Industrial sector sees modest improvements going into 2015
Industrial sector sees modest improvements going into 2015
22 October 2014
Sydney, 23 October 2014 –CBRE has released its Industrial Marketview Q3 report which highlights an increase in offshore transactions compared to recent years, meanwhile the sector is tracking along steadily with overall sales of $728m.
Over the past five years, industrial has accounted for just 3% of direct foreign investment in real estate assets and just 9% of investment activity in the industrial sector, compared to 28% for office.
However, there is currently $500-600m of Australian industrial property in due diligence with offshore groups and due for completion in Q4 –representing almost 12% of total annual transactions, higher than the last five years average.
Matt Haddon, Regional Director of Industrial and Logistics Services, said; "Whilst actual transaction statistics have perhaps masked offshore investor interest, investors (particularly from Asia and the United States) have been a constant and active participant in major asset bidding over the past six years."
"Initially, when offshore investors started to explore the Australian Industrial & Logistics market in the wake of the GFC, they faced less competition from local REIT's, who were focused on repairing damaged balance sheets. Over time, local players re-emerged as the dominant buyers - but the offshore groups didn't go away, they were simply out-bid by a hungrier local market."
"Now, in the second half of 2014, off-shore groups have reset their return hurdles ahead of anticipated yield tightening, and have accordingly won exclusive due diligence positions on a significant number of on and off-market Industrial opportunities. We expect the final transaction statistics for 2014 to finally reflect the level of activity of offshore investors in this market," Mr Haddon said.
Supply manageable at the moment but counting on demand recovery
The CBRE report shows Australia’s industrial sector tracking as forecast, with flat rents and lower prime yields. Output improved modestly and supply is increasing, particularly driven by development in the Victorian market.
The supply pipeline is increasing nationally, however CBRE believes the risk of oversupply is manageable, particularly if demand conditions improve in line with industrial output growth.
Stephen McNabb, CBRE Head of Research said; “We expect demand conditions to continue to improve gradually, with the gap between the industrial economy and the overall economy narrowing. A stronger performance from the housing and consumer sectors as well as the lower AUD are supportive factors for the industrial sector, the latter providing for some improvement in competitiveness.”
“An improvement in demand will help to gradually absorb the higher supply coming through the market this year, particularly in Melbourne. We expect greater balance in 2015 and this will support the rent outlook beyond,” Mr McNabb added.
“The lower AUD is expected to support an improvement in industrial output over the next year, as its prior strength had been associated with a period of very soft sector growth.”
Incentive levels rise in Victoria and South Australia
Whilst face rents have remained relatively stable across the Australian industrial market over the last two years, incentive levels have risen, particularly in the Victorian and South Australian markets - which have also recorded the most significant rental price drops over the past two years.
The rise in Victoria is driven by the speculative and pre-commitment market, with pre-lease incentives in West Melbourne, for example, reaching up to 30% in an attempt to attract tenants and develop land currently held on the developer’s balance sheet.
In South Australia, rising incentives have been driven by vacancy and slower growth across the market. With minimal pre-commitments in the pipeline, and speculative developments essentially non-existent, landlords are reluctantly raising incentives to attract tenants to fill vacancies caused by slower growth and impending car manufacturing closure.
For Q4, CBRE forecasts minor increases in net face rents, which are expected to be associated with some stabilisation in incentives.
Key research figures
·Economic growth was 0.5% in Q2 2014, with 3.1% growth on a year-on-year basis. Exports and dwelling construction continue to increase, which is driving the industrial market.
·Industrial output growth improved modestly in Q2 2014 to 1.4% (yoy) compared to flat performance in 2013.
·Business confidence (as measured by NAB) remains positive but has stabilised in the last two quarters. The construction sector remains the most confident
·Industrial rents are currently stable for super prime warehouse facilities, with minimal growth on both a quarterly and year-on-year basis.
·Rents are forecast to grow slightly in 2014, with stronger growth in 2015 and 2016 (1.3% and 2.8% respectively).
·Super prime asset yields have compressed 29bps over the past year and secondary yields compressed 8bps. The yield spread between super prime and secondary is currently 165bps. Yields are forecast to continue to compress further, tightening by 10bps per year over the next two years.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website atwww.cbre.com.au.