SEQ Industrial Market Update
Update of the investment market in the South East Queensland property outlook for 2020
SEQ’s industrial property sector is expected to be strong over the medium-term, underpinned by augmentation of the tenant/occupier market, in particular growth in e-commerce and associated 3PL tenants, population growth, and the need for food manufacturing, chilled food processing, and their associated distribution centres. Furthermore, major infrastructure investment into SEQ has led to improved transport networks and stimulated private investment into the region. The rise of e-commerce has created a need for warehouse and distribution space that is likely to continue into the long-term.
However, the outbreak and spread of COVID-19 has clouded the short-term outlook for both the global and domestic economies. The impact on the domestic economy is likely to be felt strongly in supply chains, as both goods imported and exports will be disrupted, as well as the education, tourism and retail industries. Business confidence is likely to remain negative and many investment decisions are expected to be delayed until the virus is contained. It is anticipated that GDP growth in the March and June quarters will be significantly weaker than previously expected. Past this, it is difficult to predict how long-lasting the impacts of COVID-19 will be on the economy.
The information in this report is based on current understanding and developments with regards to all factors including the Novel Coronavirus COVID-19. The response of governments, business and individuals is fluid at current and the impacts of future events may significantly change our expectations for this market and sector.
2019: the year of the $100 million plus transactions
Access to debt and the international capital flow of funds pushed industrial property to reach record yields in 2019. The bond to yield premium resulted in industrial investment looking increasingly attractive during 2019, particularly in the Brisbane market. Also, over the past 12 months there was a shifting of funds out of other asset classes into industrial.
“The industrial market continued to see strong interest from domestic and foreign capital in 2019. The strong fundamentals of Brisbane saw a record number of large transactions, bringing the total value of sales for 2019 to $1.45 billion, which is well above the annual average transaction volume.”
Daniel McGrath – Director
During 2019, we saw yields tighten to record lows in Sydney and Melbourne. This encouraged a number of investment funds to increase their focus on the Brisbane market, which
offers a yield premium of circa 50 basis points in the prime market and circa 100 basis points in the secondary market.
Major institutional money has also been chasing strategic land purchases. Examples of this include Mapletree paying $95 million for 36 hectares of land in Crestmead; ISPT/Alliro Group acquiring a 23 hectare site in Wacol for $59.77 million; Frasers Property purchasing a 65 hectare site in Yatala for $35 million; and Dexus acquiring a 9.2 hectare site in Richlands for $26.5 million.
What’s in-store for the investment market in 2020 and beyond?
COVID-19’s impact on the economy is likely to result in the decision to delay investment decisions. The domestic economy is potentially heading towards a recession or depression (if the crisis continues for an extended period of time), and this is likely to have a significant impact on investor sentiment, demand and activity.
The significant amount of uncertainty in the market, combined with declining consumer and business sentiment could see investor demand and sales activity decline substantially over the short-term. Added to this is that some potential buyers might be reluctant or unable to travel due to government travel restrictions.
Looking past the acute phase of the virus, the fundamentals for investment in commercial real estate, particularly industrial property, remain solid. The ‘lower for longer’ forecast for the official cash rate is likely to encourage investment into real estate going forward, however, this will only occur when confidence and certainty returns to the market. We expect yields to remain low over 2020.
We are of the opinion that there remains a significant amount of capital chasing industrial assets and that once some normality returns to the market, transaction activity will recover.
Road and rail networks will support growing freight movements
The Inland Rail project is set to improve national freight distribution capacity and transport efficiencies. It is expected to be completed in 2025 and is anticipated to transform the way we move freight around the country.
Comprising 13 individual projects and spanning more than 1,700 kilometres, the Inland Rail is the largest freight rail infrastructure project in Australia. In November 2019, the Australian and Queensland Governments signed a bilateral agreement to deliver the Inland Rail. The project is part of the broader $25 billion commitment that the Queensland Government has made to road and rail projects across Queensland since 2013.
Another project, currently in the study phase, is the dedicated freight rail connection to the Port of Brisbane. The potential benefits of connecting the Inland Rail – which stops at Acacia Ridge – to the Port of Brisbane, are considerable.
The 2019 Queensland Freight Strategy projects that the State’s freight task and volumes will grow by more than 20% over the next decade. This growth will place pressure on freight networks, however, particularly land-based networks that provide key inter-regional and urban links. Currently, 98% of freight is trucked through the Port of Brisbane through roads.
A report prepared by Deloitte Access Economics, found a dedicated rail connection to the Port of Brisbane would deliver 2.4 million less truck movements on regional roads per year and around $820 million in economic, social and environmental benefits annually. The project would also provide a strategic benefit to accessibility of industrial distribution outside the immediate TradeCoast region.
Looking forward, there is the potential that the lower for- longer interest rate environment and need to create employment opportunities will encourage the State and Federal Governments to invest even further in infrastructure upgrades. It is likely that 2020-2021FY budget announcements over coming months will announce the commencement of some new projects. We would also expect that the Queensland State Election scheduled for October this year will bring a range of infrastructure projects to the front of the agenda.
Logistics, consumer goods and advanced manufacturing driving occupier demand
Occupier demand for prime industrial property remained strong in 2019. The trend of tenants choosing to upgrade to modern, efficient, buildings remains common, with a large portion of leasing transactions being design and construct/ pre-commitment deals. In fact, most new supply added to the market during recent years has been the result of design and construct deals. Strong activity in the design and construct sector has been driven by the competitive pre-lease rents being offered (which are being supported by the low cost of capital) and tenant preference for new space. Major absorbers of space during the past few years have been e-commerce and associated 3PL tenants, food manufacturers and distribution centres and chilled food processing and distribution facilities.
Growth in demand from transport / logistics users has emanated from growth in the e-commerce sector. Australia Post’s 2019 report that is based on deliveries data recorded by the Australia Post Group, found that online purchases grew by 21% year-on-year in Queensland. Australia Post states that Queenslanders are big online shoppers, with three of the nation’s top 10 buying postcodes (by volume) – Toowoomba, Mackay, Bundaberg – each experiencing growth above 20 per cent in 2018. The shift in the way consumers are shopping is positively impacting on the industrial occupier market and is set to continue in the short to medium-term outlook.
In 2019, we saw a number of large commitments to logistics tenants, including Phoenix Transport (9,999 square metres), DHL (20,600 square metres) and Ceva (20,800 square metres) in Berrinba and DNV Transport and Silk Contract Logistics (15,000 square metres) in the Port of Brisbane.
Occupier activity in Berrinba has increased over the past two years, with the completion of the $512 million Logan Enhancement Project in 2019 improving the area’s connectivity to the arterial road network and the Port of Brisbane through the widening of the Gateway Extension Motorway as part of the project.
Consumer and retail goods tenants Mitre 10, Pinnacle Hardware and Rinnai Corporation (27,000 square metres, 14,000 square metres and 6,000 square metres respectively) also pre-committed to space in Berrinba over the past year.
Other consumer and retail goods tenants that have preleased space include Crimsafe Security Systems and Oz Wide Group at Yatala (5,400 square metres and 4,720 square metres); and Fisher and Paykel at the Port of Brisbane (20,000 square metres). Demand from these occupiers is associated with a number of factors including population growth and the performance of the housing market, including housing transfer activity which is forecast to pick up nationally over the medium-term.
Population growth is also a key driver of demand from food manufacturing and distribution occupiers. In 2019, Coles committed to a 66,000 square metre advanced facility in Redbank and Blenners Transport moved into a new cold storage and food distribution facility in Darra.
The impact of COVID-19 on occupier demand is likely to be mixed
Over the near term, we expect that businesses will delay any major unnecessary decision making including relocation and expansion plans. This is likely to persist until there is more certainty in the economic outlook. As a result, we expect that occupier demand will flatten over the coming six months.
However, we are of the opinion that COVID-19 may positively impact industrial demand from some e-commerce and 3PL providers who may need to expand their space requirements in support of a potential shift in the short- to medium-term shopping habits of consumers. We have already seen changes in relation to social distancing behaviour and policies, and this looks certain to continue for the coming six months at least. As consumers become more accustomed to purchasing goods online during the acute phase of the pandemic, COVID-19 might act as somewhat of a catalyst for stronger take-up of e-commerce that has the potential to continue once ‘normality’ resumes.
Owner occupiers were active purchasers and vendors in 2019
Although remaining cautious, owner occupiers were actively taking advantage of the historically low cash rate and the positive impact this has on the rent/buy equation during 2019. This was particularly evident at the smaller end of the market and in the land market.
Large owner occupiers were also active in 2019, with a number divesting and then leasing back off the purchaser, with sale and leaseback transactions attractive to owner occupiers given the current yield regime and the price that investors are willing to pay for industrial property. There have been numerous examples of this over recent years, with the largest, most recent, being Arnott’s Biscuits’ sale and leaseback of its food manufacturing facility in Virginia.
We expect that owner occupier demand will soften in 2020 (despite the recent reductions of the official cash rate to 0.25%) due to businesses delaying major decision making during the current economic environment. The COVID-19 outbreak has already extensively impacted the economy and some small industrial businesses are likely to struggle due to trade difficulties, employee sick leave and impacts from quarantining and social distancing policies. As such, we expect major decisions from these occupiers will be postponed until after the pandemic is contained.
Certainly, once the confidence returns to the market, we expect that the ‘lower-for-longer’ outlook for monetary policy will continue to be a draw-card for small businesses looking to enter the occupier market or current owner occupiers looking to upgrade their facilities.
Strong occupier demand drove Brisbane’s industrial land market in 2019
The Greater Brisbane Region’s industrial land market has strengthened considerably during recent years. Activity has predominantly been in the design and construct market, largely a result of increased occupier demand for modern, purpose-built and efficient buildings. Occupiers have also had incentive to upgrade to newer premises because of the competitive effective rental rates on offer (a result of the strong flow of investor funds into the market).
Strong activity in the pre-commitment market has resulted in a dwindling supply of large lots ready for development. As a result, there have been some instances of occupiers and developers acquiring brownfield sites (particularly in inner, prime locations such as Geebung, Northgate and Eagle Farm), with the intention of redeveloping the site over the medium- to long-term.
There has also been the acquisition of larger greenfield sites. For example, Mapletree Logistics Trust acquired 36 hectares of land in Heritage Park in the second half of 2019. The land will become part of the proposed Crestmead Logistics Estate being developed by the site’s vendor Pointcorp. There have also been several large sites sold in Yatala and Stapylton during recent years as well as 23 hectare site in Richlands during 2019.
According to the Queensland Government’s Land Supplyand Development Monitoring Program, an estimated 205 hectares of industrial land was taken up per annum across the Greater Brisbane Region between 2011 and 2018. Most take-up occurred in the Ipswich City LGA, which accounted for 132 hectares per annum. In terms of future supply of industrial land, the State Government estimates there to be circa 5,800 hectares of land across the Greater Brisbane Region. A large portion of this is zoned as ‘Industry Investigation Area’ within the Ipswich City LGA.
Supply difficulties during 2020
Building approval data from the Australian Bureau of Statistics shows that a record $1.62 billion of industrial property was approved across Queensland during 2019. Whilst building approvals data provides a forward indicator for future supply, we can expect that some developers may choose to postpone development plans over coming months. Furthermore, supply-chain issues may result in delays during the construction process for facilities currently under construction.
Industrial property is more than sheds
Smart building innovation in industrial development is becoming more in-focus as developers are under increased pressure to include sustainable and green features. The latest building approval data shows close to 40% of the total value of approvals in Queensland in 2019 were for buildings over $20 million in value, which is above the 15-year average of 23%, indicating that the trend of highly specialised industrial property development is likely to continue.
In November 2019, Thomson Adsett delivered Queensland’s largest industrial rooftop solar installation within the new Darra Industrial Estate. Developers are including features such as LED light fixtures that save energy and skylights that let more natural light into the warehouse space. Furthermore, solar installations have a higher return on investment in Queensland than the southern states due to more sunlight hours.
The growth of e-commerce and 3PL providers, means a new generation of warehouse spaces needs to be built, often with different specifications for slab thickness, clearance, and container hardstand to accommodate the needs of retailers that ship products to individual customers.
Likewise, the growth in warehouse robotics and food manufacturing is changing the design and modern specifications of ‘smart’ industrial buildings, including the Asahi facility in Heathwood and the new 66,000 square metre Coles facility in Redbank. The facility will be a 95% automated ambient distribution centre and is expected to be complete in 2022. Coles estimates that the new warehouse will double their distribution capability.
The new 49,000 square metre Australia Post facility in Redbank incorporates a $240 million robotics capability with a parcel picker that can move 2,500 parcels per hour and 23 automated guided vehicles capable of moving 1.4 tonne objects and setting them down at 5mm tolerances. The facility has also installed 3,244 solar panels generating enough energy to power a small suburb per year.
Future design in Australia may include warehouses with large break-out areas, on-site bus stops, on-site day care, and other features designed to attract workers. The market is expected to evolve with companies introducing technology for a greater intensity of available space. Highbay warehouse design with robotics, highly engineered deeper concrete floors (that cater for the high-bay design) and wider concrete hardstand circulation areas combined with multiple on-grade and recessed loading docks is set to dominate the short- to medium-term development horizon.
The outlook for the Brisbane industrial market is uncertain
Whilst we continue to be of the view that the medium-term outlook for the Brisbane industrial market is positive, the COVID-19 outbreak is likely to impact all asset classes, including the property market, over the short-term.
We have scaled back our short-term expectations for sales activity and occupier demand in the SEQ industrial market, given the high level of uncertainty surrounding COVID-19 and the highly pessimistic short-term outlook for the domestic and global economies. However, as noted within this report, COVID-19 also has the potential to create a shift in consumer purchasing behaviour that could lead to a sustained increase in demand for 3PL services. We expect that once the uncertainty lifts, normality returns and confidence improves, conditions have the potential to return to the trajectory they were on during 2019.