,700 square
metres respectively.
Tenant: Mitsui Coal
Date: February 2016
NLA: 820 m2
Gross Face Rent: $906/m2
Incentive: 30.00%
Gross Effective Rent: $634/m2
Term: 10 years
295 Ann Street
A circa-1974 B-grade office building situated within the traditional ‘Uptown’ precinct
of the CBD. The building comprises 17 storeys of office space plus lower ground
and two basement levels of car parking for 85 vehicles. The building has average
floor plates of 1,216 square metres and has an accredited NABERS Energy Rating
of 5 stars and Water Rating of 4.5 stars.
Tenant: ABS
Date: February 2016
NLA: 2,474 m2
Gross Face Rent: $575/m2
Incentive: 35.00% (fit-out and rental abatement)
Gross Effective Rent: $374/m2
Term: 10 years
| P9www.m3property.com.au
• There remained strong demand for investment stock in the Brisbane CBD during
2015, being the result of the weight of money, low interest rates and the more
favourable dollar for foreign investors.
• The following table shows settled sales that went under contract during 2015 and
were sold for investment purposes (i.e. not for redevelopment or conversion
purposes). The total value of the sales is an estimated $1.34 billion (note: this
includes sales over $10 million only).
• We are also aware of a number of sales, including 545 Queen Street, that are
currently under contract, however have not yet settled.
• In addition to the above buildings sold for investment purposes, 363 Adelaide Street
sold for $47,500,000 to Valparaiso Capital Partners who intend to convert the
building to student accommodation.
YIELDS
• During the December 2015 quarter, yields ranged between 6.00% and 6.50% for
Premium accommodation, 6.50% and 7.25% for A-grade and 8.00% and 9.50% for
B-grade. Over the year, average Premium yields tightened approximately 25 basis
points and A- and B-grade yields tightened approximately 10 basis points.
• We expect yields to remain relatively stable over the short- to medium-term due to
forecast stability in the cash rate. Yields will, however, remain sensitive to
conditions in the global economy, including the possibilities of negative interest rates
in the United States (which could result in downward pressure on yields) and the
Chinese Government implementation of regulations on the amount of money leaving
the country (which could result in upward pressure on yields).
While the investment market is being
underpinned by low interest rates
and the favourable exchange for
foreign investors, investment risk
remains sensitive due to the current
disconnect with the leasing market.
$1.38 billion of CBD office assets
were transacted during 2015.
The spread between average
Premium and Secondary yields is
now 260 basis points. The spread
has widened considerably since the
pre-GFC period when it was as
narrow as 70 basis points.
INVESTMENT MARKET
Comm3ntary Autumn 2016
Address Date Sale Price EY PY $/m2 NLA WALE (Income)
Prime
313 Adelaide St Aug-15 $125,400,000 6.86% 7.13% $8,594 4.33 yrs
1 Eagle St* Jul-15 $592,000,000 6.98% 6.65% $9,948 4.51 yrs
215 Adelaide St Jul-15 $224,000,000 6.87% 6.88% $7,695 4.50 yrs
Secondary
41 George St Dec-15 $159,800,000 8.60% 8.71% $5,334 5.41 yrs
179 North Quay Nov-15 $35,300,000 N/A N/A $4,107 N/A
201 Charlotte St Oct-15 $81,500,000 8.51% 8.31% $6,065 6.18 yrs
410 Ann St Jul-15 $140,000,000#
N/A N/A $7,000#
N/A
420 George St Jun-15 $20,000,000 9.99% -0.83% $3,092 3.78 yrs
Source: m3property
Note: Comprises buildings sold for investment purposes (>$10 million) during 2015; * Office
Component # estimate - 410 Ann Street was purchased as part of the sale of a $2.45 billion portfolio of
nine assets. Individual analysis of this sale is not available, however we have included an estimated
price of $140 million ($7,000/m2); N/A – Not Available
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Dec-0
5
Dec-0
6
Dec-0
7
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
Dec-1
4
Dec-1
5
Brisbane CBD Yields
Premium
A-grade
B-grade
Source: m3property
| P10www.m3property.com.au
AEP Investment Management was
founded in 2008 and is a Singapore-
based investment management
company that specialises in cross-
border investment, with a focus on
commercial buildings and business
parks.
KEY SALE
41 GEORGE STREET
• 41 George Street is located within the traditional ‘Government and Residential’
precinct of the Brisbane CBD, with the entrance to the Queen Street Mall
approximately 500 metres to the north. It has primary frontage of approximately 48
metres to George Street and secondary frontage of approximately 60 metres to
Margaret Street. The immediate area is set to undergo significant gentrification with
the development of the Queen's Wharf precinct.
• The property comprises a semi-modern office building constructed circa-1979,
situated on a 2,811 square metre near-regular shaped corner allotment. The
building comprises 26 levels of B-grade office accommodation with an average
tower floor plate of approximately 1,080 square metres, ground level retail and office,
and parking for 129 vehicles within three basement levels. The building has a
NABERS rating of 4.5 stars.
Sale Price: $159,800,000
Sale Date: December 2015
Vendor: QIC
Purchaser: AEP Investment Management
NLA: 29,960 square metres
PY: 8.71%
EY: 8.60%
MY: 8.66%
IRR: 8.37%
$/m2 NLA: $5,334
WALE: 5.41 years by income
• The property was purchased by a Singaporean investor. At the date of transaction,
the building was leased to an overall above-average calibre of tenant - the
Queensland State Government (Department of Housing and Public Works), with the
ground level retail partly leased to a newsagency and partly vacant (representing
0.15% of the total NLA - 46 square metres).
• The Queensland State Government lease is a gross lease for an eight-year term
with two three-year options, with 4% annual increases. The passing office rental
was $534 per square metre, being approximately at, or about, our assessment of the
market rental prevailing at the date of transaction.
• The Queen's Wharf development is expected to be near completion at the time of
lease expiry. The development of the Queen's Wharf precinct will provide significant
gentrification and amenity to this part of the CBD, with the long-term leasing and
retention prospects for the building is expected to be enhanced.
• The property was acquired by QIC from the State Government in April 2013 for a
recorded price of $83,050,000.
Comm3ntary Autumn 2016
| P11www.m3property.com.au
There are approximately 6,800
square metres of unused TSAs in the
Brisbane City.
Historically, TSAs typically traded for
between $2,000 and $3,000 per TSA.
TSAs are highly illiquid in the
prevailing market.
The BCC is currently reviewing the
Draft CCNC plan.
FOCUS POINT
Comm3ntary Autumn 2016
Transferable Site Areas (TSAs) were introduced into the Brisbane City Centre in 1987.
TSAs are not able to be utilised for a development upon the site in which they are
originally allocated, however are available to be freely traded within the market. TSAs
allow for building height development potential to be transferred between sites within the
same area of the city centre, while preserving heritage-listed sites.
According to the Brisbane City Council (BCC), 60 sites were allocated TSAs in the
Brisbane City Plan 2014. We obtained a copy of the TSA Register in January 2016 which
showed that from an original allocation of 40,900 square metres, there are now circa
6,800 square metres of unused TSAs in the Brisbane City. TSAs have been integral in
the approvals of developments including 140 Alice Street, 55 Elizabeth Street, 140 Ann
Street, 42 Albert Street, 50 Albert Street, 30 Albert Street and the Vision development.
TSAs are commercially valued and considered when a property is sold with attached
TSAs. The inherent value of these rights is fixed to current market conditions, as well as
changes to the planning policies restricting or encouraging development. Historically,
TSAs typically transacted for between $2,000 and $3,000 per TSA. The following table
shows TSA transfer transactions of which we are reasonably aware that occurred during
this period.
Source: Various sources, m3property
The above transactions occurred, however, under a different planning scheme with
reduced densities and TSAs having greater use effect than under the Draft Brisbane City
Centre Neighbourhood Plan (CCNP). The Draft CCNP allows increased density and will
change the way TSAs can be used if implemented. Fewer developers within the CBD will
require TSAs to meet their individual GFA and building design objectives.
The key relevant proposed changes are as follows - the removal of all GFA restrictions;
an increase in allowable tower site cover for commercial developments to 50%; the
removal of the ability to utilise TSAs for residential developments; restriction on the site
characteristics of properties able to receive TSAs; and the ability to propose a
performance-based outcome for any proposed development exceeding the maximum site
cover.
Given the restrictions proposed, and expected to be passed in the new planning scheme,
TSAs are highly illiquid in the prevailing market. While at the peak of the market, the
6,800 square metres of unused TSAs currently in the market would have had an
estimated market value of between $13.6 million and $20.4 million, we expect that the
market value of these TSAs would now be significantly reduced.
In response to the Draft CCNP, the Property Council of Australia (PCA) made a
submission to the BCC suggesting the development of a plan that allows for greater
alternative uses of TSAs. The PCA noted that the removal of GFA calculations, combined
with the removal of the ability to utilise TSAs for residential developments, would result in
a substantial loss in TSA values. The PCA suggested that TSAs should be used for both
residential and non-residential developments (as previously allowed) as well as in
exchange for car parks in commercial developments.
According to the timeline of the Draft CCNC listed on the BCC website, Council is
currently reviewing feedback on the plan and amending it where appropriate. Once this
has been completed, the Plan will be submitted to the State Government for review. It is
expected that the final CCNC will be adopted around mid-2016.
TRANSFERABLE SITE AREAS
Parties Date TSA m2 $ per TSA
Sunland Property Group Jun- 10 270 $2,500
Northbridge MJN P/L Aug-08 29 $3,500
104 Edward Street Proprietor Mar-08 152 $2,000
10 Charlotte Street Proprietor / Daisho Oct- 08 377 $2,750
62 Queen Street Proprietor / Vision Feb- 08 100 $2,200
40 Charlotte Street Proprietor / Daisho Oct- 08 346 $2,750
51 Edward Street Proprietor Dec- 07 100 $2,200
130 Mary Street Proprietor / Dexus Oct- 07 1,070 $2,600
OFFICES [email protected]
DefinitionsDefinitions
m3property Research
OUTLOOK
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44 Waymouth Street
Adelaide
South Australia 5000
T 61 (8) 7099 1800
F 61 (8) 7099 1850
Level 2
15 James Street
Fortitude Valley
Queensland 4006
T 61 (7) 3620 7900
F 61 (7) 3620 7999
Level 29
600 Bourke Street
Melbourne
Victoria 3000
T 61 (3) 9605 1000
F 61 (3) 9670 1658
Perth Sydney Disclaimer
Unit 2
168 Stirling Highway
Nedlands
Western Australia 6009
T 61 (8) 6500 3600
F 61 (8) 6500 3698
Level 23, MLC Centre
19 Martin Place
Sydney
New South Wales 2000
T 61 (2) 8234 8100
F 61 (2) 9232 5144
This report has been derived, in part, from sources other than
m3property. In passing on this information, m3property makes no
representation that any information or assumption contained in this
material is accurate or complete.
To the extent that this material contains any statement as to the
future, it is simply an estimate or opinion based on information
currently available to m3property and contains assumptions which
may be incorrect. m3property makes no representation that any
such statements are, or will be, accurate.
We believe that the worst is now behind us
in terms of leasing demand in the CBD.
Growth in the education and legal sectors
as well as the trend towards recentralisation
has been, and will continue to be, a positive
source of demand for the CBD.
Despite this, most large firms who were in a
position to upgrade have done so and the
number of large firms with lease expiries in
the short term is decreasing. As a result,
leasing demand in the CBD will continue to
stem from smaller requirements.
The CBD office market is still in a
precarious position, however, as a result of
the impending completions of 180 Ann
Street, 480 Queen Street and 1 William
Street. The completion of these buildings
will add a large amount of new supply to a
market which has just started to show signs
of recovery, and we expect that the vacancy
rate will increase considerably through
2016. Furthermore, if Shayher group
proceed with 300 George Street, the
vacancy rate will spike again when the
building is completed (expect 2019 at the
earliest).
Because of increasing vacancy, tenants will
continue to be afforded the luxury of being
critical of the facilities provided by
buildings / premises.
We expect that face rents will remain stable
over the short term and that landlords will
continue to offer high incentives. We do
expect, however, that incentives have now
peaked, and as a result, that effective rents
will start to show some growth towards the
end of this year.
We are of the opinion that yields will
continue to remain largely tied to the cash
rate rather than the leasing market and
because of this, will be stable across all
grades of stock over the short term. This is
based on forecast stability in the cash rate
over coming years.
Note, however, that yields will remain
sensitive to global economic conditions.
For example, at the time of writing this
report, the US Federal Reserve has noted
the possibility of implementing negative
interest rates if the economy takes a ‘turn
for the worse’. If this did eventuate, we
would expect that domestic yields would
come under downward pressure due an
increased weight of money looking to
purchase assets in a higher returning
economy. Furthermore, the Chinese
Government is looking to regulate the
amount of money leaving the country which
could have a softening affect on Australian
yields.
Overall, despite the fairly subdued short-
term outlook, over the longer-term, we
expect the Brisbane CBD to increase in its
importance as a professional, business and
financial services hub, driven, in part, by an
increasingly diverse Brisbane and
Queensland economy.
The outlook for the Brisbane CBD office market is neutral.
OUTLOOK
For more information please
contact:
Research Contact
Casey Robinson
P 07 3620 7906
Key Valuation Contacts
Ross Perkins
P 07 3620 7901
Michael Coverdale
P 07 3620 7907
Jeremy Hoffman
P 07 3620 7912
m3property Research
Prime: Combination of Premium and
A-grade.
Secondary: Combination of B-, C-
and D-grade.
Net Absorption: Change in occupied
stock within a market over a specified
period of time.
Net Lettable Area (NLA): defined in
accordance with the Property Council
of Australia “Method of Measurement”
Pre-commitment: contract signed to
occupy space in new or refurbished
space prior to construction
commencing.
WALE: Weighted average lease
expiry.
Equivalent Yield: An annualised yield
that is derived from the current net
income and future changes to the net
income over time but no allowance is
made for future rental growth. It is the
rate of return of a net income stream
over a specific period of time that
reflects current actual rents and costs
and current levels of rental values.
Passing Initial Yield: The percentage
return on value or price derived from
the current net passing income. No
allowance is made for any future rent
growth.
Market Yield: The return on value
derived from the net market
income. No allowance is made for any
future rent growth.
Internal Rate of Return: The discount
rate that equates the present value of
the net cash flows of a project with the
present value of the capital
investment. It is the rate at which the
Net Present Value equals
zero. Reflects both the return on the
invested capital and the return of the
original investment, which are basic
considerations of potential investors.
Terminal Yield: The capitalisation rate
used to calculate the terminal value
(the value at the end of the discounted
cash flow period).
Definitions
