2ND HALF 2016 - LJ Hooker Commercial · 2 LJ Hooker Commercial Industrial Market Monitor 2nd Half 2016 “We want to be exceptional” ljhcommercial.com.au “We are pushing the boundaries,

1

2ND HALF 2016

> Industrial remains a steady, stable and predictable investment choice

> Leasing fundamentals improve as demand strengthens

> Owner-occupiers dominate as interest rates fall

2 LJ Hooker Commercial Industrial Market Monitor 2nd Half 2016

“We want to be exceptional”

ljhcommercial.com.au

“We are pushing the boundaries, connecting, sharing, learning,

creating and doing whatever it takes to be the best in commercial real estate with our customers at the

centre of everything we do.”

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Sydney 6Leasing market 8Investment market 10Supply 11

Melbourne 12Leasing market 14Investment market 16Supply 17

Brisbane 18Leasing market 20Investment market 22Supply 23

Perth 24Leasing market 26Investment market 28Supply 29

Adelaide 30Leasing market 32Investment market 33Supply 33

Canberra 34Leasing market 36Investment market 37Supply 37

Hobart 38Leasing market 40Investment market 41Supply 41

Darwin 42Leasing market 44Investment market 45Supply 45

ContentsNational Overview 5


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Why invest in industrial property?

Its nature is not cyclical like the office market, which produces big winners in the upswing and big losers in the downturn. Industrial property is far more steady. It is not as glamorous as retail property, but is far less management intensive. More often than not, there is a single tenant who signed up for a long lease, compared with a multitude of occupiers, all on different lease terms. But, in most cases, it is not a play for capital gain.

Steady, stable, predictable

In fact, industrial property is not unlike fixed interest, such as government bonds. Like bonds, industrial property promises steady, predictable cash flow. However, it offers significantly better returns: industrial property is a “rising yield (on initial investment) real asset”, while bonds are a “fixed coupon declining real value” investment. In other words, income from industrial property increases every year, while bond returns remain the same. In the case of bonds, the value of the initial investment declines in real terms, eroded by inflation. In

contrast, industrial capital values tend to increase with rising construction costs, minus a little due to the ageing of the property. Plus, or minus a little bit more when markets display a degree of cyclicality. Bonds are safe – but total returns are dismal.

The other positives

In the inner areas of the capital cities, industrial property offers potential uplift in prices via change of use. Older industrial precincts continue to be encroached by residential uses, with significant uplifts in land prices as rezonings are approved.

There are differences between cities: exposure to the resources industry means the mining capitals show weaker prospects for demand in the short term, while some are benefiting more from the lower $A than others. In general, prospective IRRs from industrial property are not huge, but they are competitive compared with other property classes.

Certainly, returns from industrial property markedly outperform bonds.

Looking ahead, what can we expect from industrial property?

There is no cycle to speak of going forward. However, there is an influence of bond rates on industrial yields. Some people think that industrial property yields nothing other than bonds, that there is a 1:1 relationship between the two. That is not true. The strength of the relationship varies – in some markets it is stronger than in others. Between one third and two thirds of bond rate movements are passed on to yields. The remainder is largely made of up expectations of capital gain.

Our forecasts are for 10-year bond rates to remain low over the next three years, but they are unsustainably low in the longer term. There is expected to be a sharp upward movement towards the start of next decade, we just don’t know when exactly. It will affect industrial property capital values as yields soften in response, and investors need to put in place plans to deal with it.

Chart 1: Intro

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2009 2010 2011 2012 2013 2014 2015 First Half 2016

Source: LJ Hooker Research / RCA Other/Unknown Institution Occupier/Developer Private Syndicate

Note: Excludes transfers, equity buyouts and M&A transactions.

Australian industrial sales transactions

6 LJ Hooker Commercial Industrial Market Monitor 2nd Half 2016Aerial images supplied courtesy of Airview Online – www.airviewonline.com

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SydneySydney industrial market

The New South Wales economy has turned the corner and is beginning to perform strongly. It has been outperforming the national average since FY2015, reflecting the rise in residential building activity which has had positive flow-on effects into other industry sectors.

Population growth, a buoyant labour market, low interest rates and the wealth effect of rising residential property prices have combined to lift consumer confidence and private consumption expenditure. This provides a solid base, from which industrial property markets can benefit from moving forward.

Sydney Outer West industrial market

Average prime net face rent $113 psm pa

Average prime yield 6.9%

Average prime incentive 10%

Average prime capital value $1,650 psm


Leasing market

The Sydney industrial leasing market remains buoyant. Demand is strong, underpinned by solid growth in the NSW economy, with an estimated 600,000 square metres absorbed over the 12 months to June 2016; just below its previous peak in 2005.

Demand for industrial space continues to focus on warehousing and distribution space, with the transport and logistics sector being the main source. Its main driver is the search for efficiency, which is manifest in structural change such as supply chain outsourcing and e-commerce—both of which have experienced exponential growth over recent years. At the smaller end of the market, strong population growth in the South West Priority Growth Area is underpinning demand for industrial units at Smeaton Grange and Gregory Hills.

In the Southern region, strong demand from businesses with connections to the port and airport is met by dwindling supply as large parts of the area are rezoned to residential uses. In the North, high land values associated with gentrification make traditional industrial development financially unfeasible, while the Central West is also losing land due to rezoning. The Outer region, with its ready supply of land acts as Sydney’s main relief valve, accommodating most of the demand for large, new industrial premises and taking in space users that are being pushed out of the older, more centrally located precincts.

Strengthening demand and declining net additions have seen a fall in vacancy rates over the past 18 months. We estimate that the metropolitan-wide vacancy rate contracted from 3.7% at December 2014 to around 2.0% at June 2016, its lowest level since 2007. Despite falling vacancies, rental growth remains subdued. Over the 12 months to June 2016, prime face rents grew by an average of 1.5% across the four major regions. The reason is the strong competition in the pre-lease market, primarily in the Outer region, where rents have been flat for several years.

Sydney

251A Pacific Highway, Coffs Harbour. Managed by - LJ Hooker Commercial Coffs Harbour.

99

Leasing outlook

The outlook for space demand over the next three years is positive, with a forecast of above-average net absorption. NSW can look forward to its strongest period of economic growth since the late 1990s over the next two to three years, underpinned by dwelling construction and investment in infrastructure projects.

At the larger end of the market, the transport and logistics sector will continue to be the main source of demand for industrial space. Global trends in supply chain outsourcing, including contract warehousing, the continued rise of e-commerce and the expansion of global retailers/brands into Australia will require the most efficient and well located premises available. E-commerce in particular requires a string of different facilities depending on how time critical certain goods are.

The area around the M7/M4 interchange will remain the most sought after location for transport/distribution. Nearby Erskine Park remains popular, although the short term focus will be on Greystanes, Marsden Park, Horsley Park and Prestons.

Being able to increase supply to accommodate any given level of demand within a short period of time means the outlook for rental growth remains modest. Overall, our forecasts are for average prime net face rents to

grow by 5.0% over the three years to June 2019. The outlook for secondary rents is similar to the prime market.

In the smaller strata and industrial estate market, the steady addition of new, speculative stock will likely contain rental growth as well, particularly in the more active precincts. There will be more pressure on rents in areas threatened by conversion to other uses, particularly in the Southern and Central Western region.

Sydney Outer West industrial rents and capital valuesChart 2: Sydney outer west industrial rents and capital values

Value $/psm Rents $/psm

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For Lease - 423-427 Victoria Street, Wetherill Park. LJ Hooker Commercial Silverwater


Sydney

Investment market

Sydney’s industrial investment market continues to perform strongly. Together with Melbourne, it remains Australia’s most desirable investment market and is often the first port of call for large offshore investors.

In 2015, Sydney made up over 40% (by value) of industrial property investments across the major capital cities, equivalent to over $2 billion. Trading activity has continued strongly into 2016, with portfolios by Goodman, JP Morgan and Altis changing hands in May and June.

We estimate that average prime property prices rose by 7% through FY2016, following an 8.5% increase in FY2015. The rise was underpinned by a firming in average yields of 40 basis points, to 6.9% over the 12 months to June 2016.

Yields on secondary properties also firmed by 40 basis points in FY2016. Many investors have either been priced out of the prime market and forced up the risk/return curve, or focused on value-add opportunities. The latter has become the main focus in the Southern region in particular, where up-zoning has reduced supply and investors are hoping for more of the same.

Investment outlookThe outlook for the Sydney industrial investment market is positive, particularly in the short to medium term. Yields are highly correlated to long

bond rates which, on our forecasts, will average 2.5% for 10 year (Australian) government bonds over the coming three years. This should ensure that the momentum of funds flowing into industrial property will be maintained. Over the three years to June 2019, average prime yields are forecast to firm by another 25 to 40 basis points. The firming in yields will underwrite moderate growth in capital values, with our forecasts suggesting a 10% rise over the three years to June 2019.The firming in yields will underwrite moderate increases in property prices, with our forecasts suggesting a 10% rise over the 30 months to June 2018.

Sold - Unit 10, 21 Bay Road, Taren Point, LJ Hooker Commercial Sutherland Shire.

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Supply

Sydney warehouse demand and new supply

Meanwhile, around 77,000 square metres of secondary stock was withdrawn from stock over the same period, to be either redeveloped in the case of GPT’s former International Trucks plant at 18–24 Abbott Road, Seven Hills, or to make way for construction of the St Peters interchange of WestConnex. Overall, we estimate that net additions of stock totalled around 425,000 square metres in FY2016.

Development activity is dominated by institutional players, with Charter Hall, Dexus, Frasers, Goodman, Stockland and Sydney Business Park the most active players. The Outer industrial

region has been dominating new construction since the early 2000s. In 2015, Eastern Creek and Marsden Park accounted for nearly 40% of all new space added, with Erskine Park and Smeaton Grange adding another 11% each.

Supply outlookNew completions in 2016 are set to exceed 2015’s total by around 10%, based on projects already completed or currently under construction. Work already under way or planned suggests that 2017 could see even more construction than 2016, but many of the projects on the drawing board

depend on pre-commitment before going ahead. Nonetheless, we expect speculative construction activity to continue at similar levels to this year, with institutional developers targeting tenants needing space at short notice.

Supply additions will be moderated by further stock withdrawals, primarily in the South and Central West. Industrial properties around the Green Square area are being redeveloped to residential apartments, while the majority of the Carter Street precinct in Homebush/Olympic Park has been rezoned to residential. As a result, vacancy rates will remain contained in the short to medium term.

The volume of supply added to stock during FY2016 was noticeably lower than during the previous year, with an estimated 450,000 square metres of new completions. However, to this must be added another 59,000 square metres of rebuilt premises that had been destroyed in the April 2015 hail storm.

For Lease - 9 Hexham Place, Wetherill Park. LJ Hooker Commercial Silverwater.

Chart 3: Sydney warehouse demand and new supply

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Melbourne

The recent pick-up in demand for industrial space is a reflection of the strength of the Victorian economy, which is leading all states and territories in terms of State Final Demand growth. Indeed, industrial demand indicators for warehouse space has reached its highest level since 2005.

Melbourne industrial market





Melbourne South-East industrial market


Melbourne

Leasing market

Demand for industrial property has picked up pace strongly over the last 12 months with gross and net take-up of space well above the long run average—buoyed by increased activity in the pre-lease market.

The bulk of demand is being generated from retailers as well as transport and logistics operators, who are investing in new facilities to increase efficiency in their supply chains and distribution networks.

Tenant demand is being encouraged by favourable leasing deals which allow companies to move into new, more efficient premises at little to no rent premium. Most of the take-up of space has been concentrated in the West and the South-East, with much lower demand in the North and City-Fringe.

At the smaller end of the market, agents report good enquiry from owner occupiers across the regions, with many looking to take advantage of low interest rates to secure their own premises.

Over the last 12 months, prime net stated rents have remained stable across all the regions, ranging from an average $74 per square metre in the West up to $82 in the South-East. At the same time, City-Fringe rents increased by about 4% to an average $144 per square metre underpinned by rising land values in the wake of recent rezoning’s. In the secondary market,

rents remained stable across the regions, with the benchmark South-East sitting at an average $62 per square metre.

Surprisingly, rents have remained steady even in the face of rising vacancies. The reason is that face rents are being supported by substantial leasing incentives. The strength of the investment market and subsequent firming yields/rising values has allowed the major owners to compete hard for tenants, offering substantial lease incentives and placing a floor under stated rents.

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Leasing outlook

Demand for industrial property in Melbourne will be heavily influenced by the outlook for the Victorian and national economies and is unlikely to maintain the same momentum of the last 12 months. Demand for warehousing is expected to soften in the next two years as growth in Victorian economy weakens.

The positives for the Victorian economy are expected to come from rising public investment—as a number of infrastructure projects proceed—and private consumption expenditure, flowing from the strength in the labour market, which is expected to be maintained for at least the next 12 months. Major projects set to commence in the short term include the $5.5 billion Western Distributor Upgrade and Metro Rail.

Even so, the Victorian economy faces a number of headwinds. Victoria is a net exporter of goods and services to other states and will be affected

by sluggish national growth as the negative shock from the resources downturn is absorbed and non-mining business investment takes time to recover. Lower economic growth will lead to lower demand for goods to be stored and distributed and reduce demand for new warehouses.

Supporting tenant demand is the continued search for larger and more efficient warehouses, or “upgrader demand”. This demand is more difficult to determine, but is only likely to maintain momentum while the investment market allows for attractive pre-lease deals.

The outlook for average net stated rents across Melbourne will be influenced by continued strong competition in the pre-lease market, weakening demand and rising vacancies. Over the next three years to June 2019, we forecast rent growth across the regions of 2% to 5%. Increasing competition to attract tenants to the secondary market will also weigh on rents, with minimal growth forecast in the South-East. The nudging-up of leasing incentives is expected to see both prime and secondary effective rents in the South East decline by about 3% over the next two years before stabilising.

Melbourne South-East industrial rents and capital valuesChart 4: Melbourne South-East region industrial rents and capital values



2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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Melbourne

Investment market

The investment market has been very buoyant in Melbourne with the value of deals reaching their highest levels since 2007. The world-wide “hunt for yield” means investors are attracted to the stable cashflow offered by industrial properties and comparably attractive yields on offer.

Over the last 12 months a number of benchmark sales have occurred in Melbourne, including Charter Hall’s $238 million purchase of Woolworths, yet-to-be-built 69,000 square metre distribution centre at Dandenong, and a number of portfolio sales. Unlisted funds and foreign investors are the most aggressive in chasing assets. Solid demand from owner-occupiers and developers across most of the regions is also driving sales activity in the sub-5,000 square metre market.

Prime yields have firmed by around 40 basis points, underpinning solid price growth. Indeed, prime yields in the West, South-East and City-Fringe are now below the rates reached in 2007. The firming in secondary yields has been at a slower pace, at around 20 basis points, trailing their 2007 lows by 50 to 80 basis points. As a result, price growth is more moderate.

Investment outlookWe expect the flow of funds into the industrial property markets will

push prime yields a little lower before stabilising. We forecast a further firming of 25 basis points across the regions by June 2017, to an average of around 6.5%.

Prospects for capital growth amongst prime industrial property remain reasonable over the next 12 months as the firming in yields continues. Subsequently, prices are expected to stabilise. Secondary prices will follow the same pattern, but display weaker growth with investors continuing to favour prime assets.

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The value of industrial construction in Melbourne has climbed close to the record levels last seen between 2005 and 2008. Over the year to June 2016, we estimate that the value of work done for warehouses and factories reached $1 billion, 80% of which is warehouses.

Most activity has been focused in the South-East and West. Estimates suggest between 600,000 and 700,000 square metres of supply is underway, which is well above the long run average. Major projects underway include CEVA’s 90,000 square metre distribution centre at Truganina, Target’s 63,000 square metre facility, also at Truganina, and Woolworths’ 69,000 square metre warehouse at Dandenong.

Major developers are aggressively competing for tenants, encouraging businesses to upgrade/consolidate into new premises at little to no price premium before selling the asset into

their own managed fund or to other investors. Major investors including Frasers and Goodman are also rolling out a number of speculative projects in an attempt to secure businesses who need new space within a limited period of time.

Agents/major developers report an emerging shortage of serviced retail lots in the West as well as localised shortages in the North, around Epping, and in the South-East around Keysborough/Dandenong flowing through to rising land values. Strong demand is coming from owner occupiers and private developers.

However, these shortages are yet to have a material impact on rents.

Supply outlookBased on the number of buildings underway and the latest approvals data, the value of construction work done is expected to remain high over the next 12 to 18 months with warehouses dominating new supply. Apart from the major pre-leases mentioned above, there are numerous projects exceeding 20,000 square metres that are underway or about to proceed which will help underpin activity. Supply will remain focused on the West and South-East.

Supply

Melbourne warehouse demand and new supplyChart 5: Melbourne warehouse demand and new supply

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Brisbane

Economic conditions across Queensland remain split between those areas which focus on the slowing mining and resource sector and those reliant on the improving tourism industry. This has made leasing demand patchy, but positive, while investment demand from owner-occupiers and investors continues to remain solid.

Brisbane industrial market





Brisbane TradeCoast industrial market


Brisbane

Leasing market

Brisbane’s industrial leasing market remains patchy, reflecting the soft economic conditions across Queensland. When making leasing decisions, tenants are primarily motivated by the pursuit of efficiencies rather than growth.

The buoyant industrial property investment market is encouraging developers to build as much new stock as possible. AREITs continue to build on a speculative basis, keeping vacancies high and fanning competition for tenants which results in rising leasing incentives and weak rental growth.

Brisbane recorded solid net absorption of industrial space in the second half of 2015, buoyed by several large pre-lease deals. Demand has since moderated to an estimated 100,000 square metres through the first six months of 2016. Positive net

absorption has been underpinned by transport and logistics operators moving into newly built (and larger) premises, but also by combined factory and distribution centres. Examples of the latter include global glass maker Owens-Illinois (Yatala), Beaumont Tiles (Rochedale), G. James (Eagle Farm) and Wild Breads (Darra).

In most cases, the space users sought more efficient premises in locations that offered better access to the major road network, while a few re-built at, or close to, their previous location.

The affordability of rents continues to play a vital role in tenant upgrading and relocation. Lower supply additions has seen the market-wide vacancy rate decline to 3.9%, from 4.4% at June 2015, easing the (downward) pressure on prime face rents, which have shown signs of stabilising. However, average prime leasing incentive rose from 10% to 13% through FY2016. Amongst the three major industrial regions, the TradeCoast remains the tightest, with the lowest levels of incentives and the highest face rents.

For Lease - 285-293 McDougall Street, Glenvale. LJ Hooker Commercial Toowoomba.

21

Brisbane Trade Coast prime industrial rents and capital valuesChart 6: Brisbane Tradecoast region industrial rents and capital values



2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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Leasing outlook

The industrial leasing market will remain challenging in the short to medium term, thanks to the challenging economic conditions brought about by the decline in investment associated with gas-related construction.

There are some positives, however. Residential building will remain strong for another 18 months, while the lower $AUD, if it is maintained, will continue to boost Queensland’s tradeable sectors. Overall, State Final Demand (SFD) growth should pick up modestly over the coming three years, averaging around 2% growth per annum, while thanks to the boost from exports, Gross State Product (GSP) growth should grow at 3% per annum.

Meanwhile, the underlying drivers of demand for industrial space will remain the same. In the absence of significant revenue growth, the majority of businesses will be focused on efficiencies to boost profits. That

includes accommodation, meaning space demand will concentrate on prime properties in locations offering quick access to the major road network. Expansion will not be a major driver of net absorption in the short term, although achieving efficiency gains through property often required larger premises—particularly in the transport and logistics sector.

With speculative construction expected to continue, vacancies will remain at or slightly above current levels in the short to medium term. Accordingly, prime face rents are forecast to remain flat over the coming three years. There is still a risk of further small falls, but it is

more likely that owners will use higher incentives in order to meet the market. Accordingly, average prime leasing incentives are expected to rise by up to 2% and effective rents to fall by 0.5% to 2% over the next 12 months, before levelling off.

Secondary face rents are likely to remain under pressure, continuing to drift lower over the coming two years. The weakness in face rents will be accompanied by a further upward movement in incentive levels, causing a more pronounced setback to effective rents compared with prime space.

For Lease - 285-293 McDougall Street, Glenvale. LJ Hooker Commercial Toowoomba.


Brisbane

Investment market

The low global interest rate environment continues to see a strong flow of funds into industrial property, with the resulting competition for scarce assets leading to a firming in yields.

Over the 12 months to June 2016, average prime investment yields across the Brisbane market firmed by 30 to 50 basis points. At June, average prime yields ranged from 7.1% on the TradeCoast and in the North to 7.3% in the South. Mirroring their prime counterparts, yields on secondary assets also firmed by 40 to 50 basis points through FY2016 to averages of 8.25% on the TradeCoast and 8.5% in the North and the South.

Investors are focusing on prime properties with long WALEs in order to minimise leasing risk. Competition for such asset has pushed up their prices, forcing many investors to accept higher levels of leasing risk.

In response, prices of secondary grade properties have also risen over the past two years.

Investors’ focus on risk has seen variations within each grade exceed the difference between their averages: in the prime category, a WALE of 15 years can attract a yield as low as 5.75% on passing income, while 8.5%+ is not uncommon for an asset with a short WALE or vacant possession.

Investment outlookAs in the other major industrial markets, we expect to see a further firming in yields over the short term.

Prime investment yields across all three of Brisbane’s major industrial regions are forecast to firm by 25 basis points over the coming 12 months, before levelling out.

Recent differences in yield levels between the regions are likely to be maintained, with the TradeCoast to retain the mantle of most popular region for both tenants and investors. Given the lack of new construction in the unit estate market, competition between investors and owner-occupiers will underwrite tight yields at the smaller end of the market.

For Sale/Lease - 6-10 Traders Way, Currumbin Waters. LJ Hooker Commercial Gold Coast.

23

Supply

At around 360,000 square metres, completions reached a new post-GFC peak in 2015, although this still fell well short of the 625,000 square metres added to stock at the peak of last decade’s boom.

Estates in the Far North (Brendale), the Western Corridor (Richlands, Redbank and Darra) and the Southern TradeCoast (Lytton and Wynnum) dominated new supply, all of which—with the exception of Brendale—are located on major arterial roads and/or directly at the port.

Supply additions slowed through the first half of 2016, with only a little over 100,000 square metres of new space

completed. The largest projects were Dexus’ speculative 23,000 square metre twin-warehouse at 50 & 70 Radius Drive, Larapinta; a 14,500 square metre warehouse for Denbow Transport at 119 Burnside Road, Stapylton; Beaumont Tiles new 13,200 square metre facility at Goodman’s Rochedale Motorway Estate; and a new 12,000 square metre factory for Wild Breads at Charter Hall’s Connect West Business Park in Darra.

Supply outlookMirroring demand, construction activity is expected to be more subdued over the coming three years. Already, space currently under construction points to a 30%+ decline in completions in 2016 compared with 2015, with modest approvals figures pointing to the continuation of more moderate supply additions over the subsequent two years.

Brisbane warehouse demand and new supplyChart 7: Brisbane warehouse demand and new supply

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For Sale/Lease - 6-10 Traders Way, Currumbin Waters. LJ Hooker Commercial Gold Coast.


252525

Perth

The fortunes and challenges faced by the Western Australian economy are well known. Industrial leasing demand has tracked economic conditions although consolidation of space has seen activity remain steady. Despite this investment markets have remained relatively active, driven by investors searching for yield and owner-occupiers taking advantage of record low interest rates.

Perth industrial market

Perth Eastern industrial market






Perth

Leasing market

Demand for industrial properties across Perth is closely linked to the strength of the economy. All indicators point to continued weakness in the leasing market for industrial properties in Perth, with the Western Australian economy bearing the brunt of the collapse in mining investment.

The weakness in the economy is reflected in the leasing market, where gross take-up across the metropolitan area over the year to March 2016 was down by around a third from peak levels. Transport and logistics companies dominate those occupiers that have done deals; however, there are few businesses looking to expand.

Most leasing activity is being driven by businesses consolidating their production and distribution requirements. Agents report weak leasing markets across the regions, with long delays in getting deals finalised. The drive by businesses to

consolidate/downsize their operations has pushed vacancies to historically high levels in all regions except in the north. Furthermore, vacancies are concentrated amongst secondary stock, with far fewer options amongst prime stock, particularly above 8,000 square metres.

Rising vacancies and competition to attract/retain tenants has impacted on market rents and leasing incentives. In the Eastern region, prime average stated rents have fallen by 7% over the last 12 months to $95 per square metre. Declines in the secondary market have been more severe—

reflecting higher vacancy—down by an average 10%, to $76 per square metre.

The Perth industrial investment market is dominated by private owners, with few institutional investors. This has limited the level of incentives being offered, which are typically well below the eastern seaboard markets. However, given the level of vacancies, incentives are common place and have risen over the last six months. Private owners are offering incentives up to 10% across the regions, with institutional owners doing deals at 15 to 20%, indicating effective rents have fallen more than stated rents.

For Sale - 17, 11B & 11C Aldous Place, Booragoon. LJ Hooker Commercial Perth.

27

Leasing outlook

Perth demand and industrial building approvals

The outlook for industrial property demand will continue to be influenced by the WA economy, which has further to contract as the resources boom unwinds. At June this year, we estimate that WA is around 40% through a near-70% peak-to-trough fall in engineering construction, with the trough expected to be reached in 2017–18.

The downturn in resources investment is flowing through to other parts of the WA economy. Household spending will remain constrained by ongoing weak employment growth. Overall employment growth is defying gravity in Western Australia and is expected to decline over the next 12 months before beginning a weak recovery from 2017–18.

The few positives for the state are increased mining production and government infrastructure investment. However, rising commodity exports will not drive new demand for industrial

space as these are transported directly to the ports. Investment has a much stronger multiplier effect than production, which filters down to industrial property demand. There is the potential that government funded infrastructure projects in road and rail will benefit industrial property demand, but this will be more than offset by declining investment in other parts of the economy. By 2018, we expect there will be substantial excess capacity in industrial properties in Perth, which will need to be absorbed before there is a recovery in net new demand.

Ongoing soft demand means there is likely to be further downward pressure on rents and/or upward pressure on leasing incentives. Fortunately, the volume of new supply looks to be slowing, which will alleviate some of the future rises in vacancies. Nevertheless, businesses, particularly those servicing the resources industry, are likely to maintain their cost cutting focus for some time yet and will look to reduce occupancy costs, particularly if their existing leases are nearing expiry and they are paying well above market rates.

For Lease - 525 Great Eastern Highway, Redcliffe. LJ Hooker Commercial Perth.

Chart 8: Perth demand and industrial building approvals

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28 LJ Hooker Commercial Industrial Market Monitor H1 2015

Perth

Investment marketThe investment market in Perth has been reasonably active over the past year with over 70 deals (exceeding $1 million) reported, reflecting a total value of more than $700 million.

Private investors were the most active buyers by the number of sales, with Charter Hall’s benchmark acquisition of the Stockyards Industrial Estate at Hazelmere (for $240 million at the end of 2015), boosting the value of sales compared to the previous year.

Prime industrial yields range between 6.5 and 8.75%, with the variation reflecting the premium paid for long term leases to strong covenants compared to properties carrying leasing risk. Competition for well

leased properties with long WALEs has pushed average yields in the East down by an average of 60 basis points over the last 12 months and 10 basis points since December 2015 to an average of 7.6%.

There is little difference in current prime yields across industrial regions. Yields for secondary properties have remained unchanged over the last 6 to 12 months, sitting 50 to 90 basis points higher than prime property, depending on the region.

Investment outlookIn the short term, the flow of funds seeking exposure to industrial property is likely to continue to support yields at current levels, particularly for prime stock with long WALEs. However, we expect further falls in rents will increasingly be priced in by investors in Perth. This will put pressure on yields to soften, particularly for secondary properties.

For Sale - 17, 11B & 11C Aldous Place, Booragoon. LJ Hooker Commercial Perth.

29

The pattern of industrial supply in Perth this year has been influenced by the completion of major projects in the South and Eastern regions. At the beginning of the year, Kmart’s and Aldi’s new 48,000 and 42,000 square metre distribution centres were completed at Jandakot.

Furthermore, CEVA’s 34,000 square metre and Mainfeights 24,000 square metre warehouses (both at Hazelmere), were completed late 2015/early 2016 and have been included in completions figures for 2016. These four projects account for the bulk of completions for the last 12 months, pushing up vacancies as the companies moved out of secondary space.

Little speculative construction was completed over the last 12 months in Perth. Given the softness of the leasing market, developers need to secure pre-commitment before proceeding with new projects.

Supply outlookBased on projects under construction and the latest approvals data, the volume of new industrial construction in Perth looks set to fall over the short term. The latest approvals data shows annual approvals running at just over $400 million. Significantly, no individual warehouse or factory above $20 million has been approved in the previous 12 months. Only a handful of major projects are due to commence in the near term based on pre-commitment, most notably a 30,000 square metre Bunnings distribution centre on Clifford Street, Maddington and McPhee’s 20,500

square metre warehouse on Talbot Road in Hazelmere. Given the outlook for demand and the leasing markets, a rebound in new commencement activity is unlikely in the next few years unless driven by pre-commitments as large scale businesses consolidate.

Major new road infrastructure projects funded by the state and federal governments, such as NorthLink WA, the second stage of Gateway WA and the Perth Freight Link (should it proceed) will all contribute to the more efficient movement of freight around Perth.

Supply

For Lease - 525 Great Eastern Highway, Redcliffe. LJ Hooker Commercial Perth.


3131

Adelaide

After underperforming over the past decade, a period of revitalisation is forecast for the South Australian economy. Two positive drivers are expected to drive this growth. Firstly, public spending on infrastructure is ramping up. Secondly, the federal government recently awarded the French company DCNS the $50 billion contract to build 12 new submarines at the ASC’s Osborne shipyards. The contract is expected to run for around 15 years, securing the jobs of up to 1,700 workers.

Adelaide industrial market





Adelaide Inner North industrial market


Adelaide

Leasing market

Demand reached a trough in 2014 and has been steady since. Business stocks have shown soft, though positive, growth over the past two years, underpinned by a recovery in consumer spending and a return to solid levels of residential construction.

The North West and Inner West regions have accounted for the majority of leasing transactions over the past year, led by businesses in the manufacturing and trading—including retail—sectors. Among the largest leases signed in the first half of 2016, the South Australian Tourism Commission lease a 6,200 square metres warehouse at Coker Street, Ferryden Park that had stood vacant for several years, while several private and public sector tenants took out leases of 1,500+ square metres.

Vacancy rates remain elevated across most precincts, with the exception of the Outer North, and rents remain under pressure. In general, the Inner regions saw a slightly lesser rate of decline than their Outer counterpart, with the key North and West regions the least affected. At June, we estimate that average prime face rents in the latter stood at $110 per square metre. By contrast, the greatest falls have been recorded in the South, both Inner and Outer, and in the Outer North.

Leasing outlookThe Adelaide market is expected to see a very mild recovery in underlying demand for industrial space over FY2017 thanks to a slow pick-up in business stocks. Demand for warehouse property should therefore enjoy a slight boost. In addition to new demand, there is likely to be an element of relocation demand as companies take advantage of further road infrastructure improvements to relocate to sites with superior accessibility.

Sold - Lot 506 Woomera Avenue, Edinburgh. LJ Hooker Commercial Adelaide.

33

Investment market

Over the first six months of 2016, only one sale was recorded with a value in excess of $5 million: ISPT sold a fully occupied 12,400 square metre warehouse at 491–499 South Road, Regency Park, for $14.9 million on a yield of 8.5% with a WALE of around 8 years.

Prime investment yields have firmed by around 20 basis points over the past 12 months, with the key Inner North region showing an average of 8.1%. Yield levels for individual buildings are highly dependent on WALE, with the top end of the prime category achieving an average of 7.7% across the entire market.

The first six months of 2016 saw several notable land sales. The Commissioner of Highways sold two parcels at Francis Road, Wingfield in February, one to Australia Post (14,800 square metres, $162 per square metre), the other to a private investor (6,600 square metres, $200 per square metre). The Urban Renewal Authority also sold a 2.1-hectare site, at Wingfield, for $175 per square metre to Collins Transport.

Investment outlook

In the investment market, we could well see some more cap rate compression near term. The phase of falling bond rates driving down property investment yields is drawing to a close. The investor profile is unlikely to change in the near term. AREITs are likely candidates if a large, newly developed asset with a long lease in place comes onto the market.

There is no shortage of industrial land available for future development. The former multi-function polis site of 400 hectares at Gillman in the prime Inner North region is to be developed for industrial use over the next 30 years.

Other land reserves in the North include the 15 hectare ‘East Grand Trunkway’ site, the 100 hectare Vicinity Industrial Base in Direk and the Holden site, with the latter offering potential for redevelopment. In the Inner West, Adelaide Airport’s 30 year vision seeks to greatly expand the airport and create an “Airport Business District”.

Meanwhile, a 40 hectare site at Parafield Airport has been selected to become a Food Park, aimed at creating opportunities in the food processing industry by allowing the co-location of food industry tenants and related service providers.

Supply outlook

Looking forward, as companies relocate to take advantage of road improvements—particularly in the improvements they will leave behind secondary space in the more established and centrally located areas. In some cases, sites may be suitable for residential redevelopment.

Supply

Adelaide demand and industrial building approvalsChart 10: Adelaide demand and industrial building approvals

$ million


% annual change

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 40

120

200

280

360

-10

-5

0

5

10

Total demand index

Total approvals

Forecast


35

35

Canberra

Canberra’s location off the main route between Sydney and Melbourne and relatively small population base means that business is primarily geared to service the local market, including manufacturing, storage/distribution and retailing. Amongst the major supermarket chains, only IGA has a hub in Canberra—the others use Goulburn or Sydney for supplying the ACT.

Canberra industrial market



Average prime incentive 9.0%


Canberra industrial market


Canberra

Leasing market

The strength of occupier demand varies between the three precincts. Mitchell continues to experience the strongest demand of the three, attracting data centre operators, while the federal government is also currently building a new National Archives Preservation Centre.

Meanwhile, Hume has been successful in attracting occupiers requiring larger, new facilities. The precinct is popular with the transport and distribution sector, offering larger than average sites and good access to the major road network. In contrast, Fyshwick continues to be attractive for business service operators, but has been losing some large format retailers to Majura Park at the airport.

Building vacancies remain highest in Fyshwick, due to both the age of existing stock and competition from Majura Park, though inquiries have picked up over the last three

months. In contrast, Mitchell features the tightest submarket, with new development relying on the recycling of existing premises.

Rents have been flat since the start of 2016. At June, average prime warehouse rents stood at $130 to $140 per square metre—the same as in June—while secondary properties achieved between $80 and $100 per square metre.

Leasing outlookThe weakness in private and public spending will persist in the short term

and limit demand for warehousing and factory space. However, there is a chance of improvement in FY2017, with commencement of the Capital Metro light rail project starting to inject money into the Canberra economy.

While aggregate underlying demand for warehousing space will be soft, upgrader demand for new space will continue to underwrite (limited) construction of new premises. Supply chain outsourcing, including transport and storage for (new) retailers are the most likely source of demand, with contribution also from records management companies.

Sold - 119–121 Wollongong Street, Fyshwick by LJ Hooker Commercial Canberra.

37

Investment market

Average prime yields are around 7.5% across all submarkets, while secondary assets showing any kind of risk or short term lease tails are typically in the high 9%s and upwards.

After a strong 2015, industrial construction activity has slowed in line with weak underlying demand.

The only major completion so far this year is a new industrial building at 1 Couranga Crescent, New West Industry Park in Hume. Another small facility is under construction at nearby 9 Couranga Crescent, but little else is being built across the Canberra market.

There are, however, several projects in the pipeline that have a reasonable probability of going ahead in the short term. They include four other properties

on Couranga Crescent, three of which have had development applications submitted earlier this year. Another development being marketed is a 6,500 square metre warehouse at 48 Vicars Street, where the developer is likely to commence on a speculative basis.

Supply outlookGiven the modest outlook for demand, traditional warehouse and factory

construction activity will be moderate. We expect owner-occupier-led activity to underwrite several new projects at Hume in FY2017, but the magnitude of activity will be well below previous peak levels. The upside is that vacancy rates should remain relatively stable. Once again, the exception is Fyshwick, which could suffer further loss of business.

Supply

Canberra demand and industrial building approvals

Only one major industrial property sale was recorded in Canberra in the first half of 2016. A 3,200 square metre facility at 147 Flemington Road in Mitchell—featuring a combination of warehouse, showroom and offices and leased to Southern Plumbing Supplies on a WALE of 4 years plus a 10-year option—sold for $6.5 million, equivalent to a yield of 7.3%.

In June, a 1,680sqm mixed-use retail/showroom/warehouse building at 119–121 Wollongong Street, Fyshwick

was sold for $2.2 million on an equivalent yield of 7.5%; tenants are Jaycar, Bursons Automotive and Duratech Industries.

Industrial land values have been stable through the first half of 2016. At Hume, blocks of less than 2,000 square metres have most recently sold for around $180 per square metre, though asking prices are closer to $200 per square metre. Larger blocks can be had for $140 to $160 per square metre.

Investment outlookThe investment market is expected to continue to operate in a similar manner to 2015 over the coming two to three years, with low interest rates the key driver. Securely leased properties will command a significant premium over those featuring short WALEs, (almost) regardless of grade. Our forecasts are for bond rates to rise modestly in the short term, but for prime yields to remain around current levels.

Chart 9: Canberra demand and industrial building approvals

$ million


% annual change

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0

15

30

45

60

75

-10

-5

0

5

10

15

Total demand index

Total approvals Forecast


3939

Hobart

Over the first half of 2016 there has been a noticeable movement in the market, particularly in the Cambridge precinct where demand by owner-occupiers for showroom/warehouse strata units has risen. Owner-occupiers are taking advantage of low interest rates to buy unit stock that had been sitting vacant over recent years or newer spec-built units.

Hobart industrial market

Average prime gross face rent $100 psm pa



Hobart industrial market


Hobart

Leasing market

After a dismal performance at the beginning of this decade, the Tasmanian economy has turned around and has seen steady growth over the past two years.

The improvement in the economy translated to an increase in the underlying demand for industrial space in Hobart.

In the more established precincts of Derwent Park, Glenorchy and Moonah, demand remains steady—albeit the leasing market is somewhat patchy, with limited demand for larger stock offerings. That said, churn in these preferred precincts is minimal and, with the area largely developed, there is little impetus for new development.

Residential building activity in the nearby Cambridge Park estate and to the east in Sorrell has facilitated demand for warehouse/storage space from local tradesmen and building materials suppliers, as well as from smaller distributors, agricultural enterprises, winery and craft distillers and from airport-related users. This has seen a marked reduction in vacancies within the precinct and has allowed new speculative stock to continue to be added to the market, as well as the release of new industrial subdivisions.

There has been modest movement in leasing since December 2015. Higher quality space is available to rent in the northern and eastern industrial precincts within a range of $100 to $140 per square metre net, while secondary space is leasing within a band of $60 to $80 per square metre.

Leasing incentives do not play a significant role in Tasmania’s industrial market due to the high proportion of private owners. Nevertheless, incentives of up to 10% may be offered in special cases.

For Sale - 15 Pearl Street, Derwent Park. LJ Hooker Commercial Hobart.

4141

Leasing outlook

We expect Hobart to continue to outperform the state economy as a whole in the near term, with the City benefiting from a range of growth drivers.

State Final Demand (SFD) is currently running at its highest level in several years, supported by public sector spending and private residential and non-residential building.

In terms of industrial demand, economic conditions are expected

to underpin demand for warehouse space in those industrial precincts near to the Airport. More broadly, we expect demand for industrial space in Hobart to be sustained around current levels in the short term.

We do not anticipate any significant

upward movements in rents given the availability of land stocks and re-development opportunities in the traditional prime precincts. That said, tightening vacancies will reduce the need for incentives to lease space.

Investment market

Sales transactions have increased over the past six months, but this has been dominated by owner-occupier activity in the Cambridge area where a number of new strata warehouse unit developments have been completed.

Tenanted strata units are typically selling within a yield band of 8.2% to 8.5%, but there has been evidence of free-standing warehouses with 5-year leases to national tenants selling on yields as low as 7.5% over recent

months. But such stock is in short supply.

Our indicator of prime yields has been kept steady at between 8 to 8.25% in the absence of any significant sales to provide guidance.

Land values have also remained stable over the past year, with sufficient land available—particularly in Cambridge and Brighton—to satisfy any given level of demand. In the Cambridge area land values are around $115/sqm.

Supply

Building approvals data suggests that warehouse space will continue to dominate new construction across Hobart in the near term. The latest Hobart industrial approvals data shows close to 90% of approvals were

for warehouse space, predominantly in Hobart’s north-east and north-west.

Even so, no significant individual projects have been completed, nor are any anticipated over the remainder of

the year. Most of the activity remains in the sub-$5 million category and comprises unit-style development. There are no major briefs currently in the market that could underpin major industrial development.

Hobart demand and industrial building approvalsChart 11: Hobart demand and industrial building approvals

$ million


% annual change

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Forecast

0

10

20

30

40

50

-10

-5

0

5

10

15

Total demand index Total approvals


4343

Darwin

The massive Ichthys LNG processing plant has been underpinning the Darwin and NT economy for the past three years. This project is now entering the final phase of construction with businesses supporting the project currently running at capacity. As the need for services for the project winds down so too will the economic growth and demand for industrial space.

Darwin industrial market





Darwin industrial market


Darwin

Leasing market

Most industrial occupiers in the Darwin industrial market are small users, requiring less than 1,000 square metres and are already geared up to service peak demand from the massive Ichthys LNG processing plant that has been underpinning the Darwin and NT economy for the past three years.

Indeed, the Darwin industrial market has missed out on much of the boost from Ichthys, with a significant proportion of contracts awarded to companies from outside the Territory—and outside Australia— and most construction workers operating on a fly-in-fly-out basis.

Despite weak demand, vacancies remain relatively contained. While Darwin did not see wide-spread over-building over the first half of this decade, backfill space has caused rising vacancies amongst secondary grade stock. As a result, secondary rents in particular remain under downward pressure, but prime space has also begun to be affected by

owners competing with each other to retain tenants.

Across Darwin, rents for higher quality space sit within a range of $140 to $250 per square metre and from $100 to $120 for secondary space. Rents are higher than in other parts of Australia reflecting Darwin’s remoteness. Lease incentives are not common in the Darwin market, with minimal inducements occasionally offered to tenants signing long term leases.

Leasing outlookThe outlook for the industrial market in Darwin is linked to the prospects for the Northern Territory economy.

Beyond FY2018 there are few key drivers of economic growth. Private investment is expected to peak this year and next, as Ichthys enters its final phase of construction.

As a result, demand for warehousing space will be weak. Vacancies are likely to climb over the next few years. While there will be little construction activity in the short term, businesses servicing shrinking sectors of the economy will be forced to close or rationalise their space requirements as their forward workload dries up. Accordingly, there is downside risk for rents as building owners compete to attract and retain tenants.

For Lease - 3/124 Coonawarra Road, Winnellie. LJ Hooker Commercial Darwin.

45

Investment market

Supply

Reflecting the weakness in demand, the industrial property investment market was quiet as well through FY2016.

In the absence of major sales that could provide guidance, valuation yields have remained stable over the past 12 months. Prime yields sit within a range of 7.5% to 8.5, with WALE the prime determinant of price.

Given the outlook for the leasing market, investor interest in the Darwin market is likely to remain subdued in the short to medium term. Transaction volumes will be modest, although yields are not expected to blow out

as a consequence. Future leasing risk means investors will continue to focus on properties with long WALEs, while anything with short to medium term lease expiries will be discounted.

On the supply side, industrial building activity in Darwin has fallen sharply over the past two years. Warehouse and factory activity fell by 40% and 75% respectively since their peaks in September 2014 and March 2015.

The last major projects completed were Northline Logistics’ 15,000 square metre distribution centre at 14 Dawson Street and Qube’s 11,000 square metre warehouse on Berrimah Rd—both at East Arm. They were joined by two smaller warehouses on Dawson Street, East Arm, which together added another 6,000+ square metres to stock in mid 2015.

Construction of smaller projects has over the past few years been concentrated in Berrimah, at the Berrimah Business Park and on Mel Road. Projects primarily comprised

small freestanding buildings and speculatively-built industrial units.

As of July 2016, no significant projects were underway. Industrial development is being held back by a lack of demand and low rents, which make construction for lease financially unfeasible. There is plenty of vacant land, with the exception of the traditional industrial precincts close to the city centre, such as Winnellie. Ready-to-build land available is available in Berrimah, Wishart, Tivendale and East Arm. Despite only modest land take-up, industrial

land values have not changed significantly across the regions over the last 12 months.

The short term outlook for industrial construction is weak. Approvals of new warehouses and factories have dropped by nearly three quarters since early 2015. While proving challenging for the construction industry, the lack of new construction will ensure that vacancy rates do not blow out.

Darwin demand and industrial building approvals

45

Chart 12: Darwin demand and industrial building approvals


% annual change

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0

20

40

60

80

100

-60

-30

0

30

60

90

Total demand index

Total approvals

$ million

Forecast


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