1. Leigh Warner Director, Research & Consulting 28 March, 2014 Green development: a market-driven perspective

2. Data on the ‘green’ premium/performance need to be questioned Sample sizes are small Cannot separate ‘green’ from ‘new’ Survey data is subject to rationalisation (and ‘new’ factor) Attitudes shift through the cycle Price factors and perceptions do change behaviour The underlying trend is strong, but gets obscured by market trends Strong market = ‘green’ demand, but old secondary stock also leases and owners/agents begin questioning ‘is sustainability real’ Weaker market = less ‘green’ demand, but when the tide goes out you can see who is swimming naked (older secondary buildings) Problems are becoming evident but how do we fix them? Leave it to market pricing, or is there market failure and a public interest? A ‘Postcode 4000’ initiative? Environmental upgrade agreements? My angle… I have none With no vested interests, my views on sustainability are born out of agnostic observation

3. Brisbane office market outlook March 2014 Anecdotal Evidence Tenant/landlord perceptions Contents Market Trends The problems revealed Data Evidence With a pinch of skepticism

4. Source: JLL The sample size is growing, but still small…. Number of Buildings by NABERS Energy Rating There is still only a short history of performance on many buildings

5. NABERS Energy Rating (Base Building) No. of rated buildings as a % of total buildings Source: JLL Less than 10% of buildings

6. You can’t read too much into results like this….. Sydney CBD Vacancy by NABERS Energy Rating (Base Building), As at Q2/2013 Source: JLL These are all new buildings on initial leases, rents are also stronger – but a new car is more expensive than an old one! The real test is in re- leasing and performance over time of retro-fits

7. Data suggests there is stronger capital growth… But Green Star definitely has a ‘new’ factor

8. NABERS also appears to give a premium… With capital growth again seemingly the driver

9. Brisbane office market outlook March 2014 Anecdotal Evidence Tenant/landlord perceptions Contents Market Trends The problems revealed Data Evidence With a pinch of skepticism

10. Tenants appetite has cooled – tenant reps report that sustainability has definitely slipped down tenancy priorities for corporate occupiers The business environment is still cost-driven Still underlying appetite for new – but needs to be justified with business case and focus on efficiency gains Public sector is slightly different and it is impacting on markets Tenants more concerned with NABERS as it directly relates to their operational costs Green star is a ‘nice to have’ but just viewed as standard in development Landlords are starting to worry about old stock and its competitiveness in the leasing market But the unknown is the extent retro-fitting Developers remain focused on sustainability as part of the ‘package’ of new, but has it become most green star points for least $s? Anecdotal Evidence

11. Brisbane office market outlook March 2014 Anecdotal Evidence Tenant/landlord perceptions Contents Market Trends The problems revealed Data Evidence With a pinch of skepticism

12. 11 CBD Net Absorption and Vacancy The disconnect between leasing and capital markets… This is important because the strength of capital and demand for new is driving development when fundamentals do not justify – creating a problem for older stock

13. Source: JLL Research Vacancy in context Australia & US Office Markets Vacancy Rate, 2013 Australia has gone up, other industrialised countries have come down – meeting in the middle

14. Source: Jones Lang LaSalle Research 11.6% 10.2% 14.9% 11.0% 10.8% But the composition of vacancy is getting interesting…. CBD Office Market Vacancy by Grade The big question is whether this vacancy is becoming structural? I’ll come back to Sydney

15. Structural vacancy in Australian markets CBD Office Markets – Age Profile of Stock Source: JLL Research Almost 50% of stock in excess of 30 years old

16. 14.8% 15.5% There is great concern about the outlook at present… Vacancy is at a record high and three large developments are under way

17. 10.6% 15.5% 14.8% 19.4% 28.1% 14.1% Predominately supply- driven event Predominately demand- driven event The composition of vacancy is different to the 90s… Brisbane CBD Office Market Vacancy

18. Market VacancyPeak Prime Rent Peak Incentive %Quarter $/sqmQuarter % Brisbane 14.8Q3/1993368Jun 9041Q2/1994 Sydney 23.3Q3/1993669Jun 9049Q3/1993 Melbourne 26.1Q2/1993467Dec 9049Q4/1992 Perth 31.8Q4/1992327Mar 8950Q1/1992 Adelaide 19.9Q2/1993222Jun 9030Q2/1993 Average (excl. Brisbane) 25.345 Low rents and no prospect of leasing surplus space led many tenants to ‘carry’ space rather than sub- lease, which is reflected in the high incentive (compared to 30% today). This surplus space just does not exist across the private sector today Hidden vacancy in Brisbane was great in the 1990s Australian CBD Office Market Vacancy and Incentive Troughs

19. 6.2% - would require average net absorption of around 20,000 to 25,000 sqm p.a. (assuming there is a moderate level of stock re-grading) 14.4% The prime market can move back into equilibrium Brisbane CBD Office Market Vacancy Outlook

20. Completions supply… Brisbane CBD Completions (including refurbishments) and withdrawals Source: Jones Lang LaSalle Research + 236,100 sqm - 144,350 sqm = 91,750 sqm or 4.2% of total stock over 5 years Net Supply Equation

21. Assessing Stock We have identified 19 buildings totalling 225,000sqm that could feasibly be withdrawn over the next 5 years, so our forecast estimate assumes 64% of this stock will actually be withdrawn Testing our withdrawal assumptions - market 44% of Brisbane CBD Stock is B-Grade and vacancy is 19.9%

22. Source: Jones Lang LaSalle Research Market 1970-20131990s Average Stock Withdrawals (% of stock) Ratio of Refurbishments to Withdrawals (%) Average Stock Withdrawals (% of stock) Ratio of Refurbishments to Withdrawals (%) Sydney CBD1.2%54%1.7%62% Melbourne CBD1.1%46%1.8%26% Brisbane CBD0.7%55%1.2%42% Adelaide CBD1.0%65%0.7%56% Perth CBD1.1%31%1.0%35% Canberra1.2%52%1.7%40% All CBD Markets 1.2%51%1.5%44% Withdrawals could easily exceed our expectations, particularly if more is done to encourage conversions like Melbourne’s Postcode 3000 initiative in the 1990s Testing our withdrawal assumptions - history Our forecast translates to 1.2% of stock p.a.

23. Source: Jones Lang LaSalle Research 50 Super Prime Assets Market Market Value ($, billion) Sydney$12.3 Melbourne$5.5 Brisbane$3.8 Perth$4.5 A lower opportunity set in the core market will force investors to move up the risk curve. Limited product for core capital CBD Office Markets, Super Prime Cohort

24. The theory seems great – essentially tries to address the incentive problem between who undertakes expenditure and who benefits Uptake in NSW and Vic has been very limited to date Tenants (and tenant advisors) still need convincing as they simply see all options in the market and think landlords should be undertaking the capital works to maintain leasing relevance Ultimately success will depend on how well it is sold – it needs good high provide case studies and strong convincing advocates Are development upgrade agreements the answer? The Brisbane industry (including me) are just learning about this

25. COPYRIGHT © JONES LANG LASALLE 2014 Thank you Leigh Warner Director, Research & Consulting Brisbane +61 7 3231 1445 leigh.warner@ap.jll.com This document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from Jones Lang LaSalle. This document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. Jones Lang LaSalle accepts no liability for damages suffered by any party resulting from their use of this document. Disclaimer