_South Australia EOFY Commercial Market Overview

Looking back to the start of FY19/20, Adelaide was certainly being viewed as the ‘land of opportunity’, with a real sense that we had finally dropped the ‘City of Churches’ identity for a new brand that suggested South Australia was now an investment destination with the opportunity for real value buying.

This change in ‘identity’ has primarily stemmed from major macroeconomic drivers such as the generational Federal Government $80 billion defence spend and the incoming ‘pro-business’ State Liberal Government. This has led to investors starting to look at South Australia as a genuine investment alternative, and coupled with an arbitrage in yield when compared to the ‘hot’ Eastern Seaboard’ markets, the moons seem to have aligned for what was turning into a South Australia renaissance.

Prior to COVID-19, the commercial property market in South Australia was performing well, like most property markets in Australia. When looking specifically at the office market, transactions volumes were up, yields were compressing, rents were increasing (particularly in the A and Premium Grades), incentives starting to rationalise and growing capital inflows from outside the state as investors started to accept the South Australia investment narrative. South Australia provided, in a relative sense, a 100-150 basis point arbitrage when looking across most asset classes. Interstate and international markets were buoyed by this relative ‘value’ buying, with several private high net wealth and family offices also getting active.

There was also a sense of confidence in the development market pre COVID-19, with development sites in metro Adelaide preforming strongly as we saw fast food, childcare and fuel/convenience driving developer demand. This increased demand produced relative growth in land rates, with most main road sites in core locations heading towards the $1,000/sqm mark up from the $700 - 900/sqm range.

When considering the Adelaide CBD, the apartment market had certainly come of age, driven by both downsizers and a buoyant student population. We saw strategic town centre sites hit square metre rates over $10,000/sqm for the first time over the last cycle; however, depending on location and planning outcomes most land rates will certainly find themselves well below this level. The positive thing out of this newfound ‘city living’ demand is that Adelaide genuinely has an apartment market, and with it being well supported by State and Local Governments, I am of the opinion that this demand is here to stay

There is no doubt that the advent of COVID-19 put a major hand brake on the property market, especially in its initial phase. However, with the State Government doing a strong job of battling the health crisis, and subsequently getting it under control, we saw market sentiment bounce back relatively quickly. Given this positive result, South Australia scored many points with investors, and with the state economy almost back to full throttle (at least from an activity point of view), I think that as the broader national economy kicks back into gear South Australia will be well positioned to take advantage of what is hopefully a strong overall recovery.

However, we cannot ignore the State of Disaster in Victoria and how its effected sentiment more broadly. Risk adverse market participants are likely to sit on the sidelines for the short to medium term, and this will affect overall demand. Although, it is clear from the last 3 months or so that there is a real genuine desire from investors across the spectrum to place capital in assets that provide genuine low risk profile. Strong tenant covenants, solid locations, secure income and a genuine growth story, are desired most. My intuition is that assets that tick all the boxes could even see price growth over the short term.

Looking at the development site sphere, there is the potential for downside, not unlike other periods of market dislocation, developments will get put on the back burner. With debt harder to come by, due to retreating financial markets, we do see some downside risk for development sites moving forward.

There is no doubt that the fear mongering in the media has taken its toll on markets more broadly throughout this period. However, much of the downside is out of our control, so from a Knight Frank Adelaide perspective we have tried our best to remain active throughout.

I enjoy football (soccer for most in Australia) and as one of my favourite coaches, former Socceroos Coach Ange Postecoglou, once said, “once you cross that white line, there was no time for excuses.” With that in mind, I think it is easy to form excuses as to why we can’t get on with generating outcomes for our clients. So, for us, we have tried to focus on getting the small things right, as in times like these, it can be hard to look too far ahead.

Continuing with the football clichés’, “goals win games, but defences win championships”. We have taken a ‘back to basics’ approach, a defence strategy of sorts, to help us remain our clients trusted advisor, whilst trying to stay as active as possible in the broader market context. We hope this strategy put us in a position to generate enough scoring (listing) opportunities, and over the course of the year, achieve overall success together with our clients.

This approach, has allowed us to develop an informed up to date opinion on current sentiment, and we genuinely feel there is real life in the market, with a flight to quality likely to drive activity in the next 6 to 12 months.

Most clients in the property game are keen to get on with it. Debt remains at historic lows and is likely to remain so for some time, meaning those with access to debt funding are keen to consider new opportunities. Those that have cash/equity are finding themselves in between a rock and a hard place as they search for stable returns, something they cannot seem to find in alternative investments like equities and for obvious reasons, not in the bank. This cash will ultimately need to go somewhere though, so watch this space. However, there are many that have decided to sit on the bench and will likely remain so for the foreseeable future or at least until they feel like they are missing out.

If I look further ahead to the next 12-24 months, I believe the broader economic markets might turn around quicker and sooner than people think. Although, I must admit, this statement comes from someone who believes the world’s response to date has been disproportionate. Albeit, this will take some courage from our political leaders to set the tone and is likely to be contingent on finding some type of therapeutic or vaccine response to the virus.

We have already seen the ‘flight to quality’ investing begin, and given we expect further financial distress over the short to medium term, I believe the next 12 to 18 months are likely to see the ‘value buyers’ get off the bench and re-enter the game. So, whilst we are unlikely to see the strong growth experienced over the last market cycle, I am expecting an increase in transactions on both sides of the value spectrum.

If you would like to discuss the South Australian market in more detail do not hesitate to get in touch, or if you are interested in our Victoria EOFY commercial market overview you can read it here. 

Oliver Totani
Director, Head of Agency, South Australia
Oliver.Totani@au.knightfrank.com
+61 8 8233 5210
+61 412 808 743