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Why Adelaide’s older stock is an opportunity for investors

THE INVESTOR
10 January 2019

Developers are seizing the opportunity to redevelop older office stock in South Australia as the state’s capital, Adelaide, struggles to keep pace with demand for space from booming industries.

Much of Adelaide’s secondary office stock has remained in the same hands for 40 to 50 years without any major upgrades as tenants, with limited B and C-grade refurbished options, have tended to stay put, says Jamie Guerra, Head of JLL’s Adelaide Office.

“Demand, feasibility and confidence haven’t come together in the past to encourage sustained tenant activity in the secondary market and as a result landlords of older stock have been able to maintain a viable level of occupancy and strong returns relative to their capital outlay,” he says

But things are changing, says Guerra.

“Because of the growth we are seeing in sectors such as defence, health, education and infrastructure, real estate investors from the east coast are coming over and seeing value in the market’s older buildings, upgrading them and enticing businesses to move in.”

High profile private investor Con Makris recently sold his long held 14-storey complex at 431 King William Street to the fund manager Quintessential Equity.

The 12,000 square metre building exchanged for A$43 million after upgrades including a lobby extension and the addition of amenities.

Quintessential has raised $100 million for its recently announced “blind fund” and King William Street is one of the fund’s first assets with appetite for more acquisition of office and industrial assets.

Growth in key industries, a diverse tenant base, comparatively affordable lot sizes for a recognised CBD, and higher yields and liquidity than Australia’s eastern seaboard has put Adelaide on the domestic investment landscape.

Net effective rents are forecast by JLL Research to increase by 25 percent between 2018 and 2023.

“The confidence investors have in the direction of the Adelaide market means they are prepared to be more speculative on the risk curve,” says Guerra.

While property funds are snapping up secondary offices, many are also being kept within families, where second-generation owners will be required to take a fresh approach to their assets.

Landlords are taking a whole-of-building approach to refurbishments with emphasis on communal space, says Anthony Meola, Commercial Manager, Project and Development Services, JLL.

“We’ve seen a departure from the idea of a building as a collection of separate offices contained behind a closed façade. There’s a huge focus on amenities, shared lounge environments and inviting the community into the building with ground floor activations.”

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