While demand for well-located prime office space remains strong, the market for lower grade CBD offices is far more challenging and an opportunity is emerging to reimagine these properties for alternative uses to generate higher returns.

One such alternate is student accommodation. Australian universities have seen strong demand from international students, with overseas student numbers rebounding post COVID and remaining resilient despite policy uncertainty. At the same time, Australia’s student accommodation market is facing significant undersupply – the current proposed purpose-built student accommodation pipeline of circa 8,000 new beds due to come online by 2026  will not meet future demand.

With limited new supply, the fundamentals of strong demand and rental growth make this a compelling opportunity for investors and is one that has been seized in Brisbane by the Dexus Real Estate Partnership (DREP) Fund Series.

DREP Series

Dexus’s first opportunity fund, Dexus Real Estate Partnership 1 (DREP1) launched in 2021 and raised equity of A$475 million. Leveraging the Dexus platform and a trading track record spanning more than 10 years, the Fund secured 15 transactions across the spectrum of real estate investments. 

The Fund is on track to deliver the target net equity IRR of circa 15% . The second fund in the series – Dexus Real Estate Partnership 2 (DREP2) – is open for investment, enabling institutions and private wealth clients to invest directly in this high-performing strategy. The final close for DREP2 is scheduled for later in 2025 and equity raised so far is circa A$470 million. 

History shows we are at a tremendous point in the cycle for opportunistic investing – and investment vintage, the year when an investment is made matters. If you look at returns over time for opportunistic and value-added real estate funds globally, the highest-performing investment vintages have historically followed periods of recalibration and disruption. 

And, if you believe that we have hit peak inflation and that we've hit peak rates, with one rate cut from the Reserve Bank of Australia this year and more touted, then this may be the next vintage following dislocation. This stage in the cycle offers a rich opportunistic investing environment that is the most attractive I’ve seen since the GFC, but it doesn’t stay this way forever.

Strategy in action: repositioning office for student accommodation

DREP2’s first investment is an economic interest in the redevelopment of 41 George Street in Brisbane, a B-grade office tower in the city’s CBD, presenting the fund with a prime repositioning opportunity —converting underused office space into modern, high-quality circa 1,200 bed student housing in a growing educational market. 

The project aligns with our strategy to unlock value in existing assets and leverage macroeconomic tailwinds in alternative real estate sectors. For our investors, it is an opportunity to leverage Dexus’s broad set of capabilities that include office development and refurbishment, delivery of projects with a focus on quality, sustainability and wellbeing and the Dexus Infrastructure team's deep understanding of the Australian student accommodation sector.

With a portfolio spanning over 7,000 beds across three of Australia’s leading universities, Dexus is the largest on-campus student accommodation investment manager in Australia. 

The 41 George Street building occupies a high-profile, elevated site and its location means it can service multiple university campuses and provide easy access to Brisbane amenities. The 27-storey tower will be the closest student housing to Queensland’s second largest university campus, Queensland University of Technology, and two blocks from the Griffith University CBD campus, which is set to open in 2027.

The building core is concrete as opposed to the usual concrete and steel hybrid structure that Dexus has found at other refurbishment opportunities. The building’s ‘good bones’ mean there is less risk of problems that are usually associated with conversion from commercial to residential accommodation (e.g. hazmat and fire separation) and reduced additional work is required.

For example, the existing structure, centralised lift core and façade will be reused. The facility will include three floors of resident amenities including gym, yoga, gaming and cinema rooms along with 1,182 studio and two-bedroom student accommodation beds, which are scheduled to be completed in 2026. 

Five years ago, few would have anticipated distressed office investment in Australia, and now we have Dexus leading the way in maximising opportunities arising from this and DREP2 is assessing further office conversion opportunities in its pipeline.

The investment in the redevelopment of 41 George Street, a well-located but aged empty B-grade office building on attractive terms is a great example of how the office sector has changed and how premium and lower grade office has diverged in more ways than one. 

It is also a great example of how DREP has been able to draw on Dexus’s capabilities to reposition and create an enhanced asset to unlock value for investors.