Australian Industrial Overview

July, 2018

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E-commerce Changing Industrial

Key Points

  • Altering consumer preferences towards e-commerce are driving opportunities and challenges within the industrial market.
  • Rents and incentives have shown mixed results, with Sydney and Brisbane leading rental growth and Perth still discounting over the year to June 2018.
  • Land values have risen, driven by solid demand for land, particularly in Sydney and Melbourne.
  • Tenant demand for industrial space decreased in some states over the year to June 2018 compared to the year prior, with Adelaide and Perth seeing the largest falls. Sydney, on the other hand, saw positive growth over the same period.
  • Supply remains largely pre-commitment driven, however, speculative development is increasing.
  • Acquisition activity continues to slow, despite investor demand remaining for quality space and land.
  • Yields across prime and secondary assets continued to tighten over the year to June 2018, except for Adelaide and Brisbane, which both stabilised.
  • Forecasts indicate that yields are likely to reach cyclical lows in the national industrial markets over varying time frames starting from this year. Yield tightening is already slowing.

Authors

Jennifer Williams

National Director - Research

View Profile > NSW
James Farrugia

National Director - Industrial

View Profile > NSW

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Market Overview

Industrial supply and demand are expected to increase over the next 12 months across Australia. Overall, rents have been mixed with strong growth in some areas and declines in others, while yields have continued to firm and land values rise over the year to June 2018. Sales activity has been moderate and this, combined with rising bond rates, is likely to result in slowing yield compression.

The key drivers of the industrial market in Australia at current are changing infrastructure, zoning and planning changes, international retailers looking to expand or enter into the Australian market and continued low interest rates.

These drivers are reducing the amount of available industrial land in inner submarkets, pushing up rents in these locations and increasing demand for outer submarkets.

Most tenants have a preference to locate in close proximity to major road, sea and air transport. Planning changes and congestion in the inner submarkets (compared to improvement in infrastructure, lower occupancy costs, greater choice and availability of space in outer submarkets) is driving a movement of tenants towards the outer precincts of most capital cities around Australia.

Prime and secondary net face rents across the metropolitan markets and submarkets over the year to June 2018 varied by city and submarket. Brisbane and Sydney have seen the most growth of the cities averaging 3.6% and 3.7% over the year, respectively. Perth continued to see rentals fall over the past 12 months although the rate of decline has slowed.

Yields firmed and land values increased over the year to June 2018 on the back of reduced supply and positive demand for industrial sites and buildings

Key Influences & Indicators

  • Economic Growth

    Growth in the Australian economy is being driven by population growth, increasing infrastructure spending and sectors benefiting from a falling Australian dollar, such as tourism, agriculture and education. According to the Australian Treasury Budget Papers, in real terms Gross Domestic Product is forecast to grow by 2.50% in 2017-18 and improve to 3.0% in 2018-19.

  • Interest Rates

    Interest rates have a dual impact on the industrial sector, firstly indirectly through other sectors and secondly through the investment market. Record low official interest rates (currently at 1.50%) stimulate economic activity across a range of industries especially consumer related retailers (consumer discretionary and home improvement/building retailers), the construction sector and A-REITs.

    With Banks raising interest rates independently of the Reserve Bank, rising bond rates and increased restrictions on lending to investors and taxes on overseas investors, yield compression has slowed over the past 12-18 months compared to the year prior.

  • Industrial Building Approvals

    Australian industrial building approvals, by value, increased over the year to April 2018, compared to the year prior. This is likely to result in industrial building supply levels, remaining solid in the short-term. The loss of industrial space to other uses, such as residential and mixed-use, is resulting in an overall reduction of industrial land in inner areas of most Australian cities. This has been pushing industrial development to the outer submarkets and keeping approval levels high over recent years. The majority of growth in approvals over the year to April 2018, compared to the year prior, has been for factories and other secondary production buildings (71.8%), other industrial buildings not elsewhere classified (40.8%) and warehouses (26.2%).

  • Vacancy

    Based on our sample of prime properties in Australia’s major industrial A-REITs, the vacancy rate decreased to 2.8% over the year to December 2017. This was down from 3.6% in December 2016. In the March quarter 2018, vacancy increased marginally to 2.9%.

    Based on our sample of prime properties in Australia’s major industrial A-REITs, the vacancy rate decreased to 2.8% over the year to December 2017. This was down from 3.6% in December 2016. In the March quarter 2018, vacancy increased marginally to 2.9%.

State Infrastructure/Data Round-Up

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