A shift in investment activity is underway in the Australian industrial market, with foreign buyers injecting capital in secure assets while local groups are looking to move up the yield curve.
According to CBRE’s 2015 Q1 Industrial MarketView report, offshore investors are seeking out super prime assets with strong covenants and long lease terms that require minimal direct management. CBRE Regional Director, Industrial & Logistical Services, Matt Haddon said yield compression in the super prime sector of the market was underpinned by the increased appetite levels from investors.
“In 2014, transaction activity in the industrial sector was dominated by large portfolio sales, however, a shift in investor demand, particularly along the eastern seaboard, has underpinned super prime yield compression,” Mr Haddon said.
“Prior to Q4 2014, offshore investment in the Australian industrial and logistics market had been relatively modest, with only a handful of foreign parties exposed to the sector. In the past six months however, momentum has continued to build, virtually doubling the number of offshore parties invested in logistics assets – with a host of further first time entrants currently assessing maiden acquisition opportunities.”
CBRE Research shows yields in the super prime industrial market have compressed toward peak levels of 2007, with Melbourne experiencing a current gap of 175 basis points between super prime and secondary assets. “With the yield spread between super prime and secondary assets much greater than at the market peak of 2007 (Sydney excluded), considerable opportunities continue to exist for investors who can manage market risk and take advantage of the greater returns on offer,” Mr Haddon said.
In Q4 2014, offshore groups secured four assets with sub-7% yields, including 38-46 Bernera Road, Prestons; 133-145 Lenore Drive, Erskine; 1 Griffin Crescent, Brendale; and 2-12 Banfield Court, Truganina. CBRE Senior Research Manager Mark Lafferty said foreign purchases of industrial property during 2014 represented 7% of total offshore commercial property sales during the year.
“Offshore investors are looking for defensive assets in the Australian marketplace to generate long-term income,” Mr Lafferty said. “They are attracted by Australia’s yield and income stability and don’t perceive a large risk to capital values for high quality assets.”
The report shows domestic buyers are less likely to acquire long leased super prime assets, preferring to move up the yield curve as they become more open to taking on a degree of leasing and location risk in return for greater value. “We are seeing quite a distinction in the names on campaign enquiry schedules for long leased assets, as opposed to properties with shorter WALEs, such as multi tenanted estates” Mr Haddon explained.
“Onshore investors, with local asset management platforms and deeper market understanding, are far more willing to back their judgment on traditional risk factors, whilst offshore parties have been reluctant to bid as aggressively in the absence of a long term, secure lease position.”.Mr Lafferty said while Q1 was a flat quarter for the industrial market, the declining AUD would help boost business confidence and support rental growth in 2016.
“Onshore manufacturing will continue to benefit from the decreasing cost of capital, which will assist business investment and increase sentiment levels in the industrial market,” Mr Lafferty said.
South Sydney continues to be the powerhouse of New South Wales’ industrial market due to its proximity to the CBD, airport and Port Botany, with demand soaring to gain a presence in the sought after location.
A rise in residential conversion activity is placing pressure on supply in the South Sydney industrial market and driving up rents as a result. In Q1, super prime rents and prime rents lifted 2% and 1.3% respectively, while secondary rents remained unchanged. Mr Lafferty said the changing landscape of South Sydney was underpinning demand from non-traditional operators.
“Residential development in South Sydney is drawing interest from retailers wanting to establish themselves in response to the growing population, with Wesfarmers purchasing a warehouse in Tempe, which is likely to be redeveloped into a large format retail centre. The transport and logistics sectors remained a key driver of occupier demand, accounting for approximately 50% of leasing transactions during the quarter.
The report shows $125.3 million in industrial property over $5 million changed hands over the three month period, representing eight sales including Stockland’s purchase of an industrial warehouse in Botany for $20.3 million.
In response to increased appetite for development sites in Melbourne, a number of large englobo land parcels were listed for sale in Q1. A 55 hectare site in Craigieburn and 29 hectare parcel in Tullamarine are on the market, while in the west 61 hectare and 49 hectare landholdings are available.
“Demand for developable land is being driven by the current investment and market conditions,” Mr Lafferty said. Occupier demand remained stable during the quarter, with the transport and storage sector continuing to be the most active tenants. The supply pipeline is Melbourne is forecast for 680,000sqm due for completion in 2015, a 17% increase on 2014 development.
Brisbane is forecast to welcome a large supply of industrial stock in 2015, with approximately 385,000sqm due for completion this year, the largest amount of supply in Brisbane since 2008. Mr Lafferty said while the Queensland economy was continuing to experience a slowdown from the mining investment downturn, several major gas projects would continue to support to the state’s industrial sector.
Industrial rents fell slightly since last quarter with super prime rents at $116 per square metre, prime at $114 per square metre and secondary at $93 per square metre. Brisbane recorded $44.4 million in industrial transactions during the quarter – slightly less than previous quarters. The report shows yields continue to compress across all asset classes, with super prime at 6.50%, prime at 7.43% and secondary at 8.77%. “Significant interest in industrial assets from institutional and foreign investors is driving the current yield compression, despite limited rental growth,” Mr Lafferty explained.
Demand for industrial property in Perth is being driven largely by consolidation requirements, with many occupiers looking to cut costs long term and increase efficiency amid the mining investment downturn. “This has resulted in a significantly lower level of infrastructure investment and widespread contraction in the workforce requirements of firms both directly and indirectly involved in the mining sector,” Mr Lafferty explained.
Prime rents declined in all sectors, falling 4.1% in the east and south to $112 per square metre and 2.5% in the north to $108 per square metre. Despite a decrease in new supply in the 12 months to March 2015, a large amount of stock is due for completion in the subsequent year at 203,994sqm, which includes two major distribution centres for Komatsu (23,846sqm) and Aldi Australia (48,851sqm).
Despite signs of stability in the Adelaide industrial market in the second half of 2014, conditions remain challenging. Mr Lafferty said the mining slowdown would continue to impact the industrial market, with declining prices affecting groups such as Senex Energy who are cutting capital expenditure by 20%.
He commented: “As one of the more aggressive explorers in the Cooper Basin precinct, their cost cutting measures are indicative of the pressures that will be placed on SA-based mining groups forced to rationalise expenditure and real estate footprint given lower commodity prices.” Super prime yields compressed marginally over the quarter to 7.83%, with the Adelaide West market continuing to offer the sharpest yields at 7.50%.
“With local investors shifting their focus to non-core locations given heightened interest in super prime assets along the east coast, the Adelaide market may benefit from investment in assets in strategic locations with strong covenants and lengthy lease terms,” Mr Lafferty said.
Gross rents remained stable, following two – three quarters of decline, with declines expected amid tenants signing lease terms at below asking rents. The supply pipeline for 2015 is forecast at 57,685sqm, with a 14,000sqm Costco distribution centre and 30,000sqm Aldi facility due for completion.
The Canberra industrial market showed no signs of improvement during Q1, 2015, with rents remaining unchanged from the September quarter. While the ACT industrial market continues to support the local economy, there is speculation that freight moving to Sydney could eventually be transported to Canberra Airport due to its curfew free status.
“It is potentially more efficient for freight to be transported to Canberra and subsequently driven to Western Sydney for distribution centres due to traffic congestions and the curfew status of Sydney airport,” Mr Lafferty said.