Melbourne Industrial Market Snapshot Q3 / 2015
Highlights
The majority of new development is in Melbourne’s South-East and West, with around 80,000 m2 of new industrial premises due for completion in 2015.
The bulk of the new supply was on a pre-lease basis and comprises distribution centres and refrigerated logistic facilities. Demand revolves around upgrade, expansion and consolidation.
Rental Incentives for Prime grade industrial space average 10% - 15%, subject to the strength of the tenant and lease term. In some cases, the Western Region incentives may range from 15% to 20% plus. For the pre-commitment sector some owners are prepared to offer innovative packages, particularly with regard to Economically Sustainable Developments. This is a marketing strategy to differentiate themselves from the strong competition for quality tenants in a very competitive marketplace.
The continued low interest rate environment is likely to remain for the foreseeable future. This is beneficial for tenants, together with owner-occupiers and the investment market.
Future Outlook
Tenant demand and prime rental growth rates are likely to remain subdued in 2015, given the high pre-commitment levels of new supply. Incentives should remain around 10% - 20%. Business confidence will need to improve, to generate a sustained increase in leasing activity (subject to stronger economic growth).
Whilst, secondary grade rents will face increased pressure, as a result of increased secondary vacancy levels. An ongoing trend is a ‘flight to quality’ as tenants upgrade buildings without a high differential in rent (say from Secondary-Grade to Prime-Grade industrial).
Owner-occupiers are returning to the market by purchasing a property as an alternative to leasing, particularly in a low interest rate environment. The key focus is on cost management and supply chain efficiencies (mainly industrial properties under 5,000 m2).
In the $5m to $10m industrial market, smaller industrial properties have sold on a regular basis (with reasonable frequency) at yields in the 7.25% - 8.75% price range. If there is a perceived leasing risk with a particular property, the yield on secondary grade properties is likely to be in excess of 9.5%. This lower-end price range has ongoing solid support from private investors attracted to relatively high yields, with possible capital growth upside in the medium-term. The majority of sales transactions are occurring in the sub-$5m market. Prime yields average around 6.75% to 7.75%, whilst secondary yields average 8.25% to 9.00%.
Peter Flynn
Director – Intercommercial Property Group
