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Urban Enterprise Urban Planning / Land Economics / Tourism Planning / Industry Software

www.urbanenterprise.com.au

LAND TITLES OFFICE ECONOMIC ASSESSMENT

JANUARY 2018 LOVELL CHEN

AUTHORS

Matt Ainsaar

Kurt Ainsaar

Urban Enterprise

Urban Planning, Land Economics, Tourism Planning & Industry Software

389 St Georges Rd, Fitzroy North, VIC 3068

(03) 9482 3888


© Copyright, Urban Enterprise Pty Ltd, 2017

This work is copyright. Apart from any uses permitted under Copyright Act 1963, no part may be reproduced without written permission of Urban Enterprise Pty Ltd.

VERSION: 2.0

DISCLAIMER

Neither Urban Enterprise Pty. Ltd. nor any member or employee of Urban Enterprise Pty. Ltd. takes responsibility in any way whatsoever to any person or organisation (other than that for which this report has been prepared) in respect of the information set out in this report, including any errors or omissions therein. In the course of our preparation of this report, projections have been prepared on the basis of assumptions and methodology which have been described in the report. It is possible that some of the assumptions underlying the projections may change. Nevertheless, the professional judgement of the members and employees of Urban Enterprise Pty. Ltd. have been applied in making these assumptions, such that they constitute an understandable basis for estimates and projections. Beyond this, to the extent that the assumptions do not materialise, the estimates and projections of achievable results may vary.

CONTENTS CONTENTS 3

1. INTRODUCTION 1

1.1. ENGAGEMENT 1

1.2. BACKGROUND 1

2. SECTION 101(2)(b) OF THE VICTORIAN HERITAGE ACT 6

2.1. OVERVIEW 6

2.2. REASONABLE USE 7

2.3. ECONOMIC USE 9

2.4. CONCLUSIONS REGARDING REASONABLE AND ECONOMIC USE 15

APPENDICES 16

APPENDIX A LTO PROPOSAL – CONCEPT PLANS 16

APPENDIX B DCF ANALYSIS –COMMERCIAL OFFICE BUILDING 17

APPENDIX C DCF ANALYSIS – 2014 PROPOSAL – COMMERCIAL OFFICE (REFURBISHMENT OF LTO & STRONG ROOM ONLY) 18

APPENDIX D DCF ANALYSIS – PROPOSED VERTICAL UNIVERSITY CAMPUS 19

FIGURES

FIGURE 1 SUBJECT SITE – FORMER LTO 2

TABLES

TABLE 1 AREA SCHEDULE – VU LTO VERTICAL CAMPUS PROPOSAL 5

ACRONYMS

CBD – Central Business District

DDA – Disability Discrimination Act

EFTSL – Equivalent Full Time Study Load

EOT – End of Trip

GFA – Gross Floor Area

IRR – Internal Rate of Return

LTO – Land Titles Office

NLA – Net Lettable Area

VU – Victoria University

GLOSSARY OF TERMS

Internal Rate of Return (IRR) - Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In other words, the IRR takes into account the time value of funds invested and funds received.

U R B A N E N T E R P R I S E 1 J A N - 1 8

1. INTRODUCTION

1.1. ENGAGEMENT

Lovell Chen, on behalf of Victoria University (VU), engaged Urban Enterprise to prepare an economic assessment to inform a heritage permit application to be submitted to the Heritage Council of Victoria for the refurbishment and redevelopment of the former Land Titles Office (LTO), located at 247 – 283 Queen Street, Melbourne.

The purpose of this report is to assess ‘the extent to which the application, if refused, would affect the reasonable or economic use of the registered place or registered object’, as stated in Section 101(2)(b) of the Victorian Heritage Act (2017).

1.2. BACKGROUND

This section provides an overview of the proposal for the subject site including an identification and acknowledgement of the buildings heritage significance, an overview of the site’s principal use and activity, and an assessment of the subject site.

This section will also provide background information relating to Victoria University’s vision for the site, and their intention to consolidate a number of smaller CBD sites into one vertical state-of-the-art campus. This will draw on the University’s Whole-of-Institution Campus Master Plan, which outlines the University’s strategic vision for the former LTO site, and the plan to reinstate and maintain the heritage assets, allowing a degree of public access once operational.

1.2.1. HERITAGE SIGNIFICANCE

The Land Titles Office is of architectural, technical and historical significance to the State of Victoria. The LTO is a Heritage Inventory Site, recognised by the Heritage Council of Victoria (inventory number H7822-1152).

Statement of Significance

“The Titles Office, 283 Queen Street, was erected in three stages. The first stage, begun in 1874 and finished in 1877, comprised an L-shaped two storey office building built around the strong room. The strong room was extended to its present size in 1884-85. Between 1887 and 1889 the perimeter office building was completed to give the current external appearance occupying the full length of a block to Queen Street. The designs for the perimeter structure were undertaken by the Public Works Department and are attributed to JJ Clark. The main facade is symmetrical about a central three storey block, and sits on a bluestone plinth. The two storey wings are recessed and terminate in pavilions that project to the same line as the central block. The facade employs the Doric style in a quite severe and plain manner. The rhythm of the paired round arch windows on the ground floor is mimicked by paired columns on the first storey and by pairs of urns on the balustraded parapet. Construction is of rendered brick. The Old Law Office (formerly the Strong Room) has an interior incorporating arched, fire proof floor construction, known as the Dennett system. Fire precautions were essential to protect the irreplaceable Certificate of Titles and other land-related documents that the building houses.

The Titles Office is architecturally significant for exemplifying the dictum of the Public Works Department, led by William Wardell until 1878, that architectural style needed to be as simple as possible so long as proper architectural effect was preserved. The restraint is clearly evidenced by the severity of the Doric order employed by architect JJ Clark, and decoratively the building is in contrast to his masterpiece, the Treasury Building of 1858. However, the composition of the Titles Office still draws on the Italianate style and on Renaissance palazzos for inspiration to produce a building with serene and sedate grandeur, and one of the most extensive public building facades in Melbourne. The Titles Office is technically significant for the range of fire precaution measures employed. The strong room with its superb interior is an exceptional example of early high security and fire-proof construction in Victoria. The floor, built on the Dennett system, is a development of fire resistant construction

2 L A N D T I T L E S O F F I C E E C O N O M I C A S S E S S M E N T

L O V E L L C H E N

employing iron bressumers connected by brick arching and covered with a layer of cement. The Titles Office is historically significant as a building signifying the change of law for the recording of land ownership. The 1862 Real Property Act introduced the Torrens System to Victoria and dealings under the new Act were dealt with exclusively from the new building.”

1.2.2. VICTORIA UNIVERSITY’S VISION FOR THE LTO CAMPUS

Victoria University operate a suite of existing campus buildings within the heart of Melbourne’s legal precinct. These buildings are centrally located, and accessible by public transport.

The disparate nature of the University’s landholdings and associated tenure arrangements presents a significant opportunity for consolidation. The overarching objectives of consolidating CBD campus sites is to increase student populations, consolidate programmes and maximise partnership opportunities.

As a campus location, the LTO site offers unparalleled collaboration opportunities for partnerships, primarily with business and legal entities but also with other education providers. Victoria University’s presence in the CBD remains a primary focus for its vision for the University.

It is important to note that Victoria University have an existing permit for a mixed-use building adjacent to the LTO at 364 - 378 Lt Lonsdale Street. However, it is VU’s preference to not pursue this site due to the inefficient configuration and smaller floorplate. If the redevelopment of 364 – 378 Lt Lonsdale Street was to be pursued, VU would need to retain some of their existing campus leases in the CBD, which would also detract from the objective of creating a single, high-profile and attractive campus.

1.2.3. SUBJECT SITE

The subject site of the permit application is the Land Titles Office (LTO), located at 247 – 283 Queen Street, Melbourne. The former LTO building encompasses the majority of the site, and includes frontage along Queen Street, Lonsdale Street and Little Lonsdale Street, as shown in Figure 1.

FIGURE 1 SUBJECT SITE – FORMER LTO

Source Urban Enterprise 2017


1.2.4. PREVIOUS PROPOSAL (2014)

In 2014, VU were granted a permit to completely refurbish the LTO. The permit proposed to restore and refurbish the existing three levels of the LTO (excluding the Strong Room and basement) to accommodate the Chancellor and Vice-Chancellor suite and associated rooms, teaching and learning spaces, student study and social spaces, Mitchell and Victoria Institute offices and Industry Training rooms.

The Gross Floor Area (GFA) of the existing LTO building is 3,744 square metres (with net lettable area of 2,729 square metres) over 3 levels, plus the basement level and Strong Room, which were both excluded from the proposal.

The refurbishment proposed the following:

• Restore and repaint the grand façade on Lonsdale, Queen and Lt Lonsdale Streets; • Retain the original iron fencing along Queen Street; • Reopen the existing disused entrances on Queen Street; • Create a new primary entry of steel and glass; • Remove and replace the less historically significant additions and alterations to the rear of the LTO, as well

as the non DDA compliant existing stairs, lifts and amenities with a new façade, stairs and lift of steel glass and metal cladding.

VU decided not to pursue the 2014 scheme due to the significant cuts to TAFE funding by the State Government at that time. Since then, VU have updated their strategic vision for their campus presence in the CBD, with a plan to consolidate existing CBD campuses on the LTO site.

1.2.5. CURRENT PROPOSAL

Victoria University’s current proposal is to restore and refurbish the former Land Titles Office and Strong Room, whilst developing a state-of-the-art vertical University campus above the Strong Room, which enables Victoria University to consolidate all existing campuses within the CBD to one site.

The redevelopment proposal consists of a 16-level building with an approximate Gross Floor Area (GFA) of 29,717 square metres (excluding the existing LTO building, but including the Strong Room). The Net Lettable Area of the new building (plus Strong Room) would be 23,263 square metres.

The proposed programming for the vertical campus includes:

• 27% Formal teaching and learning; • 18% circulation; • 14% Informal teaching and learning; • 10% Osteo and Dermal Clinic; • 8% College of Business; • 5% Other; • 5% HDR/Entrepreneurial Hub; • 5% VU College; • 3% Learning Commons • 3% Social space and student services; and • 2% College of Health and Biomedicine.

Victoria University currently operate three separate campus sites in Melbourne’s CBD. Each CBD campus is highly accessible, but offers varying levels of functionality, due to building configuration and tenure. The proposed redevelopment of the subject site would allow Victoria University to consolidate all existing CBD sites into the LTO site, as well as accommodate future growth expectations to 2030.


L O V E L L C H E N

VERTICAL CAMPUS

John Wardle Architects have prepared concept plans for the redevelopment proposal.

The restoration and refurbishment of the LTO and Strong Room are based on four key strategies, which are summarised below.

Strategy 1: New Entry

• Creation of a new main entry and new VU positioning in Melbourne’s CBD. • This entry will also include DDA requirements as the main entry to Victoria University.

Strategy 2: Maintaining Existing Entries on Queen Street

• Retain existing entries off Queen Street. • Create a new entry at the north-west corner of the site.

Strategy 3: Establishing a Sense of Terra Firma

• Creation of public realm between the LTO building and the Strong Room. • Non-significant 1920’s alterations proposed for removal to improve the public ground plane. • Extent of canopy to Terra Firma between the existing heritage fabric. • Align the façade of the building over the strong room with the original heritage wall locations.

Strategy 4: Sensitive Integration while Revealing Strong Room

• Integration of building lifts with a high degree of sensitivity into the heritage fabric to the south end of the Strong Room.

• North ‘Significant’ Strong Room fabric is retained, its existing character amplified, its sense of gravitas celebrated.

Concept plans are provided in Appendix A.

PROCUREMENT STRATEGY

Based on VU’s procurement strategy for the redevelopment proposal, Urban Enterprise understand that VU are seeking an investor to deliver the construction component of the redevelopment of the LTO site, with VU having already undertaken the detailed planning and design phases of the redevelopment.

VU propose to sell and lease existing landholdings in the CBD in order to unlock surplus funds.

Once the redevelopment of the LTO site is complete, VU will become the long-term tenant of the building for a 20-year period, with a further four options to extend for five year periods.


SCHEDULE OF ACCOMMODATION

VU’s proposal will provide an integrated vertical campus, with the aim of significantly enhancing the student experience.

The tower will integrate formal and informal teaching and learning spaces, as well as providing co-working and shared spaces that promote communication and collaboration between students.

Table 1 provides the area schedule for the proposal including the proposed programming, NLA/GFA and floorspace efficiency of each level.

TABLE 1 AREA SCHEDULE – VU LTO VERTICAL CAMPUS PROPOSAL

LEVEL PROGRAM

TOWER BUILDING TOTAL NLA (sqm)

LTO BUILDING TOTAL NLA (sqm)

TOTAL GFA (sqm)

EFFICIENCY (%)

Level B2 (Plant) 0 255.8

Level B1 (Plant) 0 588

Level 01 Lobby / Retail / Security 534.5 1077.9 3,241.00 50%

Level 02 Library/Learning Commons / Student Services / EOT 883 1437.2 2,775.80 84%

Level 03 Student Social Space / EOT 711.2 213.8 1,268.60 73%

Level 03 (Mezz) EOT 242.2 423.4 57%

Level 04 Informal Learning / Plant 614.5 1,358.30 45%

Level 04 (Mezz) Informal Learning / Plant 428.4 1,089.60 39%

Level 05 Formal Teaching & Learning / Informal Learning 1,296.90 1,650.50 79%

Level 06 VU College / Informal Learning / Shared Workspace 1,408.20 1,761.80 80%

Level 07 Retail Tenancy / Formal Teaching & learning/ Informal Learning / Triple Height Informal Learning

1,459.50 1,813.10 80%

Level 08 Formal Osteo Teaching & learning / Informal Learning 1,441.80 1,795.40 80%

Level 09 Osteo & Dermal Clinic / Formal Learning 1,441.80 1,795.40 80%

Level 10 Osteo & Dermal Clinic / Formal Learning 1,441.80 1,795.40 80%

Level 11 Formal Learning / Health & Biomedicine / Informal Learning 1,441.90 1,795.50 80%

Level 12 Formal Learning / Informal Learning 1,441.90 1,795.50 80%

Level 13 Formal Learning / Informal Learning 1,441.90 1,795.50 80%

Level 14 College of Business / Formal Learning / Informal Learning 1,441.80 1,795.40 80%

Level 15 College of Business / Formal Learning / Informal Learning 1,441.80 1,795.40 80%

Level 16 Formal Learning 1,421.00 1,795.40 79%

Level Plant Plant 0 1,076.00

TOTAL 20,534.10* 2,728.90 33,460.80**

Source: Area Schedule – VU LTO Vertical Campus, John Wardle Architects 2017 * Excludes LTO ** Includes LTO


L O V E L L C H E N

2. SECTION 101(2)(b) OF THE VICTORIAN HERITAGE ACT

2.1. OVERVIEW

The Heritage Act 2017 commenced operation on 1 November 2017 and introduced a streamlined processes and enforcement tools to ensure Victoria’s significant heritage places and objects are appropriately protected into the future.

Section 73(1)(b) of the previous Heritage Act (1995) has been replaced by Section 101(2)(b) of the Heritage Act 2017, however the wording remains the same. Section 101(2)(b) states that “In determining whether to approve an application for a permit, the Executive Director must consider the following—

…(b) the extent to which the application, if refused, would affect the reasonable or economic use of the registered place or registered object”

Heritage Victoria has prepared Guidelines relating to the consideration of ‘reasonable’ or ‘economic’ use. The Guidelines include the following:

1. When considering section 101(2)(b) the Executive Director needs to first determine what is reasonable use of the heritage place or registered object.

2. A reasonable use is to be assessed objectively having considered the particular circumstances of the proposal before the Executive Director. In forming a view the Executive Director might consider (1) the historic and recent uses of the place or object (2) other potential uses, of the place or object, (3) the context within which the place or object is located, and (4) the long-term financial viability of the place or object if the current use is maintained.

Given that the wording of Section 101(2)(b) remains unchanged, Urban Enterprise has assumed that the Guidelines identified for ‘reasonable’ or ‘economic use’ remain valid.


2.2. REASONABLE USE

The following section responds to the particular circumstances of the proposal in considering the LTO’s ‘reasonable use’.

HISTORIC AND RECENT USES OF THE PLACE OR OBJECT

The LTO at 247 – 283 Queen Street was completed in 1877 as a purpose-built building for the use of the Land Titles Office, which incorporated secure storage facilities for the paper titles for land in Victoria. This use continued until 2001. Hence, after 125 years at the Queen Street site, the Land Titles Office relocated to a more contemporary building.

Public access to the LTO building was limited to an area where title dealings could be requested and actioned.

The principal activities undertaken at the LTO could be classed as clerical or administrative, together with the secure storage of paper titles.

The LTO building was purpose-built for a use which relied on methods of storing and accessing land titles that are no longer relevant and have been superseded by new technologies and processes. The LTO has vacated the site. Hence, the continued use of the building as a Land Titles Office cannot be considered a ‘reasonable’ use.

It is also evident that the LTO’s closure and the sale of the site by the State Government in 2001 meant that the use of the building for another Government-related use cannot be considered in the assessment of “reasonable use”. The sale of the site meant that the State Government had declared the site surplus to its requirements.

OTHER POTENTIAL USES, OF THE PLACE OR OBJECT

Therefore, other potential uses for the LTO that could be considered “reasonable use” would be uses that are similar to those formerly undertaken at the site.

As stated previously, the activities conducted on the site would be classed as primarily clerical and administrative, together with the storage of titles.

It is considered that the closest use to these former activities on the site would be “office”.

THE CONTEXT WITHIN WHICH THE PLACE OR OBJECT SITS

The subject site sits within Melbourne’s legal precinct in the CBD, which is in close proximity to the following:

• Commercial office buildings – Professional and financial services, including legal firms;• Commercial office buildings – Occupied by Barristers Chambers;• Courts – Supreme Court, County Court, Magistrates Court and the Children’s Magistrates Court;• University campuses – Victoria University, RMITs multiple campus presence on Swanston Street, LaTrobe

Street and Elizabeth Street, as well as the LaTrobe University campuses located on Franklin Street.

The location of the LTO within Melbourne’s legal precinct and at the edge of the education precinct, provides some indication of the “reasonable use” of the site.

The proximity of the LTO to commercial buildings in the legal precinct of the CBD provides further support for “office” being a “reasonable use”.

The proximity of the LTO to the education precinct of the CBD provides support for “education” being a reasonable use”. Whilst an education use comprises learning and teaching spaces, it also incorporates office and administrative functions.

Furthermore, the proposed programming for VU’s vertical campus at the LTO site includes Business and Entrepreneurship, which provides synergies with the nearby business and legal precincts.

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THE LONG-TERM FINANCIAL VIABILITY OF THE PLACE OR OBJECT IF THE CURRENT USE IS MAINTAINED

From 2004 to 2014, Victoria University utilised the building for administration and storage purposes. However, due to the continual degradation and ‘wear and tear’ of assets and subsequent maintenance requirements, VU decided to vacate the building in 2014.

The building has now been vacant for three years.

The cost of refurbishing the building and making it fit for occupation is estimated at $45.1 million (in 2017 dollars). This includes the LTO and Strong Room.

Clearly, an alternative use must be identified as the “reasonable use” of the building in order to ensure the preservation of the heritage asset.

The assessment indicates that “office” and “education” uses should be considered as the “reasonable use” of the LTO building.


2.3. ECONOMIC USE

The previous assessment identified the “reasonable use” of the LTO building as “office” and/or “education”.

Office use reflects the type of activity that previously occurred in the LTO building.

The current proposal by VU for a mix of office/administration spaces, learning/teaching spaces, research spaces and student amenities is considered to be similar to, or aligned with, the activities previously undertaken in the LTO building.

The assessment of “economic use” is therefore based on both an office use and an education use. The economic use of an office is based on two development scenarios. The first development scenario is based on the redevelopment proposal prepared by VU for the LTO, but replacing the education use with office use. In this circumstance, it is assumed that the site would be sold to a developer/investor, who in turn, would seek to achieve a commercial return from the development.

The second development scenario is based on the previous scheme (approved in 2014), which was to restore and refurbish the existing three levels of the LTO and Strong Room, with the purpose of a boutique commercial office use.

The economic assessment of an education use is based on the development proposal prepared by VU for the LTO, and is based on the procurement strategy, whereby VU will seek an investor to deliver the construction component of the redevelopment of the LTO site, with VU having already undertaken the detailed planning and design phases of the redevelopment.

The differences between the economic assessments largely relate to the financial return that would be expected from the development and the likely funding arrangements that would be utilised to finance the development.

2.3.1. FINANCIAL ANALYSIS OF REDEVELOPMENT PROPOSAL: COMMERCIAL OFFICE DEVELOPMENT

OVERVIEW

To objectively assess and test the site’s reasonable and economic use as an office, Urban Enterprise has undertaken a discounted cash flow analysis to determine the expected financial return for the redevelopment of the site for an A-grade commercial office building.

It is assumed that a development of the site for commercial office space would be undertaken by a developer/investor who would seek a commercial return on the investment.

Typically, a benchmark financial return for a project of this type would be an Internal Rate of Return (IRR) of between 15% and 20%. This is the return that a major bank lender would require to be achieved in order to lend funds for the development.

FINANCIAL MODEL & ASSUMPTIONS ADOPTED

The discounted cash flow analysis for a commercial office at 247 – 283 Queen Street adopts the following set of assumptions:

• The discounted cash flow analysis is based on the existing redevelopment proposal of LTO site, but developedas an A-grade commercial office building in lieu of education space.

• The building’s Gross Floor Area is 29,717 sqm and Net Lettable Area is 21,544 sqm (excludes the existingLTO building).

• The project is developed, leased and held for 20 years prior to sale.• Construction period is 2 years.• The development is 100% funded by debt (the assumed interest rate is 5% p.a.).• Construction costs are based on Quantity Surveyor estimates.


• Estimated net effective rent is $500 per sqm of NLA. The building is assumed to be 100% occupied, commencing Year 3.1

• A capitalisation rate of 7%2 is assumed to determine the value of the asset at the end of year 20.• The cost of site acquisition is the purchase price paid by VU in 2001 ($3.15 million).

DEVELOPMENT COSTS

Construction Costs

Construction costs for the tower, which will be constructed above the Strong Room were provided by VU, based on Quantity Surveyor estimates.

Total construction costs for the new tower and restoration of the heritage assets, include the following elements:

• Plantroom – North West;• Transfer Structure;• Tower Level 04 – 18;• Fixture, fittings and equipment;• External works;• Refurbish and fit out of Strong Room; and• Other costs (consultant fees, authority fees, AV/IT, decanting, relocation, client costs).

The total construction cost for the redevelopment is $296.4m.

The total construction cost includes $45.1m to restore and refurbish the LTO/Strong Room (comprising $31.0m for the LTO and $14.1m for the Strong Room), and $251.3m to construct the vertical campus.

Urban Enterprise has assumed a construction period of two years.

Interest

It is assumed that the commercial office development would be 100% funded by debt. The assumed interest rate for the life of the development is 5% p.a.

INCOME

Rental Income It is assumed that the Net Lettable Area will be 100% occupied over the life of the development, commencing in year 3. The average net effective rent in year 3 is assumed to be $500 per sqm, and is escalated at 3.75% per annum, in line with typical commercial leases.

Asset Capitalisation Urban Enterprise assumes the sale of commercial floorspace would occur at the end of the development period, i.e. year 20.

The capitalisation rate adopted for the purpose of estimating the capital value at the end of year 20 is 7%, in line with current transactions occurring in the marketplace.

1 Market Commentary, Melbourne CBD Office, Jones Lang Lasalle 2017 2 Briefing Notes, Melbourne CBD, Savills 2017


KEY FINDINGS

The discounted cash flow analysis for an A-grade commercial office at the subject site resulted in the following outcomes:

• Total development cost is $463.5m:• $31.0m to restore and refurbish the LTO;• $14.1m to restore and refurbish the Strong Room;• $251.3m to construct the new vertical campus; and• $167.1m (site acquisition, interest).

• Total income is $628.4m• Net income is $164.9m• IRR of 2%.

The discounted cash flow is included in Appendix B.

The IRR of 2% is significantly less than the 15%-20% that a bank lender would typically require. Hence, the redevelopment of the subject site for an A-grade commercial office would not be financially viable.

The key reasons why the IRR is so low are as follows:

• A developer/investor will seek a commercial rate of return in order to invest in the development.• The cost of heritage restoration works for the LTO and Strong Room is substantial at $45.1m, which

represents 15% of the total construction cost. Of this amount, $14.1m relates to restoration and conservation works for the Strong Room for which there will be little economic return.

• The commercial office building is assumed to be 100% funded by debt, resulting in significant annual interest expenses over the life of the development.

2.3.2. FINANCIAL ANALYSIS OF 2014 PROPOSAL: BOUTIQUE COMMERCIAL OFFICE (REFURBISHMENT OF LTO & STRONG ROOM ONLY)

OVERVIEW

To objectively assess and test the LTO and Strong Room’s reasonable and economic use as a boutique office, Urban Enterprise has undertaken a discounted cash flow analysis to determine the expected financial return for the refurbishment of the LTO and Strong Room for a commercial office use.

It is assumed that a refurbishment of the site for commercial office space would be undertaken by a developer/investor who would seek a commercial return on the investment.

Typically, a benchmark financial return for a project of this type would be an Internal Rate of Return (IRR) of between 15% and 20%. This is the return that a major bank lender would require to be achieved in order to lend funds for the development.


The discounted cash flow analysis for a commercial office at 247 – 283 Queen Street adopts the following set of assumptions:

• The discounted cash flow analysis is based on the 2014 proposal to reinstate and refurbish the existing threelevels of the LTO and Strong Room, with the purpose of using as a commercial office in lieu of educationspace.

• The building’s Net Lettable Area is 3,933 sqm. This includes a NLA of 2,792 sqm for the LTO and 1,204 sqmfor the Strong Room.

• The project is developed, leased and held for 20 years prior to sale.• Construction period is 1 year.


• The development is 100% funded by debt (the assumed interest rate is 5% p.a.).• Construction costs are based on Quantity Surveyor estimates.• Estimated net effective rent is $450 per sqm of NLA. The building is assumed to be 100% occupied,

commencing Year 2.3

• A capitalisation rate of 7.25%4 is assumed to determine the value of the asset at the end of year 20.• The cost of site acquisition is the purchase price paid by VU in 2001 ($3.15 million).

DEVELOPMENT COSTS

Construction Costs

Construction costs for the refurbishment of the LTO and Strong Room were provided by VU, based on Quantity Surveyor estimates.

The total construction cost to restore and refurbish the LTO/Strong Room is $45.1m (comprising $31.0m for the LTO and $14.1m for the Strong Room).

Urban Enterprise has assumed a construction period of one year.

Interest

It is assumed that the commercial office development would be 100% funded by debt. The assumed interest rate for the life of the development is 5% p.a.

INCOME

Rental Income It is assumed that the Net Lettable Area will be 100% occupied over the life of the development, commencing in year 2. The average net effective rent in year 2 is assumed to be $450 per sqm, and is escalated at 3.75% per annum, in line with typical commercial leases.

Asset Capitalisation Urban Enterprise assumes the sale of commercial floorspace would occur at the end of the development period, i.e. year 20.

The capitalisation rate adopted for the purpose of estimating the capital value at the end of year 20 is 7.25%, in line with current transactions occurring in the marketplace.

KEY FINDINGS

The discounted cash flow analysis for a commercial office at the subject site resulted in the following outcomes:

• Total development cost is $80.9m:• $31.0m to restore and refurbish the LTO;• $14.1m to restore and refurbish the Strong Room; and• $35.8m (site acquisition, interest).

• Total income is $95.1m• Net income is $14.2m• IRR of 1%.

The discounted cash flow is included in Appendix C.

3 Market Commentary, Melbourne CBD Office, Jones Lang Lasalle 2017 4 Briefing Notes, Melbourne CBD, Savills 2017


The IRR of 1% is significantly less than the 15%-20% that a bank lender would typically require. Hence, the refurbishment of the LTO and Strong Room for a commercial office would not be financially viable.

The key reasons why the IRR is so low are as follows:

• A developer/investor will seek a commercial rate of return in order to invest in the development.• The cost of heritage restoration works for the LTO and Strong Room is substantial at $45.1m. Of this amount,

$14.1m relates to restoration and conservation works for the Strong Room for which there will be little economic return.

• The commercial office building is assumed to be 100% funded by debt, resulting in significant annual interest expenses over the life of the development.

2.3.3. FINANCIAL ANALYSIS OF PROPOSAL: UNIVERSITY CAMPUS

Having tested the reasonable use of the building as an office and found that this use is financially not viable, the alternative reasonable use of “education”, based on the VU proposal has been assessed.


The discounted cash flow analysis for a vertical university campus at 247 – 283 Queen Street adopts the following set of assumptions:

• The construction component of the redevelopment of the LTO site will be undertaken by a builder/investor,with VU having already completed the planning and design phases, which includes obtaining a permit for theredevelopment of the site.

• Once construction is completed, VU will be the sole tenant for a 20 year period with an option to extend for 4x 5 year periods.

• The discounted cash flow analysis is based on the existing redevelopment proposal for the LTO site, i.e. thepermit application.

• The building’s Gross Floor Area is 29,716 sqm and Net Lettable Area is 21,544 sqm (excludes LTO).• The financial analysis is based on a 20 year time period, with a reversionary value included at the end of the

20 year period.• The construction period is 2 years.• The development is 100% funded by the successful bidder arising from VU’s procurement process. Given the

strength of the rental pre-commitment by VU, it is expected that the project will attract interest frominstitutional investors.

• Construction costs are the same as the ‘office’ assessment.• Estimated revenue equates to $500 per sqm, and is escalated at 3.75% p.a.• The cost of site acquisition reflects the purchase price in 2001.

DEVELOPMENT COSTS

The development costs for the redevelopment of the subject site are the same as those adopted in section 2.3.1.

INCOME

Rental Income

The Net Lettable Area will be 100% occupied over the life of the development by VU, commencing in year 3. The average net effective rent in year 3 is assumed to be $500 per sqm, and is escalated at 3.75% per annum.\


KEY FINDINGS

The discounted cash flow analysis for a vertical University campus at the subject site resulted in the following outcomes:

• Total development cost is $299.6m:• $31.0m to restore and refurbish the LTO;• $14.1m to restore and refurbish the Strong Room;• $251.3m to construct the new vertical campus; and• $3.2m for site acquisition.

• Total income is $628.4m.• Net income is $328.3m.• IRR of 5%.

The discounted cash flow is detailed in Appendix D.

An IRR of 5% is less than what a commercial developer would typically seek. However, the benchmark commercial return is less relevant for an investment of this nature, as VU have absorbed a large portion of risk for an investor. More specifically, VU will have undertaken the relevant design and planning components of the project, and obtained the relevant approvals, thereby mitigating the investment risk.

In addition, the construction cost estimates include appropriate contingency allowances and provision for cost escalation to tender. Combined with the long-term pre-commitment to rent by VU and the quality of the tenant, this will most likely attract interest from institutional investors who do not necessarily require the levels of return sought by commercial developers.


2.4. CONCLUSIONS REGARDING REASONABLE AND ECONOMIC USE

2.4.1. REASONABLE USE

Given that the LTO vacated and sold the site, the specific use as a Land Titles Office is no longer relevant and cannot be considered a ‘reasonable’ use.

It is evident that the LTO’s closure and sale of the site by State Government in 2001 meant that the use of the building for a Government-related use was also no longer relevant.

Other potential uses for the LTO that could be considered ‘reasonable use’ would be uses that are similar to those formerly undertaken at the site, which include administrative, clerical and storage uses.

The location of the LTO within Melbourne’s legal precinct and at the edge of the education precinct, provides support for the ‘reasonable use’ of the subject site being “office” and/or “education”.

Furthermore, the proposed programming for VU’s vertical campus at the LTO site includes Business and Entrepreneurship, which has clear synergies with the activities in the nearby business and legal precincts.

The assessment indicates that ‘office’ and/or ‘education’ uses should be considered as the ‘reasonable use’ for the LTO site.

Apart from the principal land use, ‘reasonable use’ is integrally connected to the proposed investment in the restoration and refurbishment of heritage buildings on the site. VU are proposing to invest in the refurbishment of the heritage significant LTO and Strong Room in the order of $45.1m.

2.4.2. ECONOMIC USE

The financial assessment of an office use and development on the subject site indicates that the development would not be viable. The development is projected to generate an internal rate of return (IRR) of 2%, compared to a requirement of major bank lenders for an IRR of 15%-20% for this type of project.

Similarly, the financial assessment of an office use based on the refurbishment of the LTO and Strong Room only, indicates that the development would not be viable. The development is projected to generate an internal rate of return (IRR) of 1%, compared to a requirement of major bank lenders for an IRR of 15%-20% for this type of project.

In regard to the education use, a financial assessment for a redevelopment proposal of this nature is complex, and is largely due to the procurement process adopted by VU to deliver the redevelopment.

Whilst the assessment indicates that the development would achieve an IRR of 5%, the procurement strategy adopted by VU substantially mitigates the risk of the project to a developer/investor. This procurement strategy is obviously unique to VU. Notwithstanding, it is considered that an IRR of 5% is at the lower end of the range for an institutional investor. Therefore, refusal of the permit application would severely adversely affect the economic use of the site.


APPENDICES APPENDIX A LTO PROPOSAL – CONCEPT PLANS

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M1M2

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EXISTING STRONG ROOM OVER SHOWN DASHED

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CONTRACTORS SHALL VERIFY JOB DIMENSIONS BEFORE ANY JOB COMMENCES.ALL SHOP DRAWINGS SHALL BE SUBMITTED TO THE SUPERINTENDENT AND MANUFACTURESHALL NOT COMMENCE PRIOR TO THE RETURN OF UNAMENDED SHOP DRAWINGS SIGNEDBY THE CONSULTANT. FIGURED DIMENSIONS SHALL TAKE PRECEDENCE OVER SCALED. THISDRAWING SHOULD BE READ IN CONJUNCTION WITH ALL RELEVANT CONTRACT, SPECIFICATIONSAND DRAWINGS COPYRIGHT OF THIS DRAWING IS VESTED IN WARDLE

THIS DRAWING IS AN UNCONTROLLED COPY UNLESS STAMPED OTHERWISE

Tel : +61 3 8662 0400

25 Rokeby Street, Collingwood, Victoria 3066 Australia

© 2017 John Wardle Architects ABN 83 006 814 268

www.johnwardlearchitects.com

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Rev. Issue Revision Description Date1 FOR INFORMATION 07/12/2017

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66.2 m²GFA - PLANT

232.6 m²GFA - LIFT LOBBY

130.4 m²NLA - RETAIL

404.1 m²

NLA - LIBRARY &LEARNING COMMENS

630.7 m²GFA - TERRA FIRMA

275.2 m²GFA - LTO BUILDING

122.2 m²NLA - LTO BUILDING

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66.3 m²



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158.5 m²NLA - RETAIL

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NLA - CIRCULATION

793.8 m²NLA - CLINIC

385.7 m²



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9520LEVEL 17 PLANT AREA PLAN



APPENDIX B DCF ANALYSIS –COMMERCIAL OFFICE BUILDING

YEAR 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TOTAL

COSTS INCURRED TO DATE

Site Acquisition $3,150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL CITD $3,150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,150,000

CONSTRUCTION COSTS

LTO and Strong Room $0 $45,067,002 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

New building $0 $125,666,499 $125,666,499 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL CONSTRUCTION COSTS

$0 $170,733,501 $125,666,499 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $296,400,000

OTHER COSTS

Interest $0 $8,694,175 $14,977,500 $14,370,678 $13,741,099 $13,087,912 $12,410,230 $11,707,134 $10,977,673 $10,220,857 $9,435,661 $8,621,019 $7,775,829 $6,898,943 $5,989,175 $5,045,290 $4,066,010 $3,050,007 $1,995,903 $902,271 $0 $163,967,365

TOTAL DEVELOPMENT COSTS

$3,150,000 $179,427,676 $140,643,999 $14,370,678 $13,741,099 $13,087,912 $12,410,230 $11,707,134 $10,977,673 $10,220,857 $9,435,661 $8,621,019 $7,775,829 $6,898,943 $5,989,175 $5,045,290 $4,066,010 $3,050,007 $1,995,903 $902,271 $0 $463,517,365

INCOME

Net Rental income $0 $0 $0 $12,136,450 $12,591,566.88 $13,063,751 $13,553,641 $14,061,903 $14,589,224 $15,136,320 $15,703,932 $16,292,830 $16,903,811 $17,537,704 $18,195,367 $18,877,694 $19,585,607 $20,320,068 $21,082,070 $21,872,648 $22,692,872 $304,197,457

Asset Capitalisation

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $324,183,885 $324,183,885

TOTAL INCOME $0 $0 $0 $12,136,450 $12,591,567 $13,063,751 $13,553,641 $14,061,903 $14,589,224 $15,136,320 $15,703,932 $16,292,830 $16,903,811 $17,537,704 $18,195,367 $18,877,694 $19,585,607 $20,320,068 $21,082,070 $21,872,648 $346,876,757 $628,381,342

NET CASHFLOW -$3,150,000 -$179,427,676 -$140,643,999 -$2,234,228 -$1,149,532 -$24,161 $1,143,412 $2,354,768 $3,611,551 $4,915,463 $6,268,271 $7,671,810 $9,127,982 $10,638,760 $12,206,192 $13,832,403 $15,519,597 $17,270,061 $19,086,167 $20,970,377 $346,876,757 $164,863,977

CUMULATIVE CASHFLOW

-$3,150,000 -$182,577,676 -$323,221,675 -$325,455,903 -$326,605,435 -$326,629,596 -$325,486,184 -$323,131,416 -$319,519,865 -$314,604,402 -$308,336,130 -$300,664,320 -$291,536,338 -$280,897,578 -$268,691,385 -$254,858,982 -$239,339,385 -$222,069,324 -$202,983,157 -$182,012,780 $164,863,977

IRR 2%


L O V E L L C H E N

APPENDIX C DCF ANALYSIS – 2014 PROPOSAL – COMMERCIAL OFFICE (REFURBISHMENT OF LTO & STRONG ROOM ONLY)

YEAR 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TOTAL


Site Acquisition $3,150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL CITD $3,150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,150,000

CONSTRUCTION COSTS

LTO and Strong Room $0 $45,067,002 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL CONSTRUCTION COSTS $0 $45,067,002 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $45,067,002

OTHER COSTS

Interest $0 $2,410,850 $2,349,450 $2,285,747 $2,219,655 $2,151,085 $2,079,944 $2,006,135 $1,929,558 $1,850,109 $1,767,681 $1,682,162 $1,593,436 $1,501,382 $1,405,877 $1,306,790 $1,203,988 $1,097,330 $986,673 $871,866 $0 $32,699,720

TOTAL DEVELOPMENT COSTS $3,150,000 $47,477,852 $2,349,450 $2,285,747 $2,219,655 $2,151,085 $2,079,944 $2,006,135 $1,929,558 $1,850,109 $1,767,681 $1,682,162 $1,593,436 $1,501,382 $1,405,877 $1,306,790 $1,203,988 $1,097,330 $986,673 $871,866 $0 $80,916,721

INCOME

Net Rental income $0 $0 $1,769,805 $1,836,173 $1,905,029 $1,976,468 $2,050,585 $2,127,482 $2,207,263 $2,290,035 $2,375,912 $2,465,008 $2,557,446 $2,653,350 $2,752,851 $2,856,083 $2,963,186 $3,074,305 $3,189,592 $3,309,201 $3,433,297 $47,793,071

Asset Capitalisation $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $47,355,814 $47,355,814

TOTAL INCOME $0 $0 $1,769,805 $1,836,173 $1,905,029 $1,976,468 $2,050,585 $2,127,482 $2,207,263 $2,290,035 $2,375,912 $2,465,008 $2,557,446 $2,653,350 $2,752,851 $2,856,083 $2,963,186 $3,074,305 $3,189,592 $3,309,201 $50,789,111 $95,148,885

NET CASHFLOW -$3,150,000 -$47,477,852 -$579,645 -$449,574 -$314,626 -$174,618 -$29,359 $121,347 $277,705 $439,926 $608,231 $782,846 $964,010 $1,151,968 $1,346,974 $1,549,292 $1,759,198 $1,976,975 $2,202,919 $2,437,335 $50,789,111 $14,232,164

CUMULATIVE CASHFLOW -$3,150,000 -$50,627,852 -$51,207,496 -$51,657,071 -$51,971,697 -$52,146,315 -$52,175,673 -$52,054,326 -$51,776,621 -$51,336,695 -$50,728,464 -$49,945,618 -$48,981,607 -$47,829,640 -$46,482,666 -$44,933,374 -$43,174,176 -$41,197,201 -$38,994,282 -$36,556,947 $14,232,164

IRR 1%


APPENDIX D DCF ANALYSIS – PROPOSED VERTICAL UNIVERSITY CAMPUS

YEAR 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TOTAL


Site Acquisition $3,150,000

TOTAL CITD $3,150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,150,000

CONSTRUCTION COSTS

LTO and Strong Room 0 $45,067,002 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

New building $0 $125,666,499 $125,666,499 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL CONSTRUCTION COSTS

$0 $170,733,501 $125,666,499 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $296,400,000

TOTAL DEVELOPMENT COSTS

$3,150,000 $170,733,501 $125,666,499 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $299,550,000

INCOME

Net Income from Students

$0 $0 $0 $12,136,450 $12,591,566.88 $13,063,751 $13,553,641 $14,061,903 $14,589,224 $15,136,320 $15,703,932 $16,292,830 $16,903,811 $17,537,704 $18,195,367 $18,877,694 $19,585,607 $20,320,068 $21,082,070 $21,872,648 $22,692,872

Asset Capitalisation $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $324,183,885

TOTAL INCOME $0 $0 $0 $12,136,450 $12,591,567 $13,063,751 $13,553,641 $14,061,903 $14,589,224 $15,136,320 $15,703,932 $16,292,830 $16,903,811 $17,537,704 $18,195,367 $18,877,694 $19,585,607 $20,320,068 $21,082,070 $21,872,648 $346,876,757 $628,381,342

NET CASHFLOW -$3,150,000 -$170,733,501 -$125,666,499 $12,136,450 $12,591,567 $13,063,751 $13,553,641 $14,061,903 $14,589,224 $15,136,320 $15,703,932 $16,292,830 $16,903,811 $17,537,704 $18,195,367 $18,877,694 $19,585,607 $20,320,068 $21,082,070 $21,872,648 $346,876,757 $328,831,342

CUMULATIVE CASHFLOW

-$3,150,000 -$173,883,501 -$299,550,000 -$287,413,550 -$274,821,983 -$261,758,232 -$248,204,591 -$234,142,688 -$219,553,464 -$204,417,144 -$188,713,212 -$172,420,382 -$155,516,572 -$137,978,868 -$119,783,501 -$100,905,807 -$81,320,200 -$61,000,132 -$39,918,062 -$18,045,415 $328,831,342

IRR 5%

Urban Enterprise

389 St Georges Road,

Fitzroy North, Vic, 3068

(03) 9482 3888


land titles office - heritage€¦ · and redevelopment of the former land titles office (lto), ......

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