Australia’s industrial sector is currently experiencing a period of high demand, with record low vacancies and a steady tenant demand for space.

According to Knight Frank, higher inflation and construction costs have resulted in a cooling in customer sentiment. The leasing market remains strong, with a take-up of 716,000 sqm recorded across the eastern seaboard. Brisbane and Melbourne both experienced record take-ups, with Sydney held back by a lack of stock.

High levels of demand and the projected rent rises are leading to higher development activity, with Knight Frank predicting 2.5 million square metres of floorspace will be created on Australia’s east coast by the end of 2022.

“The leasing market continues to go from strength to strength as evidenced by the lack of availability and surging rental growth,” says Knight Frank Australia Chief Economist, Ben Burston.

“Headwinds are now emerging in the form of weaker consumer sentiment which points to a slowdown in retail spending, but these are unlikely the materially slow demand in the near term and the structural lack of supply means that rental growth will persist in the near term.”

“On the investment front, the sharp uplift in bond yields and swap rates has directly impacted funding costs and hedging costs for offshore investors. Reflecting this, Q2 saw investors adopting greater caution with industrial deal volumes dropping back to more normal levels with $3.3 billion traded – down 20 percent on Q1.

“Investor appetite remains strong, particularly for short-WALE infill opportunities offering the potential to benefit from rental uplift, but pricing metrics are shifting with yields shifting out by 25 basis points in most cities.”

Land values are on the rise in most markets, with Adelaide seeing an 85 percent increase in medium sized sites. Perth is experiencing the fastest pace of growth nationally, with prime rents up by 18.6 percent year-on-year.

Just 99,000 sqm of industrial stock remains in Sydney, with under 50,000 sqm of prime space remaining across all precincts. The South, South West and Outer West precincts of Sydney now have close to zero available supply.

“Land values tend to respond with a lag to the growth of rents and capital values and the current uplift is partly a response to the rise in values during 2021,” says Burston.

“Desirable locations with good access to transport infrastructure are increasingly scarce and the larger scale of tenant requirements is another driver of growth, with markets like Perth seeing a narrowing of the spread between the value of smaller and larger lots. After a strong burst of growth, we expect land values to stabilise in the second half of the year.

“The rise in bond yields and 2-5 year swap rates has attenuated in recent weeks, after peaking in mid-June, but the full effect of the sharp rise since January has yet to play out and we expect yields to shift out further in the second half of the year.”

To read the report in full, click here.

Jarrod Reedie

knight-frank-q2-industrial-report-2022-1732008715.png

Let’s connect!