Unprecedented interest in industrial and logistics real estate has taken Australia’s total investment volume to nearly $14 billion for 2021, nearly double the pre-pandemic high of $8 billion in 2019.
The rise in demand, according to Knight Frank, can be attributed to the demand for the industrial sector from developers, investors and tenants, as e-commerce continues its growth within the country. With the competition for industrial stock intensifying, take up of existing stock has now risen 25 percent above the average in Q3 2021. 82 percent of the investment volume has taken place on the eastern seaboard.
Katy Dean, Director, Head of Industrial Research at Knight Frank Australia, says she expects the interest in the sectors to continue beyond 2021 with the forecast development pipeline in 2022 set to reach a new high with 2.6 million sqm planned.
“We are seeing competition for industrial stock continue to intensify, with take-up of existing stock rising 25 percent above the five-year average in Q3 to 500,000 sqm on the east coast. This, in turn, is pushing some markets like Sydney’s western precincts and Melbourne’s west and south-east to a critical shortage of prime existing stock, and therefore compressing the volume of available secondary supply considerably too. This is also evidenced on the east coast, where the volume of available secondary supply (+5,000 sqm) has now dropped to its lowest level since 2011 after declining almost 45 percent over the last 12 months alone,” she says.
“Record volumes of investment capital continue to flow into the industrial sector too, with investors also pushing up prices through acquisition and development activity. This demand has created powerful tailwinds in Q3, resulting in further contraction of vacant space and the return of rental growth rates of 1-2 percent over the quarter in most markets. We expect to see further strong rental growth and investor interest in this sector throughout 2022, underpinned by low vacancy, supply constraints, the continued expansion of e-commerce, and intensifying competition for space.”
Land value has also seen a sharp increase in Q3, with the average aggregate price of small lots increasing 4.1 percent and 1-5ha lots increasing 5.8 percent. This growth trajectory will continue, with much higher rates of growth expected in those precincts facing critical land shortages in the short-term. The volume of available vacant supply has declined for a fourth consecutive quarter, dropping 2.8 percent in aggregate, its lowest level since January 2013.
“The rate of compression of super prime yields has begun to slow, but on a year-on-year basis is still showing an average 116 bps compression since Q3 last year. In Q3, Melbourne super-prime yields have compressed 50 bps, while Perth and Adelaide have compressed 25 bps to average 4.75 percent, Brisbane has compressed 5 bps to 4.2 percent and Sydney is holding at 3.75 percent,” says Dean.
“There remains a question mark on how low yields can go in Australia – the market will retain its strong momentum but with yields at these low levels there may be limited scope for further downward movement in 2022, particularly in Sydney and Melbourne.”
Industrial leasing activity is surging in Sydney, with leasing volumes already at 1.05 million sqm, eclipsing the total volume for 2020. Pent-up demand lifted take-up rates to 81 percent above the same period last year in Q3. Zoned and serviced land in the harbour city is in short supply, and this is seeing some sites sell for in excess of $1,000/sqm suggesting that there will be significant growth in land values in Q4, into 2022. Sydney has also reached a new record low of vacant supply, with strong tenant demand in Q3 resulting in an 8 percent decline quarter-on-quarter to 201,248 sqm – a 71 percent fall year-on-year.
Melbourne industrial land values have skyrocketed, driven by developer appetite for the west and north regions, with the transport and warehousing sectors dominating. A surge in development is shortly to follow, with 1,172,297 sqm of new industrial space to be delivered this year, and the pipeline forecast to rise further in 2022 to 1,319,855 sqm. Melbourne has seen its land value for 1-5ha lots increase by 67 percent this quarter and 54 percent since the start of 2021. Alongside this, the take-up of vacant space has risen by 61 percent compared to Q3 2020.
In Brisbane, leasing activity remains high with rolling 12-month take-up 58 percent higher than a year ago and Q3’s take-up of 224,031 sqm 67 percent above the five-year average. Vacancy is now 29 percent percent below the levels of a year ago despite significant speculative projects starting development, which are expected to account for more than a third of the pipeline in 2022. Land ready for immediate development continues to be highly sought after with prices up 22 percent in the past year for 1-5ha blocks.
The industrial market in Perth has been buoyed with the Dexus and APN Industria REIT partnership that has seen the purchase of a $1.5 billion portfolio of industrial properties. As leasing demand gains momentum in Perth and a new rental growth cycle emerges, growing confidence in the occupational demand profile triggers sizable yield compression and pushes up land rates for small lots by 4.7 percent in Q3.
In Adelaide, industrial land supply remains constrained with small lots growing on average 6.8 percent quarter-on-quarter, and 1-5ha lots increasing 5.9 percent. Developers and owner occupiers are increasingly looking to brownfield sites where possible, and several speculative developments are underway with developers’ confidence buoyed by early leases prior to practical completion.
Image: Frasers Property Industrial