Late last year, The Local Government (Building Upgrade Agreements) Amendment Bill 2015 bill passed through the South Australian government House of Assembly. The bill allows commercial building owners in the Adelaide CBD to access Environmental Upgrade Finance (EUF), a mechanism that provides favourable lending terms for the specific purpose of “undertaking environmental improvements to improve the energy, water and environmental efficiency of existing buildings¹.” And with Adelaide CBD’s secondary vacancy levels sitting at record highs, the timing of this initiative could play an important role in boosting Adelaide’s occupancy levels as well as improving the overall quality of the city’s stock.

Figure 1 shows the breakdown of Adelaide’s total stock by grade in comparison to Australia’s other CBD and large suburban office markets. Of these, Adelaide has the lowest proportion of prime stock, sitting at 35%. Now couple this with a secondary vacancy rate of 19.9% (as at 4Q15) and we have two key factors that would indicate that this new Environmental Upgrade Finance would be of significant benefit to Adelaide CBD’s secondary asset owners.

As at 4Q15, JLL Research considers 251 assets in the Adelaide CBD as secondary grade, totaling
915,600 sqm. An analysis of Adelaide’s secondary stock shows that over 30% of secondary buildings in the city have vacancy at 25% and above. That’s 77 individual buildings with a quarter of their space or more unoccupied. When drilling down further, 29 secondary grade assets in the Adelaide CBD have a vacancy rate of 50% or more.

Given that Adelaide’s occupier profile generally have smaller space requirements than Australia’s east coast counterparts, there is demand for modern, efficient assets with floor plates under 1,000 sqm. However, this product is under-supplied to the market. As at 4Q15, two-thirds (67%) of Adelaide’s buildings are over 20 years-old and refurbishment activity of these ageing assets over the last few years has been subdued (from 2013-2015; 6 projects, 25,300 sqm).

In a city with government aspirations to become the world’s first carbon neutral city, the Local Government (Building Upgrade Agreements) Amendment Bill 2015 is a step in the right direction for the South Australian state government. But it also presents an opportunity for Adelaide’s predominantly private and syndicated owners of secondary buildings. A refurbishment cycle within Adelaide’s secondary grade will increase the desirability of Adelaide’s under-leased buildings to tenants looking for quality modern space. At the same time, owners will be adding value to their property through a reduction of operating costs and an improvement in environmental credentials.

¹ Press Release – South Australian Minister for Sustainability, Environment and Conservation, Minister for Water and the River Murray and Minister for Climate Change (December 2015)

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