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News release


Wide yield spreads still attractive to investors: industrial sector

JLL 2Q 2014 research statistics: Solid transaction activity and investment in new development driven by attractive pricing metrics

​SYDNEY, 23 JULY 2014 – Investors remain attracted to the stable fundamentals of the industrial sector, with transaction volumes in the first half of 2014 up 35% on the same period last year, according to JLL’s latest quarterly research statistics.

Quarterly highlights – 2Q 2014:

There has been almost AUD 1.6 billion in industrial sales year-to-date 2014, well up on the AUD 1.18 billion in the same period in 2013
Sales in 2Q14 were AUD 874 million, led by activity in Melbourne and Sydney, though sales activity has been robust in all cities
Occupier demand remains relatively subdued: approximately 447,000 sqm of gross take-up in 2Q14, significantly up on 1Q14
Construction is accelerating: 719,000 sqm was completed year-to-date in 2014 and a further 941,000 sqm is under construction
New supply in 2014 is set to be the highest since 2008 record levels 
Average face rents remain steady in most markets as supply and demand remains in a fine balance

Michael Fenton, JLL’s Australian Head of Industrial said investment activity is very solid, with allocated capital to the sector estimated to typically exceed available product by a ratio of 5:1. 

There has been almost AUD 1.6 billion in industrial sales year-to-date 2014, well up on the AUD 1.18 billion in the same period in 2013. Sales in 2Q14 were AUD 874 million, led by activity in Melbourne and Sydney, though sales activity has again been robust in all cities this year.

The average sale price in 2014 of approximately AUD 18.4 million per sale follows on from the record of AUD 21.0 million per sale set in 2013. This indicates that there is good depth in the market for larger assets that have been more prevalent since the middle of 2013.

Mr Fenton said, “Our expectation is that vendors will increasingly be encouraged by price signals and the depth of capital evident in the market to selectively bring assets to the market to crystalize gains made over recent years or to exit underperforming assets.”

“Buyers remain led by the major and smaller domestic A-REITs and their managed funds, mid-tier boutique funds, syndicators and some high-net worth private investors. 

“Scalable offerings in the second half of 2014 may draw out the interest of offshore groups without a direct exposure to the Australian market and we may see one or two new entrants transact in Australia by years end,” said Mr Fenton.

The research statistics show tenant demand remains patchy as businesses adopt a more cautious outlook in the face of domestic headwinds, but that the balanced fundamentals in the sector are supporting steady rental levels in 2014.

Mr Fenton said, “We did expect to see a minor slowdown in occupier activity in the first half of this year with a softer retail environment and the May Budget contributing to weaker sentiment. However, we still see the on-going change of use activity in mature industrial precincts driving tenants to change their location and commit to new space and leading to more activity in the sector in new growth precincts.”

“Smaller businesses are more cautious given the current business environment and they are preferring to ‘stay put’ or to lease existing space when available, so it is understandable that our research shows take-up is down a little this year overall,” said Mr Fenton.

Nick Crothers, JLL’s Director of Industrial Research, said the balanced fundamentals may be challenged in the second half of 2014 as supply picks up, including further speculative development. 

“We recorded 133,000 of speculative supply year-to-date and 310,000 sqm is under construction for completion by year end with no known occupier commitments. This equates to a pre-commitment rate of less than 70%,” said Mr Crothers. 

As of 2Q14, 941,000 sqm was under construction for 2014 with Melbourne and Brisbane to be supply leaders this year. It is likely to be the first time more stock has completed in Melbourne than Sydney since 2006; further, it will be the first time ever that more supply has completed in Brisbane than Sydney.

“Melbourne and Brisbane also have the highest concentration of speculative construction and are displaying softer leasing conditions both in terms of face rental growth and average market incentives,” said Mr Crothers. 

There was limited evidence of market rental growth during the past few quarters. Average face rents have been flat in most markets. This is primarily a result of speculative construction and a competitive pre-lease environment stifling rental tension in existing stock.

Large occupier moves recorded in 2Q14
Large occupier moves recorded in 2Q14.jpg 
 National Industrial new supply pipeline.jpg
Source: JLL Research

Prime grade yield premium to bonds.jpg
Source: RBA, JLL Research