Leasing markets drive growth for Australian industrial property
April 26, 2012
Robust demand from tenants and an ongoing shortage of A-grade space has defined Australia’s industrial sector over the past six months, with strong leasing markets set to drive market performances around the country throughout the remainder of 2012.
According to Colliers International’s new Industrial Research & Forecast Reports for the first half of 2012, strong leasing activity and demand has powered a healthy Australian industrial sector through the first quarter of the year.
“Our market looks set for continued, steady growth for the balance of 2012,” Malcom Tyson, Colliers International Managing Director of Industrial, said.
“The strength of industrial leasing markets around the country paints a fairly healthy picture – it is proof that demand for industrial space is robust.
“With solid demand for quality, prime-grade industrial space – which will continue to be in short supply – and the prospect of interest rates not rising in the near term, the strengthening sentiment we have seen in Australia’s industrial sector over the past six months looks like it is here to stay for the remainder of 2012.”
Mark Courtney, Colliers International Director of Research, said through until 2013, average annual rent increases would be around 2-4 per cent across all capital city markets, picking up to around 5 per cent by 2013.
“A lack of new supply and increased confidence in the Sydney market has seen transaction volumes remain steady, in turn leading to a tightening of available stock across the market,” Mr Courtney said.
“Recently completed, speculatively built new supply has received strong demand and is now 80 per cent committed. The largest of these commitments was a 21,000sq m lease to DB Schenkar at Dexus’ newly built asset in Lenore Lane, Erskine Park.”
The largest deal in Sydney over the past six months was Qube Logistics’ $123million purchase of Stockland’s 55 per cent stake in the Moorebank Industrial Property Trust, owners of the proposed Moorebank Intermodal Terminal.
The leasing market remained firm in Sydney, with 257,000sq m (tenancies greater than 2,000sq m) taken up in the first half of 2012, up from 243,000sq m in the second half of 2011.
“We have seen an increase in sub-lease space into the market, as tenants consolidate multiple tenancies into one or two sites,” Mr Tyson said.
“Institutional land owners have continued to take advantage of the lack of stock in the market and pushed ahead with plans to speculatively build properties across the Central West.”
In Melbourne, 370,000sq m was leased in the past six months, an increase of almost 100 per cent on the previous six months.
Mr Courtney said this was a strong result, influenced by some large leases including 44,000sq m to Silk Logistics, 25,000sq m to Trimas and 24,000sq m to Kraft,
“Melbourne is expected to continue to have a shortage of prime grade stock over 3,000sq m due to strong tenant demand and limited new construction activity,” Mr Courtney said.
Melbourne’s West remained the best-performing market, accounting for 52 per cent of the total area leased.
Mr Tyson said many Victorian tenants were being forced to take up existing secondary grade stock as a result of prime-grade shortages.
In South Australia, more than 200,000sq m was leased in 2011 and at the end of the first quarter of 2012, leasing activity had already surpassed that of the same time last year.
“While net face rents have remained relatively stable during the last six months, the increasing level of activity and continued demand for prime-grade facilities should underpin some rental growth during the third and fourth quarters of 2012,” Mr Courtney said.
“There was a good level of pre-lease activity in 2011 – approximately 55 per cent of all deals done were greater than 3,000sq m, compared to around 35 per cent in 2010. There is genuine demand in Adelaide, and it is for large sites.”
In Brisbane and Perth, mining economies continue to support demand for industrial property.
Mr Courtney said almost one in four major industrial leases in Brisbane over 2,000sq m entered into over the past six months were signed by firms servicing the mining sector. Overall, 220,000sq m was leased in the first half of 2012, up from 186,000sq m in second half 2011.
“In addition, there has been a sizeable spike in land sales and leases to firms also engaged in servicing the miners,” he said.
“Demand for industrial land by logistics, wholesaling, manufacturing as well as mining firms continues to impact the total land supply. Available sites along the Logan Motorway and in the Southern precincts remain tightly held.
“Meanwhile, industrial land parcels that are available for development are increasingly limited and speculative development remains modest, with Australand the only significant developer active in the larger warehouse market.
“Notably, leasing activity picked up strongly in the Yalata Enterprise Area which underlines the tight Brisbane industrial market conditions. Yatala accounted for 23 per cent of all leasing transactions by area over the period.”
Mr Tyson said the West Australian economy was maintaining relatively strong growth and was likely to support the current rental rate over the short term.
“In Perth, however, infrastructure investment is lacking so while demand for industrial sites will continue, projects that encounter this issue are likely to take a number of years to be completed,” he said.
“Rents are likely to be stable, particularly for large space, as new supply is limited and mostly pre-committed.
“The pre-lease market remains strong and we have also seen a trend in short lease terms (between 2 and 5 years) become more common over the past twelve months.”
Mr Tyson said the activity of local institutions was encouraging offshore buyers to consider Australian industrial property.
“Our assets are highly sought after,” he said.
“Institutions such as GPT, GIC and Blackstone Group are all regarding industrial as being something worth considering in a diversified portfolio.
“Quality assets with good cash flow in transport-rich locations are delivering good capital and income returns.
“Those who are active in this space have confidence in the sector. Good buildings are being leased up very quickly as investors look to expand their portfolios.
“In the current economic climate, it is more about generating a good solid 8-9 per cent return, along with rent growth at CPI or better.
“However, it is an opportune time to take a strategic position in anticipation of strengthening income returns.”
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