Savills Research South Australia Briefing Adelaide Fringe Office Highlights A slight rise in the vacancy rate was led by the return of refurbished floor space, the largest level since 2013, reflecting long-term growth prospects of the precinct; Public investment in state infrastructure is helping to buoy the jobs market with a significant rise in job advertisements noted recently that will support employment over long-term; Limited new development in the pipeline, with refurbishment of existing building trending in the shortterm; The Fringe market remains tightly held with major few transactions occurring recently; A grade yields have stabilised but any upswing in investment volumes in the short to medium term could potentially drive some compression. A Grade Averages Latest Yr Change Outlook Rental N.F. ($/sq m) 345 n/c Incentives 25.0 +500bps Rental N.E ($/sq m) 260-5.5% Yield Market (%) 7.75 n/c IRR (%) 8.65 n/c Capital Values 4,400 n/c Demand & Supply Latest PCP* Vacancy 11.4 11.3 Net Absorb. ( 000 sq m) 1.6-8.1 Stock U/C ( 000 sq m) - - - % of market - - - % committed - - *PCP = Previous Corresponding Period
Report Contents Vacancy 3 Supply 3 Leasing Activity & Demand 4 Sales Activity 5 Rents 6 Outlook 7 Key Indicators 8 Key Contacts 8 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 The Adelaide Fringe office market includes those sections of Greenhill Road, Fullarton Road and Dequetteville Terrace which have direct Parkland frontage. The Fringe precinct also includes 1 Anzac Highway and 1 Richmond Road. The precinct is one of the smallest nationally, with approximately 217,200 square metres of office floor space. The area has traditionally had high occupancy rates due to the unique location and opportunity for single building occupancy, higher car park ratios and links to the CBD. 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. Ship builder, DCNS Australia has recently taken space in the Fringe, and a number of other community organisations have relocated to the precinct. Few major assets change hands in the precinct, with recent sale transactional activity limited. Similarly, new development activity remains low, with the market characterised by a large amount of refurbishment activity relative to the 2000s when A grade vacancy rate commonly sat close to 0.0%. The Fringe remains very attractive and continues to be a drawcard for investors looking at counter-cyclical opportunities, as well as investors operating under a value-add or repositioning strategy. PCA Summary Table Adelaide Fringe (as at Dec-17) Prime Secondary Total AUS CBD Total Stock ( 000) 40.7 176.6 217.2 7,273.3 Total Vacancy ( 000) 4.4 20.4 24.9 660.7 Vacancy (%) 10.9 (5.3) 11.6 (7.9) 11.4 (7.4) 9.1 (8.9) Net Absorption ( 000) 0.7 (2.0) 0.9 (-1.8) 1.6 (.2) 11.5 (57.6) Net Absorption (%)* 2.0 (8.6) 0.6 (-1.1) 0.8 (0.1) 0.2 (0.9) Net Additions ( 000) 3.4 (2.5) -0.2 (-0.2) 2.3 (2.3) -36.5 (86.3) - Stock Additions ( 000) 3.4 0.9 4.2 102.5 - Stock Withdrawals ( 000) - 1.1 2.0 139.0 Net Additions (%)** 9.0 (9.8) -0.6 (-0.1) 1.1 (1.1) -0.5 (1.3) (10yr Averages shown in brackets; NB: Secondary Rents shown are for B Grade; All rents equivalent to whole floor mid-rise *As a percentage of occupied stock; **As a percentage of total stock savills.com.au/research 2
Vacancy The headline vacancy rate rose to 11.4% in December 2017, up from 10.1% in June 2017. On a year-on-year basis, the vacancy rate is up from 11.3%. The increase in the vacancy rate over the six months December 2017 can be attributed to returning supply, the largest in a 12 month period since 2013. While tenant demand has been somewhat choppy since 2015, landlord/owner confidence appears to be buoyed by the medium-term demand profile and long-term growth prospects as noted in the volume of space being withdrawn for refurbishment over that same period. More than 10,000 square metres has been withdrawn in the last two years this is more than the last 15 years combined. Circa 7,400 square metres of this withdrawn stock has since been reintroduced into the market and with a lower level of demand over the same period, not all this has been absorbed, resulting in a stable, yet elevated vacancy rate over the last 12 months. Historic Vacancy Rate (Adelaide Fringe) 14% Prime Secondary Total 12% 10% 8% 6% 4% 2% 0% Net Supply by Year 12,000 Historic Net Additions Savills Forecast 15yr Avg 10,000 8,000 6,000 4,000 2,000 - (2,000) (4,000) Source: PCA / Savills Research Source: PCA / Savills Research Supply Due to the precinct sustaining a high occupancy rate, particularly over the decade to 2016, the Adelaide Fringe office market has not had a high volume of development activity. However, over the last two years vacancy has increased, slightly changing the dynamics of the market. New development activity remains subdued, with internal upgrades of existing stock becoming more common. A number of small-scale refurbishment projects, either on a whole building basis or floor-by-floor basis have been completed during this period and there are several in the pipeline. The Fringe does have a high volume of secondary grade stock, which limits options for tenants seeking Prime grade space, potentially contributing to the flight to quality in the CBD precinct. That said, the Fringe market has unique characteristics, such as high car park ratios and building signage that are not necessarily available in the CBD. savills.com.au/research 3
Leasing Activity & Demand In the 12 months to December 2017, Savills identified approximately 4,200 square metres of leasing activity (>500 square metres) in the Adelaide Fringe office markets. This is below activity levels 12 months prior and just below the five year average of approximately 7,900 square metres. The Mining, Utilities & Industry was the dominant sector, accounting for 53% of transactions by volume, followed by Property & Business Services with 42% and Govt & Community with 4%. There continues to be some organic demand on the back of the defence projects, with ship builder, DCNS Australia (now Naval Group) announcing at the end of 2016 that they would be a taking floor in 1 Richmond Road, Keswick. Naval Group has secured the contract for the design and build of the Future Submarines project. The office opened in February 2017 and initially is expected to house about 50 employees. Leasing Activity by Size (> 500 square metres) 12,000 <= 5,000sqm 5,000sqm - 10,000sqm > 10,000sqm 10,000 8,000 6,000 4,000 2,000 Leasing Activity by Tenant Type (> 500 square metres) Mining - 55.7% Undisclosed - 26.4% Prop & Bus Serv - 17.9% Recent Notable Leases (by Area Leased) Tenant Property Date NLA Type Rent Term SA Power Networks 1 Richmond Rd, Keswick Aug-17 2,337 Direct 405 (G) 8 Hansen Yuncken 191-192 Fullarton Rd, Dulwich Mar-17 750 Renewal 390 (G) 5 HammondCare 182-184 Fullarton Rd, Dulwich Mar-17 181 Direct 350 (G) 3 Leasing Types: p = Pre-commitment, d = Direct, s = Sub-Lease, r = Renewal savills.com.au/research 4
Sales In the 12 months to December 2017, Savills has identified approximately $28.9 million worth of office transactions (greater than $5 million) in the Adelaide Fringe area, across three transactions. Historically, few major assets are traded in the Fringe. In the suburban markets, approximately $41.6 million of transactions (greater than $5 million) were identified in the 12 months to December 2017. Two of the recent suburban major sales include 2 Second Avenue, Mawson Lakes and 32-38 Gawler St, Salisbury. 2 Second Avenue sold in April 2017 for $32.10 million on a passing yield of 7.64%. Formerly occupied by BAE systems, the campus-style building was leased to Codan at the end of 2015 on a long-term lease. The building was owned by Renewal SA, who also undertook an extensive upgrade of the building in 2015. 32-38 Gawler St, Salisbury sold at auction in October 2017 for $9.5 million on a passing yield of 6.95%. At the time of the sale, Centrelink had recently renewed lease terms. Given that strong demand does exists for nearby locales and assets are returning yields below current averages seen in the Fringe, there is potential for some capital growth in the medium-term, however much will be dependent on an improvement in the leasing market. That said, deals can be found in the nearby suburban markets and adjoining Adelaide Frame precinct, suggesting that the Fringe remains tightly held by private investors and owner occupiers, who are opting to hold assets, at least for the short-term. Sales Activity by Size (Adelaide Fringe) (> $5 million) $120m $5m - $50m $50m - $100m >$100m $100m $80m $60m $40m $20m $0m Vendor & Purchaser Type (> $5 million) Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other Capital Value ($/sq m) vs. Market Yield (%) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Capital Value - Adelaide Fringe Market Yield (RHS) 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% savills.com.au/research 5
Recent Notable Sales (by Sale Price) Property Price ($m) Date NLA Yield Type $/sq m 9-11 Dequetteville Tce, Kent Town 6.00 Oct-17 2,207 n.a V 2,719 257 Fullarton Rd, Parkside 13.50 Sep-17 2,381 5.85 r 5,670 191-192 Fullarton Rd, Dulwich 9.43 Feb-17 2,325 7.61 r 4,054 ; r = reported yield; e = equated market yield; i = initial yield Rents As at December 2017, net face rents in Adelaide Fringe typically range from $330 to $355 per square metre per annum for A grade and $270 to $300 per square metre per annum for B grade. There has been no change in the year to December 2017. Similar to CBD trends, incentive levels do vary by building grade, with A grade buildings now averaging more than 25% on average. B grade incentives are higher, averaging 30% or above in some cases. As at December 2017, net effective rents typically range from $250 to $265 per square metre per annum for A grade and between $195 and $220 per square metre per annum for B Grade. Net Face Rents by Grade ($/sq m) Net Face & Effective Rents (as at Dec 2017) 400 Grade A Grade B 400 Net Face Net Effective Incentive (Net Basis % RHS) 28.0 350 350 27.5 300 250 200 150 100 50-300 250 200 150 100 50 0 Prime Secondary 27.0 26.5 26.0 25.5 25.0 24.5 24.0 23.5 Source Savills Research Source Savills Research savills.com.au/research 6
Development The table below details the major upcoming and planned development projects in the Adelaide Fringe. Building Address Dev Stage NLA Exp. Comp Precom (%) Tenant 100 Greenhill Rd (refurb) UC 1,440 2018 0 - ; UC = Under Construction, DA = Development Approved, EP = Early Planning 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 Fringe, it bodes well for improvements in actual job numbers and potential for positive net absorption over the next 12 months. The limited availability of Prime grade options for tenants seeking that flight to quality may stimulate further repositioning or refurbishment projects, though is likely to be on building by building proposition. On that note, expect to see some improvements in the leasing market from a demand perspective as companies consider relocation plans again. Broadly speaking, overall business sentiment has improved. However, it is expected decision making will remain protracted, unlikely to trigger a positive shift in transactional volumes in the short-term. While the gap between Prime and Secondary space vacancy rate narrowed recently, the market may see this begin to diverge slightly. Expect incentive levels to remain elevated and given the ownership profile of the market, will continue to vary greatly by building at least in the short-term. Investor demand for prime grade assets in the Fringe remains high but there are limited on-market opportunity to drive this activity especially in the short-term. Overall A grade yields have stabilised but any upswing in investment volumes in the short to medium term could potentially drive some compression. savills.com.au/research 7
Adelaide Fringe Key Indicators (as at Dec-17) Adelaide Fringe A Grade B Grade Low High Low High Rental - Gross Face ($/sq m) 400 425 335 365 Rental - Net Face ($/sq m) 330 355 270 300 Incentive Level Net 20% 30% 20% 35% Rental - Net Effective ($/sq m) 250 265 195 220 Outgoings - Operating ($/sq m) 40 45 25 40 Outgoings - Statutory ($/sq m) 20 30 25 35 Outgoings - Total ($/sq m) 60 75 50 75 Typical Lease Term 5 7 3 5 Yield - Market (% Net Face Rental) 7.50 8.00 8.00 9.00 IRR (%) 8.00 9.25 9.25 10.50 Cars Permanent Reserved ($/pcm) 90 120 80 100 Cars Permanent ($/pcm) 90 120 80 100 Office Capital Values ($/sq m) 4,125 4,725 3,000 3,750 NB: All rents equivalent to whole floor mid-rise Key State Contacts Research Katy Dean +61 (0) 8 9488 4140 kdean@savills.com.au Office Leasing Adam Hartley +61 (0) 8 8237 5043 ahartley@savills.com.au Valuations Heath Dowling +61 (0) 8 8237 5039 hdowling@savills.com.au Capital Transactions Peter Isaksson +61 (0) 8 8237 5020 pisaksson@savills.com.au City & Metro Sales Steve Bobridge +61 (0) 8 8237 5015 sbobridge@savills.com.au Project Management Steve Christodoulou +61 (0) 8 8237 5004 schristodoulou@savills.com.au Asset Management Jeffrey Klaebe +61 (0) 8 8237 5018 jklaebe@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 8