RESEARCH

SYDNEY CBD OFFICE & HOTEL INSIGHT OCTOBER 2015

Key Facts Of the Sydney CBD office stock which has traded since January 2010, 47% (by NLA) has been to offshore groups

100% of Sydney CBD hotel rooms (4 & 5 star) which have sold since January 2010 have been to offshore groups

Offshore groups currently own 88% of the Sydney CBD hotel room stock (4 & 5 star), up from 69% in January 2010

Offshore groups directly own 30.2% of Sydney CBD office stock by value, up from 16.2% in January 2010

Ownership of both Sydney CBD office and hotel assets has well and truly gone global as Asia’s growing appetite for Sydney CBD property coincides with continued demand from mainstay investor locations such as North America.

Overview Investment into Sydney CBD office and hotel assets by offshore groups has grown considerably over the past five years, boosted by relatively higher yields and more recently by currency depreciation. To measure the impact, Knight Frank has assessed the ownership of investment grade stock in the Sydney CBD office and hotel sectors as at September 2015, compared against January 2010. The globalisation thesis is clear-cut with offshore ownership of CBD office and hotel assets increasing significantly. So far in 2015, Sydney CBD office sales ($10m+) have totalled to $4.93 billion, which is already above the historical high recorded in 2014. Of this amount, 60% has been to offshore groups, which compares to just 18% in 2010. Similarly, the purchaser profile of Sydney CBD hotels continues to be dominated by offshore groups, with 100% of 2015 purchases being made by foreign groups, namely from Asia.

Sydney is seen as an attractive investment proposition to offshore groups given our perceived less risky operating environment with greater market transparency, stable economic and political environment and favourable yield metrics. While direct offshore office ownership in 2010 was controlled largely by groups from North America, an emerging trend in recent years has been the growing presence of Asian investors, particularly from China, Hong Kong and Singapore. China’s share of office stock alone has jumped 12-fold since January 2010. While local funds, both listed and unlisted remain the largest owners in the Sydney CBD office market, portfolio re-balancing and capital management initiatives have resulted in local groups being net sellers since January 2010 with their proportion of ownership reducing significantly. Alternatively, while ownership in the hotel sector has historically had a large proportion of foreign owned stock, the share has risen substantially over the past five years, again the result of robust demand from Asia.

MATT WHITBY Group Director, Head of Research & Consulting Follow @ KnightFrankAu

2

FIGURE 1

Sydney CBD Office Offshore Ownership Total Value & SQ.M by Grade, Jan 10 to Sept 15

Source: Knight Frank Research *YTD to September

SYDNEY CBD OFFICE

0

200

400

600

800

1,000

1,200

1,400

$0

$2

$4

$6

$8

$10

$12

$14

$16

2010 2011 2012 2013 2014 2015*

PRIME VALUE

SECONDARY VALUE

TOTAL SQM (RHS)

Billions '000s

FIGURE 2

Sydney CBD Office Ownership by Value (Offshore) & SQ.M (Aust^) Selected Country/Region, Jan 10 to Sept 15

Source: Knight Frank Research *YTD to September ^Australian Institutional

FIGURE 3

Sydney CBD Office Development Pipeline By Ownership Type, 2015-2020+

Source: Knight Frank Research Note: Excludes refurbishment/backfill space

In the office sector, the assessed market value of Knight Frank’s Sydney CBD investment grade database at September 2015 was $51.9 billion, covering 4.37 million sq.m (88% sample size vs PCA figures). Since January 2010, both domestic and offshore investors have been increasingly active in the Sydney CBD with transactions over the period totalling just under $20 billion. Of this amount, 52% by value was sold to offshore groups. With heightened amounts of foreign capital remaining in the market, investment volumes are currently at peak levels with YTD 2015 (September) transactions measuring $4.93 billion. Over the past five and a half years, approximately 1.89 million sq.m of office stock has traded (44% of the Knight Frank database), of which just over 888,000 sq.m (or 47% of stock sold by area) has transferred to offshore groups. While prime grade stock has constituted the majority of offshore purchases at 58% by NLA (propelled by recent prime grade sales), there has been a significant jump in secondary grade stock acquisitions by offshore groups. The driver of this has been demand for secondary assets in prime locations with re-development/change of use potential, with major examples including 1 Alfred St & 31 Pitt St (Dalian Wanda), 175 Liverpool St (Shimao) and 338 Pitt St & 233 Castlereagh St (Visionary).

Blackstone (US) and Ivanhoe Cambridge (Canada) for a 25% share of 161 Castlereagh Street (Liberty Place) in late 2014. Since January 2010, Greater China (China & Hong Kong) has seen the strongest rate of growth, up 12-fold to $4.47 billion (see Figure 2). This result was strengthened by the recent Investa portfolio transaction to China Investment Corporation (CIC) where the Chinese sovereign wealth fund acquired just under 135,000 sq.m of office NLA within the Sydney CBD. This included a 25% share in 225 George Street, 50% share at 400 George Street and a 26% share at 126 Phillip Street amongst others. The growth of offshore ownership since 2010 has been assisted by portfolio re-balancing and capital management initiatives from local listed and unlisted groups which has resulted in them being net sellers over the period. Instead, local groups have become more active via capital partnering with large offshore funds and development of new stock (e.g. Mirvac at 200 George Street). Offshore groups own a large share of Sydney’s development pipeline, accounting for 31% of future office stock (see Figure 3), underpinned by the additional stages of Barangaroo (T1-Qatar Investment Authority, 37.5% & T3 -CPPIB, 50%) and Ten Carrington (Brookfield) - see Figure 3.

While local groups remain the biggest landlords, 1.35 million sq.m (or 30.8% by area) of the Sydney CBD office stock is owned directly by offshore groups either wholly or in part, translating to a value of $15.64 billion. Since 2010, direct offshore ownership of office stock has more than doubled from just under 630,000 sq.m and increased by 203% in value terms. In comparison, domestic institutional ownership has shrunk by 6% to 2.42 million sq.m since January 2010. If indirect offshore ownership through capital partnering initiatives, investment into platforms and listed securities was included in this analysis, the proportion of foreign owned stock would be materially higher. Following the recent completion of Barangaroo Tower II and the Canadian Pension Plan Investment Board’s (CPPIB) 50% share (bought in 2012), Canada has overtaken Singapore as the largest owner by value by country with a market value of $3.57 billion. Of note, the bulk of Canadian office purchasers have been for prime trophy assets with 91% of stock by value (or 86% of office NLA) being confined to the prime market. In conjunction with the US, North America has increased its ownership from $2.00 billion in January 2010 to its current value of $5.09 billion. Notably, the majority of this increase stemmed from acquisitions which occurred over the past 18 months including the joint venture between

0

50,000

100,000

150,000

200,000

250,000

300,000

2015 2016 2017 2018+ 2019+ 2020+

A-REIT GOVERNMENTOFFSHORE PRIVATESUPER FUND UNLISTED/SYNDICATE

0

500

1,000

1,500

2,000

2,500

3,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2010 2011 2012 2013 2014 2015*

GREATER CHINA

SINGAPORENORTH AMERICA

AUSTRALIAN INSTITUTIONS (RHS-SQM)

Millions '000s

3

RESEARCH OFFICE & HOTEL INSIGHT— SYDNEY CBD

Park to Sunshine Insurance Group from China. While groups from Asia have historically been the most active players in the Sydney CBD hotel market, owning 51% of the room stock in January 2010, demand from Asia has ramped up considerably in recent years, where they currently own 77% of all rooms. It has been the emergence of China over this period which has propelled this proportion. Since January 2010, Chinese/Hong Kong ownership has increased from effectively zero to almost 2,000 rooms or 18.4%, the majority of which has occurred over the past two years (see Figure 6). Interestingly but not surprisingly, the bulk of Chinese/Hong Kong acquisitions to date have been for the ‘trophy’ hotel assets which is in contrast to the office market where they have been actively pursuing secondary stock, particularly those with change of use opportunities. Notwithstanding a slight decrease over the period, Singapore remains the largest owner by country, with just over 3,000 rooms or 29% of total room stock (down from 32.1% in January 2010). However, with Singapore’s Pontiac Land Group acquiring the 99 year lease of Sydney’s Sandstone buildings at 23 and 35 Bridge Street, their ownership of Sydney CBD hotel rooms will increase once the circa 240 luxury hotel rooms are developed.

In line with record tourist numbers from Asia and in particular China, foreign investment into the Sydney CBD hotel sector (4 & 5 star) has enjoyed similar momentum with room ownership by foreign groups currently at peak levels. Brought about by healthy occupancy rates, increased room revenues and a positive outlook, offshore demand for Sydney CBD hotels has been robust in recent years, with the concentration of foreign ownership significantly higher than that of the Sydney CBD office market. As at January 2010, 69% of the 10,850 rooms in Knight Frank’s 4 & 5 star hotel database were owned by offshore groups, the bulk of which (3,482 rooms or 11 hotels) stemmed from Singapore. Additionally, domestic institutions owned 31% of Sydney CBD hotel rooms (4 & 5 star) at that point in time. Fast forward five and a half years and the proportion of offshore ownership has jumped to 88%, brought about by the growing investment appetite from Asia. Since January 2010, 4,825 rooms (45% of rooms) have sold, all of which were to offshore groups. Recent significant sales ($400 million+) have included the Westin Hotel to Singapore’s Far East Organisation and Hong Kong's Sino Group, the Hilton Hotel to Chinese backed Singaporean investment house Bright Ruby and the Sheraton on the

The rise in offshore ownership over recent years has come at the expense of domestic groups where their proportion of ownership has diminished rapidly (see Figure 6). With favourable selling conditions coupled with an increased focus on capital management initiatives, a number of hotels previously owned by domestic groups have traded since January 2010 including the likes of the Four Seasons Hotel (previously owned by Eureka Funds Management). Foreign demand for Sydney hotels is not just confined to the Sydney CBD core with those located in the fringe also being subjected to strong demand. In recent years this has included the acquisitions of Blue Sydney (Woolloomooloo) to Hong Kong’s Ovolo Group and the purchase of the Larmont Sydney (formally the Diamant Hotel) by a joint venture between Singaporean and domestic funds. Looking ahead, the high concentration of offshore ownership is expected to remain, however with the majority of Sydney’s 5 star trophy assets trading over the past two years, it is likely that they will become more tightly held over the next two to three years. For assets that do become available, there is expected to be significant offshore interest, particularly from China as they become more accustomed to investing in Sydney, and tourism demand continues to drive performance.

SYDNEY CBD HOTELS

FIGURE 4

Sydney CBD Hotel Ownership By Region, Sept 15 (4&5 Star Hotels)

Source: Knight Frank Research

12.1%

77.2%

2.4%

3.4%

4.8%

AUSTRALIA ASIA NORTH AMERICA EUROPE OTHER

FIGURE 5

Change in Sydney CBD Hotel Ownership By Country, Jan 10 & Sept 15 (4&5 Star Hotels)

Source: Knight Frank Research

FIGURE 6

Sydney CBD Hotel Ownership (%) By Country, Jan 10 - Sept 15 (4&5 Star Hotels)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Cur

rent

CHINA/HONG KONG AUSTRALIA SINGAPORE OTHER OFFSHORE

Source: Knight Frank Research

Australia

China

Hong Kong

Malaysia

Singapore

US

Thailand

Other

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 1,000 2,000 3,000 4,000

2015

Ow

ners

hip

by

Num

ber

of

Ro

om

s

2010 Ownership by Number of Rooms

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

North Shore Office Market Overview October 2015

Sydney Residential Development H2 2015

Asia Pacific Capital Markets Report September 2015

Knight Frank Research Reports are available at KnightFrank.com.au/Research

Sydney CBD Office Market Overview September 2015

© Knight Frank 2015 This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not permitted without prior consent of, and proper reference to Knight Frank Research.

For the latest news, views and analysisof the commercial property market, visitknightfrankblog.com/commercial-briefing/

COMMERCIAL BRIEFING

RESEARCH Matt Whitby Group Director Head of Research & Consultancy +61 2 9036 6616 Matt.whitby@au.knightfrank.com

Nick Hoskins Director – NSW Research +61 2 9036 6766 Nick.hoskins@au.knightfrank.com

Luke Crawford Senior Research Analyst +61 2 9036 6629 Luke.crawford@au.knightfrank.com CAPITAL MARKETS James Parry Head of Institutional Sales, Australia +61 2 9036 6758 James.parry@au.knightfrank.com

John Bowie Wilson Head of Commercial Sales, NSW +61 2 9036 6743 John.bowiewilson@au.knightfrank.com

Dominic Ong Senior Director, Head of Asian Markets +61 2 9036 6747 Dominic.ong@au.knightfrank.com VALUATIONS David Castles National Director +61 2 9036 6648 David.castles@au.knightfrank.com

Alistair Bell Director, Hotels & Leisure +61 2 9036 6763 Alistair.bell@au.knightfrank.com

Outlook For the office sector, with limited

buying opportunities expected in the prime market, the majority of transactions over the next 12-24 months are expected to stem from investors targeting non-core or value-add assets. With offshore groups showing an increased appetite for secondary assets with development/change of use potential, accounting for 54% of secondary stock acquisitions since January 2010 (by NLA), they are expected to remain the dominant players in the market.

For the hotel market, investment

volumes are expected to ease as the majority of Sydney CBD 5 star trophy assets have sold over the past two years. With this in mind, offshore investors are likely to become more

aggressive in their approach to secure hotel assets while it is likely they will seek investment opportunities in metropolitan and regional markets.

With the inflow of Chinese investment

only gaining sizeable momentum over the past 18 months, they are expected to become a more dominant force on both office and hotel ownership over the coming years as they become more accustomed to investing in Sydney.

Increasing fractionisation of ownership

is expected to become a greater feature going forward as offshore groups seek joint ventures with domestic institutions to gain exposure to assets and local knowledge.

Methodology:

This analysis collects and tabulates data based on direct ownership of specific assets. The analysis does

not specifically include additional offshore capital that may have been invested indirectly via capital

partnering initiatives, investment into platforms and listed securities. A recent example of this is the

DEXUS and CPPIB acquisition of the Commonwealth Property Office Fund (CPA).

Asset acquisitions are only included in the database at project completion eg Barangaroo Tower 2.

Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of c l i en t s wo r l dw ide i nc l ud ing developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

http://www.knightfrank.com/Research�http://www.knightfrank.com.au/research/results.aspx?typeid=research&divisions=2,3&categories=44&regions=5&isocodes=AU&view=gridhttp://www.knightfrank.com.au/research/results.aspx?typeid=research&divisions=1,3&categories=42&regions=5&isocodes=AU&view=gridhttp://www.knightfrank.com.au/research/results.aspx?typeid=research&divisions=2,3&regions=5&subregions=3&view=grid

Sydney CBDSydney CBD officeSydney CBD hotels

/ColorImageDict > /JPEG2000ColorACSImageDict > /JPEG2000ColorImageDict > /AntiAliasGrayImages false /CropGrayImages true /GrayImageMinResolution 300 /GrayImageMinResolutionPolicy /OK /DownsampleGrayImages true /GrayImageDownsampleType /Bicubic /GrayImageResolution 300 /GrayImageDepth -1 /GrayImageMinDownsampleDepth 2 /GrayImageDownsampleThreshold 1.50000 /EncodeGrayImages true /GrayImageFilter /DCTEncode /AutoFilterGrayImages true /GrayImageAutoFilterStrategy /JPEG /GrayACSImageDict > /GrayImageDict > /JPEG2000GrayACSImageDict > /JPEG2000GrayImageDict > /AntiAliasMonoImages false /CropMonoImages true /MonoImageMinResolution 1200 /MonoImageMinResolutionPolicy /OK /DownsampleMonoImages true /MonoImageDownsampleType /Bicubic /MonoImageResolution 1200 /MonoImageDepth -1 /MonoImageDownsampleThreshold 1.50000 /EncodeMonoImages true /MonoImageFilter /CCITTFaxEncode /MonoImageDict > /AllowPSXObjects false /CheckCompliance [ /None ] /PDFX1aCheck false /PDFX3Check false /PDFXCompliantPDFOnly false /PDFXNoTrimBoxError true /PDFXTrimBoxToMediaBoxOffset [ 0.00000 0.00000 0.00000 0.00000 ] /PDFXSetBleedBoxToMediaBox true /PDFXBleedBoxToTrimBoxOffset [ 0.00000 0.00000 0.00000 0.00000 ] /PDFXOutputIntentProfile () /PDFXOutputConditionIdentifier () /PDFXOutputCondition () /PDFXRegistryName () /PDFXTrapped /False

/CreateJDFFile false /Description > /Namespace [ (Adobe) (Common) (1.0) ] /OtherNamespaces [ > /FormElements false /GenerateStructure false /IncludeBookmarks false /IncludeHyperlinks false /IncludeInteractive false /IncludeLayers false /IncludeProfiles false /MultimediaHandling /UseObjectSettings /Namespace [ (Adobe) (CreativeSuite) (2.0) ] /PDFXOutputIntentProfileSelector /DocumentCMYK /PreserveEditing true /UntaggedCMYKHandling /LeaveUntagged /UntaggedRGBHandling /UseDocumentProfile /UseDocumentBleed false >> ]>> setdistillerparams> setpagedevice