Sydney Industrial m3property Insight

July, 2019

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The Sydney industrial market is one of the strongest performing markets across the nation.

Positive conditions driving the industrial market

The Sydney industrial market remains one of the strongest performing markets across the nation displaying robust rental growth, booming land values and solid investment demand over the year. Positive market conditions, major key road infrastructure projects, the continued growth of e-commerce along with rising population, have been the main drivers of this market.

Building approvals over the last four years were significant, recording levels above the long-term (18-years) annual average. It is expected that as a result of these approvals, there will be high levels of new supply entering the market over 2019. However, land constraints within the inner precincts are likely to result in the majority of the new supply being within the outer precincts.

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Low vacancy is pushing up rental growth

The downward trend in vacancy as a result of stock withdrawals along with positive tenant demand have pushed up both prime and secondary net face rents. Net face rents recorded an increase of 6.9% for prime stock and 8.9% for secondary stock over the year to June 2019. The Inner West subregion displayed particularly strong growth, recording 26.0% over the year to June 2019 due to competition for industrial land from other uses.

Incentives decreased slightly for prime and remained stable for secondary space over the year to June 2019.

Outgoings are expected to rise as owners pass on increased land tax bills to tenants.

Land values rise steeply

Land values continued their upward trend, reaching record highs across all submarkets. Over the year to June 2019, a 36.2% incline in land values was recorded for Sydney. This was driven by tenants placing a high value on proximity to inner metropolitan locations where vacant industrial-zoned land is in short supply. The rises were particularly strong within locations where rezoning of prime industrial sites for residential and mixed-use purposes have occurred. The submarket which epitomises both these attributes is the South. This area has witnessed significant growth over the past year. This is noteworthy given it is already coming off a substantially higher base than the other submarkets.

Sales activity drives record low yields

Transactional activity was solid over the past year with circa $2.3 billion of sales recorded over the year to June 2019. This represents an increase of 20.5% compared to the year prior. Over the past year, the purchaser profile within the Sydney industrial market has shifted with A-REITs being the main purchasers in this market, accounting for 24.4% of the sales.

This strong investor demand along with positive market fundamentals have placed downward pressure on yields. Over the year to June 2019, average prime yields tightened by over 50 basis points to range between 4.50% and 7.00% and average secondary yields tightened by 65 basis points to range between 5.50% and 7.75%. m3property Research forecasts investment yields to stabilise in the short-term, after a period of strong firming.