Melbourne Industrial Market
The Melbourne industrial market remained strong, benefiting from solid population growth, residential construction and improved business confidence.
The Melbourne industrial market remained strong, benefiting from solid population growth, residential construction and improved business confidence. An increase in tenant demand was witnessed, with tenants committing to good quality purpose-built facilities. Funds and developers are still supporting face rents with incentives, however, effective rents have started rising over the last year.
The Victorian Environment, Land, Water and Planning Department released their Urban Development Program, Metropolitan Melbourne Industrial 2017 report. According to the report, State Significant Industrial Precincts (SSIP) 2017, there was 28,750,000m2 of industrial stock in the market in 2017. The West SSIP stated as having the largest amount of floor space with 11,920,000m2 of built industrial space followed by the South East region with 8,870,000m2.
Tenants continued to take advantage of the availability of new stock and easily move to new purpose-built facilities. These new facilities often represent a consolidation of existing facilities and provide greater efficiencies. This is leaving backfill space in secondary buildings.
A shift towards automation and ‘dark warehousing’ facilities is occurring, as industrial occupiers look to streamline their supply chain and capitalise on emerging technology, in particular picking distribution software which appeals to retail distribution operators. Data warehousing also falls within the ‘dark warehousing’ category having little demand for on-site staff.
Prime buildings in highly sought after locations with good infrastructure are experiencing stable levels of tenant demand while some secondary stock is struggling to attract tenants.
At March 2018 incentives for prime grade stock continued to reduce, averaging 19%, whilst secondary grade averaged 7.50%. Net face rents were stable over the year to March 2018. This resulted in net effective rents increasing over the year to June.
“With continuing yield compression and land take up, localised rental movement is expected in the following twelve months.”
Melbourne’s industrial market experienced healthy transactional activity from investors (above $5,000,000 in value) in 2017 with 64 properties transacting. Sales volume was stable during 2018 with 13 sales occurring over the year to date. Over the year to May 2018 there were 51 transactions accounting for approximately $1,200,000,000, down from $1,790,000,000 the year prior.
Investor sentiment and activity reflects an increasing appetite for prime assets. This has been driven by improving market fundamentals and the spread between property yields and interest rates.
Prime industrial assets are generally trading at yields around 5.75% to 6.75% in Melbourne at March 2018. Over the past two years yields in Melbourne have tightened by 50 to 75 basis points. Lower yields have been recorded for high value or national grade investment properties.
Demand for industrial land above one hectare remains steady, driven by large owner occupiers and a trend towards larger facilities.
The average land value across Melbourne, for serviced 1-2 hectare allotments, as at March 2018 was $225/m2 (excluding City Fringe) an increase of approximately 37% from the March quarter 2017. Land values ranged from an average of $150/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.