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News release


Industrial sector enters growth phase

Rent and value outlook improves, leading to firmer yields

SYDNEY, 17 MARCH 2011 – New industrial supply in 2010 was the lowest in over a decade, Jones Lang LaSalle’s research statistics show, as demand continues to improve, leading to broad-based rental growth and yield compression in the sector.
Quarterly highlights – Q4 2010:
• Steady improvement in demand with gross take-up of 439,700 sqm in Q4 2010
• Lowest year of new industrial construction in over a decade
• New supply was 260,600 in Q4 2010 and total supply in 2010 was 894,500 sqm
• Supply is picking up - 255,500 sqm of projects began construction in Q4 2010
• Market rents have entered the growth phase of the cycle
• Investment yields for prime grade stock are gradually firming, supporting improving asset values
• There were 44 properties sold for $602.6 million in Q4 2010 compared to 37 properties totalling $539.5 million in Q3 2010
Michael Fenton, Australian Head of Industrial at Jones Lang LaSalle said all the lead indicators point to a strong year for the industrial property market in Australia. 
“The run down of inventory levels has ended and with growth in imports set to continue on the back of a strong Australian dollar, take-up of space in the sector is expected to gather momentum,” said Mr Fenton.

Industrial rents entered the growth phase of the cycle in 2010 and further evidence of this was clear in Q4/2010. Average prime grade rents increased 10.2% in Perth East, 6.5% in Sydney South, 5.3% in Brisbane Southern, 2.6% in Melbourne South East and 1.5% in Melbourne West in 2010.
Rental pressure has also emerged in the secondary grade market due to tighter availability of existing stock as demand improves and new supply troughs. Average secondary grade rents increased 11.7% in Perth East, 9.4% in Sydney South, 4.8% in Melbourne South East, 3.7% in Melbourne West, 3.1% Brisbane Southern and 0.8% in Sydney Outer Central West.

As a result of improving rental conditions, yields are firming for prime grade assets with good lease covenants in anticipation of more rental uplift to come. Prime grade yields have firmed 25-50bp across the major capital city markets since their peak in mid-2009, with variances between local precincts. Logically the markets that are recording greater rental growth have generally shown the largest firming in yields.
“Owners of industrial assets are certainly more confident in offering assets for sale now than the previous 12 months. Yield compression is reinforced by the number of new entrants and established groups re-entering the market in 2011 as active buyers.  The confidence these buyers are exhibiting is based purely on strong market fundamentals,” said Mr Fenton.

On the demand side, gross take-up of industrial space was 439,700 sqm in Q4 2010. This is in line with the quarterly average of 428,500 sqm recorded 2010. The manufacturing sector (34%), wholesale trade sector (23%) and retail sector (14%) were the primary drivers of gross take-up in Q4 2010. The remaining 29% of take-up came from seven different industry sectors.

“There was a clear improvement in occupier demand in 2010, lead by big retailers and logistics groups that are looking through the cycle and committing to their future expansion programs. I expect medium size and smaller businesses to follow suit as the business cycle continues to improve,” said Mr Fenton.
“Sydney was a standout in 2010 and the last quarter of the year was no different. Sydney accounted for 56% of gross take-up in Q4 2010, along with Perth (22%), Brisbane (12%), Adelaide 6% and Melbourne (4%).”

On the supply side, there was 260,700 sqm of major new industrial stock completed in Q4 2010. Over 86% of this had known pre-committed tenants. There was 806,600 sqm under construction and due to be completed in 2011, with 86% pre-absorbed as of Q4 2010.
“New supply activity was quite low last year. Clearly new development is picking up in line with all the major pre-lease activity going on in 2010. There has also been an increase in speculative development activity to fill this supply gap – a clear sign of confidence in the demand outlook for the industrial sector in 2011. Given these fundamentals, I expect to see steady improvement in rents and values in the coming year and as a result, further investment into the sector in the form of asset purchases and capital spending on new development,” said Mr Fenton.