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News release


Australian Industrial sector continues to gain impetus

Australia’s market has the second highest investment activity in Asia Pacific.  Australia’s multi-billion dollar infrastructure development underway will drive investment forward

A new report by global property services firm, JLL, reveals the depth of Australia's industrial investment market.  Regionally, Australia achieved the second highest industrial investment activity in Asia Pacific in 2016, behind Japan.  Australia was the most popular destination for cross-border investment – with over $2.68 billion invested.  Australia's multi-billion dollar infrastructure development underway will drive the investment market over the next five years.


JLL's Australian Industrial Investment Review 2017  reports it was another year of new records for Australia's industrial and logistics sector in 2016.  All-time highs were reached for total transactional volumes, portfolio sales and inbound cross-border capital.  Robust underlying growth fundamentals coupled with accommodative monetary policy were accretive to asset price inflation.


JLL's Head of Industrial – Australia, Michael Fenton said, "The gradual institutionalisation of the sector in Australia has gained impetus over the past four years.  Industrial annual sales volumes have had nine consecutive years of growth, with new records reached every year since 2014.  2016 volumes reached $6.89 billion, surpassing last year's all-time high. Portfolio transaction volumes have grown 155% per annum since 2013.


"Sale and leaseback deals remained the theme in 2016 and we expect to see an increased frequency of this type of deal in 2017.  As additional transactional evidence emerges, the case for re-rating has strengthened for many industrial assets.


"Current pricing levels will spur vendor motivation with an increased number of transactions likely to occur off-market. Given the stage of the cycle, corporates will look to capitalise on current pricing to sell existing assets while fund managers will continue to pay premiums for stabilised income profiles – bringing forward more sale and leasebacks.  Moreover, the limited investable opportunity and pricing will ensure AREITs focus on land acquisitions and bolster forward pipelines," said Mr Fenton.


Australia's multi-billion dollar infrastructure development to drive the industry forward:

The JLL Report states that Australia is currently experiencing a level of infrastructure development that dwarfs the past.


Mr Fenton said, "There are more than $86.8 billion in transportation infrastructure projects currently underway.  Over $47 billion of these are expected to be completed in the next five years. 


"This will have a profound impact on the industrial market to reduce the operating costs for distributors, raise the implicit value of existing assets and unlock new markets.


"We are also seeing further consolidation of the sector.  Australia's industrial market has undergone a rapid institutionalisation over the past decade.  Portfolio transaction volumes have risen by an annual average of 155% since 2013.  Never has the sector had such high stock of capital invested, or stock of capital looking to be placed.  Such growth, in part, was a function of the increased offshore demand for Australian logistics assets.  In 2016, just under a half of all transactions ($2.9 billion or 39%) was capital from direct offshore investment," said Mr Fenton. 


JLL's Senior Industrial Analyst, Sas Liyanage said, "A sustained rise in bond yields could sway focus away from capturing value through accelerated cap rate compression toward maximising asset cash flows through income growth and value-add opportunities.


"Low-interest rates, robust economic fundamentals and the drive for income will likely ensure the continued sustainable expansion in supply. Our forecasts anticipate this year will be the highest year of supply since 2008. This will be concentrated in Melbourne and Sydney, accounting for 73% of total supply.


"The good news is that supply conditions between now and previous construction peak are markedly different. Firstly, this year's expected supply is approximately 34% below that in 2006 to 2008. Secondly, the majority of new stock coming online is being absorbed by the market.  During the previous peak, 34% of the newly-built space was vacant upon completion. This year, we are running at an unleased rate of 13% for assets completed or under-construction," said Mr Liyanage.


Key highlights for industrial investment activity in 2016 included:


  • Sydney and Melbourne accounted for more than 68% of the national sales volumes and were the second and fourth largest markets in Asia Pacific.  Transaction volumes have mirrored domestic economic activity in those states;
  • Offshore investment has grown too, rising by 107% per year since 2014.  Australia is the preferred destination in Asia Pacific for industrial cross border activity;
  • Average national prime yields reached a record low.  Record low levels were set in all state capitals excluding Perth and Adelaide;
  • Unlisted property trusts were the most active participants in the market in 2016;
  • Sale and leaseback deals were widespread in 2016.


State Outlook for industrial investment activity in 2017:


  • Sydney and Melbourne will still be considered as high growth markets, however pricing will be accordingly sharp. In these markets, secondary yield compression hasn't occurred to the same intensity as that in the prime over the past few years. As such, some assets will have a greater margin to absorb further rises in bond rates. JLL believes yield spreads in Sydney and Melbourne will narrow in the near-term.
  • Brisbane and Perth will present counter-cyclical opportunities, with rental contractions subsiding in the year. In Brisbane, the outlook has firmed given an uptick in enquiry and the stabilisation in rents. In Perth, we expect industrial demand to be buoyed by growth in the retail sector.