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News release

Industrial demand softened in the last quarter of 2011 but investment activity held up, with sales in line with 2010 levels

Industrial fundamentals remain solid due to low levels of new supply coming through the pipeline

AUSTRALIA, 15 FEBRUARY 2012 – Industrial demand has softened, leading to rental conditions stabilising and a slowdown in the number of new industrial projects beginning construction, according to Jones Lang LaSalle’s latest quarterly research statistics.
Australian Head of Industrial, Michael Fenton said that tenant demand has softened as businesses adopt a more cautious outlook in the face of global headwinds, but that the fundamentals in the sector are supporting solid investment sales results, including several portfolios and large asset sales in 2011.
“We did expect to see a slowdown in industrial occupier take-up in the later part of the year.  We expected less pre-lease activity by the major retail and logistics groups given that they drove much of the demand in 2010.
“Smaller businesses are more cautious given the current business environment and they are preferring to ‘stay put’ or to lease existing space when available, not wanting to commit to a move with a longer lease term,” said Mr Fenton.
For the whole of 2011 Melbourne recorded the largest share of national take-up (28%), closely followed by Brisbane (27%), Sydney (26%), Perth (15%) and Adelaide (5%).
Investment activity in 2011
Over the whole of 2011, Jones Lang LaSalle recorded 123 major industrial property sales (> AUD 5 million) totalling AUD 1.76 billion. This was only just below the AUD 1.87 billion recorded in 2010 in which 149 sales were recorded.
Mr Fenton said, “The average sale price in 2011 at AUD 14.3 million was the highest since 2007. This indicates there is good depth in the national investment market for purchasers of industrial property and more buyer depth for larger lots sizes that just was not there in 2008 and 2009.
“The major participants remain private investors, offshore groups looking to build their presence in the market and existing domestic institutional funds with a focus on the industrial sector as a core mandate,” said Mr Fenton.
“We transacted one of the largest sales of the year with Sir Joseph Banks Corporate Park in Botany NSW selling for AUD 76.825 million in November 2011 to DEXUS.  Offshore investor Aviva purchased three further Sydney properties from Mirvac in December for a combined AUD 66.8 million, coming off the back of Aviva’s AUD 96.9 million purchases of the half shares in Mirvac’s Hoxton Park developments for Big W and Dick Smith Electronics in September.”
Supply pipeline in 2012
Nick Crothers, Director of National Industrial Research at Jones Lang LaSalle, said the fundamentals remain solid due to quite low levels of new supply coming through the pipeline. “Despite a gradual pick up in supply since 2010 which was the lowest level in a decade, new supply is expected to remain below the average of the last decade in the next two years,” said Mr Crothers.
At end of 2011, 998,100 sqm was under construction and due to be completed in 2012.

Approximately 81% had been pre-absorbed. Ten new projects began construction in Q4/2011 totalling 172,700 sqm of stock. This was a significant decrease on the 20 projects totalling 396,600 sqm that got underway in Q3/2011 and the 23 projects starting construction in Q2/2011 totalling 229,800 sqm.
“The lower level of new construction project starts is an indication that the supply pipeline is not accelerating and that oversupply is unlikely in the near term,” said Mr Crothers.
Rental growth
There was limited evidence of market rental growth during the last quarter of the year.
Mr Crothers said, “Rents had been growing above trend in many markets in the first half of the year.
“However, momentum appears to have been crimped by more cautious demand conditions and some speculative construction that completed in the last few months,” said Mr Crothers.
Over the year to December 2011, average prime grade net face rents increased by 6.9% in Perth East, 6.4% in Sydney Outer Central West, 3.3% in Brisbane Southern and 1.5% in South East Melbourne.