Commercial property in Adelaide is re-emerging on the global investment landscape.
Stamp duty reform, growth in key industries and comparatively higher yields and liquidity than Australia’s eastern seaboard are creating strong drivers for investment.
The City of Adelaide asked five commercial property leaders to provide an overview of the Adelaide market:
JLL SA Managing Director, Jamie Guerra
Adelaide has re-emerged on the investment landscape for cross-border investors and large Australian institutional fund managers in recent years.
JLL research has identified four key growth areas that are driving the re-emergence of Adelaide on the global investment landscape - SMEs, tech, defence and education.
Activity within the defence tech sector has already increased over the last 12 months. Boeing, DCNS and Babcock International have recently opened South Australian offices in the CBD and Fringe. Meanwhile SAAB, Lockheed Martin and BAE Systems have expanded or are in the process of expanding operations in the city’s northern suburbs.
Adelaide is the epitome of low risk with the volatility of returns typically lower through the cycle. The JLL Liquidity Index (which adjusts for market size), highlights that Adelaide is one of the most liquid CBD office markets in Australia.
Adelaide also offers investors a cyclical opportunity as the prime grade yield spread between Adelaide and other CBD office markets is wider than historical benchmarks. The wider than average spread highlights the attractiveness of asset pricing in Adelaide relative to Sydney and Melbourne and has started to stimulate new investment enquiry in the Adelaide CBD office market.
With a more diverse tenant base than other CBD office markets, Adelaide is ideal for investors as this flows through to lower volatility in occupier demand and reduces Adelaide’s reliance on any one industry sector for growth.
Savills SA Managing Director Rino Carpinelli
The commercial property market in Adelaide, particularly in the CBD, has become more attractive to investors on both a national and international level. In no small part this is due to the yield differential between the South Australian capital and the eastern state capitals of Melbourne, Sydney and Brisbane.
The yield difference across these CBD commercial markets is typically between 1 to 2 per cent which is substantial. An office building in Sydney which sells on a 5.50% yield is likely 6.75% to 7.00% here in Adelaide. Given the historically low yields in the eastern states, local participants are increasingly observing interstate investors and funds looking towards Adelaide to provide greater returns and portfolio diversification.
In addition, the State Government has applied a staged Stamp Duty reform for commercial investment. The first cut occurred on 1 January 2016 and the second on 1 July 2017 with the final cut due on 1 July 2018 to abolish Stamp Duty altogether. It is considered this will make South Australia one of the most attractive commercial investment locations, in terms of tax benefits, in the nation.
Furthermore, the City of Adelaide’s removal of red tape to height restrictions for development sites within the CBD and objectives to attract strong population growth is considered to continue the strengthening of commercial investment here in Adelaide.
Knight Frank Australia Joint Managing Director, Guy Bennett, and Director Capital Markets, Lukas Weeks
Adelaide is on the radar for investment with major Australian and international investors recognising the compelling value proposition that the market offers relative to Sydney and Melbourne.
While Sydney in particular has seen unprecedented demand for real estate, re-setting yields to levels tighter than those achieved pre-GFC, Adelaide currently offers a yield spread of up to 200-250 basis points.
This value proposition is evidenced by $1.18bn of transactions over $10m recorded in 2016 – approximately four times the long-term annual average.
In addition to the value proposition, investors recognise the significance of major infrastructure investment taking place in Adelaide, including the Health and Biomedical Precinct. The announcement in 2016 that approximately $85bn in defence related contracts would be delivered in South Australia also continues to be a real talking point in our discussions with offshore based investors.
We anticipate that recent announcements by the State Government and Adelaide City Council aimed to encourage investment by both owner occupiers and investors will stimulate further activity in the residential development market.
CBRE Director Capital Markets, Ian Thomas
Whilst there has been subdued transactional activity in Adelaide in the first half of 2017 compared to long term averages, the second half will see the level of opportunities increase. The number of properties to be offered for sale will be matched by the increase in buyer groups from other Australian markets but also from further afield including Singapore, Hong Kong and mainland China.
The Adelaide commercial property market is attractive for four key reasons:
- Consistency and stability – our market has shown average growth of around 3% however more importantly, we have not experienced the troughs on the back of peaks felt by other capital city markets.
- Geographic diversity – no two markets are the same and Adelaide provides an alternative market to Sydney and Melbourne.
- Enhanced returns – when investing in Adelaide, you can expect a higher return relative to the eastern seaboard.
- No stamp duty on the sale of commercial property from 1st July 2018.
Colliers National Director Capital Markets & Investment Services, Alistair Mackie
South Australia is set to become the most competitive tax jurisdiction for commercial investment in Australia.
On July 1, the South Australia government’s second stamp duty reform came into effect as part of comprehensive legislation to make the state’s commercial property market more competitive. Stamp duty will be completely abolished for certain assets classes on July 1, 2018.
The projected outcome will see transaction costs lowered, removing any disincentive to trade assets and in turn encouraging assets to be traded more freely, leading to an increase in transactions in the medium term.
The Adelaide commercial property market offers exceptional value for investors when compared to Sydney and Melbourne, with growing interest from institutional and offshore investors expected to push up the prices of prime grade assets.
A two-tiered investment market is emerging in which prime grade assets with long leases are in hot demand so there is some scope for increased capital values.
Meanwhile, the Adelaide CBD apartment market has seen a jump in completions in the past 18 months, with 1,400 due to be finished in 2017.
These figures are well above the 10-year average and we predict that absorption will be higher in the next three years.
This higher-than-average supply is to support the City of Adelaide’s target of 50,000 people living in the Adelaide CBD, which will double the precinct’s permanent resident population.
For further information about investment opportunities in the City of Adelaide, contact Senior Advisor - Investment Growth, Patrick Robinson, on +61 8 8203 7829 or firstname.lastname@example.org