Colliers International Research releases its Industrial Research and Forecast Report for H1 2017.
The supply demand ratio of industrial land is shifting. On the east coast, Melbourne and Sydney in particular, the housing boom has brought an intense focus on the supply of residential. A large proportion of this has been through urban regeneration, the change of zoning from industrial to residential. The inner parts of Sydney and Melbourne have, as you would expect, been the focal points of this rezoning. The resulting loss of these industrial lands has resulted in the trend which, while in some cases started 5 years ago, now has really started to impact directly on the industrial land availability in these markets. An estimated relocation of approximately 100,000sqm p.a. will take place over the next 5 years. This demand will be joined by the estimated 150ha – 250 ha of land required per annum to meet the needs of a growing population, as well as catering for the massive infrastructure spend that is being played out.
Extrapolating this demand out for a 10 year period starts to bring a focus on to the available land that is either ready for industrial development, or has the potential for industrial development subject to zoning and servicing. In a market such as Sydney, which is, by virtue of the geographic constraints, effectively a land constrained market.
“Competition is increasing for development land between the property institution looking for long term industrial investment property, and the industrial business looking to own their own premises, which has lifted prices by over 25% in the last 24 months,” said Malcom Tyson, Managing Director, Industrial, Colliers International.
“Any large land parcels that are suitable for major industrial estates will be chased hard in 2017.”
“Government policy and planning decisions obviously have a major impact on future supply, however based on a current supply and demand analysis we forecast that there is between 6 to 10 years of industrial supply left in the Sydney market,” said Sass J-Baleh, Research Manager, Colliers International.
The Colliers International Industrial Research and Forecast Report for H1 2017 found in 2016 around $4.5 billion of industrial sales occurred nationally, which is above the five-year average of $4.3 billion. Yields compressed in each of the eastern seaboard capital cities between H2 2015 and H2 2016.
“Against a backdrop of decreasing asset volumes coming to market and rises in offshore and domestic interest for industrial assets, it is likely we will see further cap rate compression during the year, particularly for secondary grade stock in Sydney and Melbourne,” said Anthony Mylott, National Director, Industrial Valuation, Colliers International.
“Demand drivers will continue to concentrate on the infrastructure boom, precincts well serviced by transport connections, areas of high tenant retention and labour market improvements.”
As institutional investors continue to expand their ownership of industrial assets (particularly within the logistics sector), the availability of assets for sale has diminished. Limited property portfolios are expected to reach the market in 2017, raising the competitiveness for purchasing assets.
The ownership of the investment grade industrial stock is still the least concentrated of the major asset classes of office, retail and industrial. 30% of investment grade industrial is owned by the top 8 players, with the balance of the ownership spread between corporate, private and emerging investment vehicles.
“Taking advantage of the current buoyancy in the investment market will be the corporate owner, who by the sale and leaseback of their premises will unlock and release capital that is tied up on their balance sheet,” said Mr Tyson.
“This trend of sale and lease back programs is anticipated to continue in to 2017, underpinned by the extensive capital mandates circulating through the Australian Industrial property market.”
The broad trends being observed within Metropolitan Sydney – amplified over the past two years – has been the shift in preference for industrial users (particularly those large users within the manufacturing and logistics industry sectors) to locate further west of Sydney, and the urban renewal of industrial zoned land in pockets of inner and middle ring areas.
There has been, and will continue to be, increasing demand to regenerate sites through mixed use developments. Recent urban renewal projects include Mascot Central, Green Square Town Centre, Clemton Park Village at Campsie, and East Village at Zetland. The movement of operations toward western industrial precincts (i.e. Outer West, South West, and North West sub markets) allows these users to reap the benefits of cheaper land values, access to large sites and ability to construct custom built facilities.
Melbourne’s industrial market has continued to remain active. Transport infrastructure projects, coupled with a favourable economic climate (i.e. record low interest rates and strong annual projected population growth rate to 2031 of around 2.2 per cent), has led to a number of large investment sales. Over the past 12 months Victoria recorded around $1.6 billion in industrial sales above $15 million (representing around 35 per cent of total national sales), well above the five-year average of $1.04 billion.
Over 2017 we anticipate there to be continued solid capital inflow from offshore investors as well as strong local investment volumes, which is expected to drive yield compression across both prime and secondary asset classes, particularly against the backdrop of limited stock availability and rapidly decreasing industrial zoned land.
Urgency has returned to the Brisbane industrial leasing market as options for occupiers become constrained as enquiry increases and the supply pipeline slows. As investors continue to move up the risk curve, the spread between prime and secondary assets is expected to narrow, opening opportunities for investors to recycle capital. Industrial sales (>$5 million) totalled $322.3 million for the six months to December 2016. This was 28 per cent less than that transacted for the six months to June 2016 at $445.8 million.
Investment sales increased sharply with institutions accounting for almost 75 per cent of the dollar sales volume and driving the market direction.
Investment activity in the Adelaide industrial market has remained strong with a pipeline of settlements during the first half expected to see this trend continue into 2017. During the last quarter of 2016 we saw several large transactions complete with the buyer pool in the Adelaide market increasing. In particular an increase in interest for institutional grade investment. This has seen the buyer pool for this asset class strengthen with a range of investors both institutional grade and private investors in the market. They have turned their attention to the Adelaide market over the last six months as Melbourne and Sydney industrial markets have seen yields tighten more rapidly.
The Adelaide market has not seen as rapid trend and therefore is still offering higher returns for industrial assets. The current quarterly yield data shows limited evidence of tightening yields with the lower inner industrial markets still around seven per cent. However it is expected that there will be further evidence in the coming half which will see yields fall below this level.
The December 2016 quarter for Western Australia’s state final demand put an end to five consecutive quarters of contraction with a modest 0.4 per cent seasonally adjusted quarter on quarter growth. This rebound in growth was largely driven by a recovery in private business and public sector investment spending. Over 2016 major industrial transaction activity remained robust, totalling $757.5 million. This is evidence of the continued appetite for Perth assets from institutional investors. In the last quarter alone $230.6 million in assets were transacted.