Melbourne Industrial Property Market Snapshot - July 2016

Sentiment - Improving market, increased supply of industrial land

Valuation - Hardening yields, becoming more expensive

The majority of new development is in Melbourne’s West and South-East, with around 518,000 m2 of new industrial premises due for completion in 2016 (64% pre-committed). Activity was strong from lower development costs.

Primarily, the bulk of the new supply comprises distribution centres and refrigerated logistic facilities. A new business model ‘Click and Bricks’ is also adding to demand, with online shopping E-commerce operations based on goods direct from the warehouse to consumer’s houses. Demand revolves around a greater need for efficiency and consolidation with upgrade, expansion and consolidation acting as a catalyst.

Rental Incentives have increased due to higher vacancies in existing stock providing strong competition to secure tenants. Incentives for Prime grade industrial space average 10% - 20%, subject to the strength of the tenant and lease term. In some cases, the Western Region incentives may range from 15% to 25% plus. Secondary stock incentives are around 8% - 12%. Strong competition for pre-commitments has resulted in some innovative leasing packages, particularly with regard to Economically Sustainable Developments.

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.

Prime rental rates are likely to remain static for the balance of 2016, given the high pre-commitment levels of new supply and relatively high vacancy rates. Rental growth over the past decade is due mostly to the erosion of development margins. Secondary grade rents will continue to remain under pressure, due to high vacancy rates and the ongoing trend for tenants to upgrade to higher quality properties to improve efficiency.

Business confidence will need to improve, to generate a sustained increase in leasing activity (subject to stronger economic growth). The lower AUD is benefitting Australian exporters.

There is a notable increase in owner-occupiers 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 sq. metres).

Industrial sales are expected to remain strong in 2016 (solid sales in 2015). Yields in the prime market average 6.50% - 7.75%, whilst secondary yields are 8.00% - 9.00%. In 2015, unlisted trusts and private investors represented around 50% of the sales market. Some weakness is expected in the secondary market in 2016, particularly if there is a leasing risk involved, or a property is inefficient.