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Council weighs Le Cornu site risks - both financial and political


City councillors have acknowledged that getting something built on the old Le Cornu site will involve significant risks – whether the council develops the project itself, sells it under strict conditions or something in between.

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Having bought 88 O’Connell Street for $34 million – up to $14 million above its professionally assessed value – the Adelaide City Council bears the burden of making sure something gets built there.

“We wouldn’t want history repeating … that’s the whole point of the exercise,” area councillor Sandy Wilkinson told InDaily.

“We wouldn’t want to just sell it to another Makris.”

The council will tonight vote on ‘guiding principles’ for any future development on the site, which include a maximum height of eight storeys.

Before they agreed to buy the high street property from the Makris Group in December last year, councillors considered a feasibility study, outlining three options to get it developed.

Each comes with its own, significant risks.

InDaily asked several city councillors how they would manage those risks if re-elected in November.

Sell it to a developer

The first option is that the council could sell the land to a developer under a contract that guarantees certain design elements, including a height limit, and locks in deadlines for construction.

According to the document, the council would likely lose about $10 million on resale but recoup the cash over 13 to 15 years.

Central ward councillor Houssam Abiad said it was possible the development industry would show no interest whatsoever in the site, given the height limits and compulsory timeframe the council will have to impose on any prospective new owner.

“There’s a very big chance that that might happen – that no-one might be interested,” he said, arguing the guiding principles might have to change in order to interest developers in the site.

North ward councillor Sue Clearihan said whatever happens, the old Le Cornu site must not be sold to just one developer.

“There needs to be multiple owners,” she said.

“We can’t fall into the trap of having one owner that would hold up development on the site for another 20 years … because you could end up in the same situation we’ve come from.

“If we go through all this preparation and end up with a single owner of the site, the risks of the same thing happening again are huge.”

North ward councillor Phil Martin told InDaily developers’ interests don’t necessarily align with those of the North Adelaide community.

“The worst nightmare would be for a developer to come along and say that … the economy’s not as good as it could be – therefore I’m going to delay any action.

“Let’s be clear: if you’re a developer and you have the title to a property you’ll do whatever you need to do to get the best return.

“That’s business and anyone who thinks otherwise is dreaming.”

Area councillor Anne Moran agreed that selling the site to a developer would put the council in a poor negotiating position down the track.

“As night follows day”, she argued, the following scenario would likely unfold: the developer agrees to a land management agreement and buys the site; the developer later argues that economic conditions have changed, and that unless the agreement is modified to allow several more storeys in building height, construction would have to be delayed indefinitely.

Moran said this would leave the council in the perilous political situation of either agreeing to development that the North Adelaide community would find abhorrent – a political nightmare – or taking the land back, un-developed: also a political nightmare.

Moreover, she added: “We have overpaid, so if we did sell it on we’d just be selling it on at a loss.”

Council builds it

The second option is that the council builds the development itself.

This would give councillors full control over the outcome, the design and the political consequences of the build.

But it would also come at a huge financial cost – modelled to reach $177 million – and saddle ratepayers with an extraordinary level of risk.

The initial outlay – equal to more than two-thirds of the council’s total revenue last year – would push the council beyond its prudential debt limits.

And the council would likely have to build higher than eight storeys in order to earn the $177 million back (estimated to occur over seven years, with a $36 million return on top).

Several councillors argue that the council does not have the expertise to build major developments and has a poor track record of development.

Abiad said he would wait until the guiding principles for the property are settled before making a final judgement, but that he would “advise against” the council building the project itself.

“We’re not good at developing,” he said, adding that the council lacked the expertise of private developers.

“We haven’t had a successful track record of developing anything.

“It’s always been a cost blowout … it won’t be good.”

South ward councillor Priscilla Corbell-Moore said it would be unfair on ratepayers outside of North Adelaide to take the risk.

“I’m not interested at all in the council doing it itself … I wouldn’t want the whole city burdened,” she said.

Lord Mayor Martin Haese said it would not be financially prudent for the council to build the development itself.

“I wouldn’t want to see (the) city council tie up a disproportionate amount of resources on one project,” he said.

But councillor Martin said the council had neglected North Adelaide and should be willing to invest.

“In the past five years, the ratepayers of this city have lavished more than $60 million on Rundle Mall, Victoria Square and the laneways redevelopment alone,” he told InDaily.

“Our North Adelaide businesses are dying a slow death and our community hasn’t got the suburb it deserves because of a lack of council interest and investment.

“A council-curated development or a joint venture is the only way to guarantee the best outcome, not only for North Adelaide but also for the council’s coffers through uplift in rates that could be worth an extra two million a year.”

Haese rejected the idea the council had neglected North Adelaide.

“I believe that this term of council has been more supportive of North Adelaide that any other council in living memory,” he argued, listing the purchase of the old Le Cornu site, investment in the north parklands and the Renew Adelaide project on Melbourne Street as examples.

Launch a joint venture

Under a third scenario, the council would enter a joint venture with a developer.

There are a variety of ways this could work, but broadly it would mean handing over most of the responsibility for construction to a developer but retaining influence over the project and partial ownership of the land – and sharing in some of the risk and some of the profit.

Corbell-Moore, Martin, Wilkinson, Abiad, Moran and Haese all told InDaily this was a viable option.

Haese said this could allow the council to maintain some commercial interest in the site, or ensure part of the land is kept for public use.

But he said the constraints of any joint venture would only be known after the council had gone out to market with an expression of interest process.

“This is a prime piece of real estate,” he said.

“I think there will be considerable interest.”

Property Council SA president Daniel Gannon said the development industry was keen to work with the council on a solution.

“There’s no doubt that this is a really tricky situation for the City of Adelaide to deal with,” he said.

“(But) there would be an appetite for the property sector to work with the city of Adelaide to deliver a commercial outcome on this site.”

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