Sydney, 25 November 2015 –Online retailing is set to become the next powerhouse of Australia’s industrial market, with the sector expected to expand its footprint across the country by three million square metres over the next five years.
CBRE’s 2015 Q3 Industrial MarketView shows retailers specialising in online sales are underpinning growth in the market, with the capacity to absorb the equivalent space vacated by the upcoming closure of car manufacturing in 2017.
CBRE Regional Director, Industrial & Logical Services, Matt Haddon said Australia’s industrial landscape was evolving.
“The transport and logistics sector remains a major player in Australia’s industrial market, however, there has been a significant spike in demand from businesses with an online sales component,” Mr Haddon said.
“Increasing appetite levels from this sector of the market will absorb space created by the demise of car manufacturing, and ultimately shift the focus of Australia’s industrial market from manufacturing to transports and logistics and online retail.
Mr Haddon said Australia’s industrial market continued to attract interest from investors over the quarter, with offshore buyers driving the majority of demand.
“Combined with the relative stability of our economy, Australia’s industrial assets offer attractive yields and market fundamentals that appeal to foreign investors,” Mr Haddon explained.
The report shows prime industrial yields have compressed by 80 – 100 basis points since mid-2014 in the east coast markets, while Adelaide has experienced a hardening of 30 – 50 basis points.
Sydney’s industrial market offers the lowest levels of risk from an investment perspective, with secondary yields converging towards prime yields – suggesting that investors are discerning for risk.
CBRE Senior Research Manager Bradley Speers said industrial rents had almost reached the bottom of the cycle, with Sydney the only market to experience rental growth during the quarter, albeit at a modest level.
“The strength of the New South Wales economy is undoubtedly supporting demand in the Sydney industrial market; however, we expect to see upward movement in most other markets from the second half of 2016,” Mr Speers said.
Approximately $1.87 billion in industrial property (>$5 million) changed hands during Q3 – significantly higher than the $1.25 billion quarterly average since 2013. While transaction activity has been strong year to date (totalling $3.46 billion), the yearly total is unlikely to surpass the record pipeline of sales in 2014, which reached $5.31 billion.
Strong levels of tenant demand in Sydney’s industrial market underpinned record rental growth in Q3.
Super prime rents increased 0.25% over the period to $150 per square metre, while prime rents lifted 0.2% to $117 per square metre and secondary rents jumped 0.4% to $100 per square metre.
Mr Speers said low supply levels couple with residential conversion activity would help drive further growth in Sydney’s industrial market.
“The expected supply for 2015 is approximately 30% below the long term average, at which will help to sustain, and in some cases, lift rents in some precincts,” Mr Speers said.
Currently, there is 463,000sqm of industrial space under construction; however, just 85,000sqm is due for completion in 2015, with the remainder to be delivered in 2016.
Foreign investors continue to dominate the super prime and prime sectors of the market, causing some domestic investors – specifically AREITS – to move up the risk curve into secondary assets.
There were 26 transactions totalling $712 million in Q3 – a 25% increase from Q2.
In Q3, one of the largest land parcels in Melbourne’s city fringe area was offered to the market, with General Motors Holden offering more than 37 hectares in Port Melbourne – representing almost 30% of the total industrial zoned land in the precinct.
Melbourne continues to see a strong supply pipeline, with 800,000sqm on track for completion in 2015 – the largest increase in supply to be focused in the west.
Major developments completed during the quarter include a 70,000sqm distribution facility in Truganina and a 41,000sqm freight facility at Melbourne Airport.
Investment activity gained momentum in Q3, with $670 million in industrial property transacting, up from $303 million in Q2.
Mr Speers commented: “With Melbourne’s industrial market offering attractive yields, particularly in an international context, it is likely new offshore groups will continue to enter this market.”
Strong demand has seen yields continue to tighten, compressing 20 basis points over the quarter.
Brisbane welcomed approximately 33,000sqm of new stock in Q3, with a total supply pipeline of 294,000sqm due for completion by the end of 2015.
Supply is expected to increase in 2016, with 354,000sqm forecast – well above the annual five year average of 261,000sqm.
Industrial rents remained steady over the quarter, with a lift in the supply of speculative industrial stock expected to hinder any growth in the immediate term.
Industrial sales in south-east Queensland for Q3 were $364 million, taking the sales volume year to date to $540 million – above the total for the same period in 2014 ($409 million).
The industrial market sentiment has softened in line with the transitioning resources sector, with few occupiers with space expansion requirements in the market.
Mr Speers commented: “Consolidation is the main driver behind current demand, with many occupiers looking to cut costs long term and increase efficiency.”
Rents continued to decline over the third quarter in all areas across Perth, with prime rents in the east and south decreasing by 6% to $105 per square, while rents in the north fell by 1% to $106 per square metre over the same period.
After a period of relatively low supply in 2014, 2015 is set to deliver a large amount of new stock to the market. A total of 52,000sqm reached completion in the first half of 2015, with a further 124,000sqm in the second half to take the total 2015 supply pipeline to 176,000sqm.
There were four transactions in Q3 totalling $93 million. While modest yield compression was recorded in all asset classes during Q2, driven largely by the low interest rate environment, yields remained unchanged over Q3.
Investment appetite levels for prime industrial assets have increased, resulting in more investment opportunities being brought to the market.
“Solid interest from both local and offshore groups signals an increasing appetite for South Australian industrial assets with their comparatively attractive yields, at a time when eastern seaboard assets have experienced solid yield compression,” Mr Speers said.
“With a combined estimated value circa $200 million, the opportunities could present an opportunity for new investors to gain scale quickly by establishing themselves in the South Australian market, or by expanding existing portfolios with safety of secure covenants and long WALEs.”
A low supply pipeline over the past six years has resulted in a shortage of quality space available to meet contemporary corporate standards. While there is demand for new premises, rental rates required to complete projects will constrict industrial development in the medium term.
Given the heightened interest in super prime assets along the east coast, investors are starting to shift focus to non-core locations such as Adelaide to acquire new opportunities.
Changes to stamp duty regulation over the coming years will provide a further boost to the Adelaide market, giving it a competitive advantage over eastern seaboard states.
Development activity in Canberra’s industrial market has been driven by owner occupiers, with recent projects including the Recall Storage warehouse in Hume and the new National Mail and Marketing warehouse.
After almost a year of no industrial sales over $5 million, the Bitek warehouse in Hume with a 7.5 year lease transacted at a yield of 8.0% for $5.75 million in the September quarter.
Canberra industrial net rents remained unchanged over the quarter, while yield compression has also been more subdued compared to other markets.
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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 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 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 at www.cbre.com.