This article is from the Australian Property Journal archive
ADELAIDE’S CBD rent growth is offsetting the market’s value softening, leaving office investment stable over 2022.
According to Knight Frank’s Adelaide CBD Office Market Report, the cost of funding was up in 2022, with average prime yields softening 58 basis points from 5.26 per cent in Q2 2022 to 5.84 per cent in Q4 2022.
“We have seen a 71 basis point shift from the historic low of Q4 2021, with the spread to Sydney expanding 29 basis points from 73 basis points in Q2 2022 to a current spread of 102 basis points,” said Tony McGough, partner of research and consulting at Knight Frank.
“This spread is enhanced by around 26 basis points when accounting for transfer fees with South Australia’s stamp duty exemption on commercial transactions, providing a genuine value proposition for the state.”
Over 2022 there were 10 settled transactions coming in at over $10 million in the CBD office market.
This reflected $531.14 million in total sales volume for the year, for a 95% increase on 2021’s $271.96 million.
Six (60%) of these transactions took place before the RBA began its cycle of eight consecutive cash rate rises over 2022.
“While changes in banking continue to dominate market sentiment, we are currently experiencing genuine engagement from equity investors, supported with debt solutions, looking for risk-adjusted investments in Adelaide,” said Max Frohlich, director of institutional sales in South Australia at Knight Frank.
“This is due to Adelaide’s affordability, stability and comparative advantage, with no stamp duty on commercial transactions.”
There were also assets exceeding $10 million that transacted over 2022 but either settled or are scheduled to settle in 2023, including these assets in the 2022 total would bring the total sales volume to $807.38 million.
This includes the $130.5 million sale of 211 Victoria Square, which settled in February 2023 and upcoming settlements for 63 Pirie Street, 45 Pirie Street and 50 Hindmarsh Square.
“Looking ahead, higher funding costs for property investors are a clear risk to the outlook. However, financial markets now expect that the rate hiking cycle from the RBA is coming to an end and that interest rates will attenuate from here,” added Frohlich.
“[W]e expect the spread between interest rates and yields to be partially restored over the next few months and that this will provide the market with renewed confidence going into Q2 2023.”
The Adelaide CBD’s gross effective rents for prime stock was up 2.49% to $411/sqm in January 2023, with secondary stock up 2.24% to $274/sqm in the second half of 2022.
“A historic amount of supply of office space will be added to the Adelaide CBD in 2023, with 92,016 square metres set to enter the market, which is the largest anticipated supply over a one-year period since records began,” said Martin Potter, head of leasing at Knight Frank, South Australia.
Potter noted that while a large sum of this supply is already pre-committed, the vacancy rate is forecast to rise from the current 16.1% to 18.4% by the end of 2023.
“Older generation prime and secondary stock will be in need of refurbishment to attract new tenants as ‘flight to quality’ remains a prominent factor,” added Potter.
According to recent research from JLL, Adelaide CBD’s office market will grow by 6.9% in 2023, a rate too slow to keep up with demand. As the ACBD hit a vacancy rate of 16.5% in Q4 2022, with prime-grade office vacancies at 17.0% and secondary at 16.2%.
“Despite economic uncertainty in recent years, the Adelaide office market has provide remarkably resilient in comparison to cities on the eastern seaboard, which can be partly attributed to sustained demand from government tenants and a diverse mix of small-to-medium enterprises,” concluded Potter.
