Adelaide office investment at new high: Colliers
Investment activity in Adelaide has reached new high as vacancy falls in suburban markets, according to Colliers International’s latest Metro Office report.
“There is strong demand for office assets from investors, with a record $103.87 million ($5 million+) worth of office transactions recorded in 2016," it said.
This was the highest level of investment in metro markets on record.
The largest sale was the GP plus Clinic, 16 Playford Blvd, Elizabeth, which sold for $42 million in November 2016.
This building had a 13.8 year lease term remaining and sold on a yield of 5.8 percent to Australian AREIT.
"Prime quality assets with long lease terms are in high demand across all office markets which has resulted in a tightening in yields for the suburban markets,” the report stated.
Colliers says that the Adelaide office market is still offering investors higher returns than some other office markets and this is driving demand.
“It is the lack of stock being offered to the market which is likely to restrict sales volumes going into 2017. New supply in the Fringe market remains limited, with most of the supply which has been added over the last 12 months being stock which has been withdrawn, refurbished and then offered back to the market."
The most recent refurbishment completed was 8 Greenhill Road, Wayville which was completed in late 2016, the report said.
This has contributed to an increase in vacancy to 11.3 percent as at January, says Colliers.
“Also contributing to the increase in vacancy is the move of Grant Thornton into the Adelaide CBD market, which resulted in -1,260 sqm of net absorption in the last six months.
This brought total annual net absorption for the fringe market to -8,126 sqm as at January 2017.
Rents in the fringe eased over the last 12 months, with Grade A effective rents falling by 4.8 percent.
This was mainly due to an easing of the top end of rents in the fringe market.
Incentives have however remained stable with a wide range of 15 to 25 percent.
There are two buildings currently under refurbishment and due to be completed in the third quarter of 2017.
These are 127-128 Greenhill Road and 100 Greenhill Road, which will add 2,742 sqm to the Fringe market and is likely to result in an increase in vacancy in the second half of 2017, said the report.
The fringe market has seen 8,433 sqm of withdrawals over the last two years, but most of these buildings have been refurbished rather than redeveloped.
“There has been a change in the parking restrictions along Greenhill Road, with clearways in place until 10 am and then from 3 pm. This restricts client parking and is likely to restrict demand in the future.
"Several of the buildings in the fringe market do not have disability access and therefore the first and above levels can be more difficult to lease."
When most of these buildings were built in the 1980s, there was one space allocated per 25 sqm, however, now the ratios demanded are more likely to be one space to 12 to 15 sqm, the report said.
This area has also been rezoned to allow for higher building heights and mixed use including residential.
Colliers expects that over the next five years the fringe market will see more withdrawals.
“Over the next five years we expect the Fringe market to see more withdrawals which will see new developments with a change of use. With vacancy forecast to increase for 12.7 percent over the next 12 months it is likely that rental growth in the fringe market will be limited over the next 12 months."
Incentives are expected to remain stable within the current range of 15 to 25 percent, it said.
The suburban market has seen vacancy tighten to 6.5 percent.
This is down from 7.7 percent in September 2016.
All markets saw a fall in vacancy, with the east seeing vacancy fall to 4.8 percent and the south to 1.8 percent.
New supply in the suburban market remains restrained.
The only major construction is the Port Centre at Port Adelaide.
This 3,238 sqm building is currently under construction and is due to complete in 2018.
This building is fully committed to Australian Customs on completion, said the report.
There are several smaller projects in the pipeline, but most are seeking pre-commitment prior to construction commencing.
Colliers says that the suburban market is very much needs based and therefore tends to have lower vacancy as there is limited speculative development in this market.
“Rental growth in the suburban market has remained stable over the last 12 months with a rental range of $265 to $335 per sqm net. Incentives have also remained stable, within a range of 15 to 25 percent."
With vacancy falling it is more likely that incentives may begin to fall which will lead to growth in net effective rents, said the report.
An example would be 1284 South Road, Tonsley (above) which has been leased.