Savills Research South Australia Briefing Adelaide CBD Office Highlights Adelaide CBD office market has recorded two consecutive periods of positive net absorption, also the highest level seen in five years; resulting in a decline in the vacancy rate; The repositioning of Secondary space, as more owners undertake internal upgrades, typically on a floor-by-floor basis, has helped drive the flight to quality and increased absorption of space during the last 12 months; Although coming from a low base, the growth in job advertisements in the last 12 months is the largest nationally; The recent uptick in foreign investment indicates the emergence of counter-cyclical strategies by buyers. A Grade Averages Latest 12mo Diff Outlook Rental N.F. ($/sq m) 370 +0.0% Incentives (%) 40.0 +100bps Rental N.E ($/sq m) 260-5.5% Yield Market (%) 7.50-50bps IRR (%) 8.25-50bps Capital Values ($/sq m) 5,000 +6.4% Demand & Supply Latest PCP* Vacancy (%) 15.4 16.2 Net Absorb. ( 000sq m) 14.3-1.1 Stock U/C ( 000sq m) 24.5 10.70 - % of market 1.7% - % committed 48% *PCP = Previous Corresponding Period
Report Contents Vacancy & Availability 3 Leasing Activity & Demand 4 Sales Activity 6 Supply & Development 8 Rents & Outlook 9 Key Indicators 10 Key Contacts 10 Associate Director Research Katy Dean kdean@savills.com.au For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please email research@savills.com.au Executive Summary Although the Adelaide CBD office market is one of the smallest markets nationally with 1.4 million square metres, it has traditionally had a diverse industry base that has made it a highly attractive place to live and do business. Being at the centre of Australia s road, rail and air logistics networks has provided time and cost advantages to many businesses, including resources and most significantly defence. The South Australian economy is beginning to benefit from the new shipbuilding program centred at Techport near Port Adelaide with organic growth in office demand from Defence related industries being one by-product. Public investment in state infrastructure is also helping to buoy the jobs market with a significant rise in job advertisements noted recently that will support employment over the short to medium term. While the leasing market has been slow moving over the last three years, a upswing in demand has finally contributed to positive net absorption levels and a slight reduction in the overall vacancy rate. There had previously been a distinct gap between Prime and Secondary grade space but this is beginning to shrink, with demand Secondary grade space particularly in the Core underpinning office take-up. There has been a small rise in incentives within this segment, indicating that owners are being favourable with inducements to fund early access or new fitouts. Investment appetite for Adelaide remains elevated and although far from the peak volumes seen in 2016, the purchaser profile indicates that the yield proposition on offer relative to the eastern seaboard is highly attractive to investors operating under a counter-cyclical strategy. PCA Summary Table Adelaide CBD (as at Dec-17) Premium A Grade Prime Secondary Total AUS CBD Total Stock ( 000sq m) 41.7 553.2 594.9 829.3 1,424.2 17,936.8 Total Vacancy ( 000sq m) 3.9 81.4 85.3 134.6 219.8 1,763.3 Vacancy (%) 9.3 (7.5) 14.7 (9.2) 14.3 (9.1) 16.2 (11.6) 15.4 (10.6) 9.8 (8.9) Net Absorption ( 000sq m) -0.4 (.2) 3.5 (14.0) 3.1 (14.1) 11.2 (-6.9) 14.3 (7.3) 142.3 (171.8) Net Absorption (%)* -1.1 (0.4) 0.8 (3.6) 0.6 (3.3) 1.6 (-0.9) 1.2 (0.6) 0.9 (1.1) Net Additions ( 000sq m) - (-) - (21.3) - (21.3) 3.4 (2.9) 3.4 (24.1) -49.4 (303.2) Stock Additions ( 000sq m) - - - 5.3 6.3 254.4 Stock Withdrawals ( 000sq m) - - - 1.7 2.9 307.9 Net Additions (%) - (-) - (5.0) - (4.5) 0.4 (0.4) 0.2 (1.9) -0.3 (1.9) / PCA / 10yr Averages shown in brackets; savills.com.au/research 02
Vacancy The Adelaide CBD office market vacancy rate decreased in the 12 months to December 2017, reaching 15.4%, down from 16.2% percent in December 2016. After a slow couple of years, there are green shoots emerging with the market recording its second period of positive net absorption, also the highest level seen in five years. Increasing competition on the supply-side for Prime grade stock had previously lead to a rise in backfill vacancy within Secondary space as these tenants relocate, however this trend seems to be subsiding as the divergence between Prime and Secondary vacancy rate begins to shrink. This trend comes on the back of owners looking to reposition buildings on a floor-by-floor basis to retain existing tenants. The absorption of B Grade space, albeit from a low base after several years of contraction, has been driven by small business demand and a focus on reducing or maintaining overall occupancy costs. Historic Vacancy Rate Full Floor Availability by Period 20% Prime Secondary Total 18% 18% 16% 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 80,000 70,000 60,000 60,000 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 0 Premium (sq (sq m) m) A Grade A Grade (sq (sq m) m) In 6 Mths 6-12 Mths 1-2 Yrs > 2 Years In 6 Mths 6-12 Mths 1-2 Yrs > 2 Years / PCA OMR Full Floor Availability In Savills Prime Full Floor Availability Report, the state of the leasing market is assessed in a different manner to most vacancy surveys. The report considers Premium and A grade buildings in the city on a floor-by-floor basis, identifying whole floors competing for tenants - both now and in the future - including those under construction and refurbishment. Compared to November 2016, the number of full floors available has decreased from 64 to 57 in November 2017. Of the 57 Prime floors, all are available for occupation within the next six months. All of this space is available for occupation as either direct or sub-lease vacancies. Further options exist for tenants seeking B grade buildings, with 42 full floors currently available to the market. The availability of larger contiguous areas remains limited, with just two 5,000 square metre opportunities being available in the market as at November 2017. By Grade By Precinct Total Premium A Grade Core Frame Fringe B Grade Total Prime Floors (No) 441 32 409 382 53 6 214 Total Prime NLA (sq m) 592,083 41,458 550,625 499,915 80,333 11,835 196,764 Prime Floors Available (No) 57 3 54 56 1-42 Prime Full Floor Avail. (sq m) 71,165 2,757 68,408 69,665 1,500-39,121 Prime Full Floor Avail. (%) 11.6 6.6 12.0 13.5 1.9 0.0 20.5 Max Contiguous Floors (No) 5 2 5 5 - - 4 Max Contiguous Area (sq m) 5,220 2,235 5,220 6,560 - - 6,226 savills.com.au/research 03
Leasing Activity & Demand In the 12 months to December 2017, Savills identified approximately 19,844 square metres of leasing activity (>500 square metres) in the Adelaide CBD office market. The majority of these leases (approximately 95% of total space) occurred in the Core precincts. The Financial & Insurance sector was the dominant sector, accounting for 47% of transactions by volume recorded, followed by Government & Community tenants, Mining and Property and Business Services sector. Leasing Activity by Precinct (> 500 square metres) 250,000 <= 5,000sqm 5,000sqm - 10,000sqm > 10,000sqm 200,000 150,000 100,000 50,000 The majority of leasing activity identified (approximately 72%) was either a direct (new) transaction or renewal by sitting tenant. Recent transactions have laid a solid foundation for the coming 12 months, including Cooper Energy s commitment to a full floor in 70 Franklin Street. The deal follows Babcock International deal early 2017 which saw them move their regional headquarters to Adelaide. Leasing Activity by Tenant Type (> 500 square metres) Fin & Ins - 46.7% Govt & Community - 19.4% Mining - 10.6% Prop & Bus Serv - 10.6% Undisclosed - 9.3% IT & Comm - 3.5% Net Absorption vs. Growth in Professional Job Ads 80,000 Annual Net Abs. - ADL CBD 70,000 Prof. Job Ads - SA 60,000 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) 30% 20% 10% 0% (10%) (20%) (30%) (40%) Source: DOE / Savills Research savills.com.au/research 04
South Australia continues to show strength in regards to job opportunity, with a notable increase job advertisements recently. Although coming from a low base, the growth in job advertisements in the last 12 months is the largest nationally. This shift in growth is underpinned by the State Government s boost to infrastructure spending, with a record $9.5 billion allocated in the State budget over the next four years expected to support an average of 5,700 jobs annually over that period. The pull-back in automotive manufacturing has helped redirect the focus to other sectors, most significantly defence and health with significant capital investment underway. In addition to increased activity as a result of various defence projects, stamp duty on non-residential property transfers will be abolished from July 2018. The 2017-18 Budget also included small business payroll tax relief over the next four years and this is estimated to benefit around 1,300 employers. The abolition of stamp duty on non-residential transfers and other recent reforms helps to reduce costs to do business in the state, providing further opportunities for investment, growth and employment. Professional Job Advertisement Growth by State (Dec-17) NSW 0.5% AUS 5.5% ACT 5.7% QLD 6.2% VIC 9.1% WA 14.8% SA 15.5% 0% 5% 10% 15% 20% Source: DOE / Savills Research Recent Notable Leases (by Area Leased) Tenant Property Date NLA (sq m) Type Rent Term Employers Mutual 26 Flinders St, Adelaide Jun-17 3,500 Direct n.a 3 University of Adelaide 122 Frome St, Adelaide Jul-17 2,110 Renewal n.a 2 Nexia Edwards Marshall 153 Flinders St, Adelaide Feb-17 1,757 Renewal 420 (G) 5 First Mortgage Services 115 Grenfell St, Adelaide Jun-17 1,271 Direct 400 (G) 7 Southern Rail 233 North Terrace, Adelaide Aug-17 1,234 Direct 425 (G) 5 H&R Block 115 Grenfell St, Adelaide Mar-17 932 Direct n.a n.a. UniSA 60 Light Sq, Adelaide Aug-17 905 Direct 455 (G) 5 RP Data 30 Currie St, Adelaide Mar-17 872 Renewal n.a 5 Iron Road 30 Currie St, Adelaide Mar-17 872 Renewal n.a 1 National Rail Safety Regulator 75 Hindmarsh Sq, Adelaide Aug-17 830 Direct 495 (G) 8 Techstars 2 King William St, Adelaide Sep-17 700 Direct n.a 5 Colliers International 121-129 King William St, Adelaide Mar-17 663 Direct 515 (G) 10 Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal savills.com.au/research 05
Sales Activity In the 12 months to December 2017, Savills has identified approximately $475 million worth of office transactions (greater than $5 million) in the Adelaide CBD area. This is down on $987 million in the previous 12 months but above the 10-year average of $378 million. 2016 year-end result of $987 million was the highest level recorded in the past decade. The quality of assets that have been presented in the last two years has been high, which bodes well for institutions and off-shore groups looking at comparable assets in other markets that are sitting on much lower yield ranges. In August 2017, 45 Pirie Street was purchased by Singapore-listed AEP Group for $105 million. The property is anchored by the Attorney General s Department who were known to have pre-committed to the Charter Hall GPO Precinct development, and therefore has significant leasing risk over the medium term. 2017 volumes were recently boosted by the announcement that Dexus had exchanged a conditional contract to sell 11 Waymouth Street, ANZ House, for $202.5 million. Dexus own a 50% interest, with CPP Investment Board owning the other 50%. The sale of both interests is subject to FIRB approval with settlement expected during Q1-2018. The purchaser is reportedly Singaporean investor Mapletree. The sale of ANZ House is indicative of the changing buyer profile through 2017. Foreign investors account for almost 84% of major office acquisitions by value in 2017. This well above the average activity for foreign investment, with foreign investors accounting for about 30% of major office sales annually in Adelaide during the past 10 years. Adelaide market Prime yields are still seen as a drawcard against assets on the eastern seaboard and overseas markets. The recent uptick in foreign investment indicates the emergence of counter-cyclical strategies by buyers. The combination of available Prime grade asset opportunities in Adelaide and relatively higher yield return will continue to guide capital in the market. Sales Activity by Price (> $5 million) $1,200m $5m - $50m $50m - $100m >$100m $1,000m $800m $600m $400m $200m $0m Vendor & Purchaser Type (> $5 million) Vendors Purchasers Yield Spread to Bond & IRR Adelaide CBD 10% 8% 6% 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other 14% 10yr Bond Rate Average Adelaide CBD (Grade A Yield) 12% Average Adelaide CBD (Grade A IRR) 4% 2% % Source: RBA/Savills Research savills.com.au/research 06
Market yields in the Adelaide CBD, as at December 2017, are estimated to range between 6.25% and 7.50% for Premium buildings, and between 7.00% and 8.00% for A grade buildings. The average yield for A grade office buildings in the quarter to December 2017 is 7.50%, representing a 50 basis point firming over the year. Capital values in the Adelaide CBD, as at December 2017, are estimated to range from $4,125 per square metre to $5,850 per square metre for A grade buildings, and between $2,500 per square metre and $4,000 per square metre for Secondary grade (B grade) buildings. Capital Value ($/sq m) vs. Market Yield 6,000 Capital Value - ADL CBD Market Yield (RHS) 5,000 4,000 3,000 2,000 1,000 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% Recent Notable Sales (by Sale Price) Property Price ($m) Date NLA Yield Type $/sq m 11-29 Waymouth St (ANZ House), Adelaide 202.50 Dec-17 30,997 n.a r 6,533 45 Pirie St, Adelaide 105.00 Aug-17 19,855 8.10 e 5,288 121 King William St, Adelaide* 58.70 Jul-17 12,643 n.a n.a 4,643 141-143 Rundle Mall (Citi Centre), Adelaide 42.00 Aug-17 16,376 n.a n.a 2,565 99 Gawler Pl, Adelaide* 34.60 Jul-17 11,127 n.a n.a 3,110 75-79 King William St, Adelaide 8.39 Jul-17 3,583 5.80 r 2,341 74-86 Gilbert St, Adelaide 6.80 Jan-17 n.a n.a n.a n.a 180 Flinders St, Adelaide 5.30 Jul-17 1,397 n.a n.a 3,794 109 Grote St, Adelaide 5.00 Aug-17 1,126 n.a n.a 4,440 Yield Types: i = Initial, r = Reported, e = Equated, v = Vacant, dev = development; *Part of portfolio sale savills.com.au/research 07
Supply While there are numerous small projects, including refurbishments, underway or in planning there are only two major office developments (>20,000 square metres) in the pipeline with development approval Precinct GPO and the Festival Plaza redevelopment. Net Supply by Year (square metres) 50,000 Historic Net Additions Savills Forecast 15yr Avg 40,000 30,000 Stage 2 (the larger tower) of Charter Hall s staged redevelopment of the existing GPO and Telephone exchange buildings is under construction, following the pre-commitment to Attorney-General's Department. Completion is expected in Q3-2019. 20,000 10,000 - Walker Corporation and the State Government $610 million Festival Plaza (Riverbank) project received approval in November 2016. No firm timing on start date is Timing for completion is not likely until late 2020, early 2021. (10,000) A 19-storey mixed-use building is under construction on the site of the old Maughan Church. Expected to comprise up to 6,500 square metres of office, the development is due online later this year. Development The table below details the major upcoming and planned development projects in the Adelaide CBD. Building Address Dev Stage NLA Exp. Comp Precinct Tenants Cnr Pitt & Franklin St UC ~6,500 2018 Core 185 Pirie St DA 6,500 2018/19 Frame 322 King William St EP 11,550 2018/19 Frame 203 North Tce DA ~1,360 2019 Core Precinct GPO, Tower 2 UC 24,690 2019 Core Attorney-General s Department Precinct GPO, Tower 1 Mooted 15,307 2020/21 Core Festival Plaza Building Mooted 40,000 2021 Core ; UC = Under Construction, EP = Early Planning, PS = Plans Submitted, PA = Plans Approved, DA = Development Approved savills.com.au/research 08
Rents As at December 2017, net face rents in Adelaide CBD typically range from $395 to $460 per square metre per annum for Premium grade, $330 to $410 per square metre per annum for A grade and $265 to $335 per square metre per annum for B grade. Incentives have gradually increased over the last two to three years, resulting in a decline in net effective rents of between 15% and 20% over the three years to 2017. Broadly speaking, incentive levels do vary by building grade and by precinct, with Prime grade core located assets between 37.5% - 42.5% net on average. Secondary grade incentives are higher, averaging 45% net or above in some cases. Net Face Rents by Grade ($/sq m) 500 Premium Grade A Grade B 450 400 350 300 250 200 150 As at December 2017, net effective rents typically range from $250 to $290 per square metre per annum for Premium, and between $200 and $245 per square metre per annum for A grade. Please note, there has been revision to the methodology which has resulted in an amendment to previously published numbers, as at Q4-2017. Net Face & Net Effective Rents as at Dec-17 ($/sq m) Net Face Rent Net Effective Rent Net Incentive % - rhs 500 450 430 400 370 350 300 300 270 250 225 200 165 150 100 50 - Premium Grade A Grade B 46.0 44.0 42.0 40.0 38.0 36.0 34.0 32.0 Outlook There are strong signs of a recovery in the job sector, with the state s job advertisements continuing their upward trend and while this is yet to translate into significant take-up of office space in the CBD, it bodes well for improvements in actual job numbers and a continuation of positive net absorption over the next 12 months. Expect to see continued improvements in the leasing market as more companies begin to consider relocation plans again. Conditions will remain tenant favourable in regards to incentives, however given the gap between Prime and Secondary space has begun to narrow, may start to see incentives levels stabilise towards the second half of the year. The repositioning of Secondary space, as more owners undertake internal upgrades, typically on a floor-by-floor basis, has certainly helped drive the flight to quality and increased absorption of space during the last 12 months, as well as close that gap between Prime and Secondary. Expect a continuation of this trend in the short-term. Yield compression is still evident, suggesting that there is still scope for further compression left in this cycle. Investors, mostly off-shore groups, have been prominent recently, however expect greater competition from local private investors and syndicators seeking to acquire assets to value-add and reposition. savills.com.au/research 09
Adelaide CBD Key Indicators (Q4-17) Premium A Grade B Grade Low High Low High Low High Rental Gross Face ($/sq m) 500 580 425 520 345 430 Rental Net Face ($/sq m) 395 460 330 410 265 335 Incentive Level Net 35% 40% 35% 45% 40% 50% Rental Net Effective ($/sq m) 250 290 200 245 145 185 Outgoings Operating ($/sq m) 65 70 55 65 40 50 Outgoings Statutory ($/sq m) 40 50 40 45 40 45 Outgoings Total ($/sq m) 105 120 95 110 80 95 Typical Lease Term 7 10 5 10 3 7 Yield Market (% Net Face Rental) 6.25 7.50 7.00 8.00 8.25 9.50 IRR (%) 7.25 7.75 7.75 8.75 8.50 9.75 Cars Permanent Reserved ($/pcm) 380 450 350 410 300 350 Cars Permanent ($/pcm) 370 450 350 400 300 350 Office Capital Values ($/sq m) 5,250 7,350 4,125 5,850 2,500 4,000 NB: All rents equivalent to whole floor mid-rise *There has been revision to the methodology which has resulted in an amendment to previously published numbers, as at Q4-2017. Key State Contacts Research Katy Dean +61 (0) 2 8215 6011 kdean@savills.com.au Valuations Heath Dowling +61 (0) 8 8237 5039 hdowling@savills.com.au City & Metropolitan Sales Steve Bobridge +61 (0) 8 8237 5015 sbobridge@savills.com.au Asset Management Jeffrey Klaebe +61 (0) 8 8237 5018 jklaebe@savills.com.au Capital Transactions Peter Isaksson +61 (0) 8 8237 5020 pisaksson@savills.com.au Office Leasing Adam Hartley +61 (0) 8 8237 5043 ahartley@savills.com.au Project Management Steve Christodoulou +61 (0) 8 8237 5004 schristodoulou@savills.com.au The Savills Research & Consultancy team has years of experience, and is supported by our extensive agency, property management and valuation professionals. For national-level consultancy or subscription requirements please contact: Capital Strategy & Research Chris Freeman +61 (0) 2 8215 6093 cfreeman@savills.com.au Savills is a leading global property service provider listed on the London Stock Exchange. Trusted since 1855, we have extensive experience across the Asia Pacific, with over 50 offices, and in Australia, we have over 800 staff focused on meeting all your property needs. This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills. savills.com.au/research 10