Green development: a market-driven perspective

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

2. My angle… I have noneWith no vested interests, my views on sustainability are born out of agnostic observation • 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?

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

4. 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 Source: JLL

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

6. You can’t read too much into results like this….. Sydney CBD Vacancy by NABERS Energy Rating (Base Building), As at Q2/2013 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 Source: JLL

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 outlookMarch 2014 Data Evidence With a pinch of skepticism Contents Anecdotal Evidence Tenant/landlord perceptions Market Trends The problems revealed

10. Anecdotal Evidence • 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?

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

12. 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 CBD Net Absorption and Vacancy

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

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

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

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

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

18. Hidden vacancy in Brisbane was great in the 1990sAustralian CBD Office Market Vacancy and Incentive Troughs 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

19. The prime market can move back into equilibriumBrisbane CBD Office Market Vacancy Outlook 14.4% 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)

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

21. Testing our withdrawal assumptions - market44% of Brisbane CBD Stock is B-Grade and vacancy is 19.9% Assessing Stock

22. Testing our withdrawal assumptions - historyOur forecast translates to 1.2% of stock p.a. Withdrawals could easily exceed our expectations, particularly if more is done to encourage conversions like Melbourne’s Postcode 3000 initiative in the 1990s Source: Jones Lang LaSalle Research

23. Limited product for core capitalCBD Office Markets, Super Prime Cohort A lower opportunity set in the core market will force investors to move up the risk curve. 50 Super Prime Assets Source: Jones Lang LaSalle Research

24. Are development upgrade agreements the answer?The Brisbane industry (including me) are just learning about this • 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

25. Leigh Warner Director, Research & Consulting Brisbane +61 7 3231 1445 leigh.warner@ap.jll.com Thank you Disclaimer 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.