65 Berry St North Sydney - Valuation Report PDF

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Valuation Report “The Denison” 65 Berry Street North Sydney, NSW 31 December 2012 Under Instructions From

Charter Hall Funds Management Ltd On Behalf Of

Charter Hall Office Management Limited as the Responsible Entity for Charter Hall Office Trust, Public Sector Pension Investment Board, GIC, Westpac Banking Corporation, Commonwealth Bank of Australia, Perpetual Limited & Credit Agricole CIB Australia Limited

Reference: N2335 Knight Frank Valuations Level 4, 60 Miller Street North Sydney NSW 2060 D +61 (0)2 9028 1131 O +61 (0)2 9028 1100 F +61 (0)2 9028 1198 www.knightfrank.com.au Valuations Services (NSW) Pty Ltd ABN: 83 079 862 990, trading under licence as Knight Frank Valuations, is independently owned and operated, is not a member of and does not act as agent for the Knight Frank Group. ™ Trade mark of the Knight Frank Group used under licence.

Exec cutive Summ S ary

“TH E DENISON”” 65 BERRY STREET, S NOR RTH SYDNEY Y Instructing Party

CharterHH all Funds Manaagement Ltd.

Interest Valued

100%

Basis of Valuation

alue of the unenncumbered free ehold interest su u bject to the Market va existing te e nancies.

Relying Party/Parties &

CharterHH all Office Manaagement Limited d as the Respon nsible Entity

Purpose of Valuation

for Chart er Hall Office Trust, Public Sector S Pension Investment Board, G IC, Westpac Banking Corpora ation, Commonw wealth Bank alia, Perpetual Limited & Cre edit Agricole C B Australia of Austra Limited ffor accounting, financial reporting and firsst mortgage security purposes. p

Land Areea

1,808.0m m²

Zoning

Commerc c ial

Descript ion

A multi-s torey commerccial building com mprising 6 leve els of basemennt parking for 2262 cars (basem ment incorpora tes loading docck facility), groun nd floor foyer an nd lift lobby inco o rporating lobbyy café plus 6 gro ound floor retail tenancies, toggether with 17 upper levels of office accommodd ation and roof-top plant roomss .

NLA (current configuration) c

15,152.4m m²

Vacancy y & WALE

Vacancy: 6.7%

Valuation Methodology y

Capitalisa a tion, Discounteed Cashflow and d Direct Comp arison approache es

Date of Inspection

12 Novem mber 2012

Valuation Date

31 Decem mber 2012

Income Particulars P

At Passin n g Rents

A t Market Rents

Gross Income (p.a)

$9,327,77 73

$8 8,228,047

Adopted Outgoings

$1,710,18 85

$1 1,710,185

Estimate ed

Net

Incom me

$7,617,58 88 (excl rebatess/rent free)

(p.a) Adopted

$7,052,283 8 (incl rebates /rent free)

Capitalisation

Rate

WALE by Incom me: 5.0 yrs

8,228,047 $8

8.50%

e Adopted Discount Rate

9.25%

NPV of Capex C

63 (5 yrs) $4,070,66

$5 5,894,608 (10 yrs)

4.1% (5 yyears)

3..7% (10 years)

5.5% (5 yyears)

4..4% (10 years)

Avg Fac ce Rental Grow wth (Office) Avg Eff Rental Grow wth (Office) Adopted Value

$88,000,000 0 (exclusive of GST)

Replacement Cost

$123,800 ,000

Passing Initial Yield

WALE byy Area: 5.0 yrs

8.0% (incc l rebates/rent frree) 8.7% (exc c l rebates/rent ffree)

Core Market Yield

8.5%

IRR/Term minal Yield

@ 9.00% (3 yr) 7.96% @

Rate/m² of NLA

$5,808/m m²

Valuer’s Details

T.M. PHE ELAN FAPI Registere d Valuer No. V VAL1687 al Director Divisiona

% (5 yr) 7..86% @ 9.00%

9 9.41% @ 9.000% (10 yr)

LLACHLAN J GR R AHAM AAPI Divisional D Direcctor (Counter-signatorry only)

Executive Summary (Cont’d)

Key Points •

The property has current vacancy of 6.7% (NLA) and expiries of 11.5%, 11.8%, 7.2%, 0.9%, 45.8% and 16.1% in Years 1, 2, 4, 5, 7 and 9 respectively.

•

Terms have been agreed for a new 5 year lease for the car park with Wilson Parking Australia. The commencement date is 1 July 2012, expiring 30 June 2017 at a commencing base rental of $975,000pa plus GST. Reviews are fixed increases of 3.5%pa and turnover rent is payable if 80% of gross revenue exceeds a threshold of $1,500,000pa. In line with a former lease for the car park, Wilson is responsible for an annual electricity fee of $30,000pa (for the term of the lease) which is not subject to review.

Critical Conditions •

Mediacom (majority tenant with 45.8% of the NLA) has contraction rights (Right of Reduction) to a minimum of 4,750m2 after 1 February 2016. They are required to give the lessor 9 months written notice and they have to pro-rata repay the initial incentive provided to them. We have taken the view that the notice provision, combined with the repayment of the incentive is sufficient to offset the likely costs of releasing that area relinquished.

•

The Mediacom lease also provides for Expansion Rights over Suite 801, Suite 803, Level 2 and Suite 1202.

•

Reckon (2nd largest tenancy with 16.1% of the NLA) has Early Termination rights whereby they can terminate the lease(s) on 31 March 2018. Reckon are required to provide 12 months’ notice of their intent to exercise the Early Termination and given the effective date is into the 2nd half of the cash flow (and at that stage there will be only have 3 years remaining on lease), we have assumed the lease will run to term.

•

The Reckon lease(s) contain a clause whereby the lessor can redevelop the property after 31 March 2017, by giving the

•

The Reckon lease(s) contains Expansion Rights over Suite 601, Suite 901, Suite 902, Suite 1002 and Suite 1202.

•

Income and outgoings particulars as provided by Charter Hall.

•

The valuation is also conditional on the important notices, disclaimers and qualifications contained in the body of this

lessee 12 months written notice.

report. This Executive Summary forms a part of and should not be used or read independently from the complete report. Particular attention is drawn to the Qualifications, Important Notices and Disclaimers included in this report.

SWOT Analysis

Strengths •

The property is 93.3% occupied and has a WALE of 5.0 years.

•

It has an excellent parking ratio of 1 space/58m of NLA.

•

The property has a 3.5 star NABERS energy rating and 3.0 star NABERS water rating.

2

•

The majority tenant in the building, Mediacom (45.8% of NLA) have been in occupation for in excess of 10 years.

•

Within close proximity to rail and shopping facilities.

•

Office floor plates are readily subdivisible.

•

The upper-most levels (Levels 15 – 17) achieve corridor views of the Sydney CBD skyline and harbour.

•

A new 5 year lease has been negotiated with the car park operator (Wilson Parking) from 1 July 2012.

Weaknesses •

Vacancy of 6.7%.

•

Expiries of 11.5% and 11.8% in Years 1 & 2 respectively.

•

The passenger lifts are at the end of their viability and require refurbishment.

•

There are outstanding incentives to LJ Hooker, Telco Asset Management, Manhatton CMS, Mediacom, Halycon, Reckon,

•

Sections of the building are dated.

Effision, Blackie McDonald, Think Tank and Sims Metal.

Opportunities •

Refurbish areas of the building when appropriate.

•

Lease-up vacant areas.

•

The lift refurbishment is scheduled for 2013.

•

Allow incentives to ‘wash-through’.

•

Secure tenants with short term leases to longer term leases.

Threats •

Mediacom has a Right of Reduction to a minimum of 4,750m2 after February 2016. They are required to provide 9 months written notice and they have to pro-rata repay the initial incentive provided to them.

•

The Reckon lease(s) has Early Termination rights whereby they can terminate the lease(s) 31 March 2018. Reckon are required to provide 12 months written notice of their intent to terminate the lease(s) early.

•

The Reckon lease also contains a provision whereby the lessor can redevelop the property after 31 March 2017, by giving the lessee 12 months written notice.

•

Competition from better quality buildings with views, in North Sydney.

•

Rental levels in North Sydney have shown strong growth over the last 12 to 18 months, to the extent the rental levels in the Agrade sector are currently at all-time highs, while B-grade rentals have also shown growth. This is on the back of low vacancies in A-grade, plus a recovering domestic economy. Whilst current pointers indicate continued growth, there has been an increase in sub-lease accommodation coming to the market and if this gathers momentum rental growth may slow, if not stop.

•

Our valuation is conditional upon the HOA to Wilson Parking Australia proceeding to an executed licence under the terms and conditions outlined in this report.

•

Whilst there is the perception that the commercial property market reached the bottom of the cycle over 2009/2010, continuing global economic uncertainty, volatility in purchaser demand and uncertainty regarding interest rates and availability of finance, continue to contribute to a degree of caution in the market. However, despite uncertainty regarding direct fundamentals and leasing demand, recent sales in the “prime” market have implied a degree of yield compression due to greater competitive pressures, particularly from off-shore purchasers. Whilst there has been ample transactional evidence in the lower B-grade sector of North Sydney in recent times, there has been limited sales activity in the upper B/A-grade market.

Tena a ncy Overvie O w

To otal Number of Tenants

Avverage Lease Duration D

Occupancy

20 tenan nts

55.0 years (by inn come)

93.3% by NL LA

Key Data

Sum mmary D Data & Results

Contents

Executive Summary SWOT Analysis Tenancy Overview Key Data Summary Data & Results Qualifications 1 Introduction 1.1 1.2 1.3 1.4

2

3

5

6

3 3 3 4

Land Particulars

4

2.1 2.2 2.3 2.4 2.5 2.6

4 5 6 7 8 9

Location Title Details & Site Description Easements and Encumbrances Town Planning Details Environmental Considerations Native Title Claims

Improvements 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9

4

Instructions Undertaking by Valuer Market Value Definition Corporations Law Statement

i iii iv v vi 1 3

Key Details General Description Net Lettable Areas Building Construction Accommodation Building Services Sustainability / NABERS Building Age and Condition Base Building Capital Expenditure

9 9 10 10 11 11 13 14 15 15

Market Overview

16

4.1 4.2 4.3 4.4 4.5

16 16 18 20 22

Highlights North Shore Office Overview North Sydney Outlook Forecast & Relevance to Subject

Financial Summary

23

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9

23 24 25 26 27 28 28 29 34

Tenancy Analysis / Lease Expiry Tenancy Status & Negotiations Lease Structure Summary Outstanding Incentive Summary Summary of Total Capital Expenditure Adopted Statutory Valuation Assessments Outgoings Net Market Income Assessment Net Income Summary (Passing versus Adopted Market)

Valuation Rationale 6.1 6.2 6.3 6.4 6.5 6.6 6.7

Valuation Methodology and Considerations Capitalisation Approach Discounted Cash Flow Analysis Approach (DCF) Direct Comparison Approach Valuation Reconciliation Sensitivity Analysis Contract of Sale/Transaction History

35 35 35 38 41 41 42 43

Contents (Cont’d)

7

Additional Requirements 7.1 7.2 7.3 7.4 7.5

8

Theoretical Land Apportionment International Financial Reporting Standards Insurance Recommendation Marketability Mortgage Recommendation

Valuation Certification

Appendices -

Letter of Instruction

-

Title Documents

-

Heads of Agreement – Wilson Parking

-

Tenancy Schedule

-

Valuation Calculations

-

Sales Analysis

43 43 43 44 45 45

46

Charter Hall Funds Management Ltd On behalf of Charter Hall Office Management Limited as the Responsible Entity for Charter Hall Office Trust, Public Sector Pension Investment Board, GIC, Westpac Banking Corporation, Commonwealth Bank of Australia, Perpetual Limited & Credit Agricole CIB Australia Limited

Qualifications 1.

This report is prepared for the private and confidential use of the reliance party/parties named in Section 1.1 of this report, and only for the purpose outlined in Section 1.1. It should not be relied on by the nominated party/parties for any other purpose and should not be reproduced in whole or part for any other purpose without the express written consent of Knight Frank Valuations. Any party that is not named as a reliance party/parties may not rely on this report for any purpose and should obtain their own valuation before acting in any way in respect of the subject property.

2.

This valuation may not be relied upon for mortgage security purposes by any other party without express written approval/assignment by Knight Frank Valuations.

3.

The valuation specifically may not be relied upon by any party in connection with any Managed Investment Scheme (within the meaning of the Corporations Law) which: a)

Has as its prime or as a substantial purpose, the provision of tax benefits to investors; or

b)

Is involved in any form of direct or indirect investment in primary production including "property used for primary production".

4. 5.

Unless otherwise stated, all valuation figures herein are stated on a net of GST basis. Reliance on this report should only be taken upon sighting an original document (an electronic document is not an original document) that has been signed by the valuer and countersigned by a senior executive of Knight Frank Valuations.

The counter-signatory verifies that this report is genuine and issued and

endorsed by Knight Frank Valuations. The opinion of value expressed in this report, however, has been arrived at by the prime signatory acting as the valuer. Please note that Lachlan Graham has not inspected the subject property, and counter-signs this report only in his capacity of Divisional Director, Knight Frank Valuations. 6.

This valuation is current at the date of valuation only. The timing and extent of market movements is impossible to accurately predict and we do not attempt to do so. The value assessed herein may change significantly and unexpectedly over a relatively short period as a result of general market movements, or factors specific to the particular property as identified in this report. Losses resulting from such movement in value subsequent to the date of valuation are not foreseeable and we do not accept any duty to protect your financial interests against such movements in value. Without limiting the generality of the above comment, we do not assume any responsibility or accept any liability where this value is relied upon after the expiration of 3 months from the date of the valuation, or such earlier date if you become aware of any factors that have any effect on the valuation.

7.

In accordance with industry guidelines and requirements, Knight Frank Valuations cannot assign or confirm the original or initial valuation after the expiration of 3 months from the date of valuation. Any written assignment of the valuation by Knight Frank Valuations within this 3 month period is required to contain a statement that the valuer has not re-inspected the property nor undertaken further investigations or analysis since the original/initial valuation and accepts no responsibility for reliance upon the original/initial valuation other than as a valuation of the property at the original/initial date of valuation.

8.

This valuation is conditional on there being no material change (including as a result of general market movements, or factors specific to the particular property) between the date of inspection and the date of valuation that would impact on the value of the subject property. Should such an event occur, the valuer should be contacted for comment prior to reliance upon the valuation.

The Denison, 65 Berry Street, North Sydney File Reference: N2335

31 December 2012

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Charter Hall Funds Management Ltd On behalf of Charter Hall Office Management Limited as the Responsible Entity for Charter Hall Office Trust, Public Sector Pension Investment Board, GIC, Westpac Banking Corporation, Commonwealth Bank of Australia, Perpetual Limited & Credit Agricole CIB Australia Limited

9.

This valuation is not intended to be used to provide financial advice, express or implied, and we confirm that the valuer and Knight Frank Valuations is not licensed to provide financial product advice under the Corporations Act 2001.

10.

This valuation report is to be read in its entirety and in particular we draw your attention to the Important Notices set out in the body of the report and the Critical Conditions section of the Executive Summary.

11.

Any forecasts, including but not limited to, financial cash flow projections or terminal value calculations noted within this report are a valuation tool only undertaken for the purpose of assisting to determine the market value. No party may rely upon any financial projections or forecasts within this report on the understanding that they are undertaken for the specific purpose of determining the market value only and therefore should not be represented in any way as providing an indication of likely future profit or realisable cash flow.

12.

Any objective information, data or calculations set out in the Valuation will be accurate so far as is reasonably expected from a qualified valuer, reflecting due skill, care and diligence.

The Denison, 65 Berry Street, North Sydney File Reference: N2335

31 December 2012

Page 2

Charter Hall Funds Management Ltd On behalf of Charter Hall Office Management Limited as the Responsible Entity for Charter Hall Office Trust, Public Sector Pension Investment Board, GIC, Westpac Banking Corporation, Commonwealth Bank of Australia, Perpetual Limited & Credit Agricole CIB Australia Limited

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