This article is from the Australian Property Journal archive
Sydney’s industrial property market will continue to face strong competition from Melbourne as the location for industrial activity, according to leading analysts and forecasters BIS Shrapnel.
According to the BIS Shrapnel’s Sydney Industrial Property 2005 to 2015 report, as long as Sydney rents are nearly double those of Melbourne, any company that is not required to be in Sydney will look long and hard at its options.
Report author and BIS Shrapnel’s industrial property expert Christian Schilling said the Sydney Metropolitan Strategy – outlining the key elements of the Government’s 25-year plan to manage Sydney’s future growth, is not likely to change that.
“While infrastructure improvements will make life a little easier for distribution-based businesses, land in Sydney remains a limited resource.
“And high land prices make Sydney an expensive location for industrial space users,” he added.
The good news, however, is that Schilling expects the Sydney industrial property market to experience a fundamental shift in 2006.
The Sydney Industrial Property 2005 to 2015 report forecasts that rising bond rates will pull the industrial market out of an anomaly that has lasted for the past 10 years: firming yields that delivered strong capital gain despite the absence of rental growth.
Schilling said rental growth has been disconnected from demand growth due to aggressive competition for tenants amongst players whose objective is to build funds under management.
“Furthermore, the release of greenfield land in Western Sydney provided tenants in established areas with cheaper options for new space resulting in vacancies in the South and Central West. It has been a tenants’ market.
“Now, the market has witnessed a drop in vacancies in established areas due to strong demand for industrial space and new construction levels that have been below underlying demand. This has sparked tentative rental growth, though mainly amongst secondary stock,” he added.
However, later this year developers will face the prospect of flat, perhaps even softening yields, as increasing bond rates lead to demand for higher investment yields.
“As developers are already under pressure from the rising cost of land, developers will either need to find ways of reducing costs or increase pre-commitment rents.
“With servicing and construction costs unlikely to fall in the short-to-medium term, rents will need to rise to make financial feasibilities stack up,” Schilling said.
While tenants will initially be averse to pay increased rents, falling vacancies amongst existing stock will leave them with few options.
“In the extreme case — if developers stopped building because the financials do not work — we would soon run out of vacant space.
“Consequently, rents would rise to levels at which development would again become feasible,”
He added rental growth will be sufficient to deliver solid capital value growth and investment returns in the short-term with another two years of strong demand for industrial property in Sydney.
However, Schilling said there is a strong probability that a downturn in the economy post-2007 will have a negative impact on demand for industrial space and market performance will suffer.
By Nelson Yap