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Central Market Arcade redevelopment "likely" to plunge council into debt

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Adelaide City Council was warned that it could breach its own debt ceiling before agreeing to proceed with a $400 million redevelopment of the Central Market Arcade.

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New documents released from confidence this morning show the council was warned by independent advisory firm BRM in November that it was “likely” that proceeding with the redevelopment would breach borrowing limits “for an extended period” – unless the council took steps to “substantially increase revenue”.

A separate report, also released from confidence this week, shows the funding for the market project can be achieved by selling “under-performing assets” or increasing borrowings.

Earlier this month the council announced that it would retain ownership of the retail and public spaces of a redeveloped Central Market Arcade, with developers ICD Property and Nanshan Singapore to own and manage an adjoining 35-storey tower and hotel.

A council spokesperson told InDaily at the time that the council would contribute $28 million towards the $400 million project, with the developers funding the balance.

But a report presented to the council by BRM on November 28 stated that proceeding with the project would probably result in the council exceeding its borrowing limit, with that breach “highly likely” to be compounded by delays in the receipt of revenue from other commercial projects currently underway.

“Under this scenario, Council will breach its prudential limits… and the borrowing limits for an extended period,” the report stated.

“To mitigate this Council may need to identify other sources of income to reduce borrowings to an acceptable level.”

The report states the council has previously approved borrowing a total of $100 million – $70 million of which was approved in May last year, with the remaining $30 million ending in 2024.

BRM advisors said they undertook financial modelling to assess the impact of the project “under various scenarios”, with each suggesting the council would breach its borrowing limit.

The council’s prudential borrowing limit is calculated on an asset test, debt service ratio and leverage tests, with the 2019-20 limit set at $89.7 million.

Property and commercial associate director Tom McCready said the council’s forecasted funding deficit for this financial year is $16.5 million, with current borrowings at $38.5 million.

According to the council’s long-term financial plan the council is expected to remain “within the ranges of the prudential limits for the next 10 years”.

McCready said the council “is not presently forecasting borrowings to exceed the prudential limit within its long-term financial plan”.

A separate report released from confidence yesterday shows the council voted in November to approve spending $27.74 million (plus GST) to deliver the project, with an additional $1.39 million approved as contingency funding.

The report stated that funding for the Central Market Arcade redevelopment could be found by selling off “under-performing assets” in the order of $25 million to $30 million, or by increasing the council’s borrowing limit.

InDaily yesterday morning asked a council spokesperson to confirm which assets were deemed “under-performing” and whether the council was seeking to sell those assets to prevent it from exceeding its prudential borrowing limits.

In response, McCready said the council was currently reviewing its property holdings and had identified property assets that are either non-performing or under-performing.

“A report will be presented to Council in the new year which will present strategic property holdings and their current condition, value and performance,” he said. 

The council’s current net assets total $1.6 billion.

Earlier this month, city councillor Phil Martin disputed the council’s claim that it was contributing $28 million towards the project, although he told InDaily he was legally prevented from saying more publicly.

A resolution from the council vote shows that Martin and area councillor Anne Moran were absent from the final vote to approve the project.

The project, once completed will feature one of Adelaide’s tallest buildings, standing just short of the 135m-tall, 37-storey Adelaidean development under construction on Frome Street and the 39-storey hotel development approved fro the corner of King William and Currie streets.

It will include retail and dining spaces, a hotel, car parking and residential apartments.

All up, the council would own 6000-square metres, including ground floor retail space, a first-storey supermarket and 260 public car parks on levels two and three of the building.

The council hopes to begin demolition of the existing Central Market Arcade in May 2021 – a delay from the original target of September 2020, which the council says was to allow the 61 traders currently operating in the arcade the opportunity to earn over the busy Christmas trading period.

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