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RESEARCH & FORECASTDARWIN COMMERCIALCOLLIERS INTERNATIONAL | HALF YEARLY REPORT 2011

DARWIN COMMERCIALRESEARCH & FORECAST REPORT

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Darwin awaits new horizons…

KEY FACTS

• Holding pattern continues in transactional activity.• Local Darwin investors showing signs of increased confidence.• Improved enquiry levels. • Investment sales remain tight with financing still difficult.• Sales in the Darwin strata title office market have improved. • There is steady demand for the leasing of premium grade office buildings.

COMMERCIAL MARKET OVERVIEWThe first half of 2011 has been a relatively slow period in the Darwin Commercial market, with a holding pattern continuing in transactional activity. The number of settled commercial transactions remained subdued in the first half of 2011, following a flat period at the end of 2010.

Investment sales remain scarce with financing still an issue. Although sentiment levels have improved, a caution in regard to finance has prevented transactions coming to fruition. Lenders continue to be risk averse with eligibility criteria the biggest obstacle.

Although demand for the acquisition of commercial property remains steady, shortage of available stock has kept potential transactions to a minimum. However, there continues to be a strong demand for the leasing of office premises. In particular, there is robust demand for the leasing of premium grade office stock with this category recording strong growth in rental yields.

H1 2011 | COMMERCIAL

Darwin’s Central Business District.

MARKET INDICATORS FORECAST - 6 MONTHS

OVERALL PERFORMANCE

SUPPLY

DEMAND

INCENTIVES

TRANSACTION ACTIVITY

YIELDS

CAPITAL VALUES

POPULATION GROWTH

ECONOMIC GROWTH

INFRASTRAUCTURE

SENTIMENT

VACANCY RATE

SUMMARY

Activity levels remained tight in the first half of 2011. The total value of all commercial sales in the first half of 2011 was approximately $50.38 million.

PROJECTS IN THE PIPELINE

Darwin is potentially on the verge of a boom in the resources sector, with many pro-posed projects finalising their feasibility studies and expected to be given the green light to commence.

Strategic investment from the Northern Territory Government has ensured that the Territo-ry takes full advantage of its niche industries. The niche industries that will provide the greatest economic benefit in-clude mining; the proposed construction of the Marine Supply Base; and the on-shore processing of liquefied natural gas (LNG).

Currently in the Territory, mining accounts for 25% of the Territory’s Gross State Product and it is anticipated that the value of mining pro-duction will increase by approximately 11.8% in 2011-12. BHP has signed a contract with Genesse Wyoming to transport the copper mined from Olympic Dam, Roxby Downs in South Australia by rail to the Port of Darwin for overseas shipment. Roxby Downs is presently operat-ing the largest copper mine globally. In Tennant Creek construction is pending for the Wonarah Phosphate Mine project. The Wonarah depos-it is Australia’s largest phosphate deposit and once production begins will allow for direct shipping of the ore from the mine. Capital expen-diture of the Wonarah project is anticipated to be approximately $107 million. Other international firms operating through the Territory include Rio Tinto (Bauxite and Alumina project in Gove); GEMCO (Manganese project on Groote Eylandt) and Xstrata (Zinc project at McArthur River).

The proposed development of the Marine Supply Base will capitalise on the oil and gas projects planned around Darwin and provide vi-tal support. This will increase Darwin’s marine capability and strategically help transform Darwin into a transport junction for inter-national shipping. With Darwin’s prime position as the gateway to Asia, the construction of the Marine Supply Base will reduce freight times and will ensure Darwin progresses as a service capital. It will also add support to the numerous oil and gas developments proposed.

The Territory and the Timor Sea hold rich reserves of oil and gas, with potential for further exploration opportunities. ConocoPhil-lips presently operates an LNG project in Darwin, with potential to expand. Shell Prelude has received the go ahead and the anticipated out-put of this project is approximately US $10 Billion over its lifetime. The Shell Prelude Project is marked to be the first floating LNG plat-form in the world. However, the biggest project that Darwin waits upon is the commencement of the INPEX Ichthys project, which will process LNG in the Territory. The INPEX project will be the largest investment made in the Territory at approximately US $30 Billion.

In addition to resource investment, Darwin is nurturing its bilateral relationships with Asian countries identified as priority markets. These coun-tries include Japan, China and Indonesia, and these strategic alliances will benefit Darwin both politically and economically. On a recent visit to Darwin the Prime Minister Julia Gillard proclaimed the Territory’s virtues; “Darwin is Australia’s gateway to Asia and Territorians now find themselves on the doorstep of the greatest transformation in the world- the expansion of Asia.” The Prime Minister further noted that “the Asian middle class will soon be bigger than the combined middle class of every other region on earth”. This is set to provide unparalleled scope for Ter-ritory exports, such as mineral and foods, as well as new opportunities in service based industries such as education, finance and engineering.

The proposed new projects will undoubtedly further boost the Territory’s employment and population growth, and the current investment into the NT signifies that Darwin will be at the forefront of Australia’s economic development.

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MARKET ACTIVITY

Capital values were stable in the first half of 2011 across the commercial market, with yields generally remaining firm between 8.5% and 9.5%. Funding still remains tight, affecting market sentiment. Agents noted increased levels of enquiry and buyer interest, although they also note that many investors are still keeping their hands in their pockets. Agents suggest that many investors are waiting for the new financial year before making any definite commitments.

The first half of 2011 saw 9 strata title commercial office sales recorded, as titles issued for new city fringe developments. The highest sale price recorded was for $2.295 million at Parap Road, representing represented approximately $3903 per sqm.

A number of industrial land sales also helped to keep the commercial market active in the first half of 2011. In total there were 22 sales of industrial sites and 27 sales of strata industrial properties. The most significant of these sales was $2.5 million paid for land in Holtze. Industrial activity in the first half of the year has seen 12 sales over $1 million.

The sale of retail property in Darwin is a rare event, and in the first half of 2011 the commercial market did not alter this pattern. Whilst no retail property transactions were recorded in the first half of 2011, 9 transactions for properties zoned as Service Commercial took place.

TOP PRICES

In the first half of 2011, the highest sale was recorded at $3.5 million, for 20 Harvey Street in the CBD. The second highest sale price was recorded at 141 Stuart Highway, Parap and at 11 Grosvenor Circuit, Holtze. Respectively, these two industrial properties recorded a sale price of $2.5 million. All other sales were recorded below $2.4 million.

ZONING PROPERTY SETTLED PRICE

Central Business

20 Harvery Steet, Darwin $3.5m

Service Commercial

141 Stuart Highway, Parap $2.5m

Light Industry 11 Grosvenor Circuit, Holtze $2.5m

Light Industry 12 Grosvener Circuit, Holtze $2.4m

Commercial Unit1/25 Parap Road, Parap $2.295mSource: Lands Titles Office & Colliers International DarwinN.B. Information for this table was obtained from a public domain source

TOP FIVE SALES

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RESEARCH & FORECAST REPORT | H1 2011 | COMMERCIAL | DARWIN

INDUSTRIAL

The sale of industrial land and warehouses remained at moderate levels in the first half of 2011, although the total sales value of these properties contributed to approximately 59 % of all commercial sales. There were 22 transactions for industrial sites with a total sales value of $29.55 million. The highest sale was recorded at two industrial sites for $2.5 million. Additionally several sales over the $2 million mark were recorded, indicating that if suitable stock is available a premium price can be attained.

Demand is anticipated to remain stable for warehouses during the second half of 2011. Yields for industrial properties are currently within the 8.5% to 9.5% range, and this figure is expected to remain stable for the remainder of 2011.

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Source: Lands Titles Office & Colliers International Research Darwin

STRATA INDUSTRIAL

The industrial strata market was again the strongest performer in the volume of sales in the first half of 2011, with 27 transactions and a median price of $275,000. The median price decreased from the last quarter of 2010, where it was recorded at $338,893. Berrimah recorded the highest number of strata unit sales and a top sale price of $650,000. This contrasted to the previous quarter’s top sale price of $1.43 million for Unit 2/31 Benison Road, Winnellie.

As anticipated the oversupply of industrial units has marginally lowered their market value, as surplus stock remains unsold after the completion of newly constructed strata developments.

Capital values for new strata units, based on gross building area are generally in the range of $1,800 to $2,400 per square metre, whilst older stock are generally in the range of $1,100 to $1,400 per square metre. These rates have remained stable over the past 12 months.

Strata industrial investors can expect on average a net return in the range of 9% to 10%. It should be noted that the bulk of strata industrial units are owner occupied

17% Commercial

7% Development

59% Industrial

17% Strata

Industrial

Commercial Sector Performance - January - June 2011COMMERCIAL SECTOR PERFORMANCE JAN - JUN 2011

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RESEARCH & FORECAST REPORT | H1 2011 | COMMERCIAL | DARWIN

SECTOR PERFORMANCE

The value of all commercial settlements in the first half of 2011 was approximately $50.38 million. In comparison the total value of all commercial sales in the second half of 2010 was approximately $74.05 million, showing a reduction in the volume of transactions. This was attributed to the lack of stock available on the market and the investor attitude to hold off purchases until the new financial year.

The strongest sector in the commercial market was the industrial sector, with a total sales value of approximately $29.55 million. While the strata industrial sector held the highest volume of sales, with 27 transactions and a total value of approximately $8.6 million.

PROFESSIONAL STRATA TITLE OFFICES

Sales for strata title professional offices increased in the first half of 2011, with 9 transactions for professional offices recorded. The majority of these sales were for new premises built in Parap. The highest price recorded for a professional office sale in the first half of 2011 was for $2.295 million.

Although transactions in office sales are few, it should be noted that there is robust demand for the leasing of premium office space.

RETAIL

There were no retail sales recorded in the first half of 2011, although consumer demand improved following the decline in November in 2010. This differs from the national trend that has a seen a historical decline in retail spending.

In the year to March 2011, retail growth in the Territory increased by 1.9%. The recovery in consumer spending is attributed to many factors, in particular the more competitive pricing of supermarket goods and the clothing and apparel sector.

The unemployment rate remains historically low despite a slight increase of 0.3 percentage points to 3.5% at the end of the June quarter. The Territory’s low unemployment rate combined with population growth and a strong wages growth, is anticipated to strengthen consumer spending.

Terminal One- Stuart Highyway Winnellie

Source: Property Council Australia & Colliers International Darwin

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RESEARCH & FORECAST REPORT | H1 2011 | COMMERCIAL | DARWIN

GRADE NO. OF BUILDINGS TOTAL LETTABLE m2 % OF TOTAL $/ PER SQM.

Premium 3 34,387 16.6% $475-$525

A Grade 14 68,751 33.2% $400-$475

B Grade 24 67,254 32.4% $350-$400

C Grade 29 35,370 17.1% $275-$350

D Grade 3 1629 0.01% $200+

TOTALS 73 207,341

OFFICE BUILDING RATES

Outlook

The Northern Territory commercial market has showed signs of increased enquiry following a decline in transactional activity in the first half of 2011. It is significant that despite a slower market, Darwin is relatively free of distressed property sales which should ensure longer term stability.

An interest rate rise anticipated for the second half of the year, is one of the key factors which will influence commercial property market decisions. Currently, the low interest rate environment is helping to keep business and consumer confidence up and makes commercial investment appealing. The availability of credit still remains tight, although some banks have now relaxed their lending policies.

It is anticipated that demand for the purchase of commercial property will remain stable throughout the remainder of 2011 and it is expected that there will be growth in the leasing of commercial property. In particular office rental rates are anticipated to strengthen further. There has been significant growth in these rentals, particularly in the premium and ‘A’ grade categories in the past 2 years. Premium category offices are achieving rentals between $475-$525 per square metre and ‘A’ grade offices are achieving between $420-$475 per square metre. At present demand for ‘C’ and ‘D’ grade is low and these will require extensive capital expenditure to become competitive.

An increasing demand for large scale industrial land and properties is present and is anticipated to strengthen through the second half of 2011, with large companies appointing agents to Design and Construct projects to meet their specific business requirements. *In the year to March 2011 the Territory Economic Review recorded the Consumer Price Index (CPI) for Darwin at 2.7%, while nationally the CPI increased to 3.0%. It is anticipated that the CPI for Darwin will increase during 2011 to approximately 2.8%.

According to Access Economics the Territory’s economic growth is estimated to have strengthened to 2.2 per cent in 2010-11, due to public sector investment. It is forecast that in 2011-12, economic growth will strengthen to 3.2 per cent with increased private sector investment and a renewed confidence in household spending.

The Northern Territory Government predicts that in 2011-12, the Territory’s Gross State Product (GSP) will increase by 3.2% to $17.8 billion as a result of increased international trade, strengthening in household spending and investment in the private sector.

Darwin’s long term prospects are positive, with many multi-million dollar projects poised for commencement in both the private and public sector. The Northern Territory Government has implemented a five year plan and has strategically invested in many projects to take full advantage of the wealth that the resource sector will provide. The anticipated resource boom will be predominately centred on the extraction and processing of LNG, and this is expected to underpin the Territory’s economy for the next 40 years.

Information Sources

Easy Access, ABS, NT Government, Access Economics, REINT, NT Treasury, Territory Economic Review, Colliers International Research Darwin

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RESEARCH & FORECAST REPORT | H1 2011 | COMMERCIAL | DARWIN

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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections.

Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. COPYRIGHT - Colliers International 2011.

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