Strong market activity throughout 2019 continued well into Q1 2020 with Melbourne’s Western Industrial Market (sub-3,000sqm) experiencing sustained growth and continual demand.
Amid the COVID-19 situation that is currently influencing consumer confidence and demand throughout the whole economy, it is important to recognise the underlying trends of the Melbourne West Industrial Market (sub-3,000sqm) as we look forward to the medium and long-term. See below a summary of the key features of this market:
Vacancy of built-form stock within Melbourne’s core western market between 1,000sqm – 3,000sqm continues to remain stable at 8.24%. Positive anomalies include the inner-industrial precincts of Altona, Altona North and Brooklyn with vacancy rates at less than 2%. Historically low interest rates have created unprecedented investor demand within this sub-market especially. As such, A-Grade buildings with strong covenants are being sold at a capitalisation rate of between 6.25% and 6%, compressing from 6.5% throughout the first half of 2019. Through the Sale and Leaseback transaction process, investors have appreciated the terms and business plans put forward by Owner Occupiers; subsequently certain transactional yields have sharpened to less than 6%.
With 28.4% of all property in Altona, Altona North and Brooklyn, between 1,000sqm and 3,000sqm, being owner-occupied there is opportunity for Landlords and Investors alike in this sub-market (as well as the greater market) to capitalise on the historically low interest rates (0.25% as of March 2020) in tough market conditions. Through the Sale and Leaseback process, Landlords will have the opportunity to liberate and free up capital to redeploy into the business, create cash liquidity and optimise the profit and loss accounts, whilst Investors will have the opportunity deploy their capital into property with established business functions and processes.
Land values in the west continue to remain strong, coupled with high demand and diminishing supply of zoned and subdivided land. Land prices have increased in Melbourne’s West by over 80% in the past 4 years. Significant value increases have been experienced in Truganina particularly, with certain blocks re-selling at over 100% of the value that they were initially transacted.
Key infrastructure projects, particularly the West Gate Tunnel, will have a considerable impact on the Western Industrial market by significantly reducing travel times to the East and North, whilst the construction aids employment and provides workflow for associated businesses and suppliers. Across Melbourne, there is currently $73 billion in transport infrastructure projects in the pipeline, almost half of which are underway or committed.
Globally, Australia is the 10th largest ecommerce market by revenue. Online retail spend now accounts for 6.6% of total retail spend in Australia. However, when compared to the US and UK at 12% and 22% respectively, we are still very much behind. Looking ahead, the COVID-19 pandemic is expected to alter Australian consumer behaviours, with online retail expenditure increasing considerably as it becomes the pre-eminent focus of consumer spending, both essential and discretionary. Given the increase in consumers buying their goods online, Colliers Research forecast online retail could account for approximately 14% of total retail expenditure in Australia by the end of 2022 as a base case.
The convenience of the online retail experience to consumers and the real-time analytics it provides to retailers mean that this accelerated shift in spending will continue in the medium to long-term. Overall, the evolution of consumer behaviour and increased demand for e-commerce will continue to drive warehousing requirements and the overall industrial market through the current COVID-19 situation, and through to the long-term.
It is these underlying trends of the Industrial market itself, as well as consumer behaviour and habits, that have established the Melbourne West sub-market and evoke optimism and great opportunity for owner-occupiers, tenants, developers and investors alike in the medium to long-term.