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Obsolete Secondary Grade assets continue to be withdrawn from the market for redevelopment into Prime Grade offices or for alternative uses such as residential, student accommodation or hotels.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. Provide the advantages and disadvantages due to current market and tech central initiatives.
Your recommendation should be supported by detailed property and market forecasts and analysis backing the decision as well as an eventual exit strategy and investment time horizon. You may wish to address whether you intend to sell the asset (including to whom you might sell the asset) or pursue a strategy to hold the asset longer term to build additional equity value in the asset. Be sure to also discuss the debt financing required for any business plan that is recommended and provide an evaluation of the potential risks involved with your business plan and a means to mitigate them.
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.
The real estate landscape in Australia, particularly in Sydney, has experienced a transformative shift in recent years. A flight-to-quality trend has emerged, driven by tenants’ prioritization of modern amenities, location, and building services. As a result, Premium Grade assets in central locations have garnered significant attention, leaving older assets struggling with higher vacancy rates. Against this backdrop, Silver Street Advantage (SSA), a prominent APAC-focused investment firm, is presented with a compelling opportunity to leverage the Skyrack Tower – a C-Grade office building located in the vibrant Surry Hills precinct of Sydney. This essay will conduct a comprehensive analysis of the property submarket, discuss the advantages and disadvantages derived from the current market dynamics and technology-centric initiatives, propose an informed investment strategy, evaluate potential risks, and outline an exit strategy.
Skyrack Tower, situated in Surry Hills, boasts a strategic location, benefitting from proximity to Central Station and efficient connectivity through various transportation modes. Central Station, a key transport hub, is set to further enhance its significance with direct access to the Sydney Metro from 2025. Additionally, the Tech Central initiative is a promising driver of growth. By bringing together universities, research institutes, and tech companies, it’s set to position Surry Hills as an innovation powerhouse, fostering a rich ecosystem for start-ups and technology firms. The neighborhood’s historical charm and cultural vibrancy make it an attractive destination for creative, digital, and design-focused enterprises.
Strategic Location: Skyrack Tower’s proximity to Central Station and its connection to the upcoming Sydney Metro make it a convenient destination for commuters and businesses alike.
Tech Central: The Tech Central initiative aligns well with the property’s potential for adaptive re-use. The growing cluster of tech companies and start-ups could attract demand for modern office spaces.
Disadvantages
Building Condition: Skyrack Tower’s status as a C-Grade office building with limited capital investment presents a challenge for attracting tenants seeking modern facilities.
Short WALE: The short Weighted Average Lease Expiry (WALE) of 0.29 years raises concerns about tenant stability and potential vacancies.
Redevelopment Risk: The property’s age and condition require substantial investment for redevelopment, which poses financial and timeline risks.
Investment Strategy and Exit Plan
Given the context, SSA III should pursue a value-add investment strategy that involves a comprehensive redevelopment of Skyrack Tower. The strategy should focus on:
Renovation: Transforming the building into a modern, premium-grade office space with upgraded amenities, energy-efficient systems, and state-of-the-art technology.
Tenant Attraction: Offering competitive rental rates aligned with the market, while leveraging the nearby Tech Central initiative to target tech companies and start-ups.
Long-Term Equity Building: Holding the asset for the medium term (5-7 years) to capitalize on the anticipated growth of Surry Hills driven by Tech Central, and achieving targeted pre-tax returns of 16% project-level.
Mitigating Risks and Debt Financing
To mitigate potential risks, careful attention must be given to project management, tenant diversification, and market dynamics. A contingency fund should be allocated to address unforeseen challenges during the redevelopment process. Financing the project through a mix of equity capital from SSA III and judicious debt financing (limited to 65% loan to cost) would balance risk exposure while optimizing returns.
Conclusion
In conclusion, Skyrack Tower represents an exceptional value-add opportunity within the Surry Hills submarket. Leveraging the strategic location, Tech Central initiative, and market trends, SSA III can successfully transform the property into a premium-grade office space, catering to the evolving tenant preferences. By embracing a comprehensive redevelopment strategy and prudent risk management, SSA III can navigate the challenges, maximize returns, and contribute to the thriving innovation ecosystem of Surry Hills. Holding the asset for the medium term aligns with the anticipated growth trajectory and aligns with SSA’s value-add investment philosophy.
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