A few years ago the Eliza building, overlooking Hyde Park in Sydney’s central business district (CBD), was just another drab office block. Today it is an upmarket 17-storey apartment building with a swimming pool, lavish interiors and stunning views over Australia’s financial capital.
The block, incorporating 19 apartments, a A$15m ($13.6m) penthouse and a retail unit, is part of a growing trend in the city for redeveloping and converting tired commercial buildings into high-end residential properties.
“People want to live in the heart of the city while companies are looking to move out of their older, second-grade commercial buildings and into premium-grade offices,” says Daniel McNamara, development manager at Ceerose, a property developer.
In 1991 less than 5,000 people lived in the CBD, an area that enjoys views of Sydney Opera House and the harbour and no lengthy commute. Since then, Sydney has followed the trend in New York and London for inner-city living. The number of people living in the CBD is forecast to increase by almost a third to 29,000 in the next five years, up from its current level of 22,000, according to Deep End Services, a property consultancy.
Property owners and developers are chasing higher returns from a residential property sector, which is enjoying 15 per cent annual price rises amid a surge of Asian investment. The rapid increases are even prompting concern among some analysts about the emergence of a residential property bubble.
In contrast, the 9 per cent vacancy rate for commercial property in the CBD is rising due to a softening economy, which is depressing commercial prices, particularly for the growing stock of older, inefficient properties. A 300,000 sq metre office development at Barangaroo, situated on the fringe of the CBD, is also attracting companies away from older commercial blocks.
According to Savills estate agents, more than A$1bn of commercial property in Sydney has been bought over the past year by developers with plans to redevelop or convert the site for residential use. A further 130,000 sq metres of commercial property in the CBD is earmarked for conversion over the next three years. “The conversion of an office block into residential, dependent on location, will more often than not provide a greater return,” says Stuart Cox, of Savills. “Developers are typically looking to make a 20 per cent return on a conversion.”
Ceerose’s redevelopment of Eliza, due to be completed shortly, is an example of an office building being demolished and rebuilt on the same site. In this case the developer was allowed to double the height of the building while remaining within planning rules, providing a significant uplift in potential returns. However, a shortage of available sites, strict planning regulations in certain areas and commercial considerations are factors driving a trend towards adaptive reuse or conversion, whereby at least part of the existing structure is retained. “Surging demand for residential property, investor interest, low interest rates and a lot of owners of depressed, low-grade commercial buildings are making conversions flavour of the month in Sydney,” says Tim Turpin of Thinc consultancy.
Adapting commercial buildings for reuse as residential properties can cost more than knocking down and redeveloping a site. However, there can be benefits in retaining an existing structure when it comes to complying with strict planning rules. “Planners often incentivise adaptive reuse by allowing a greater saleable area and floorspace ratio to developers which agree to retain heritage features,” says Turpin.
Am ambitious conversion project, which recently won approval, is Fife Capital Group’s A$300m, 32-storey residential tower and retail development on George Street in the heart of the CBD. Fife Capital is demolishing two buildings and retaining the structure of another two buildings with heritage value for the project, which includes 199 apartments with views over Darling Harbour.
“The benefits of adapting buildings for reuse are planners often allow you to make them bigger than would normally be allowed. Depending on the structure, conversions can provide a faster turnround,” says Allan Fife, Fife Capital’s chief executive.
Until recently Sydney had been relatively slow to pursue adaptive reuse of commercial buildings. The first major project was delivered in the early 1990s by developer Robert Magid. His scheme added an extra nine floors and balconies on to the former Esso building. “Often it takes a fresh pair of eyes to see the opportunity,” says Michael Gaston, an architect with Kann Finch, who worked on the conversion. “One of the benefits of working with older buildings is that they are often over-engineered. In other words, they can support additional weight and extra storeys.”
Fresh eyes, in particular those of Chinese and Asian investors, are part of the recent drive for conversions. Almost one in five buyers of new homes in Sydney is either an ethnic Chinese resident in Australia or a Chinese-based investor, according to research by Credit Suisse.
Greenland Group, a state-owned Chinese developer, recently bought the Sydney water board site in the CBD for A$100m from Canada’s Brookfield Asset Management. It plans to build Sydney’s tallest residential building: a 66-storey tower with more than 470 apartments. Studios will cost from $500,000, three-bedroom properties from $2m, and penthouses between $5m and $10m. It plans to convert the heritage-listed former water board building into a hotel.
Jamie Smyth is the FT’s Australia correspondent
● Non-residents need approval to buy properties in Australia. This is usually granted for newbuilds and flats
● The level of stamp duty depends on the value of a property. For a A$1m house, it is about 4 per cent
● There were 52 murders in the greater Sydney area in the 12 months to September 2013
What can you buy for …
A$1m A one-bedroom apartment in Sydney’s CBD with a parking space
A$5m A three-bedroom apartment with views of Sydney Harbour
A$10m A large waterfront house or a penthouse in a tower in the CBD