Tenants in industrial market secure rent reductions.
The tough conditions for landlords in Perth’s industrial market are not over but the worst of the downturn may have unfolded, according to a new research report from Colliers International.
The National Industrial Research Report for the second half of 2016 shows the vacancy rate for assets over 2000sqm increased to 9.1 per cent in the six months to September with 831,333sqm of industrial space available for lease.
It found the vacancy rate was exacerbated by an increase in assets larger than 5000sqm coming to market and remaining vacant for extended periods, which drove face rents lower during the 2015-16 financial year.
Smaller properties were also impacted with the supply of industrial properties under 2000sqm increasing.
Colliers International Director Industrial Agency Raj Singh said some tenants had been locked into boom-time rents, despite trading and economic conditions moderating for the past two years.
“At lease expiries and rent reviews, tenants are obviously taking advantage of the conditions to secure rent reductions and this has impacted on investment returns,” Mr Singh said.
“Rents at prime warehouses are expected to bottom in 2016 and the vacancy looks to be stabilising but net face rents are down 20 to 25 per cent form their peak.”
There was also a drop in the value of major industrial transactions in the greater Perth area, which fell 26 per cent in the year to June while the value of land sales were down 14 per cent in the year to September.
Despite the challenging market, Mr Singh said there was still robust demand for the limited supply of securely leased investment grade industrial property.
“There is still strong demand from institutional investors to buy commercial assets because the returns remain attractive,” he said.
“Developers and owner-occupiers are also taking advantage of the downturn as they can buy well located industrial properties at a much lower price and in the last six months, Colliers has negotiated industrial property sales valued at more than $20 million.
“Perth’s population is continuing to grow and the expectation of a more stable and diverse WA economy is supporting counter-cyclical and long-term investment plays by investors.”
New industrial properties are still coming to market and the report found 103,400sqm of space was under construction in the metropolitan area and due to be finished in the next 12 months.
Colliers International’s senior research analyst Quyen Quach said slowing growth in Perth’s residential construction sector was also reducing demand for industrial space.