Record prime yield compression in over 10 years for key industrial markets.
Over the next four years, New South Wales and Victoria will see a record $110 billion of combined infrastructure investment, which will play a leading role in propelling the entire Australian industrial market forward. As interest builds for industrial assets from offshore and domestic players, Colliers International’s Industrial Research and Forecast report anticipates further cap rate compression, including secondary assets.
According to Luke Dixon, Director of Research at Colliers International, “Sydney and Melbourne look set to be the strongest markets as investors slowly moving up the risk curve, in the hunt for better yields in Sydney, whilst actively pursuing both prime and secondary assets, resulting in tighter spreads between the two classes in 2017.
“Portfolio transactions continue to gain favour in Melbourne, given that the majority of buyers include institutions looking to purchase larger assets worth over $100 million, whilst the remaining markets across Brisbane, Adelaide, Perth and New Zealand remain steady or subdued as a dearth of investment grade stock is brought to market” he said.
Sydney has the largest infrastructure pipeline of any state in Australia, and according to the government’s own forecasts, there will be an estimated $74 billion in transport infrastructure spending just in NSW over the next four years.
Due to this, Sydney’s western industrial precinct continues to have strong investment conditions with strong interest from offshore investors – Singapore, Hong Kong, Japan, and Kwap from Malaysia.
US investor Blackstone has broken the previous investment record held by Ascendas, after acquiring $1.3 billion of Goodman’s industrial assets across the East Coast, in just two transactions. This sale will provide Goodman with strong financial support to fund future land acquisitions and developments globally.
Domestically, REITs such as Charter Hall and Mirvac, as well as fund management group AMP are actively pursuing industrial opportunities. In June, AMP acquired JP Morgan’s industrial portfolio worth over $250 million, on a portfolio weighted average yield of 6.5 per cent. Prime initial yields in the west compressed by a further 15 basis points from June to September on the back of strong investment volumes.
According to Gavin Bishop, National Director of Industrial at Colliers International, “With prime yields compressing to 10 year highs, we anticipate that the spread between prime and secondary industrial assets will tighten from its current margin of 120 basis points over the coming 12 months as investors look for higher performing returns, with development or repositioning upside.”
“Land acquisition opportunities continue to be tightly contested, with owner occupiers actively competing with established developers for opportunities. Landlords are also looking at speculative opportunities with Goodman building a 22,000sqm facility in Oakdale Central, and Mirvac developing 19,000sqm in Wallgrove Road, Eastern Creek”.
Mr Bishop went on to say that developers are also speculatively developing due to tight vacancy rates in the Western market, and limited opportunities for tenants in the 10,000sqm plus market.
Tenant demographics are becoming more diversified in the western market, with 40 per cent of tenants being from storage, transport and logistics businesses, however the strong performance of retail discretionary spending by consumers is driving demand from retailers looking for storage and distribution facilities. Tenant activity from corporates has been consistently strong, with tenants such as White Wires, Blackmores, Tyre Max and Pet Barn moving into the west.
Mr Bishop said rental growth performance is strong, with net effective rents up by 3 per cent year on year, higher than their 10 year average growth rate of 2.3 per cent. “We are forecasting industrial effective rents to rise in the next 12 months by between 3-5 per cent, due to asset and land scarcity, and rising demand from tenants with exposure to discretionary retail”.
The South Sydney shrinking pool of available assets is creating opportunities and challenges for investors, tenants and landlords. Since 2012, an estimated 29 per cent of the Southern industrial market has been withdrawn for rezoning to residential development, and the acquisition of land for WestConnex and Sydney Metro.
Mr Dixon said for tenants, this means that there are fewer available assets leading many of them to look for owner occupancy opportunities, however vacant possession are rarely available. “Tighter space availability is leading to buildings using investment style methods such as expressions of interest, to lease their space. This has significant benefits for landlords, reducing their incentives and increasing their face rents but entering a competitive bid process.”
Victoria continues to attract both local and offshore investors, on the premise of a strong domestic economy, record low interest rates, booming infrastructure investment and growing population.
According to Tony Iuliano, National Director of Industrial at Colliers International, average yields have compressed by 50 basis points over the year to be around 6.75 per cent across the Melbourne metropolitan areas.
“However, Super Prime assets with long WALES and exceptional tenant covenants are attracting sub-6 percent yields. We expect strengthening demand to translate into further yield compression over the next 12 months, however, the general sentiment across most major sub-markets is that there is plenty of capital with fewer investment opportunities”.
So far this year, Colliers International has negotiated more than $900 million worth of deals alone, half of which was attributed to portfolio transactions including $460 million worth of Melbourne industrial assets from the Goodman portfolio, $68 million from the Charter Hall portfolio and the Alex Fraser portfolio ($44 million).
Mr Iuliano said the next few years in Port Melbourne look set to be defining ones for property on the cusp of the booming infrastructure investment and ongoing structural change, as infrastructure assets continue to attract investor appetite.
Assets with shorter lease expiries continue to gain momentum in the market, particularly for property with a redevelopment potential. Areas such as the Montague and the Sandridge precinct have been seeing strong tenant demand for leases with short WALES varying between 2-3 years, where much of the properties within this region serve as holding income for investors seeking to redevelop these assets and are awaiting permits.
Melbourne’s North has seen strong take up of space over the last year on the back of growing tenant demand, particularly from food, logistics and packaging businesses. Properties within the 5,000-10,000sqm range have seen the largest take-up in the year to date, with more than 54,000sqm absorbed – nearly doubling since last year. Vacancy declined considerably by approximately 45 per cent over the 12 months to August 2016 to be around 236,706sqm, with much of this vacant space attributed to lease expiries.
“Tenant enquiry in Melbourne’s West has more than doubled over the last 12 months, where the majority of this demand was concentrated on properties above 5,000sqm and smaller lots below 3,000sqm, however the inflow of speculative development has continued to wane, with the remaining speculative stock available for lease split between Frasers Property and the Goodman Group. Prime Grade Net face rents are currently in the $70-80sqm range, while Secondary Grade assets range between $50-60sqm” said Mr Iuliano.
The Brisbane industrial market remained steady throughout the first half of the year as leasing and sales transactions were limited. However, there is a growing sense that urgency will return to the market in the near term as increased enquiry, reduced supply and competition intersect in late 2016.
According to Simon Beirne, State Chief Executive of Industrial at Colliers International, as the development pipeline slows, the number of properties available for purchase or lease remain limited and a number of requirements are concluded.
“Recycling of capital is also becoming a consideration for owners as investment grade opportunities are scarce. It is expected that these factors will intersect towards the end of this year and into 2017.
“Leasing activity remained subdued in early 2016 as the majority of deals completed fell in the 3,000-4,000sqm range. Activity accelerated for larger deals in the closing stages of the second quarter as a number of major briefs were released to market”.
“The vacancy rate across Brisbane has increased to 17 per cent from 13 per cent back in March 2016 but a number of large deals are currently underway and a wave of leases are due to commence in the coming months”.
Leases for a total of approximately 110,000sqm are due to commence across a number of deals for a mix of buildings and locations including; Bevchain, Schweppes, Beaulieu Carpets, MJ logistics, Super Amart and Whites Group.
The most active area has been Gateway South and Logan Motorway corridor where Goodman, Logos, Frasers and Dexus have all had substantial leasing success in the last quarter. These leases reinforce the desire of occupiers to be located in the Logan Motorway precinct or other areas with direct access to Brisbane’s major road network.
Mr Dixon said vacancy has continued to fall across the Adelaide market to 4.8 per cent down from 5.0 per cent six months ago. Leasing enquiry has also continued to improve with several large requirements in the market which are unlikely to be satisfied with current supply. This is likely to lead to further design and construct activity in 2017 and into 2018.
One of the largest pre-commitments in the Adelaide industrial market for many years was secured and is under construction in Gillman for a 20,000sqm facility for a Multinational Corporate Client.
“On the investment side, there has been limited activity in the market above the $5 million price bracket with total sales volume of $50.1 million year to date which is about half of the 10 year average for sales. Sales below $5 million has seen more activity with owner occupiers being the most active purchaser group in the market”.
There has also been an improvement in enquiry to purchase industrial property which is likely to lead to higher sales volumes through the last quarter and into next year. This has been driven by the low interest rate environment and the opportunity to purchase a facility through a superannuation vehicle or through a business. Interestingly, this shift has impacted leasing activity with a number of leasing appointments transferring to sales campaigns
“Vacancy in the Outer North market has recorded the lowest vacancy rate of all of the precincts at 2.8 per cent. This is a dramatic turn-around from 12 months ago where vacancy was recorded at 19.9 per cent. The Outer North market has the highest exposure to the closure of the Holden plant which is expected in late 2017, and the high vacancy recorded 12 months ago was a result of several suppliers vacating upon the announcement of this closure” he said.
The Outer North has seen five sales transactions over the last three months with two investment sales and three vacant possession sales which were purchased for owner occupation. The owner occupier sales were originally listed as leasing opportunities.
Looking forward, Mr Dixon said “Despite industrial cap rates hitting 10 year peaks, yield spreads to bonds are over 300 basis points, unlike the pre GFC period when they were only 50 basis points which points to more head room for investors in the medium term”.