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Second Half 2019INDUSTRIAL

Research & Forecast Report

Joanne Henderson Director | Research+61 410 391 [email protected]/colliersedge

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will help you understand quarterly changes, as well as broader themes

behind each sector and market.

IN-DEPTH DATAGranular datasets covering historical and forecast data with over 2,000

datapoints updated quarterly.

DETAILED TRANSACTIONS

Individual reporting of major transactions.

Snapshot | Industrial 4

National Overview 5

Sydney 6

Melbourne 9

Brisbane 12

Adelaide 14

Perth 16

Newcastle 18

New Zealand 20

Our Expertise 22


CONTENTS

INDUSTRIAL | Research & Forecast Report | H2 2019

4

INDUSTRIAL SNAPSHOT

Net Face Rent Yield Capital

ValueIncentive

LevelLand Value

$/sqm % $/sqm % $/sqm

H2 2019 (Q3) $102 7.56% $1,385 11.3% $205

H1 2019 (Q1) $100 7.75% $1,319 11.3% $200


ValueIncentive

LevelLand Value


H2 2019 (Q3) $79 7.00% $1,121 17.5% $438

H1 2019 (Q1) $78 7.10% $1,099 17.5% $438

Adelaide

Perth

Average Land Value Ranges

$1,261

$393 $321$205

$441

$0$200$400$600$800

$1,000$1,200$1,400$1,600$1,800

Sydney Melbourne* Brisbane Adelaide Perth

$/sq

m

Low High Average

Source: Colliers Edge Note: *This figure for Melbourne excludes the City Fringe

Share of Supply to be Delivered 2019 to 2023

NSW VIC QLD SA WA

46%

29%

9%

10%5%

Source: Cordell Connect/Colliers International

*H2 2019 figures as at Q3 2019

* Includes the following precincts: ATC, North and Outer North, South, South West and Yatala


ValueIncentive

LevelLand Value


H2 2019 (Q3) $111 5.73% $1,975 14.3% $393

H1 2019 (Q1) $111 6.03% $1,876 14.4% $393

Brisbane*

Sydney

Melbourne


ValueIncentive

LevelLand Value


H2 2019 (Q3) $155 4.75% $3,258 9.1% $1,261

H1 2019 (Q1) $151 5.04% $3,000 8.9% $1,214


ValueIncentive

LevelLand Value


H2 2019 (Q3) $111 5.94% $1,874 16.2% $321

H1 2019 (Q1) $110 6.07% $1,816 16.2% $310


5

By Karina Salas Manager | Research [email protected]

Transport infrastructure investment transforming the industrial market

Transport infrastructure plays a critical role shaping the dynamics of how a country uses its labour force and capital. As the Australian population continues to grow and land availability for different uses becomes restricted, a strategic transport network is required to facilitate socio-economic development and to provide efficient and flexible access to different markets. The Australian transport infrastructure network has entered an era of transformation and renewal, with an estimated investment in transport infrastructure projects under construction and committed of $133 billion and with over 65 per cent of this investment scheduled for completion in the next three to five years.

Several infrastructure projects currently under construction are expected to have a significant impact on the way the Australian industrial market operates, reshaping the demand drivers for industrial land. The $16.8 billion WestConnex project in Sydney will reduce travel time between Parramatta and the Airport by about 40 minutes, cutting down transport costs for industrial operators within the Inner, Central and Outer West precincts and potentially driving industrial expansion in the Western Sydney precincts offering more availability of industrial land.

The $6.7 billion West Gate Tunnel project in Melbourne will create an alternative and direct route connecting the West industrial precinct with the Port, benefiting up to 9,000 trucks using the West Gate bridge and reducing travel time by up to 50 per cent. The completion of this project opens the opportunity to use High Productivity Freight Vehicle road access. This is expected to allow movement of greater volumes of freight with fewer movements encouraging industrial development within more affordable and distant precincts to the Port and beyond the City Fringe precinct.

Colliers International anticipates that the $10 billion Inland Rail project will challenge the status quo of the industrial market on the Australia East Coast, expanding and connecting the supply chains across Melbourne and Brisbane to international and other domestic markets. This initiative, scheduled for completion by 2028, will strategically lift the national freight capacity creating distribution and transport efficiencies reflected on rail costs savings of about $10 per tonne between Melbourne and Brisbane. The completion of this project is expected to support industrial development beyond the traditional capital-cities industrial precincts and into regional locations in proximity to the rail line in Victoria, NSW and Qld. The most likely regions to benefit from the Inland Rail are expected to be Toowoomba, Willowbank, Bromelton and Acacia Ridge in Queensland, Tottenham in Victoria and Parkes in New South Wales.

There is no doubt that the current transport infrastructure investment is set to transform the outlook of the industrial market not only for operators, but also for developers and investors currently revisiting their investment strategy to recognise the changing market dynamics created by the infrastructure investment.

Industrial land values driven by rapid population growth

Rapid population growth and high population density in the East Coast underpin the increase in land values throughout the largest capital cities, as land availability for industrial development becomes limited and its use is restricted to other purposes, particularly in proximity to the CBD.

Melbourne has reported an increase in industrial land values in the range of 25 to 105 per cent for the past five years, with the average land values sitting in the range of $305/sqm to $1,400/sqm.

Similarly, Sydney has seen growth in average industrial land values in the range of 85 to 215 per cent over the past five years to a range of $725/sqm and $2,750/sqm. In the case of Brisbane, a solid 5-year increase in land values in the range of 25 to 50 per cent, to an average range of $300/sqm to $415/sqm has been witnessed.

As more than half of the Australian population remains heavily concentrated in Sydney, Melbourne and Brisbane, industrial land values in these capital cities will continue to trend upwards, with the transition from bricks and mortar retail to e-commerce retail becoming another key driver of industrial activity in these regions.

We anticipate that the rail transport infrastructure investment pipeline will improve operational efficiencies for industrial operators located in outer and even regional precincts, which eventually may ease the pace of the growth in land values. However, a National Population Strategy is critical to promote decentralisation of Australia’s population and support a more efficient use of land and resources across the country.

NATIONAL OVERVIEW

Transport Infrastructure Projects

- 5 10 15 20 25 30 35 40 45

$- $5

$10 $15 $20 $25 $30 $35

NSW VIC QLD Various WA SA TAS NT ACT

Number of Projects

AUD

$ (b

illio

n)

Air & Space Rail Road Number of Projects

Source: Deloitte Access Economics Investment Monitor, June 2019 -Under Construction and Committed


6

SYDNEY OVERVIEW

Sydney Average Net Face Rents by Grade

$0$20$40$60$80

$100$120$140$160$180

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

Mar

-19

Sep-

19

Rent

($/s

qm)

Prime Grade Secondary Grade

Source: Colliers Edge

Sydney Average Yields by Grade

0%

2%

4%

6%

8%

10%

12%

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

Mar

-19

Sep-

19

Yiel

d (%

)

Prime Grade Secondary Grade


Transport, Postal & Warehousing and Wholesale Retail sectors continue to drive tenant demand, underpinning growth in the average prime net face rents of circa 8 per cent over the past YoY to September 2019.

The South industrial sub-market has recorded the most substantial average prime rental increase among all precincts in Sydney over the past 12 months. Prime net face rents have risen by 21.3 per cent YoY to average around $228/sqm due to declining stock and increased competition for alternative uses.

The average prime net face rent across the West sub-markets has increased by 5.3 per cent YoY to $130/sqm as at September 2019, while the average prime incentive has declined from 11 per cent a year ago to circa 10 per cent now.

Industrial investment activity in NSW has reached circa $1.97 billion over the year to September 2019, driven by demand from private and offshore investors, particularly from Japan and Europe. Yield compression is forecast to continue on the back of a record low cash rate (0.75 per cent) and bond yields trending downwards.

Limited land supply continues to drive a solid increase in land values across all industrial precincts in Sydney. The South precinct has recorded the strongest land values growth of 29 per cent YoY to September, remaining as the most sought after location for industrial operators, developers and investors willing to pay an average of $2,750/sqm.

Market Indicators - September 2019AVERAGE NET FACE RENTS ($/m2)Prime Secondary

$139 $171

L H$123 $141

L H

Prime Secondary

4.54% 4.96%

L H5.21% 5.68%

L H

AVERAGE YIELDS

Prime Secondary

$3,055 $3,456

L H$2,369 $2,501

L H

AVERAGE CAPITAL VALUE* ($/m2)

DEVELOPMENT SUPPLY

2019 ANNUAL AVERAGE (2009-2018)

473,930m2533,810m2


7

By Alex Pham Director | Research [email protected]

Conditions in the Sydney industrial market have remained positive over the third quarter of 2019. Demand continues to be driven by the Transport, Postal & Warehousing and Wholesale Retail sectors. Growth in e-commerce activity and infrastructure investment is supporting the logistics sector and demand for warehouses in strategic locations. Following the steady supply of new industrial space during 2019 with 533,810sqm of space delivered, the rate of new construction activity is expected to slow down in 2020. Since the beginning of this year, a total of 221,793sqm of new industrial space have been completed.

On the back of the positive space demand amid limited supply, net face rents have continued to rise across the board. The average prime rent in Sydney has increased by 7.9 per cent to $155/sqm in September 2019 from $144/sqm a year ago. For secondary assets, net face rents averaged around $132/sqm, which was up 7.1 per cent YoY. Incentives have declined from 10 per cent from a year ago to circa 9.0 per cent for prime and secondary properties as at 3Q 2019.

Investment MarketThe rate of capital flows into the industrial market has accelerated over the past quarter with demand stemming from both institutional and private investors. Most importantly, Colliers International continues to witness the healthy buying activity of private buyers as well as offshore investors – particularly from Japan and Europe. The amount of dry power remains high, with many groups have recently completed capital raises to put in the logistics sector. Over the 12 months to September 2019, a total of $1.97 billion worth of industrial assets in NSW have transacted, which is slightly lower than the corresponding volumes a year ago.

A notable transaction occurring in the third quarter of this year was 159 Newton Road, Wetherill Park purchased by a private investor from Lester Group for $24.4 million. The transaction represents an initial yield of 5.71 per cent and a building rate of $1,928/sqm. Another benchmark deal was 230-236 Captain Cook Drive, Kurnell which was transacted as a sale & lease back for $36 million from Dika Data to EG Funds. The purchase price reflects an initial yield of 5.90 per cent and a building rate of $2,256/sqm. With the cash rate sitting at its record low level of 0.75 per cent and bond yields continuing to trend down, Colliers International anticipates yields to compress further and to stay low for a while longer.

Sub-MarketsWest

Industrial space demand has remained solid across all sub-markets in the West, which saw rents elevated compared to a year ago. The average prime net face rent across the West sub-markets has increased by 5.3 per cent YoY to $130/sqm as at September 2019. The average prime incentive has declined from 11 per cent a year ago to circa 10 per cent as at 3Q 2019. By sub-markets in the West, the Outer West market recorded the most substantial growth in prime net face rents, which rose by 9.9 per cent over the past year to $128/sqm as at Q3 2019. Strong rental growth was also recorded

in the South West and Inner West markets over the past 12 months. The average prime net face rents in the South West and Inner West precincts rose by 6.6 and 6.3 per cent YoY to $116 and $143/sqm respectively. With relatively more moderate growth, prime net face rents in the North West and Central West increased by 2.8 and 2.0 per cent to $128 and $130/sqm respectively. Prime incentives currently average around 9 - 12 per cent across all sub-markets in the West.

Secondary assets in the Western markets also registered increases in rents over the past 12 months due to the high level of requirements for existing industrial facilities. On average, secondary net face rents across all sub-markets in the West have risen by 5.8 per cent per annum to around $116/sqm. In line with the prime market, the Outer West secondary market also recorded the sharpest escalation in net face rents – which rose by 11.1 per cent YoY to $120/sqm. The strong rental growth has spilt over to the South West precinct, where the average secondary net face rent has increased by 8.8 per cent YoY to $105/sqm. Softer growth was recorded in the Inner West, North West and Central West sub-markets, where secondary net face rents have risen by 4.4, 3.1 and 2.1 per cent to $118, $115 and $120 respectively. Incentives are being offered at around 9.0 to 11.0 per cent.

Investment yields have continued to trend down further across all sub-markets in the West. Core market yields have compressed by around 50 bps over the past 12 months. Core market yields for prime assets are currently sitting at 4.5 to 5.0 per cent. Secondary properties are trading at around 5.0 to 6.0 per cent. Land prices across the West market have increased by over 24 per cent over the past year to average between $670 and $820/sqm.

64 Biloela Street, Villawood Sold on behalf of AMP Capital


8

13 Ferndell Street, South Granville Sold on behalf of Centuria Capital

North

The industrial market across the Northern suburbs of Sydney continues to experience a lack of supply and limited stock levels. Net face rents for prime industrial space have climbed by 3.0 per cent over the 12 months to September 2019 to average around $206/sqm. In the secondary space market, net face rents currently sit at circa $168/sqm on average, up by 3.7 per cent from the previous year. While rents in areas further North such as Hornsby and Ku-ring-gai are at similar levels to the Western suburbs, rents start to escalate in the precincts closer to the commercial and population hubs of Macquarie Park, Chatswood and St Leonards. Incentive levels range quite extensively depending on the type of assets and owners. Privately-owned assets are offering incentives of around 5 per cent while institutional-grade properties are giving away up to 15 per cent in incentives to attract the right user.

The tenant base in the North sub-market continues to shift toward higher-value industrial users such as medical, IT, construction and automobile services. Investors are facing stiff competition from owner-occupiers, who are willing to pay a premium to secure strategic positions for their business. Investment yields for prime assets in the area are currently around 4.75-5.00 per cent and for secondary assets are around 5.25-5.75 per cent. However, the market is starting to see some well-located assets traded at sub-5 per cent as the competitive pressure continues to build up. A recent example was 11-13 Rhodes Street in West Ryde transacted a 4.5 per cent initial yield for $7.9 million. The buyer is an owner-occupier in the construction supply business.

South

Due to declining stock and increased competition for alternative uses, the South industrial sub-market has recorded the most substantial rental increase among all sub-markets in Sydney over the past 12 months. Prime net face rents have risen by 21.3 per cent YoY to average around $228/sqm as at September 2019. Secondary rents have increased by 15.0 per cent over the past year to average around $180/sqm as at 3Q 2019. Incentives for both prime and secondary stock are currently sitting at 7-8 per cent. Due to significant rental increases, many of the traditional industrial users have continued to relocate to more affordable markets. At the same time, the tenant base has broadened to higher-value uses such as car and furniture showrooms, wholesale retailing, import-export goods and services, as well as non-traditional tenancies such as childcare, education centres, gyms, clinics and independent coffee roasters.

The investment market remains active with strong demand for mixed-use development sites and small industrial units. Strata industrial assets in the South market continue to transact well with new projects still coming to market. There are a couple of site sales around Green Square and mascot railway for mixed-use commercial development. Investment yields have continued to get tighter over the past 12 months. Prime industrial buildings are being traded at between 4.5 and 4.75 per cent, while secondary assets are transacting at 5.0 and 5.25 per cent.


9

Prime Initial Reversionary Yield

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Mar

-05

Sep-

05M

ar-0

6Se

p-06

Mar

-07

Sep-

07M

ar-0

8Se

p-08

Mar

-09

Sep-

09M

ar-1

0Se

p-10

Mar

-11

Sep-

11M

ar-1

2Se

p-12

Mar

-13

Sep-

13M

ar-1

4Se

p-14

Mar

-15

Sep-

15M

ar-1

6Se

p-16

Mar

-17

Sep-

17M

ar-1

8Se

p-18

Mar

-19

Sep-

19M

ar-2

0Se

p-20

Mar

-21

Sep-

21M

ar-2

2Se

p-22

%

North South East West Outer East City Fringe

Forecast

Source: Colliers International

Land Values

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Mar

-05

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

Mar

-19

Sep-

19

$/sq

m

North South East West Outer East City Fringe


MELBOURNE OVERVIEW


$104 $119

L H$72 $84

L H

Prime Secondary

5.45% 6.00%

L H6.50% 7.10%

L H

AVERAGE YIELDS

Prime Secondary

$1,750 $2,229

L H$1,032 $1,314

L H


DEVELOPMENT SUPPLY


381,940m2201,800m2

Industrial developers are starting to consider what the warehouse of the future might look like, with advancements in robotics and automation driving demand for higher internal clearance to increase storage volumes and accommodate for new age picking and palletising equipment.

Strong leasing demand, particularly in the West where 2019 pre-commitment requirements are tracking at almost 5 times the long-term annual average. Speculative development activity is increasing in response to this trend.

Industrial areas are set to benefit from major new infrastructure projects and freeway upgrades improving connectivity and reducing travel times to and from the Port of Melbourne.

Land values are increasing off the back of strong leasing demand and take-up coupled with the dwindling supply of industrial land across Victoria.

Investment demand continues to be very strong, and stock remains tightly held, with the majority of transaction activity in 2019 being secondary assets or turn-key developments. Total volume is forecast to be around $1 billion which is low compared to previous years but is expected to bounce back in 2020. Strong demand relative to the supply of investment grade stock has driven a tightening of prime and secondary yields across all precincts.


10

OverviewThere are a few key themes to note across the industrial market in Victoria this quarter. The first is the continued strength in leasing demand across the board which is in part driven by the e-commerce effect but also by supply chain improvements that allow for consolidation and expansion into larger, more modern warehouses where there is land available to develop them, i.e. Melbourne’s West in particular.

Secondly, industrial developers are starting to consider what the warehouse of the future might look like. Advancements in robotics and automation is driving demand for warehouses with higher internal clearance, higher speed data connections and other changes to the traditional design elements to respond to new age storage solutions and supply chain management. More and more tenants are viewing automation as essential in new warehouse design and placing a huge emphasis on the automation of their distribution centres to increase productivity and efficiency in the supply chain. Whilst buildings are currently valued on a rate per sqm, as warehouses trend towards automation and higher clearances we can see valuation methodologies adapting.

Furthermore, across all industrial precincts, face rents are increasing as underlying land values continue to grow and yields are continuing to firm in response to lower interest rates and a shortage of investment stock available relative to demand. We forecast rents to continue growing, particularly in areas set to benefit from major infrastructure projects already underway or close to commencing, such as the West Gate Tunnel, North East Link, and the Mordialloc Bypass.

Sub-MarketsCity Fringe

Land tax increases are negatively impacting the city fringe industrial markets by driving occupancy costs higher and prompting tenants to consider relocating further from the CBD. This is particularly notable in Port Melbourne where outgoings are now above $60/sqm in the Fishermans Bend Urban Renewal Area and above $40/sqm in the Employment Precinct. This increase is continuing to push leasing demand from the more traditional logistics operators further West where land values and economic rents are significantly less. The West Gate Tunnel project due for completion in 2022 provides further encouragement for logistics operators to migrate further West by providing direct access for trucks to Citylink and the Port of Melbourne.

Leasing demand remains the strongest in employment precincts as opposed to urban renewal areas due to relatively lower occupancy costs. Research and development companies in the automotive sector and other high-tech industrial users including those linked

to advanced manufacturing are the most prevalent availability and proximity of a skilled labour force and the CBD. As the landscape changes for industrial occupiers in fringe precincts, new retail and lifestyle amenity becomes a necessity. In Port Melbourne, this has seen the emergence of tenants like Sensory Lab Coffee Roasters, Starward Whiskey, Colonial Brewing Co and event spaces like The Timber Yard and Half Acre. We forecast rents to continue to grow as precincts gentrify further and industrial landlords seek to replace the traditional industrial occupier with the likes of the above. On average face rentals in the City Fringe for prime stock are $200/sqm and $110/sqm for secondary. Incentives have continued steady at 8 per cent for prime and 12 per cent for secondary.

The most notable investment sale in the City Fringe this year to date was 127 Todd Road, Port Melbourne which was sold by The Herald and Weekly Times (HWT) to Blackstone. The $55 million price tag in April this year for the 5.82ha site reflects an underlying land value of approximately $945/sqm. The asset was purchased with a short-term leaseback to HWT at approximately $115/sqm. Average yields continue with a steady decline averaging 5.38 per cent for prime and 6.13 per cent for secondary- the recent interest rate drop will slow the rate of future compression.

North

One of the world’s largest supermarket chains, Kaufland is opening its first Australian distribution centre at MAB’s Merrifield Business Park. The 28ha site encompasses a purpose-built distribution centre that will be the largest of its kind in Australia. The Merrifield Business Park was chosen due to its location on the Hume Freeway, proximity to the city and ability to cater for future expansion. The $255 million-dollar distribution centre will incorporate 40-metre high-bay storage areas, an emerging trend that responds to increased reliance on robotics and automation.

Face rentals in the north have remained steady for the last 6 months at an average of $85/sqm for prime and $70/sqm for secondary assets. Incentives remain at 15 per cent for prime and 12 per cent for secondary assets.

Despite investment sale volumes being down on last year, there have been some key major site sales including the Ford site in Broadmeadows. Pelligra, who purchased the site from Ford, has earmarked the existing building on site as a hub that will provide for several smaller tenancies to be leased to industrial occupiers. In the long term, the balance of the surplus land will be redeveloped.

At the conclusion of the third quarter the northern market’s vacancy rate for buildings above 3,000sqm was 5.86 per cent across 21 buildings, with A Grade vacancy much tighter at 2.14 per cent. This is the result of increased demand in the North and the scarcity of prime grade stock currently available, in a market that has not traditionally added much new development stock year on year. This will change in the coming years with developers like Frasers and Vaughans being able to accommodate for pre-lease and speculative demand in Epping and as Pelligra starts to develop the surplus land on the Ford site.

By Sarah Walker Manager | Research [email protected]


11

17-23 Redwood Drive, Dingley Leased on behalf of Chromagen Australia

West

Melbourne’s West is one of the fastest growing industrial areas in Australia. Its popularity stems from its proximity to the Port of Melbourne, and connectivity to major arterials which reduces travel times and increases efficiency in supply chains. Coupled with the ability to access large parcels of land, this market continues to attract major corporate occupiers, e-commerce businesses and high profile 3PLs seeking larger warehouse footprints relatively close to the Port and the CBD. The automation trend is prevalent here also, with Woolworths recently commencing construction of their new Fresh Distribution Centre in Truganina to replace the existing centre in Mulgrave. On completion, the warehouse will comprise 14km of conveyor belts serviced by robots, a $560 million investment in automation to improve productivity and efficiency. Toyota Australia proposed a fleet of autonomous autopilot vehicles from their Altona factory in 2020. Toyota will have autopilot driverless technology to complete mobility in conveyance, towing, lifting and be able to autonomously place product throughout the warehouse and pick orders for customers.

Demand is outstripping supply with vacancy rates sitting around 2.5 per cent for prime grade stock above 5,000sqm. The rising trend of e-commerce companies attracted to the West continues, with eStore Logistics recently committing to two leases in Truganina; a 26,000sqm facility at 8 Feldsted Drive and another circa 8,400sqm development at West Industry Park. These two new distribution centres will comprise leading automated technology to ensure an optimal supply chain, with same day delivery.

There has been a combined total of 540,000sqm take up across pre-leases and existing building transactions above 3,000sqm this year with the average size deal approximately 15,500sqm. This reflects a year on year increase of 258,000sqm.

About 30 per cent of all leasing deals so far in 2019 have been in Truganina, with some of the larger existing deals including HB Commerce (30,000sqm), Secon (23,000sqm) and Estore (8,383sqm). Pre-lease activity has also been predominantly concentrated in Truganina with deals including Super Amart (50,000sqm), CEVA (38,000sqm) and Orora (8,000sqm). Face rents for prime grade assets currently average $81/sqm and $65/sqm for secondary assets, with incentives averaging 20 per cent across the board.

Transaction activity has been steady, with Mapletree Logistics Trust recently purchasing a speculative development project of 15,100sqm at 15 Boterro Place, Truganina for $18.4 million to be completed next year.

In the last three years, land values have doubled and currently average $325/sqm (serviced). The market is fuelled by demand from Institutions who remain heavily dominant, particularly with respect to land ownership and development. A noteworthy recent land transaction is ISPT‘s acquisition of 744 Boundary Road, Truganina, an unzoned vacant site within the Urban Growth Boundary which they purchased for $23.1 million. Average yields for prime assets have tightened 50bps in the last 6 months to 5.25 per cent due to the limited supply of investment stock coming to market relative to record high demand. Yields on secondary stock have remained

steady at an average of 6.75 per cent, however we expect to see some compression in 2020 off the back of falling interest rates and strong investment demand.

South East and Outer East

A notable trend in the South East and Outer East markets in 2019 has been sale and lease back transactions. Of the total investment sales this year, approximately 52 per cent have been purchased by an Institution, with the predominant vendors being corporate owner occupiers. Some examples include 67-91 Nathan Road, Dandenong South and 282-300 Hammond Road, Dandenong South which were both sold by owner-occupiers to Charter Hall for $18.6 million and $30.9 million respectively. 649-655 Springvale Road, Mulgrave was sold to Fife Capital by Rinaldi Pasta who have consolidated into their neighbouring facility. Fife purchased the 20,000sqm property for $26 million with plans to redevelop it.

The South East and Outer East markets are much more land constrained than the West, which drives developers to consider the acquisition of vacant brownfield sites or long-term land banking plays like Charter Hall’s acquisition of the Bombadier Transport site. Land values in this sub-market are the highest outside of the City Fringe averaging $ 500/sqm in the South East and $443/sqm in the Outer East.

Leasing activity is increasing due to pent up demand from corporate occupiers wanting to be located in new or modern buildings in the Bayside area. Fraser’s “Braeside Industrial Estate” has secured a lease with Puma, the third speculative tenancy in the development. Puma have committed to a 14,110sqm warehouse which will be 5 Green Star and worth approximately $25 million on completion. Puma will join IVE Group occupying 14,133sqm and Gale Pacific Group who will occupy 10,643sqm both all speculatively built. Once these three speculative sites are built, Frasers will spec another 24,000sqm with a remaining pad site that can accommodate approximately 35,000sqm. The major drawcard for this site is the proximity to the proposed Mordiallic Bypass which will be 500m from the Estate. Rents remained steady for prime assets averaging $93/sqm in the South East and $99/sqm in the Outer East. Movement was recorded for secondary in the South East increasing 7 per cent in the last quarter to average $75/sqm due to lack of available prime stock. Lack of available stock has enabled landlords to decrease incentives across prime stock to 18 per cent in the South East and 12 per cent in the Outer East.


12

Brisbane Industrial Sales ($5 million+)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

$AUD

mill

ions

Domestic O�shore Undisclosed


Brisbane Average Net Face Rent by Grade ($ per sqm)

$0

$20

$40

$60

$80

$100

$120

$140

$160

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19

AUD

$ pe

r sq

m

Prime Secondary Prime to Secondary Rent Premium


BRISBANE OVERVIEW

The proposed dedicated freight rail between Acacia Ridge and the Port will accelerate the industrial development activity in the Southern and Australia TradeCoast (ATC) precincts, with a significant level of demand from logistics, transport and distribution operators. The development supply in Greater Brisbane and Yatala is forecast to reach circa 317,650sqm in 2019, potentially remaining above the long-term average of circa 261,000sqm.

Land value growth has accelerated over the past few months increasing across several precincts in the range of 1 to 6.5 per cent for the year to September, to an average of $321/sqm (including Yatala). The ATC recorded the strongest annual growth of land values of 6.4 per cent, to $415/sqm.

Prime grade leasing activity dominates the market, driven by the relocation and expansion activity within the Yatala and South precincts. The average net face rents in Greater Brisbane and Yatala increased by 1.3 per cent, to $111/sqm in September this year. Rental activity within the secondary market continues to soften, revealing the flight-to-quality phenomenon extended across the different Australian property asset classes.

The Brisbane industrial property market has become an attractive investment option for institutional investors due the stronger returns compared to other national and worldwide investment options in property and non-property asset classes. The year-to-date volume of sales (above $5 million) in Greater Brisbane and Yatala of $1.09 billion is on track to outperform the 2018 sale volumes.

Fierce competition for industrial assets across a broad spectrum of investment players has driven further compression of yields in the range of 40 to 50bps over the past year. Prime grade investments are transacting at an average yield of 5.94 per cent while secondary grade assets are trading at an average yield of 7.53 per cent.

Market Indicators* - September 2019AVERAGE NET FACE RENTS ($/m2)Prime Secondary

$107 $114

L H$72 $90

L H

Prime Secondary

5.70% 6.18%

L H7.15% 7.90%

L H

AVERAGE YIELDS

Prime Secondary

$1,736 $2,012

L H$926 $1,260

L H


DEVELOPMENT SUPPLY


260,670m2317,650m2

* Includes the following precincts: ATC, North and Outer North, South, South West and Yatala


13

Investment MarketREITs driving demand of industrial assets

The estimated volume of sales of $1.09 billion was largely driven by large-scale transactions above $100 million (contributing to nearly 40 per cent of the total sales). The surge of REITs as an attractive investment vehicle worldwide is driving demand for large industrial assets in Brisbane with nearly half of the sales this year ($505 million) acquired by Australian and offshore REITs. This compares with an estimated participation of REITs in the Brisbane investment market for industrial assets of circa 20 per cent in 2018 and circa 5 per cent in 2017.

As the current infrastructure investment in projects like the M1 Pacific Motorway and the Logan Enhancement Project strengthens the outlook of the industrial market, REITs have identified Brisbane as a strategic location for industrial investments providing long-WALE rental streams. Colliers International anticipates that REITs will continue to drive a large portion of investment demand of Brisbane industrial assets over the next 12 to 18 months. This is because the Brisbane industrial market continues to consolidate as a preferred location for a variety of operators looking for affordable large-scale warehouses in proximity to a transport network offering cost-efficient connectivity to national and international markets.

The solid demand from REITs underpins the lift on the average sale price (for transactions above $5 million) from circa $15 million in 2018 to an estimated average of circa $24 million over the year to date. We have also noted a reduction in the number of investment sales above $5 million from circa 75 transactions in 2018 to circa 46 transactions for the year to date.

So far in 2019, the South precinct remains as the main location of investment transactions, with circa $501 million sales representing 46 per cent of the total sales volumes. The most notable transaction was the sale of the Crestmead Distribution Centre at 105-137 Magnesium Drive in Crestmead for $183.6 million acquired by Charter Hall REIT at a passing yield of 5.15 per cent from Blackstone. The building offering 89,254sqm of gross lettable area is leased to the wholesale distribution and marketing company, Metcash Trading, with a WALE of 10 years.

The long-standing reduced cost of debt and the current low levels of the Australian bond yield are forecast to continue to drive further yield compression into 2020.

Leasing MarketSouthern precincts leading leasing activity

The recent completion of the $512 million Logan Enhancement Project and the ongoing upgrade of the M1 Pacific Motorway support the consolidation of the Southern industrial precincts as a strategic location for industrial expansion in southeast Queensland. Leasing demand of existing industrial space in the South and South West precincts has been solid over the year to date, with circa 214,000sqm of gross lettable area (GLA) tenanted.

Keppel Logistics (10,480sqm) and Concept Logistics (6,950sqm) are a few of the tenants expanding or relocating within the Southern precincts this year.

The South West precinct has seen strong demand of pre-committed activity, with the Australia Post Facility (48,748sqm) and Coles Distribution Centre (66,000sqm) supporting nearly one third of the development supply within the precinct over the next three years.

Upon completion of the Logan Enhancement Project, Berrinba has now consolidated as a favoured location for industrial tenants with leasing deals of circa 82,000sqm over the year to date. This includes pre-commitment deals with CEVA Logistics (21,200 sqm), DHL (20,600sqm), Huhtamaki (food packaging operator, 12,635sqm) and Phoenix Transport (10,000sqm) and leases of existing assets with WING Aviation (drone-delivery operator, 17,800sqm).

New industrial development supply at Berrinba between 2019 and 2022 is forecast at circa 268,360sqm, with nearly 30 per cent (circa 79,200sqm) of the space reaching practical completion in 2019. Our forecast includes the purpose-built industrial facilities for Mitre 10 (27,500sqm) and QLS Logistics (12,000sqm) at the Motorway Industrial Park and the Pinnacle Hardware warehouse (12,000sqm) at Berrinba Logistics Park completed in H1 2019.

Colliers International anticipates that the suburb of Crestmead will see the next wave of leasing deals due to its proximity to the upgraded roads along the Logan Motorway and the availability of vacant industrial land along Green Road largely owned by institutional investors (estimated at circa 40ha).

Prime grade assets drive operational efficiencies and rental growth

Tenant’s preference for quality assets prompting operational efficiencies has put upward pressure on the premium paid for prime grade assets compared to the rent paid for secondary assets. The current average prime grade net face rent of $111/sqm is $30/sqm more expensive than the average net face rent for secondary assets of $81/sqm. This compares to a 10-year average rental premium of prime to secondary assets of $24/sqm. As tenants’ requirements for asset quality and location continue to drive demand of industrial assets, we expect to see an upward trend on the premium rent paid for prime grade assets compared to secondary grade assets.

1-7 Wayne Goss Drive, Berrinba on behalf of Ascendas (now Capitaland) to WING Aviation

By Karina Salas Manager | Research [email protected]


14

Adelaide Industrial Vacancy

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%


Total Adelaide Industrial Supply

020406080

100120140160180200

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

'000

s sq

m


ADELAIDE OVERVIEW

Infrastructure investment remains key for growth in the Adelaide industrial market, with the most recent state budget committing $5.4 billion to the final stages of the North-South Corridor. The state government has committed to the entire corridor to be completed within a decade.

Vacancy falls to a record low of 2.7 per cent down from 3.7 per cent. This has been driven by vacancy in the Inner North falling to 1.7 per cent. Relatively low vacancy rates are expected to result in some higher than average rental growth over the next two years. More design & construct activity is expected due to low vacancy.

Prime gross face rents have started to grow across most markets. The Inner North rents are not far from the peak in 2013 with the Outer North needing to see growth of 16 per cent to be at the same level as the peak (which is expected over the medium term).

New supply reaches decade highs with circa 152,500sqm of space due to complete in 2019. This is the highest level of new supply seen since 2007. There is 220,107sqm currently under construction with major projects including the new Metcash DC, Sigma Healthcare DC, new Huhtamaki DC and the expansion of Woolworths DC. Pre-commitment activity has driven the new supply with very limited speculative development. Large institutional developers have become more actively involved in the development of new Distribution Centres.

Prime yields are starting to tighten in key precincts over the last 12 months. Outer North has tightened 50bps with the Inner North tightening 25bps over the same period. Scope for further tightening in yields is expected.


$88 $121

L H$56 $75

L H

Prime Secondary

6.65% 8.20%

L H8.30% 9.70%

L H

AVERAGE YIELDS

Prime Secondary

$1,337 $1,458

L H$685 $789

L H


DEVELOPMENT SUPPLY


63,880m2152,500m2


15

Market OutlookThe outlook for the Adelaide investment market is positive, with rate cuts and increased demand improving the investment outlook. Demand for investment grade stock is expected to remain high with the buyer pool strengthening. We expect that institutional owners will continue to be active, but there will continue to be opportunities for businesses to purchase sites as owner occupiers. The increased competition, reduced cost of debt and relatively high yield spread compared to the eastern seaboard is expected to result in yields compressing further in the short term. This is most relevant for prime grade investment stock with long WALEs which are expected to lead the way in yield compression.

Investment MarketDespite the abolishment of stamp duty on commercial transactions in July 2018, sales volumes to September 2019 have reached $107.8 million compared to $278.9 million in 2018. Institutional owners have accounted for 59 per cent of the sales volume this year compared to 43 per cent in 2018. Institutional owners have accounted for 59 per cent of the sales volume this year compared to 43 per cent in 2018.

The east coast industrial markets have experienced significant compression in industrial yields and investors are looking to Adelaide to balance their portfolio with higher yielding assets. There is a significant amount of capital which is looking to be placed, within the Adelaide market offering higher yields and an improved economic outlook due to investments in defence, mining, energy and infrastructure. The renewed interest in Adelaide from institutional investors has resulted in yields starting to compress with prime yields over the last 12 months tightening by 50bps in the Outer North, and 25bps in the Inner North. With the RBA indicating scope to make further cuts to the cash rate, it is expected competition for assets will increase driving further yield compression.

Sub-MarketsOuter North

The Outer North has seen vacancy increase to 7.6 per cent, up from 6.7 per cent in March 2019. The Lionsgate Business Park had significant activity since it was purchased by the Pelligra Group with Levett Engineering, AMA Security, Sonnen, SA Power Networks, Australian Cranes and Genis Steel all taking space in this precinct.

Drakes supermarkets have completed their 45,000sqm - $80 million distribution centre at Edinburgh North. This new facility will see Drakes depart from Metcash who have committed to a new facility.

Prime net face rents have increased by 18.5 per cent annually with a rental range of $70-$90/sqm. Secondary rents have remained stable with a range of $35-$50/sqm. Incentives have remained unchanged at 10-15 per cent across both prime and secondary markets.

Prime yields have tightened by 50bp over the last 12 months with a significant tightening at the lower end. The current range is 7.00 per cent to 8.50 per cent. Yield compression was greater than other Adelaide sub-markets as the risks around the exit of Holden have reduced.

Land values in the Outer North have remained stable over the last 12 months and is now in the range of $35-$85/sqm.

Inner North

Vacancy in the Inner North has fallen to a record low of 1.6 per cent, down from 4.2 per cent over the last half of the year. Prime net face rents have grown by 4.9 per cent y-o-y and are in the range of $90-$125/sqm. Secondary net face rents have remained stable and are in the range of $50-80/sqm. Incentives are unchanged with prime incentives ranging between 5-15 per cent and secondary 10-15 per cent.

The Inner North has over 195,000sqm of space under construction and due to complete during 2019 and 2020. Major projects include the Sigma Healthcare DC (10,000sqm), expansion of the Woolworths DC (94,000sqm), Metcash new DC (68,000 sqm) and Huhtamaki DC (8,000sqm). As the ramp up to construction for the Frigates and submarine project nears, we expect further construction in the Inner North precinct around Osbourne to support the growth in the defence sector.

Prime yields have tightened and range between 6.25-8.00 per cent with secondary yields unchanged at 8.00-10.00 per cent.

Land values have increased 2.3 per cent over last 12 months and fall within the range of $180-$260/sqm.

West & South

Prime net face rents in the West have grown by 18 per cent ranging from $125-$170/sqm. Secondary net face rents have grown by 9.4 per cent and range between $75-$100/sqm Prime rents in the Inner South have grown by 4.5 per cent ranging $95-$135/sqm. Secondary rents have grown by 10.7 per cent and range between $55-$85/sqm. Incentives are unchanged for both markets with prime incentives at 5-15 per cent and secondary at 10-15 per cent.

Prime yields in the West have tightened to range between 6.00-7.75 per cent. Secondary yields have tightened to range between 7.75-9.00 per cent. Yields in the Inner South have tightened with prime yields between 6.00-7.75 per cent and secondary 7.75-9.00 per cent.

Land values in the West have grown by 2.2 per cent y-o-y and range between $370-$550/sqm. Land values in the Inner South have remained stable and range between $350-$500/sqm.

19 Indama Street Regency Park Sold for $4.5m on behalf of a Private Client

By Kate Gray Director | Research [email protected]


16

Perth Industrial Space Supply

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Indu

stria

l Spa

ce S

uppl

y (s

qm)


Perth Industrial Face Rents

$0

$20

$40

$60

$80

$100

$120

$140

Sep-

05M

ar-0

6Se

p-06

Mar

-07

Sep-

07M

ar-0

8Se

p-08

Mar

-09

Sep-

09M

ar-1

0Se

p-10

Mar

-11

Sep-

11M

ar-1

2Se

p-12

Mar

-13

Sep-

13M

ar-1

4Se

p-14

Mar

-15

Sep-

15M

ar-1

6Se

p-16

Mar

-17

Sep-

17M

ar-1

8Se

p-18

Mar

-19

Sep-

19

Aver

age

rent

s ($

per

sqm

)

Prime Warehouse Rents (Net Face) Secondary Warehouse Rents (Net Face)


PERTH OVERVIEW

Global economic uncertainty has impacted both consumer and business confidence in WA. But buoyant global commodity demand is driving increased exploration investment in WA, which is starting to flow through to improved landlord and investor sentiment for Perth’s industrial sector.

Vacancy had been in moderate decline since 2017 which assisted a mild recovery in Prime face rental rates in 2018-19 financial year. However, continued developer activity, weak economic growth and a subdued net tenant demand environment has seen vacancy begin to increase over H1 2019.

The flight to quality is continuing to impact secondary grade stock vacancy and is driving redevelopment activity in precincts with dated stock - such as Kewdale/Welshpool and Bayswater/Bassendean.

An improved outlook led to increased demand for land in core precincts, which had supported a 7.36 per cent increase in average vacant land values since 2018.

Prime yields have continued to tighten during 2019. Low cost of funds and lack of more favourable yielding alternative investments has seen robust investor interest in the higher yielding Perth market. The low interest rate environment has contributed to the weight of funds from superannuation seeking to be invested in the sector.


$70 $87

L H$53 $73

L H

Prime Secondary

6.25% 7.75%

L H7.25% 8.50%

L H

AVERAGE YIELDS

Prime Secondary

$1,000 $1,243

L H$673 $921

L H


DEVELOPMENT SUPPLY


248,700m2197,930m2


17

OverviewAfter a positive start to the 2019 calendar year, the leasing and investment sales environment in the September quarter appears to be more subdued.

Economic conditions have been more stable, but growth has been slow to return - much slower than most would have like or anticipated. However, the foundations for a return to demand growth are strengthening.

Population growth has continued to accelerate, rising from an annualised growth of 0.93 per cent in March 2019 to 1.0 per cent in June 2019. Business investment spending is expected to start growing again in 2020, and contribute to economic growth instead of being the driver of its contraction.

Buoyant export revenue to underpin investment revival

Resource exploration activity is trending higher, and laying the foundation for future investment spending growth. These explorations have resulted from continued demand for the state’s vital natural resources such as iron ore, natural gas, lithium, rare earths and various other; which is persisting despite global economic uncertainty.

Bumper export revenue has boosted state government royalty and tax collections, permitting the state and local government to increase public investment spending – which grew 10.1 per cent year-on-year in the June 2019 quarter.

Why it’s taking so long

Its been an extended wait for a recovery in Perth’s industrial sector. One factor, outside the business investment decline, that has hindered a rental rate recovery is supply. Despite weak net tenant demand, developers have continued to do their job – develop. Development activity certainly slowed as the downturn unfolded, but it did not cease.

Perth’s industrial floor-space continued to increase over the past four years - which contributed to the downward pressure on rents and extending the time for the market to trough.

Although the continued development activity wasn’t a positive for market rents or investor returns, it was good for construction jobs and industrial space demand connected to the sector. It was also good for the economy. Without it, the construction sector economic conditions could have been worse.

Vacancy to keep leasing market competitive

Across metropolitan Perth, rents have continued to be stable in the +2,000sqm market. The latest Colliers industrial vacancy survey in October 2019 indicates an increase in vacancy. The industrial vacancy rate across Perth’s metropolitan area was estimated to be 8.65 per cent for buildings in excess of 2,000sqm. This represented approximately 866,810sqm of total space available for lease, up from 765,300sqm in April. In the September 2019 quarter, prime face rents remained between $70 and $90/sqm. At the same time, secondary rents were $50 to $75/sqm range.

Prime-grade incentives were stable between 15 and 20 per cent, while secondary incentives were between 10 and 25 per cent.

Vacancy continues to be a larger issue in the smaller end of the market. However, the recent vacancy increase will likely have a dampening effect on rental recovery.

Yields tighten in 2019

While rents and value deterioration has largely impacted the smaller end of the market, capital values of larger investment stock, particularly institutional-grade assets, continued to be assisted by yield compression during 2019.

Yields as low as 5.9 per cent have been reported for asset transactions with strong lease covenants. Despite yield compression, transaction activity in institutional-grade segment was relatively low, with only five assets greater than $10 million changing hands in the first half of 2019. This continues to be a function of low availability as opposed to low investor appetite for this class of asset. The main obstacle for potential sellers is the lack of options with comparable or superior returns that they can divert capital into.

In general, Perth’s industrial market yields were between 6.25 per cent to 7.75 per cent for prime-grade assets and 7.25 per cent and 8.50 per cent for secondary assets. These yields, in comparison to bonds and yields in other Australian cities, remain attractive to investors and as a result, Colliers maintains a projection of further yield compression in the 2019-20 financial year.

Land values and new supply

After a low year of supply in 2018, when completions amounted to 91,915sqm (for buildings over 2,000sqm), 152,730sqm of space has been completed in the nine months to September 2019. Eventually, 2019 is expected to see total completions of 209,905sqm in Perth’s metropolitan area. Nearly half (91,590sqm) of this is in the south region, with 84,200sqm in the East and 22,145sqm in the north. Colliers’ estimate for 2020 completions stands at 66,030sqm.

Signs of improving economic conditions had seen an increase in land demand and Colliers analysis shows average core land values for lots between 2,000sqm and 10,000sqm increased 7.36 per cent between 2018 and 2019. Core industrial land values were between $350 and $525/sqm in the September quarter 2019.

19 Miles Road, Kewdale Sold for $45.25m on behalf of Coca-Cola Amatil Pty Ltd

By Quyen Quach Associate Director | Research [email protected]


18

NEWCASTLE OVERVIEW

Infrastructure investment in significant projects like the M1 Upgrades and NorthConnex, the refurbishment of the John Hunter Hospital and the Astral Aerolab Newcastle Airport are forecast to drive growth in industrial activity by either reducing operational costs or promoting industrial activity in defence or medical sectors.

Leasing activity on the rise in the second half of 2019, with increasing enquiry particularly after the Federal election. Market participants have been from a broad array of industries, ranging from the traditional mining and resource sectors together with distribution, agribusiness, e-commerce and port-related services. Rental Rates have steadily increased over the past three years, with the growth continuing across the board for the year to September.

Demand outstripping available supply of existing stock as a result of strong levels of enquiry across all sectors, particularly from Sydney based companies and major third-party logistics operators.

The shortage of supply of industrial buildings continues to drive land sales and create increased competition for existing buildings among tenants and occupiers who may not have suitable budgets or timeframes to construct new industrial facilities.

A shortage in available investment stock coupled with the falling cash rate environment is being reflected in continued yield compression.


$100 $127

L H$80 $95

L H

Prime Secondary

4.95% 6.70%

L H7.75% 8.25%

L H

AVERAGE YIELDS

Prime Secondary

$1,350 $1,700

L H$1,000 $1,250

L H


Newcastle Industrial Rents - Workshop & Warehouse Rates

$88 $88 $88 $88 $90 $90$95

$105$110

$50

$60

$70

$80

$90

$100

$110

$120

2011 2012 2013 2014 2015 2016 2017 2018 2019

Rate

per

sqm

Warehouse & Workshop $/sqm Poly. (Warehouse & Workshop $/sqm)


2018 - 2019 Vacancy Rate by Precinct

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

North West

Port

South West

West

Outer West

Inner West

2019 2018


DEVELOPMENT SUPPLY*


25,950m237,530m2

* Excludes owner-occupier developments


19

Demand outpacing supply across all industrial sectors

Colliers International has continued to experience strong levels of enquiry from investors and owner occupiers operating in a multitude of sectors such as construction and mining, agribusiness, renewable energy, e-commerce and port services. Particularly of interest is the compounding enquiry from Sydney-based companies and major 3PL operators who view the Hunter Region with major consideration as deliveries for customers into and out of the Hunter Region increases.

Key demand drivers:

1. Employment base: Currently the Hunter provides an 383,120 strong labour force, coupled with a forecast growing population to 2036 by 20 per cent. Access to labour for industry is anticipated to remain appealing for employers into the future.

2. Lifestyle: Major residential areas are typically no more than 30 minutes from the major industrial precincts, coupled with the proximity for employees to the coastal, rural and natural environments whilst the region also provides world-class education and health facilities together with national-sporting teams and entertainment facilities.

3. Price of Industrial Land: Industrial land is 50 per cent to 75 per cent less than other available options in Western Sydney, providing an appealing financial alternative to developers and owner occupiers.

4. Major Road/Infrastructure upgrade: The imminent completion of major infrastructure projects including NorthConnex will provide an improved link to the Hunter and Central Coast from Sydney Metro areas with the M1 Motorway upgrades. Motorists will soon travel from Sydney to the Hunter with less traffic lights and reduced travel times. These works have been welcomed by logistics companies with the expected reduced travel times meaning less fuel costs and more efficient logistics operations.

Lack of existing improved building stock has had a significant flow on effect, on the broader market.

Firstly, this lack of stock forces many expanding companies to acquire land to construct suitable accommodation for their operations. Land is purchased as either vacant or Design and Construct packages. As a result, industrial land supply has been diminishing and prices have been trending upward, as much as 30 per cent above 2018 sale prices.

Investor demand strong

Enquiry levels from investors, either private or REITs for premium grade industrial investment opportunities, continues to increase in H2 2019 on the back of good demand in H1.

The major issue facing the local market is the lack of available investment stock and considering the recent announcement by the RBA that the cash rate has been reduced to 0.75 per cent, demand from investors is anticipated to increase.

Given the lack of stock there has been a limited amount of investment transactions throughout 2019, although assets with long WALES and perceived strong covenants has seen a continued compression from H2 2018 to 6.10 per cent. This is evidenced by the sale of the Bunnings Trade Centre at 114 Stenhouse Drive, Cameron Park which sold at Auction with four registered bidders in August for $5,000,000 plus GST. The property had a WALE of 4.2 years and reflected a 6.1 per cent yield.

Another example is a property sold at Colliers international October Auction. The property was leased to a national tenant having an unexpired term certain of 2.35 years. The auction was hotly contested with 43 bids eventually selling for $1,160,000 reflecting a 4.95 per cent yield. The Colliers International sale demonstrates the market appetite for leased assets and set a new benchmark in the region for industrial investment yields. Many bidders were looking for alternate investment opportunities other than the perceived volatile share market and the low yielding bank term deposits. This trend is anticipated to continue into H1 2020.

Secondary assets continue to firm to reflect circa 7.75 per cent, as investors search for high yielding assets as an investment vehicle alternative to the stock market and long-term deposits.

Strata unit market

Growth in the industrial unit market has been a result of increased activity from owner occupiers in the sub-300sqm range during 2017 and the early parts of 2019, with many small business purchasers taking advantage of the ease of borrowing for SMS (Self-managed Superfunds). Subsequently Australia’s major lenders effectively stopped SMS lending by the middle of 2019, this change in lending practice initially impacted sale rates for new projects and existing industrial strata unit developments. The appetite for new units remained strong, although the speed at which sale transactions occurred slowed in H1 2019, however capital value rates have remained steady from $2,000/sqm to $2,500/sqm.

During this time, demand from tenants and rental rates for these new modern industrial strata units continued to rise. Businesses impacted by the tightening supply are increasingly looking to new strata units to accommodate their needs, with a ‘flight to quality’ evident. Rental rates for strata units are currently in the range $140/sqm to $160/sqm as at H2 2019.

11 Riverside Drive, Mayfield West Currently for Sale on behalf of a Sydney Developer

By Tim Woolf Senior Executive | Industrial, Newcastle [email protected]


20

DEVELOPMENT SUPPLY


194,340m2283,000m2

NEW ZEALAND OVERVIEW

Industrial continues to be a significantly attractive sector for purchasers across New Zealand. The Colliers International investor confidence survey shows a net positive (optimists minus pessimists) 70 per cent, 57 per cent and 32 per cent for Auckland, Wellington and Christchurch respectively.

Tight leasing market conditions in Auckland and Wellington, along with a more positive balance between demand and supply in Christchurch are providing positive sector performances. This is driving positive expectations for the sector.

Average net face warehouse rents continue to increase for many locations due to tight market conditions. Given current market dynamics, this is unlikely to change.

The development pipeline is increasing but remains limited in comparison to the extent of leasing demand. This is due to a limited number of key stakeholders controlling or in ownership of large land parcels in major markets. This is driving up land values.

Positive market dynamics and low interest rates are driving investment activity. Yields are sharpening further, and capital values are increasing.

Market Indicators - September 2019Auckland

AVERAGE NET FACE RENTS ($/m2)Prime Secondary

$145 $175

L H$118 $142

L H

Prime Secondary

4.50% 5.39%

L H5.30% 6.36%

L H

AVERAGE YIELDS

Prime Secondary

$2,700 $3,895

L H$1,860 $2,700

L H


Auckland Net Warehouse Rents

60

70

80

90

100

110

120

130

140

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

Mar

-19

Sep-

19

Ave

rage

Net

War

ehou

se R

ents

($/s

qm)

Prime Secondary Overall

Source: Colliers International Research

New Zealand Investor Confidence Survey

0%

10%

20%

30%

40%

50%

60%

70%

Auckland Industrial Wellington Industrial Christchurch Industrial New ZealandOverall

Net P

erce

nt

Jun-18 Jun-19

Source: Colliers International Research


21

Sub-MarketsAuckland

The latest August 2019 industrial survey shows the overall vacancy rate remains low at just 2.1 per cent. Some options have become available with secondary vacancy rates increasing to 2.3 per cent from 2.0 per cent in August 2018. However, a tight leasing market and limited supply response has pushed prime vacancy to a low 1.5 per cent, down from 2.0 per cent a year ago. Location continues to play a significant role in tenant demand as precincts located near main arterial routes such as the Airport Corridor are experiencing record high demand and record low vacancy rates.

Several infrastructure projects are on track to be completed over the next few years providing more opportunities for industrial tenants. There is currently 283,000sqm under construction in Auckland, 172,000sqm consented and a further 69,005sqm in the planning and feasibility stages. Limited new supply in major industrial precincts is encouraging a rise in the number of extensions to existing buildings. There has also been a rise in the number of speculatively led developments and design-builds (or build to suit) remain a popular option for selected occupiers.

Warehouse rental growth continues to track upwards due to strong market fundamentals and high levels of tenant demand. In Q3 2019, prime average warehouse rents rose to $134/sqm, up from $130/sqm a year ago. Secondary average warehouse rents rose to $113/sqm, up from $106/sqm a year ago. Auckland yields are sharpening as a result of confident investors and a low interest rate environment. Average prime yields firmed 47bp to 4.94 per cent in Q3 2019, down from 5.41 per cent a year ago. Average secondary yields firmed 43bp to 5.83 per cent in Q3 2019, from 6.26 per cent a year ago.

The 2Q 2019 Colliers International investor confidence survey found the Auckland industrial sector to achieve a net positive (optimists minus pessimists) score of 70 per cent, the highest recorded since Q2 2016. Over the past three years, the industrial sector has consistently achieved the highest confidence scores, outlining the attractiveness of the industrial sector and likely performance over the remainder of 2019 and into 2020.

Wellington

Sourcing appropriate industrial leasing opportunities in Wellington remains challenging with a vacancy rate of 1.5 per cent, or just under 39,000sqm of available space.

There has been a lack of available industrial supply over the past few years and the current pipeline is unlikely to alleviate any existing demand pressures. There is 14,105sqm of industrial stock under construction, 8,400sqm of which is from the Toll Logistics Facility on the Wellington Railyards.

We forecast supply to increase over the next few years as infrastructure developments such as Transmission Gully support further expansion of the industrial market. However, the extended timeframes applied to the Petone-Grenada link road restricts the exploration of new options in the short-term.

Wellington regional rents continue to climb due the competitive nature of the leasing market and a relatively static supply pipeline. Average prime warehouse rents rose 3.7 per cent in the past year, from $109/sqm to $113/sqm in the Q2 quarter. Wellington regional yields have been tightening consecutively over the past five years. Average prime yields firmed 46bp to 7.06 per cent in Q2 2019, while average secondary yields firmed 20bp to 8.50 per cent in Q2 2019.

Positive market and financial conditions boosted the 12-month outlook with the Q2 2019 Colliers International Investor Confidence survey results for the Wellington industrial sector at a net positive (optimists minus pessimists) score of 57 per cent, the highest in 10 years.

Christchurch

Stronger market fundamentals continue to underpin the Christchurch industrial sector. Key to this has been the ongoing recalibration of the sector that has a more balanced demand and supply profile predominantly due to local businesses expanding and absorbing existing space.

The development pipeline has also increased, up to approximately 40,000sqm, including design-build properties for Fletcher Steel and the Bidfood Distribution Centre. There is also approximately 4,200sqm under refurbishment and an additional 8,500sqm consented, including CIAL warehouse space and five warehouses for Process Refrigeration NZ.

Prime average warehouse rents remain broadly the same at around $100-$115/sqm, while secondary average warehouse rents have remained the same since Q4 2016 at approximately $80-$90/sqm.

Given the more positive market dynamics and low interest rate environment, investor activity remains strong. Prime average yields firmed 20bp between 2Q 2019 and 2Q 2018. Secondary average yields firmed a further 8bp.

The rise in rents and sharpening yields has meant prime capital values have risen by 2.3 per cent, to $1,908 in 2Q 2019 from $1,865 in 2Q 2018. Secondary capital values are up 1.2 per cent.

The 2Q 2019 Colliers International investor confidence survey found the industrial sector to achieve a net positive (optimists minus pessimists) score of 32 per cent, above the five-year average of a net positive 25 per cent.

39-59 Miami Parade, Onehunga, Auckland Sold on behalf of Ports of Auckland

By Chris Dibble Director | Research [email protected]

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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © Colliers International 2019.

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