Appetite grows for Victorian industrial property

April 24, 2012 | Industrial | Research | Commercial

Strong leasing activity and an increase in speculative development is set to drive heightened investment demand for industrial property in Melbourne, according to new research by Colliers International.                                                                                           

The Melbourne Industrial Research & Forecast Report for Q1 2012 found a shortage of prime-grade stock was expected to continue over the next 12 months and result in increased activity in the middle-tier market.

Tony Iuliano, Colliers International National Director of Industrial, said the combination of high tenant demand for prime-grade stock and limited speculative development in the current market would result in an increased number of tenants seeking second-grade stock.

"The majority of developers are now awaiting pre-commitments before starting new industrial projects in Melbourne,” Mr Iuliano said.

“A number of speculative developments in the West and South East markets have been fully leased prior to completion.

“We expect this could lead to more speculative development occurring in 2012, although access to finance still remains an issue for many developers.

“As a result, limited new supply of premium stock is expected over the short to medium term and we expect purchasers will turn their attention to the middle tier of the market, where the greatest opportunities will exist in the next 12 months.”

According to the report, the Melbourne industrial investment sales market was expected to see increased demand from investors over the remainder of 2012.

The lack of stock on the market currently available for sale was forecast to encourage capital values to increase over the second half of the year. Prime grade average yields were expected to compress further.

“From a leasing perspective, the Melbourne industrial market remains robust, with more than 370,000sq m leased between October 2011 and March 2012, an increase of almost 100 per cent from the previous six months,” Amita Mehrotra, Colliers International Research Manager, said.

“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.”

Melbourne’s West remained the best-performing market, accounting for 52 per cent of the total area leased.

Mr Iuliano said most demand for space was coming from tenants looking for warehousing and distribution centres, with the growth of online retailing also emerging as a key driver.

“Many tenants are now being forced to take up existing secondary grade stock as a result of prime-grade shortages,” he said.

“Developers are responding to the situation and, as a result, we are starting to see higher levels of speculative development.”

Ms Mehrotra said of the total 106,000sq m of industrial stock under construction, 60 per cent was speculative.

The report found net face rents remained stable across all markets over the past six months.

“However, the shortage of available stock has resulted in a decline of prime grade incentives in the South East, East and North,” Ms Mehrotra said.

“Increasing pre-lease rents have also become apparent from the stock shortage.”

Mr Iuliano said a creeping increase in net face rents was possible over the next 12 months as a direct result of the current stock shortage.

Total investment activity slowed significantly over the past six months. There were eight transactions, totalling $145 million, representing a decline in total volume of almost 50 per cent from the previous six month period.

“Institutions are now becoming more active in the Melbourne industrial market, with GPT’s recent purchase of Citiport Business Park in Port Melbourne from Salta Properties for $61million accounting for the majority of total volume,” Mr Iuliano said.

Capital values and yields remained stable over the last six months.

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