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Rents steadily improving; investment activity to pick up through 2011
SYDNEY, 20 APRIL 2011 – The Australian industrial sector is in a rising demand/low supply environment, leading to rental growth and improving confidence in the investment market, according to Jones Lang LaSalle’s March quarter research statistics.
March quarterly highlights:
· Demand steadily improving - gross take-up of 255,600 sqm was recorded in Q1 2011;
· New construction levels remain low – new supply in Q1 2011 was 239,100 sqm;
· A further 653,800 sqm is under construction for 2011;
· Supply is gradually picking up as developer confidence improves – 254,700 sqm of projects began construction in Q1 2011, in line with Q4 2010;
· Market rents are growing in most markets and grades of stock due to tight supply and demand balance;
· There were 12 major properties sold for $121.6 million in Q1 2011, around the same level as this period last year (16 property sales totalling $148.9 million in Q1 2010).
Michael Fenton, Head of Industrial at Jones Lang LaSalle said that while investment sales were typically more subdued in the first quarter of the year, investment activity was set to pick up throughout 2011 with further consolidation likely in the sector.
“Key themes emerged in the industrial investment sector in 2010 that we expect to continue in 2011,” said Mr Fenton.
“Overall sales volumes have improved compared to the GFC period. Portfolio sales have been successfully conducted and indicate investor depth. We expect to see more portfolio sales and large dollar value property offerings in 2011 to take advantage of this depth. Offshore money has arrived in Australia and is now competing strongly for industrial assets. And we have seen the return of domestic institutions as buyers after a period as net sellers of assets.
“There has been a period of consolidation in the industrial sector with companies like Colonial, AMP, Stockland, Cromwell, Salta Properties and ING exiting the market or selling down a considerable portion of their industrial portfolios.
“At the same time, new entrants are emerging and filling their places. They include the large A-REITs and fund managers that have refocused their energy on the industrial sector as a core investment sector. And they also include the mid-level managers and offshore groups who are competing to grow their portfolios off a lower base in this sector. All up, this has resulted in a considerable change in the landscape of the industrial investment market,” said Mr Fenton.
Industrial rents are now in the growth phase of the cycle. Rents are growing moderately in most markets and strongly in some markets where demand is racing ahead of supply. In the year to March 2011, average prime grade rents increased 9.8% in Perth East, 5.3% in Melbourne South East, 4.7% in South Sydney, 3.4% in Brisbane Southern, 2.5% in Sydney Outer Central West and 1.5% in Melbourne West.
Rents for secondary grade stock are showing solid growth in many markets as demand for prime grade space turns to well located secondary stock in this tight supply environment. In the year to March 2011, average secondary grade rents increased 13.5% in Perth East, 6.2% in Melbourne South East, 6.7% in Sydney South, 4.2% in Sydney Outer Central West and 2.8% in Melbourne West.
“After a period of negative to flat rental growth during the GFC due to a decrease in occupier demand, rents are now picking up solidly as fundamentals tighten. Landlords worked hard on tenant retention strategies through the last few years and will now benefit due to very low vacancy in good quality warehouse and distribution properties. We expect to see a period of around trend rental growth after the strong recovery witnessed last year coming off the market bottom,” said Mr Fenton.
Tenant demand continues to improve. There was a very high level of activity in the pre-lease and design & construct market in 2010 as big retailers and logistics groups committed to new space. So far in 2011, of the 255,600 sqm of gross take-up recorded in Q1 2011, 49% of take-up has been the leasing of vacant existing space.
“Similar to trends we saw last year, retailers are the leading space takers (47% in Q1 2011), with manufacturers next (26%) and then transport and logistics companies (22%). We are now seeing medium size and smaller businesses follow suit and enter the market as the economic cycle continues to improve,” said Mr Fenton.
“Brisbane was a standout in Q1 2011 with 46% of gross take-up. This was driven by two large Kmart deals confirmed during the quarter. Sydney accounted for 32%, along with Melbourne (17%) and Adelaide (5%). There were no major tenant moves in Perth during Q1 2011 (> 3,000 sqm), which is a direct function of the lack of readily available large warehouse facilities on the market,” said Mr Fenton.
Large occupier moves recorded in Q1 2011
Outer South West
Outer Central West
Source: Jones Lang LaSalle Research
On the supply side, there was 239,100 sqm of major new industrial stock completed in Q1 2011. Over 93% of this had known pre-committed tenants. There was 653,800 sqm under construction and due to be completed in 2011, with 82% pre-absorbed as of Q1 2011.
“The lower pre-commitment rate for projects under construction reflects the small increase in speculative activity as developers are more confident of the demand environment moving forward,” said Mr Fenton. “This is a vote of confidence in terms of investment of capital in development and we expect to see a continuation of this in the short term while overall supply remains historically low.”
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