The number one question I have been asked over the past six months is: What about the residential conversion story? While this theme is evolving in Melbourne’s CBD, the trend is more pronounced in the St Kilda Road office precinct. With 95,400 sqm of stock in St Kilda Road recently acquired by residential developers, is this deja vu of the 1990’s?

The St Kilda Road office precinct is made up of 750,000 sqm of stock. Although this stock figure has remained relatively static since 2000, conversions to residential towers during the mid-1990’s to late 1990’s resulted in a 15% (131,340 sqm) decrease in stock in the precinct, down from 876,000 sqm in 1991 to 752,000 sqm in 2000.

Over the past 24 months, subdued demand for office space, low interest rates and a surge of Asian and local investment in apartments is driving a significant uplift in demand for residential units – notably of older office buildings. The St Kilda Road office precinct largely comprises of secondary grade space, accounting for 75% of total stock – the highest across all Melbourne office markets. There are only 10 A-Grade assets in the precinct, with no significant completions since 2004. The demand for sites is exerting upward pressure on land values, which have doubled over the past decade, making residential conversion the highest and best use for many secondary grade assets on under-utilised sites.

Since the start of 2012, 30 assets have traded in the St Kilda Road precinct. Of this, nine assets totaling 95,400 sqm have been acquired for residential conversion. This theme has been more prevalent in 2014. Over 50% of assets (45,400 sqm) transacted over the past six months have been purchased by developers who are likely to pursue a conversion to residential. Chinese developer Golden Age last month acquired a five-storey tower at 450 St Kilda Road for AUD 20 million with plans to demolish it for an apartment project. Also, 20-22 Queens Road changed hands for AUD 35 million to a company controlled by Chinese national Kathryn Yang. Multiple other sales have transacted (or are currently being offered to the market) with a similar residential conversion motive, suggesting overseas capital strongly believes there is money to be made in the space.

While 95,400 sqm of stock has recently been acquired for potential residential conversion, it is unlikely conversion activity will match the same quantity experienced in the 1990’s. Although we will see a gradual decline in stock over the medium term, growing residential activity is likely to have a positive impact on the St Kilda Road office market going forward. Not only will it provide improved amenity, conversions that do occur tend to be limited to low quality, inflexible secondary grade assets. Removing poorer secondary stock will have a positive impact on average net rents in the St Kilda Road market and encourage headline vacancy to decrease with displaced tenants most likely to seek out alternative premises within the precinct.

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