- Adelaide CBD office market shows resilience with higher rents offsetting lower prices
- The largest anticipated supply of office space in Adelaide CBD will arrive in 2023
- Adelaide's affordability, stability and stamp duty exemption make it an appealing option
The Adelaide CBD office market remains resilient amongst the higher interest rate environment, with a new report showing that higher rents are helping offset lower prices.
Knight Frank’s Adelaide CBD Office Market Report found 10 transactions above $10 million settled for office asset sales over 2022, reflecting a total sales volume of $531.14 million, which was a 95% increase from $271.96 million in 2021.
Knight Frank Partner, Research and Consulting Dr Tony McGough said as the cost of funding increased over 2022 average prime yields softened a further 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,” he said.
“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.”
Adelaide worth looking at for investors
Knight Frank Director of Institutional Sales in South Australia, Max Frohlich said while Sydney and Melbourne attract most of the attention, locations like Adelaide continue to provide value:
“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. This is due to Adelaide’s affordability, stability and comparative advantage, with no stamp duty on commercial transactions.
“Our occupier market is also in good stead, and we are starting to see genuine rent growth roll through for existing high-quality accommodation on the back of the benchmarks set for the new developments at 83 Pirie Street, Festival Tower and 60 King William Street. This is providing a powerful counterpoint to recent outward yield shifts, to offset the extent of value softening.”
CBD office South Australia vs east coast yields
Higher rates pose a risk
Looking ahead, Frohlich said 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. While the full impact of the developments in the US and Swiss banking sectors are yet to play out, the RBA’s policy stance before these concerns emerged supported a possible cash rate pause in April.
He said due to a tightening in financial conditions, there is a high likelihood of a pause from the RBA.
“Due to this, we 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. As of January 2023, the Adelaide CBD’s gross effective rents for prime stock increased by 2.49% to $411 per square metre, while secondary stock increased by 2.24% to $274 per square metre over the second half of 2022.”
Divergence in rental growth
Knight Frank Head of Leasing South Australia Martin Potter said this year it was predicted there would be a divergence in rental growth between new or refurbished and secondary stock.
“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.
“A large proportion of this is already pre-committed, but we expect the vacancy rate to rise from the current 16.1% in the CBD 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.
“Despite economic uncertainty in recent years, the Adelaide office market has provided 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.”