Sydney Industrial Market
Sydney's industrial property market is performing well. Rents and land values are rising rapidly and demand is positive
Key drivers of the industrial market in Sydney at current are infrastructure, zoning and planning changes, e-commerce firms and international retailers looking to expand or enter into the Australian market and growing land constraints in some submarkets.
Demand for Sydney industrial space is changing in composition and location. Many tenants still prefer to locate in the South and Inner West submarkets due to proximity to customers and major road, sea and air transport. However, improving infrastructure in outer areas, lower comparable cost and availability of space is also driving an outward movement of tenants.
Gross tenant demand, in terms of leases signed, rose by 10% in Sydney over the year to March 2018, compared to the year prior (for deals over 1,000m2 in size). This was driven by strong activity in the Outer West and North West submarkets. The North West submarket, while only accounting for 6.7% of total metropolitan area take-up, has seen increasing activity over the past few quarters, particularly in Seven Hills and Marsden Park.
The Outer West, on the other hand, accounts for 42.6% of total take-up and therefore the increase is a significant driver of growth in the industrial market. Demand growth in the Outer West submarket has been partially driven by a displacement of tenants from inner areas, due to land use changes to mixed-use and residential and cost. Most activity in this submarket was in Eastern Creek with Huntingwood, Erskine Park and Arndell Park also active.
Prime net face rents increased by 3.6% over the year to June 2018. This was primarily driven by the South and Central West submarkets. Withdrawal of stock for change of use, saw vacancy fall and building quality improve resulting in upward pressure on rents in these markets.
Over the year to June 2018 there was around $1,615,089,520 worth of assets traded in NSW, down from $1,977,583,060 over the year prior. Developers, with 22.1% of sales, by value, accounted for the largest portion of NSW industrial sales over the year to June 2018 (over $5,000,000 in value), followed by A-REITs (15.2%). Portfolio sales activity was strong over 2015-2017, however, slowed over the second half of 2017 and into 2018.
Prime investment yields overall in Sydney have surpassed their pre-GFC lows across all submarkets. While secondary yields still lag prime considerably, the gap is reducing.
Secondary space remains higher on the risk scale perpetuated by tenants’ desire to lease the most efficient space possible. It is usually the case that rents rise in prime space as vacancy contracts and land values rise, this prices existing secondary space back into the market, lowering its risk. While land values have risen significantly, rent growth has been fairly weak, resulting in the continued perceived risk differential between the grades.
Land values increased in a range from 17.0%-37.0% over the year to June 2018 across the submarkets.
“Land values are expected to continue to rise into the foreseeable future due to the finite supply of land and the lag time required to obtain zoning changes and servicing of land to enable further development.”
This turnaround time is likely to result in pent-up demand for industrial land and therefore sustained growth in land values.