Property I.D

National Industrial Market Overview

Colliers International predicts increasing activity across the national leasing market

• Overview
• Sydney
• Melbourne
• Brisbane
• Adelaide
• Perth

Overview

Colliers International predicts increasing activity across the national leasing markets. The Autumn 2008 Industrial Market Indicators Reports produced by Colliers International suggest a rise in leasing activity is likely to occur in 2008 with businesses re-examining the option of purchasing.

Colliers International’s Managing Director of Industrial, Malcom Tyson, said industrial occupiers are faced with a relatively easy decision to leave older buildings with lower clearance, a higher number of columns and facing more traffic caused by residential density increases, to move to buildings that are priced at a modest rise in floor rent, but which offer greater cubic capacity due to higher clearance and superior access.

“With the current supply of build to suit premises, industrial companies are able to achieve a highly competitive property solution, with the costs being relatively neutral, but the product being vastly superior,” said Mr Tyson.

Mr Tyson said the outlook for 2008 nationally is for an increase in the demand for new industrial premises, as evidenced by the 10% increase in industrial leasing enquiry for Q1 2008 over the corresponding period in 2007.

The softening of yields in some of the Australian industrial markets in the wake of the credit crunch has provided attractive purchasing opportunities to investors that have previously been kept out of the game. This is evidenced by the re-emergence of the cashed up private buyer and the offshore investment groups that now see this climate as the time to accumulate quality industrial assets.

“The focus for 2008 will be clearly on assets that deliver growth by way of rent growth through repositioning or development,” Mr Tyson said.

Sydney

The performance of Sydney’s industrial markets in the last six months has been steady and while investment demand is still healthy, many investors are adopting a wait-and-see approach which has resulted in limited major transactions in the first quarter of the year.

The leasing market in many of Sydney’s industrial precincts is expected to see a pick-up in the next six months which could see leasing demand outstrip owner-occupier demand. Rental growth should be static across most markets, however there may be pockets of growth in the South West and Northern markets as supply becomes limited and/or demand picks up.

Melbourne

Sales of englobo land (more than 4 hectares) was again a key market driver in Melbourne during 2007 as institutions, developers and joint ventures looked to secure investment opportunities. More than 1,200 hectares changed hands for more than $700 million.

Rents and incentives remained stable over the last six months, however as a result of the steady increases in land prices and the cost of construction, pre-commitment rents will rise, particularly in the South East where demand is high and land supply is limited, while in the West the greater number of options and the highly competitive construction market will restrict rental increases. Rents for secondary stock should remain stable while some stock will face obsolescence as it fails to deliver the necessary level of efficiency.

Investment sales totalled more than $600 million in 2007 and another strong market is expected throughout 2008, however, a softening of yields is expected over the next six months, particularly in the secondary grade market.

Brisbane

The Brisbane industrial property market has performed strongly into 2008 and the outlook for the remainder of the year looks positive on the back of strong population growth, solid profit margins, consistent investment flows and increased financial commitments.

Industrial net face rents have risen 15% over the last six months with the biggest gains in the South Western suburbs while record net face rents for primary product of up to $210/m² are being achieved in Brisbane’s North and Australia’s Trade Coast precincts.

In a landlord’s market, rent free periods continue to diminish while average incentives range between 0%-3% across prime and secondary stock.

Average capital values for primary industrial stock have increased 15%-25% over the last six months with Australia’s Trade Coast recording the biggest gain at 24%.

The outlook is for continued growth. With generous infrastructure budgets, both the State and Federal governments are looking to support future business investment.

Net face rents should remain stable throughout the remainder of 2008, average capital value rates should remain steady and prime yields should remain firm with a possible softening of secondary yields.

Adelaide

Rents eased slightly over the last 12 months in the West and Outer North with increases between $5-$10/m² seen in the Inner North, Inner South and Outer South.

Incentives continue to rise in secondary grade stock predominantly in the Inner North and Outer

North markets with rises between 10% and 15% since mid 2007. A key driver has been the emergence of institutional investors creating multiple occupancy solutions for tenants and this is expected to continue to be a key factor in the short term.

Investment sales activity has been relatively strong in 2008 following a soft 2007 with approximately 10 major sales above $3 million. Of recent note has been the strong growth from institutional investors in the single ownership of business parks.

Yields are expected to remain relatively stable on the back of strong fundamentals and strong growth in mining, resources and defence, however the cost of borrowing and some market uncertainty may see yields soften for properties with limited value-add opportunities.

Perth

With new benchmarks being set for vacant land and strong rental growth, particularly in prime, well-located areas, industrial is now arguably the strongest sector of all the Perth property markets.

Increasing interest from property trusts and institutions for industrial investments has contributed to strong capital value growth and a tightening of yields in the past 12 months especially for well-located properties with strong lease covenants. Yields currently range from 6.5% to 7.75%.

Demand for industrial land has been extreme with vacant land selling soon after market release. Land values in strategic industrial precincts have now exceeded $500/m² with some estates approaching $700/m² and in some established precincts closer to the CBD, up to $1,000/m² as commercial/office competes with industrial use for space.

After many years of static rents, a shortage of stock and increases in land and construction costs has meant rents have increased significantly with average rents for well located space now approaching the $90/m² mark and expected to reach $100/m².