REI501 Fund Objectives and Proposed Acquisition: Haymarket Sydney Property

Contents

Fund Objectives and Proposed Acquisition..................................................................................

Objectives of the Fund..............................................................................................................

Proposal....................................................................................................................................

Executive Summary..................................................................................................................

Location Haymarket Sydney..................................................................................................

Asset Location..........................................................................................................................

Asset Type................................................................................................................................

Lease and Tenancy Profile........................................................................................................

Financial Summary...................................................................................................................

Building Stacking Plan & Typical Floor Plates...........................................................................

Purchase Price and Acquisition Costs.......................................................................................

Age and Condition of Property.................................................................................................

Analysis - Historical Performance of the Australian Real Estate Market.....................................

Retail.........................................................................................................................................

Current Retail Market...........................................................................................................

Historical Returns..................................................................................................................

Drivers for Investment Performance....................................................................................

Hotel.........................................................................................................................................

Current Market.....................................................................................................................

Historical Returns..................................................................................................................

Drivers for Investment Performance....................................................................................

Logistic & Industrial..................................................................................................................

Current Market.....................................................................................................................

Historical Returns..................................................................................................................

Drivers for Investment Performance....................................................................................

Residential................................................................................................................................

Current Market.....................................................................................................................

Historical Returns..................................................................................................................

Drivers for Investment Performance....................................................................................

Comparison and Analysis of Core Property Markets...............................................................

Analysis of Proposed Investment.................................................................................................

Future Performance of the Melbourne Market...........................................................................................

Investment Methodology (how and why)...............................................................................

Risks, Mitigants and Likely Returns..........................................................................................

Conclusion....................................................................................................................................

References...................................................................................................................................

Fund Objectives and Proposed Acquisition

The Fund Acquisition of Haymarket 2-6 Cunningham Street, Sydney NSW 2000.

The recommendation in the paper below is to make a sizeable real estate purchase in a significant east coast Australian city. This report will be examined and evaluated for approval by the CEO and Board of the Fund. It will outline the Fund's objectives and how they will be carried out. The paper examines key areas of the Australian real estate market with a focus on Sydney City in particular. The report's recommendations advise buying the target property.

Objectives of The Fund

The objectives of The Fund are as follows:

• Only substantial asset classessuch as office, industrial, retail, and residential/multifamilywill be taken into account; any acquisition must be an income-producing asset or a development project.

• Maximum purchase price of AUD $500 million

Geographical limitations apply to Australia's easternmost major cities. It is believed that investments will last for five years. A cumulative yearly IRR of 7% is to be assumed for assets that generate income. Development projects are required to have an IRR of 15% and a minimum return of 18%. (Before finance costs)

• The assets' quality is essential; commercial properties should ideally be NABERs, Green-Star, and A Grade. Credentials for sustainability should be considered before making any purchases.

Executive Summary

Address 2-6 Cunningham Street, Haymarket NSW 2000

Property Description 10 Strata titled serviced apartments to be sold in-one-line

Legal Description Lots 2, 5, 23, 24, 38, 39, 58, 59, 60 & 62 of Strata Plan 81141

Local Government Authority City of Sydney Local Environmental Plan (LEP) Sydney LEP 2012 Total Strata Area 531sqm

Unit Mix 10 Apartments

Tenant APX Hotels Apartments

Lease Expiry 12/10/23 - an extension has been granted to 12/10/25 due to Covid-19 provisions

Options 4 x 5 years until Oct 2043

Reviews CPI Annual | Market Reviews on Option

Passing Gross Income $335,834* p,a.

Total Outgoings $32,208* p.a.

Net Income $303,626* p.a

Method of Sale To be sold via Expressions of Interest closing Wednesday 8th March at 4pm - unless sold prior.

Location -Sydney Haymarket

Located on the edge of Sydney's bustling Central Business District, Haymarket is a vibrant hub known for its bustling markets, Capitol Theatre, and fine dining. Haymarket is a slice of urban life that attracts a multicultural community made up of white-collar workers, students and wealthy downsizers. Sydney's own Chinatown is a vibrant cultural hub with traditional restaurants, supermarkets, shops and spectacular events and festivals throughout the year. Haymarket locals have a variety of shopping and leisure options, including: World Square, Darling Square and Darling Harbour, with a myriad of exclusive cafes, restaurants and bars.

Asset Location

2-6 Cunningham Street, Sydney NSW 2000 is located in Sydney's CBD, provides its residents with a handy location for both business and vacation travellers. The World Square shopping complex is only 150 metres away, the Chinatown Light Rail is only 200 metres away, and the recently finished $500 million Darling Quarter development in Darling Harbor is only 700 metres away. Giving guests easy access to Sydney's well-known sights close to the property via foot or light rail, which travels to Circular Quay in 10 minutes*.

The property also benefits from many infrastructure improvements in the neighbourhood that are supported by the NSW government, such as those at Tech Central, Sydney Metro, and Central station, which help to revitalise the Sydney CBD after COVID.

Transport

• Chinatown Light Rail 200m*

• Museum Bus Station 300m*

• Central Train Station 400m*

• Museum Train Station 500m*

Retail

World Square 150m*

Chintatown Centre 400m*

Paddys Markets 550m*

Pitt Streeet Mall 1.1km*

Education

Westbourne College Sydney 950m*

University of Technology Sydney 1.3km*

TAFE Ultimo 1.1km*

International Grammar School Sydney 1.4km*

The University of Sydney 1.9km*

Asset Type

2-6 Cunningham Streets construction completed in 2008, a 43-storey residential building comprising three levels of retail/commercial space, 72 serviced apartments managed by Quest as Quest World Square, 94 residential units including 19 studios, 35 one-bedroom, 32 two-bedroom, 7 three-bedroom plus study units and 1 penthouse unit, plus eight levels of basement car parking for 90 cars (vehicle entrance from Cunningham Street). Formerly known as the Aspect Apartments. Completed in 2008 at an estimated cost of $120 million. Developer, Kimberley Securities Ltd. Architect, Wolff Architecture. Builder, Grocon. The site of the Triple 8 Hotel, a single-storey building and a four-storey brick building, both demolished in late 2003, and a three-storey building demolished in mid-2004.

Lease and Tenancy Profile

The lease and tenancy profile for 469 La Trobe Street The WALE (by income) is 2.8 years allowing the opportunity for rent reversion in the near future.

The anchor tenant for the property is Russell Kennedy Lawyers, a longstanding lessee who occupy approximately 30% of NLA. The company holds sky signage rights for the building and has been in occupation since the building was complete in 1988. The company currently has 270 employees which includes 120 years of legal professionals.

Financial Summary

Outgoings Summary

Building Location Plan

Purchase Price and Acquisition Costs

The asking price for Haymarket 2-6 Cunningham Street is $8300000 AUD. And solicitor cost and stamp duty are $2000 and $530000 AUD respectively. The total initial outlay for the acquisition is approximated to be $8840000.

Age and Condition of Property

Construction of Haymarket 2-6 Cunningham Street is completed in 2008. Most of the windows and exterior facing made up of glass which helps to maintain the building bright using the natural sun light. In addition till todays date there are no refurbishment is done, building is in good condition and dont need any refurbishment. Also building has small plants on exterior surface which help to release the oxygen in atmosphere. Consequently, the building has a 4.5 energy rating.

Anticipated Returns and Risks

The anticipated returns from a purchase price of $200,000,000 will be an initial passing yield of 4.89% with the IRR for a 5 year investment horizon to be 7.07% (Figure 12 in the Appendix). This metric is above the industry standard of 6-6.5% (Bursten et al. 2021, p. 45).

The primary risk for the acquisition is the short WALE for the property. With a high vacancy rate for Melbourne (as analysed in the forthcoming sections), this could see a reduction of passing income for the investment. Furthermore, the COVID-19 pandemic has enabled working from home to be a genuine alternative to the traditional office environment.

Analysis - Historical Performance of the Australian Real Estate Market

Retail

Current Retail Market

According to JLL Retail Market Overview, Despite a drop in shop turnover, 14.3% of the CBD was vacant, a record high. Despite strong discretionary spending-driven retail performance in November, all retail subcategories experienced MoM losses in December, with the exception of food (+1.1%) (JLL, 2022). After being compressed in all sub-sectors except LFR in 3Q22, yields remained stable in 4Q22. All subsectors experienced growth, with the exception of LFR, which remained stable on an annual basis. Given the lack of significant compression in retail assets in recent years, further retail yield compression is expected for some subsectors, but not to the extent seen in other real estate sectors (JLL, 2022).

Historical Returns

Prime yields have compressed by over 7.5% during the last decade in retail market sector.

(JLL, 2022)

Drivers for Investment Performance

Spending on retail in NSW was increased by 13.2% YoY in Dec 2022. In addition, spendings decreased to -3.4% MoM in Dec in NSW. Reduced retail sales were seen in the clothing, department stores, and household goods categories.

But the annual growth rate is still higher than the national average. 11.4% YoY growth until December 2022. (JLL, 2022)

The vacancy rate in Sydney slightly dropped from 6.1% over 2H22 to 6.1%. The CBD's vacancy rate increased by 0.9% q-o-q to 14.3%, exceeding the13.4% of the previous biannual period as the highest level since 1993, when JLL began reporting Sydney vacancy rates. While the regional, sub-regional, and neighbourhood sub-sectors reported declining vacancies, LFR vacancy increased by 1.4% over 2H22.

Hotels

Current Market

According to TRA, there were almost 4 million domestic visitors and 344,000 international visitors to Sydney's hotel, motel, serviced apartment, and guest house accommodations (HRMSG) in the week ending September 22. Domestic visitors made up 92% of all visitors (up from about 75?fore the pandemic). Sydney's overall tourism is still 40?low pre-pandemic levels, but foreign arrivals are the most depressed, at 83?low pre-pandemic levels. Because of lingering mandatory quarantine periods that were recorded in the annual data set, the average length of stay continues to be high. The majority of domestic visitors come from Victoria and New South Wales, with business travel accounting for nearly half of all visits. In terms of foreign arrivals, it was the USA and New Zealand. In terms of foreign arrivals, it was the USA and New Zealand. 41% of international arrivals were here for holiday purposes, followed by 31% for business travel. According to the Bureau of Infrastructure and Transport Research Economics (BITRE), Sydney accounted for 20% of all domestic passenger aircraft movements and 45% of all international passenger aircraft movements in the year ending September 22, outpacing all other states.

Sydney Occupancy, Average Daily Rate and Revenue Per Available Room (CBRE, 2023)

Sydney Revenue Per Available Room (CBRE, 2023)

Historical Returns

Historically, the Sydney hotel market has not experienced long-term growth at or near the target annual rate of 4.1% Year. From 2000 to 2011, visitor overnight stays declined on average, according to the TRA 1.4% for hotels. Industry's Strongest Recent Performance Sees 2.8% Compound Annual Growth based on past performance, the NSW Government's targets may not be met. Achieving our goals requires dramatic action and significant investment in infrastructure, events and promotions Achieve a compound annual growth rate of 4.1%.

Drivers for Investment Performance

Sydney's hotel sector is experiencing one of the strongest annual growth profiles across Australia.

Return to business travellers and interstate leisure travellers. Occupancy growth outperformed all majors last year 69% to 64% for tourist destinations. This is the highest since the pandemic, but remains YE on Dec 18-19

result. Average daily charges are now over $250 pre-pandemic, up 31% year-over-year. As a result, revenue per available room (RevPAR) increased significantly to $161, still down 12% pre-pandemic performance. Sydney posted the most notable year-on-year growth, followed by Melbourne

ADR and RevPAR.

Logistic and Industrial

Current Market

The Sydney's gross take-up decreased 42.0% quarter-over-quarter, totalling 116,140 sqm, the third consecutive quarter in which it fell below the 10-year quarterly average (229,910 sqm). Take-up rates are still being hampered by declining vacancy rates and constrained new stock supply options. The Sydney industrial market delivered 1,036,700 sqm of new stock in 2022, the most since JLL started tracking the market, despite slow completions in 4Q22. In 4Q22, completions totalled 108,830 sqm, which is 19% less than the 10-year quarterly average of 134,790 sqm. Larger parcel land values were evidently reverting as development options were constrained by high debt and building expenses. While the 1 Ha and 2-5 Ha parcels experienced declines of 2.9% and 2.1%, respectively, the 2,000 sqm size allotment climbed by an average of 4.7% (AUD 2,470 per sqm). Industrial transaction volumes climbed significantly in 4Q22, reaching AUD 783.9 million, a level that was 57.2% higher than the 10-year quarterly average and a 60.3% q-o-q rise (AUD 498.6 million). For the second consecutive quarter, both the prime and secondary yields decreased by 37.5 bps, bringing the market-wide prime average down to 4.31%. (JLL, 2022)

Historical Returns

Yields have consistently decreased over the previous decade with significant compression occurring. Prime yields have compressed by over 6.3% during the last decade. (JLL, 2022)

Figure 6 Histo

Drivers for Investment Performance

Sydney Prime Yield Average Range All Sydney industrial precincts' prime and secondary yields decreased by 37.5 bps in 4Q22 for the second consecutive quarter. High loan costs and rising bond yields continue to increase yield decompression as investors increasingly hold back capital to observe how the macroeconomic environment changes. (JLL, 2022)

Residential

Current Market

As with the general housing market, Sydney's apartment market has slowed, with the Western Sydney market being more adversely affected by rising interest rates on the demand side and rising developer costs on the supply side. More prestigious districts of Sydney have seen increased demand for higher-end apartment stock, and the higher sale prices per square metre are giving developers more comfort about rising cost structures. Yet, we still think that acute affordability limitations will see some demand move from houses to apartments and support demand levels over the medium term. (JLL, 2022)

Historical Returns

Unit values across Greater Sydney fell by 3.0% for the three months preceding December 2022. The current yearly decline is 9.2% compared to 13.2% for detached dwellings (CoreLogic). Due to falling capital values and rising rents, Sydney's gross apartment rental yields have climbed by approximately 70 basis points in the past year, reaching their highest level in years. Up to 2022, the rate of apartment purchases drastically declined as borrowing costs soared. Sales are now closer to levels anticipated for 2019 and 2020. Sydney apartment sales peaked each year at at 50,000 around the beginning of 2022, but they have since sharply decreased. There were still 2,700 sales per month in the second half of 2022, which is a respectably high number.

Financial Indices (JLL, 2022)

Financial Indicators (JLL, 2022)

Drivers for Investment Performance

In the near future, the real estate industry will likely face more difficulties, and Sydney is particularly vulnerable to rising interest rates because of its high home prices and debt levels. Yet, as more buyers are compelled by affordability to enter this market segment and away from homes, the demand for apartments should begin to stabilise sooner. Market equilibrium is further supported by the fact that new supply levels are currently low and are likely to stay that way for at least a few more years. So, it is unlikely that supply will keep up with the growing underlying housing demand if migration rises. The rental market is already displaying this pressure as migration levels return to those previous to COVID-19 and is likely to become much more constricted in the near future. (JLL, 2022)

Comparison and Analysis of Core Property Markets

According to analysis, the property markets of retail and hotel have similarities, and logistic and industrial and residential have certain commonalities. First, the low interest rate environment continues to push down yield and capital values higher. This is predicted to continue until 2023 interest rate forecast gradually rise. Second, there is a shortage of investment grade stock in most asset classes, leaving properties with long lease term and high demand for quality tenants.

Comparing the returns on investment for above asset classes reveals that annual growth rate is higher than the national average in retail sector and Hotel sector is experienced one of the strongest annual growth profiles across Australia.

Analysis of Proposed Investment

Sydney has around 20,000 hotel rooms, with another 1,500 on the way. This increase corresponds to the total number of rooms added to Sydney's hotel market over the past eight years, accounting for 7% of current supply. Two future demand profiles were considered, including Tourism Research Australia (TRA) forecasts and the NSW government's target to double tourism spending. The TRA forecast is based on the Tourism Forecast Commission's forecast of 1.8% annual domestic and international visitor growth in future. Projections from NSW government targets were calculated to determine the number of visitors needed to arrive at a hotel, stay overnight, and double tourism spending. Based on the current composition and spending of all visitors to the City of Sydney, this equates to a 4.1% annual increase in visitors staying in hotels

Investment Methodology (how and why)

Haymarket 2-6 Cunningham Street, Sydney NSW 2000 is in the heart of city, this could be the main reason behind the excellent returns to the investor in the future.

Prime office property in Melbourne is highly sought and offers investors excellent returns. The intention is to acquire a 100% freehold interest the subject building, 2-6 Cunningham Street. This is done using the Fund's own bonds, so no further asset financing is required.

Hotels are an important economic infrastructure not only for the tourism industry, but for the economy as a whole.The accommodation sector directly employs 14,600 people in Sydney and generates a total revenue of US$1.3 billion. Regional product. Indirectly, the benefits are much greater. Hotels are an important infrastructure for tourism helps free up value chains and visitor spending. Her nightly spending of visitors exceeds his $10 billion (85% of total spending). visitor spending in the Sydney metropolitan area). Accommodation cost per tourist Nearly 80% of a visitor's total spend flows through the rest, as it accounts for 20% of total spend. Economic Key sectors receiving this spending include retail, restaurants and leisure and transportation services. These sectors are often dominated by small businesses.

Risks, Mitigants and Likely Returns

The growth of Sydney`s hotel industry faces three key challenges:

• Demand:

Ensuring visitor numbers and length of stay in Sydney continue to grow Strong marketing and development of events and conferences.

• Infrastructure and Products:

Investment in catalytic infrastructure (e.g., convention centres, cruise ships).

terminals, famous landmarks, transportation infrastructure) are needed to drive demand and growth.

long-term visitors.

• Supply:

New hotel rooms in Sydney need to be able to develop consistently and profitably.

and sustainable.

Conclusion

Haymarket 2-6 Cunningham Street, Sydney NSW 2000, offers excellent commercial real estate. A purchase at the asking price of $200,000,000 achieves an expected IRR of 7.07.n. This is in line with the Fund's overall financial goals, as well as environmental criteria and geographic priorities. We recommend that the fund purchase this property at the asking price.