Australian Industrial m3property Insight

July, 2019

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Australia’s industrial market is in the upturn phase of the current cycle. While some states are further advanced in the cycle than others, it is generally a time when landlords should be locking in longer-term deals.

Opportunities and Challenges

  • Australia’s industrial market is in the upturn phase of the current cycle. While some states are further advanced in the cycle than others, it is generally a time when landlords should be locking in
    longer-term deals.
  • Sydney is experiencing boom-like conditions. Rental growth over the year to June 2019 was almost triple the long-term (25-year) annual average and land value growth was over four times the  13-year annual average. Risks, however, are rising with demand slowing in 2019 and supply increasing.
  • Melbourne is also experiencing significant land value increases as tenants opt for design and construct over leasing existing space. This is constraining rental growth in the market.
  • Brisbane’s industrial market is strengthening, with rents growing, land rates rising strongly and yields continuing to tighten.
  • While slightly less advanced in the upturn, Adelaide is also experiencing solid demand and rental growth. South Australia has an impressive list of projects, which should keep industrial growth solid over the short- to medium-term.
  • Perth continues to be a two-tiered market with prime well-located space performing well, while secondary stock is languishing.
  • Overall, national vacancy is starting to rise due to slowing demand in some states and rising supply. It is largely the secondary stock that is being impacted at the expense of prime, as tenants look to optimise delivery times and production efficiency.

Authors

Jennifer Williams

National Director - Research

View Profile > NSW
James Farrugia

National Director - Industrial

View Profile > NSW

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Market Overview

National Industrial Key Indicators

  • Vacancy rises

    While falling over the year, the national vacancy rate (calculated from major Trust-owned properties) increased from 2.0% in the December quarter 2018 to 2.6% in the March quarter 2019.

  • Building approvals slowing, but still high

    Rolling annual building approvals growth slowed from 28.5% y-o-y to Apr-18 to 1.2% y-o-y to Apr-19.

  • Rent growth strong

    Rental growth over the June quarter 2019 was the strongest annual increase since June quarter 2007. Sydney saw the strongest growth at 6.9% over the year.

  • Yields tighten further

    Australian yields have tightened to a record national average low of 6.48%. The lowest yields in the country continue to emanate from Sydney (4.50%-7.00%) and Melbourne (5.00%-6.50%).

  • Land values booming

    A rise in land values of 21.6% was recorded in the year to June 2019. Sydney and Brisbane have led the charge with growth of 36.2% and 21.0% respectively.

“Well-located, adaptable space is out-performing, while less adaptable space further from population centres and infrastructure is under pressure in some states”

The Industrial market is booming, it is arguably the best performing property sector currently. Nationally over the past year prime net face rents increased 3.8%, land values rose by a whopping 21.6% and prime yields firmed by 26 basis points to a new record low.

Solid fundamentals in the leasing market

The national industrial market has seen booming conditions over the past 12 months to June 2019. Vacancy at the last count in March 2019 was 2.6%. While it increased from 2.0% in December 2018, due to rising supply it remains 0.8 percentage points below the same time last year.

Strong demand over 2018 and low vacancy has resulted in supply increases over the first half of 2019 as tenants were increasingly unable to find existing space to suit their needs. This has started to push up vacancy slightly, particularly in secondary stock in some markets.

Booming conditions have resulted in rental growth of 3.8% in prime and 4.3% in secondary space over the year to June 2019. In prime stock the rent increases ranged from 0.5% in Perth, up to 6.9% in Sydney (driven by the inner submarkets). The range was wider for secondary rents, with Perth falling -2.3%, due to persistently high vacancy and Sydney (8.9%), closely followed by Brisbane (8.1%) topping annual growth.

Due to rising land values across most states and hence rising land tax bills, owners are expected to pass on increased outgoing to tenants.

The investment market is booming

Sales activity over 2018 was the strongest recorded since the mid-2000s. While 2019 has slowed over the first half, demand remains positive. Demand and solid fundamentals have resulted in yields for industrial property tightening to record lows in the June quarter 2019, ranging from 4.50% to 8.75% nationally for prime stock and 5.50% to 10.00% for secondary stock.

Land values continue to witness booming growth, the strongest growth over the year to June 2019 was recorded in Sydney at 36.2% and Brisbane at 21.0%. Inner areas of the eastern seaboard capitals are land constrained as tenants continue to seek properties in population centres to reduce last-mile transport times.

 

“Industrial land values are booming, with national growth of 21.6% recorded over the year to June 2019.”

State Infrastructure/Data Roundup

New South Wales

Net rent: $90-220/m2

Incentive: 9.9%

Yield: 4.50-7.00%

 

Major Projects

  • • NorthConnex linking M1 to M2
    • WestConnex (M4 new and widening)
    • M5 new and link to M4
    • Outer Sydney Orbital and Bringelly Rd and Old Northern Rd upgrades
    • Pacific Highway upgrade

  • • Parramatta Light Rail ($3.5bn)
    • Sydney CBD and South East Light Rail
    • Newcastle Light Rail

  • • Sydney Metro City and South West
    • Sydney Metro West

  • • Moorebank Intermodal Terminal
    • Parkes National Logistics Hub Asciano
    • Western Sydney Inland Container Terminal St Marys

  • • Badgerys Creek Airport (Aerotropolis)

Victoria

Net rent: $70-90/m2

Incentive: 14.0%

Yield: 5.00-6.50%

Major Projects

  • • CityLink-Tullamarine Widening
    • West Gate Tunnel Project
    • North East Link
    • Monash Freeway upgrade
    • M80 Ring Road
    • Melbourne Metro Tunnel

  • • Regional Network Development Plan
    • Melbourne Airport Rail
    • Fast Rail to Geelong

  • • Murray Basin Rail upgrade
    • Tullamarine Airport Rail Link
    • Inland Rail Queensland to Victoria

South East Queensland

Net rent: $100-150/m2

Incentive: 12.9%

Yield: 5.75-7.00%

Major Projects

  • • Bruce Highway (Caloundra Road to Sunshine Motorway)
    • Toowoomba Second Range Crossing
    • Logan Enhancement Project
    • Ipswich Motorway (Rocklea to Darra)
    • Pacific Motorway (Eight Mile Plains to Daisy Hill and Varsity Lakes to Tugun)
    • Kingsford Smith Drive

  • • Cross River Rail
    • Brisbane Metro
    • Inland Rail Queensland Segments
    • InterlinkSQ Freight Terminal

  • • Brisbane Airport Second Runway
    • Sunshine Coast Airport expansion
    • Gold Coast Airport expansion

South Australia

Net rent: $70-105/m2

Incentive: 11.3%

Yield: 6.75-8.75%

Major Projects

  • • North South Road Corridor
    • Torrens Road to River Torrens Project
    • Extension of the O-Bahn (Tea Tree Plaza Interchange to Golden Grove)

  • • Flinders Link Project (Tonsley Rail Line extension)
    • Gawler Rail Electrification Project
    • Underground link between the northern and southern lines
    • Grade separations and level crossing removal at major metropolitan intersections including Oaklands

  • • Adelaide Airport expansion

  • • Naval Shipbuilding Program and Osborne infrastructure upgrade including light rail, commercial, retail residential and recreation

  • • GlobeLink upgrade of major export infrastructure

Western Australia

Net rent: $60-105/m2

Incentive: 12.5%

Yield: 5.75-8.50%

Major Projects

  • • NorthLink WA stages 2 and 3
    • Great Northern and Reid Highway upgrades
    • Wanneroo Road upgrade and grade separation
    • Murdoch Drive, connection to Kwinana Freeway (upgrade) and Roe Highway. Mitchell Freeway upgrade
    • Leach Highway upgrade Carrington Road to Stirling Highway
    • Armadale Road to Northlake Road Bridge
    • Bunbury Outer Ring Road

  • • Perth Metronet station upgrades tunnelling and line extensions including Forrestfield- Airport Link, Yanchep Rail Extension and Thornlie-Cockburn link