Slings and Arrows: Can Council recoup $34 million at 88 O’Connell?

The City of Adelaide paid Con Makris a hefty $34 million for the then vacant 88 O’Connell Street site, so how will they recoup the cost? Ash Whitefly urges for patience for everyone involved. After all, it worked for Con.

Crack team ready

A team of crack real estate folks is anticipating its biggest North Adelaide expression-of-interest, pre-sale property campaign to be held in years. But there are no floor plan drawings and even the master plan was still under wraps a few weeks ago. The site is grass and gravel, but there’s a certain urgency to develop it into many levels of apartments, shops and offices.

That’s because the new land owner, the city council, last year grabbed $24m, bundled it with a Labor government Christmas stocking taxpayer gift of another $10m, and gave the lot to Con Makris to get the titles to Adelaide’s most infamous site, the former Le Cornu land at 88 O’Connell Street.

That $34m amount was interesting. It’s one of many reasons why there’s an urgency to act. A council report noted: “Two independent [2017] valuations were obtained by council, one valued the site at $20 million and the other at a range of between $24.1 million and $27.1 million. The State Valuer-General’s current valuation for rating purposes [was] $15.7 million.”

A council’s anxiety about spending a big pile of money in an apparently over-priced transaction is now competing against the clock to prove it wasn’t misjudged. For the sales staff, their urgent task is to collect ‘maybe intentions’ that might later convert to sales. But in a town where similar campaigns are struggling (gross oversupply; credit tightening) the January 2019 EOI kick-off time to capture sufficient interest, anticipating a later target of five sales per month, is ambitious.

An unnatural fit

When public corporations get into the development business, it’s a little like developers getting into the local government business. Not a natural fit. Take staff turnover. There’s an election in a few months. Some of the councillors who voted yes to the purchase last year have already flagged their retirements. Easy for them.

The Lord Mayor, Martin Haese, the chief salesman for the Le Cornu deal, wants a second term. Even if he wins another four years, however, the new development may still be incomplete in 2022 when his time is up.

There’s also no guarantee that the five key staff, who pondered the ‘five extreme risks’ in secret sessions leading up to the purchase, might stay. The purchase does not commit them to work out the 2019–25 period during which the building and sales saga will play out. If the council does what everyone assumes it will do – a joint venture – at least it will allow some control over the outcome. But the builder could be working with a completely different management team in a few short years.

Pulling back the reins

A July 2018 implementation plan noted outcomes of several ‘stakeholder engagement plans’ and ‘community sessions’ at which staff and councillors heard views about what should be built. The trend is for a lower-scale concept compared to the Disneyland scale Con Makris planned. But this increases the financial pressure on council.

Were it just another greedy developer, there’d be an expectation for a big, high-density development, delivering an industry standard 20 per cent return. To get that, the density of development required must justify the purchase price, but that’s not necessarily what’s going to occur. Somehow the council has to balance the community’s conservative suggestions against a very significant development potential.

The outcome probably won’t be what experts confidentially advised council last year when they recommended building six towers, from three to 16 storeys, containing 421, two-bed, two-bathroom apartments.

The experts said: “The project feasibility has been recreated to ascertain the required planning and yield to achieve a residual land value of $33m (ex GST).”

Close enough; council paid $34m.

All this was based on an assumption of that 20 per cent return on investment, but the council’s public consultation results suggest that that percentage won’t fly. 16 storeys? Try eight.

Already some other early financial plans made last year appear to be stalling. One anticipated immediate use of some of the land for a 100-space open car park, bringing in a quick $300,000 annual revenue to help defray the annual interest bill. Great idea, especially in a part of the city desperate for more parking spaces. The space awaits, fully prepared, but if council delivers, as soon as the builders arrive the car park will have to be closed again, for years. Hell may have no fury like city commuters and local traders given car park space relief, and then having it snatched away again. Mix business plans with local politics? Get oil and water.

Bean counters busy

The Le Cornu development isn’t the only one on council’s plate. There’s a similar massive joint venture plan for the market arcade on Grote Street in the city. It’s all go for the council bean counters. But while retaining the corporate memory of the property management staff, Lord Mayor and councillors may be at risk over looming years, there’s at least one certainty. The real estate folks will be working nights and Sundays as the Stage 1 expressions-of-interest period begins.

And it’s a curious arrangement for the potential buyers. First, they can thank SA taxpayers for throwing in $10m. But second, they’re expected to be very, very patient before they get the door keys.

They could take a leaf out of Con Makris’s book. He paid about $6m in 2001 and walked away, without laying a brick, 16 years later, with $34m. That’s patience for you.

Ash Whitefly is Executive Director of the Adelaide Whitefly Institute of Diplomatic Studies.

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