This article is from the Australian Property Journal archive
Cashed up property funds are driving competition in Sydney’s industrial property markets and this is putting the pressure on yields, according to Colliers International.
According to Colliers International, industrial yields continued to compress across Sydney’s industrial markets, down a further 25-50 basis points across all markets.
Research found South Sydney continues to offer the most aggressive yields now ranging from 6.50-7.50% for prime grade industrial property, down by 50 basis points over the first half of 2006. Whilst, Sydney’s West and North Ryde are the next most competitive markets with yields averaging 6.75-7.25% for prime grade property, also down approximately 50 basis points since the early part of the year.
According to Colliers International’s New South Wales research manager Felice Spark, Sydney’s industrial markets over the next six months looks set to enter a balanced phase as supply starts to draw in line with demand, and rental growth remains stable.
Spark added that the Sydney industrial market is currently experiencing strong tenant demand, which has spurred demand for pre-lease opportunities and existing buildings across all industrial regions.
In the first half of the year, major recent leasing activity has included Northline Distribution Services in Rosehill (19,215 sqm), M3 Logistics in Blacktown (7,202 sqm), ASA Logistics Pty Ltd in Matraville (12,141 sqm), Medtronic in North Ryde (11,930 sqm), and three major leases within Moorebank including Toyota Industries Corporation (18,000 sqm), Coles Myer (15,260 sqm) and PMP Printing (11,950 sqm).
Colliers International found that demand is also emerging in Sydney’s western industrial markets for larger warehouses. Whereas traditional large user requirements generally ranged in the 10,000-20,000 sqm bracket, recent demand has been for warehouses in excess of 25,000-30,000+ sqm in size.
And a shortage of supply, particularly for existing larger buildings in excess of 5,000 sqm has driven a wave of speculative development across Sydney’s industrial markets.
Spark said currently there is over 130,000 sqm of speculative development occurring along the M7 corridor in the Eastern Creek/Erskine Park/Glendenning area alone (SEPP 59 Employment Lands) and a further 70,000 sqm in the South West.
“In the next six to nine months when this cycle of speculative development completes, the next round of DA applications will be underway meaning there will be even more new product coming to the market.
“This surge of new supply to the market will likely have the effect of keeping rental growth contained in Sydney’s western industrial markets,” she added.
In addition, a lack of owner-occupiers is seeing Sydney’s industrial markets become increasingly tenant-led versus owner-occupier or developer-led.
Spark said transport and logistics companies continue to drive industrial leasing demand with many of these occupiers requiring a short lead time to be operational giving rise to the increased level of speculative development, particularly in Sydney’s Western and South Western markets.
“The trend of multi-unit consolidation and demand for newer, larger warehouses is expected to continue into 2007 with transport and logistics companies expected to continue to be the dominant industry driving industrial leasing demand. The M7 corridor has contributed to opportunities for many existing users to reassess their warehousing needs and location preferences,”
Spark said land values are likely to continue to experience downwards pressure in the Outer West markets but will fare strongly in the North and South where land is in short supply.
According to Colliers International, prime industrial land values ranged between $4,000-$4,500 per sqm in North Ryde; $2,200 sqm-$2,350 per sqm in Lower North; $1,900-$2,300 per sqm in the South; $1,300-$2,000 in the West; and $1,100-$1,600 in the South West.
Colliers expects values to remain the same in all regions except North Ryde.
“Overall land sales volume is down, with small lot sales virtually stalling with the retreat of the owner-occupier from the market, leading to an increasingly tenant-led market.
“Large land block prices are also likely to reduce because of downward pressure on subdivision prices, continued pressure on rents and the dearth of owner-occupiers in the market,”
Spark said investment yields may face further compression in certain industrial markets but may have gone as far as they can go in some markets too.
“The domestic industrial market faces increasing pressure from off-shore industrial markets which are providing more opportunities and better returns in comparison to the current climate in Australia.
“Additionally, with the heightening competition from emerging funds driving domestic yields down further, an increasing number of established institutional funds are looking overseas to build their portfolios,” she concluded.
By Kathryn O’Meara