Melbourne Industrial m3property Insight
Rents were stable in the Melbourne industrial market over the year to June 2019, while land values rose and yields tightened.
Increase in speculative development
Building approvals increased over the year to May 2019. According to ABS, over 60% of industrial approvals over the year to May 2019 were warehouses.
The combination of low vacancy and strong tenant demand for good quality buildings has increased the level of speculative construction. The majority of speculative developments in the pipeline are concentrated in the West and South East regions, where demand is strongest.
Rents were stable
Over the year to June 2019 incentives for prime and secondary grade stock were stable. Net face rents also stabilised over the year in all precincts, with the exception of the West where net face rents increased. There is stable tenant demand for prime buildings in highly sought-after locations whereas secondary stock continues to struggle to attract tenants. Competition among developers has led to landlords continuing to offer high incentives for new developments.
Land values increase by 30%
Average land values across Melbourne for serviced one-two hectare allotments (excluding City Fringe), increased 30% over the year to $294/m2 as at June 2019. Land values currently range from an average of $250/m2 in the West and North up to $1,500/m2 in the City Fringe where land is in short supply and alternative highest and best use is likely in the short- to medium-term.
Yields continue to tighten
Healthy investor appetite in the Melbourne industrial market exerted downward pressure on yields, especially for tightly held prime assets. In comparison to institutional grade investments, properties with lower capital values ($9-$12 million) demonstrate a lower yield at shorter WALEs with higher yields at longer WALEs.
The chart to the right shows a comparison of yields with the 10-year Australian Government bond rate. The current gap between the risk-free rate and the average prime industrial yield as at June is approximately 368 basis points and a gap of 484 basis points for secondary industrial yields. However, it’s anticipated the gap will compress in the second half of 2019 despite a RBA interest rate cut. The long-term average gap between prime yields and the risk-free rate is 3.97%.
Limited quality stock available
Melbourne’s Industrial market experienced healthy transactional activity from investors (above the $5 million threshold) in 2018 with 105 properties transacting accounting for $2.08 billion, up from $1.49 billion from the previous year. Sales recorded YTD 2019 accounted for $391.92 million with 26 transactions.
Investor demand remains healthy for passive industrial assets such as prime assets with long WALEs and annual rental increases greater than inflation.
Demand for poorer quality properties or those requiring active asset management has increased as investors look to alternative uses of property seeking higher equated market yields. Furthermore, demands for mid-sized properties ($10-$20 million) remains strong on the back of continued low interest rates and activity from syndicated funds and wealthy private investors.