In Australia, national office markets have observed a flight-to-quality over the last 2 years, with tenants prioritising building services, amenities and location against older/cheaper alternatives. This trend has been particularly noticeable within Premium Grade assets in Sydney CBD, where most of the vacancy has been concentrated in older / tired assets.
Obsolete Secondary Grade assets continue to be withdrawn from the market for redevelopment into Prime Grade offices or for alternative uses such as residential, student accommodation or hotels.
Silver Street Advantage (SSA) is a leading investment firm focused on APAC with ~US$60 billion in global AUM as of May 2023. Founded in 1987, SSA has invested US$30bn across 6,300 properties in the APAC region, managing capital on behalf of nearly 200 institutional fund investors. SSA Real Assets is a vertically integrated investment manager, with a 35-year track record investing across Core, Core-Plus, Value-Add, and Opportunistic investments.
To date, SSA has raised several funds and SSA III is the most recent in the fund series with a mandate to generate total returns targeting 16% project-level (pre-tax) returns with allocation to Australia. SSA III looks to target Core-Plus / Value-Add assets in developed Gateway cities, with a particular focus on office, residential / student housing, hotels, and industrial sectors. SSA III typically will not leverage its investments above a 65% loan to cost.
The agent has pitched the Skyrack Tower as a blank canvas Value-Add opportunity for redevelopment / adaptive re-use as it has been owned by a private family for the past 30 years who have invested limited capital. The Property has a short WALE (weighted average lease expiry) of 0.29 years.
Asset Summary
Skyrack Tower is a C-Grade office tower located in the CBD fringe office market, Surry Hills. Built in the 1960s, the property is a 9-story, 8,400 sqm building that includes 7,700 sqm of office accommodation, 700 sqm of street-level retail and 52 basement parking bays. To the best of the team’s knowledge, the building has not undergone renovations. The building is currently ~80% occupied and the NOI for 2023 is approximately $2.3mm with all tenant leases expiring within the next 12 months. The property is currently charging well below the market’s rent and is one of six investable assets with a NLA over 8,400 sqm and one of fifteen assets with floor plates over 875 sqm in Surry Hills.
You have been engaged by the SSA fund manager to review this opportunity and present your recommendation to the SSA investment committee. Your recommendation should include:
Do the Market research on the Property submarket. What is the assumptions about renovating that building into a mixer of hotel and club or co-working spaces or student accommodation? What is the assumptions about renovating that building into a mixer of Residential’s and student accommodation? Can it be generated the target project level (16%). Which assumptions will make more profit? Provide the recommendations with advantages and disadvantages due to current market and tech central initiatives.
Location Overview
Skyrack Tower is one of Sydney’s most connected addresses. Central Station, Sydney’s busiest station, connecting every train line except for one, is located just 250 metres West of the property. Further connectivity is provided by the various bus stations surrounding Central and the recent completion of the Sydney Light Rail. Central’s status as Sydney’s most connected station will be further enhanced from 2025, with direct access to the Sydney Metro to be completed.
Benefit from Tech Central
Tech Central is an NSW state government backed initiative to bring together three world class universities, a world leading hospital and over 100 research institutes and centres of excellence into one precinct.
Made up of six neighbourhoods; Surry Hills, Haymarket, Ultimo, Camperdown, South Everleigh, Darlington North Everleigh, it is envisaged to be Australia’s innovation engine. Across the six designated suburbs, the NSW government has committed to providing affordable spaces for researchers, innovators, start-ups and entrepreneurs to incubate, test and scale their ideas. Tech Central will provide up to 250,000 square metres of space for technology companies, including 50,000 square metres at affordable rates for startups and scaleups, in a connected location brimming with heritage, culture and activity. Home to News Corp, Canva, SafteyCulture, new start- ups, arts and media firms, consultancies and professional services, Surry Hills is a vibrant creative cluster and cultural hub. The growing range of creative, digital, advertising and design agencies are the lifeblood of Surry Hills with businesses seeking out the converted older buildings the area has to offer.
Skyrack Tower provides potential investors with a unique opportunity to access the forecasted growth in Surry Hills given the significant investment in infrastructure, transportation and local amenities such as restaurants, creative workspace, and tech start-ups.
In recent years, Australia’s national office markets have witnessed a noteworthy trend known as a ‘flight-to-quality.’ This phenomenon has seen tenants prioritizing modern amenities, optimal building services, and strategic locations over older, more economical alternatives. This transformative shift has been especially pronounced within Sydney CBD’s Premium Grade assets, where the majority of vacancies have congregated in outdated, less appealing structures. Concurrently, the obsolete Secondary Grade assets are being redeveloped into Prime Grade offices or repurposed for residential, student accommodation, or hotel ventures. Amidst this dynamic landscape, Silver Street Advantage (SSA), a prominent investment firm with a stronghold in the APAC region, seeks to leverage its expertise to explore value-add opportunities.
Founded in 1987, SSA has established itself as a leading player in the investment realm, boasting a substantial global Assets Under Management (AUM) of approximately $60 billion as of May 2023. Over its impressive journey, SSA has invested a remarkable $30 billion across 6,300 properties in the APAC region, catering to the diverse needs of nearly 200 institutional fund investors. The firm’s approach is defined by its vertical integration, enabling it to successfully navigate Core, Core-Plus, Value-Add, and Opportunistic investments over its 35-year history.
Currently, SSA’s latest fund, SSA III, is in the spotlight. Armed with a mission to achieve total returns targeting a robust 16% project-level (pre-tax) returns, SSA III is specifically inclined towards the Australian market. The fund sets its sights on Core-Plus and Value-Add assets in thriving Gateway cities, with a focus on the office, residential/student housing, hotels, and industrial sectors. Notably, SSA III adheres to a sensible investment strategy by keeping leverage within a prudent limit of 65% loan to cost.
The case at hand revolves around Skyrack Tower, a C-Grade office building situated on the periphery of Sydney’s central business district in Surry Hills. Constructed in the 1960s, the property comprises nine stories encompassing 8,400 square meters. This includes 7,700 square meters of office space, 700 square meters of street-level retail, and 52 basement parking bays. The property’s ownership history reveals limited capital investment over the past three decades, rendering it a prime candidate for a value-add redevelopment opportunity. Presently, the building stands at approximately 80% occupancy, with a short Weighted Average Lease Expiry (WALE) of 0.29 years. The net operating income (NOI) for 2023 is projected to be around $2.3 million, with all existing tenant leases set to expire within the next 12 months. It is worth noting that the property is currently undervalued in terms of rental rates, thereby harboring untapped potential.
In considering potential transformations for Skyrack Tower, two key options emerge: a combination of hotel and club or co-working spaces, and a blend of residential units and student accommodations. Each option carries its set of assumptions and potential outcomes.
Assumptions: Transforming the tower into a mixed-use space, encompassing a hotel, club, or co-working areas, entails a significant investment in renovations and modernization. Upgrades must align with the preferences of modern travelers or co-workers, ensuring the inclusion of upscale amenities and services.
Pros: This option capitalizes on the property’s strategic location near Central Station, offering seamless connectivity. It also aligns well with the Tech Central initiative, attracting tech-savvy professionals and entrepreneurs.
Cons: The competitive landscape in the hotel and co-working sectors demands continual innovation, and the success of the venture hinges on the property’s ability to stand out amidst a plethora of offerings. Additionally, market uncertainties could impact occupancy rates.
Assumptions: Repurposing Skyrack Tower to house residential units and student accommodations requires careful consideration of the demographic landscape and demand patterns. The proximity to educational institutions and the CBD’s vibrancy could be leveraged to attract both students and professionals.
Pros: The demand for student accommodations in Sydney remains high, driven by a growing international student population. The residential aspect could tap into Surry Hills’ emergence as an innovation hub.
Cons: This option necessitates a deep understanding of the housing market’s dynamics and regulations. Moreover, achieving the targeted 16% project-level returns might require a strategic approach to pricing and tenant selection.
In light of the current market dynamics and the Tech Central initiative, both options align well with evolving trends. Tech Central, a government-backed endeavor, bolsters Skyrack Tower’s potential as a nexus for innovators, start-ups, and researchers, amplifying its appeal to various tenant profiles.
Considering the property’s attributes, location advantages, and the evolving market landscape, a blend of residential units and student accommodations seems to be a promising direction. This option stands to tap into the robust demand for student housing, while also capitalizing on Surry Hills’ creative and tech-driven atmosphere. A prudent approach to pricing and a thorough understanding of the regulatory landscape will be crucial for success.
High Demand: The student housing sector continues to experience high demand, driven by both domestic and international students seeking convenient and modern accommodations.
Tech Central Alignment: The proximity to Tech Central aligns with the initiative’s goal of fostering innovation and entrepreneurship, making the property an attractive choice for tech-focused students and professionals.
Market Growth: The overall growth potential of the Surry Hills market, coupled with the building’s location near Central Station, enhances the appeal of this option.
Regulatory Challenges: The residential and student accommodation sectors come with regulatory complexities that require careful navigation to ensure compliance and avoid setbacks.
Investment Outlay: While the strategy has strong potential for returns, the initial investment required for renovating and repurposing the property can be substantial.
Market Fluctuations: External market dynamics can impact occupancy rates and rental prices, potentially affecting the projected 16% project-level returns.
In conclusion, the decision between the two options should be guided by a thorough market analysis, a deep understanding of tenant preferences, and a strategic approach to renovations and tenant management. The residential/student accommodation option, leveraging the property’s unique attributes and the evolving Tech Central initiative, seems poised to align well with SSA’s investment goals while tapping into the market’s demand for innovative living spaces. Success will depend on meticulous planning, execution, and a proactive approach to market fluctuations.
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