Investors Tighten Their Grip

Transcription

1 Research and Forecast report First Half Australia and New Zealand INDUSTRIAL Investors Tighten Their Grip Competition intensifies to acquire quality assets Accelerating success.

2 First Half Australia & New Zealand HOTELS Colliers International A leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and collaboration, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners. We represent property investors, developers and occupiers in local and global markets. Our expertise spans all property sectors office, industrial, retail, residential, rural & agribusiness, healthcare & retirement living, hotels & leisure. Colliers International is Australia s own global real estate success story. 370 offices in 62 countries on 6 continents United States 140 Canada 42 Latin America 20 Asia Pacific 83 EMEA 85 $2 billion in annual revenue 2.5billion square feet under management 13,500 professionals and staff We have 200 research professionals in 90 offices on 6 continents Accurate and objective property research should be the foundation of all good property decisions. Colliers International provides reliable, unbiased and authoritative property research & investment property advice across all property sectors and geographic markets within Australia and across the globe. We share our knowledge and experience to deliver innovative and effective solutions and investment property advice. Our unique approach integrates people, experience, systems, and technology to create meaningful business connections and client outcomes. Improve your perspective. We have. Property Research worth talking about. Research and Forecast report Between the Flags Hotel markets provide investors with confidence Accelerating success.

3 Metro Office INDUSTRIAL Contents Institutions tighten their grip on the industrial property market 5 Our industrial perspective 10 Industrial market overview 1. Sydney Melbourne Brisbane Perth Adelaide Auckland Wellington Christchurch 37 Our industrial experience 38 How else can we help you? Speak to one of our property experts today. au.industrial@colliers.com Partner with our Research and Consultancy team Our highly experienced team of professionals can partner with you to ensure your next project has a positive outcome. we deliver strategic advice across a full range of property sectors, ensuring that your decisions are fully informed. au.consultancy@colliers.com For more information about Colliers International and working with us, visit; Cover image: Inserrt text here. Photographer Name Name. Industrial Research & Forecast Report First Half 3

4 Glendenning, NSW Sold on behalf of Green s General Foods Pty Ltd 4 A Colliers International publication

5 Metro Office INDUSTRIAL Institutions tighten their grip on the industrial property market Australian Industrial property is a popular asset class with institutions. Notably their appetite for Industrial has intensified in the last few years. Institutional representation amongst the total pool of purchasers is becoming more dominant due to perceptions of being underweight in this market leading property class. What are the factors supporting Industrial property demand and when will Institutions appetite be satisfied? By Mark Courtney Director Research mark.courtney@colliers.com To address these questions it is useful to define the purchaser profile of the Australian Industrial property market. The following chart shows the profile derived from the details of all investment into the industrial property in Australia by transactions with values above $5million since In the year to date (YTD) the clear dominance shown by Institutions foreign and domestic, has become even more pronounced as they currently account for 71.9% of all purchases by total value of investment sales. While we are barely through the first quarter of, this result is up from the 2013 full year result of 58.8%. Private investors have increased their representation of the purchasers profile from 16.9% last year to 19.7% in YTD. Easier finance terms including low interest rates and the growing utilisation of Self-Managed Super Funds (SMSFs) are key factors supporting the growing interest by Privates. Private investors tend to seek out high quality, well maintained assets with minimal capital expenditure required in the short term. It would appear that Institutions appetite is not diminished. Our view is that they will continue to represent the single largest investment group over the near to medium term for a number of reasons. NATIONAL INDUSTRIAL MARKET PURCHASER PROFILE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% YTD Other Syndicate Private Institutional Occupier/Developer Industrial Research & Forecast Report First Half 5

6 The spread between industrial and risk free investments Like any financial investment into industrial property, it is all about returns. The chart below shows the spread between average Australian Prime Grade industrial yields and 10 Year Commonwealth bonds. At 400 basis points the spread, although down from its recent peak of five quarters ago, it still provides a good starting point for investors to consider industrial property as part of their portfolio. Should yields continue the compressing trend established since March 2009, as Colliers International expects, then it is likely that this spread will remain no less than 300 basis points over the next 18 months. On this basis the returns from Industrial appear relatively attractive. While the spread is a good indication of the type of returns that can be generated it doesn t explain why Institutions are leading the charge into Industrial. IPD statistics for the December quarter 2013 shed some light on why the industrial property option is growing more popular amongst Institutions. Industrial investment returns an income focussed proposition The chart below shows the annual total returns comprised of income and capital growth for Australian Retail, Office and Industrial property. It also shows the average total returns established over a 20 year period. It is notable that Industrial is currently providing the highest total returns at 11% as well as generating the strongest returns at 11.8% on a 20 year average basis. From an investment perspective amongst the commercial property asset classes, Industrial is currently the market leader. And the same story is being told in New Zealand where industrial showed double digit total returns of 10.8% in the December quarter 2013, which was a slight dip in total returns achieved in the previous quarter, according to PCNZ/IPD data. This is a reoccurring trend in the industrial sector which tends to lift up and out of economic recovery the fastest and stabilises more quickly than other sectors. PRIME GRADE INDUSTRIAL YIELD VS. 10-YEAR GOVERNMENT BOND RATE Rate (%) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 (f) Spread Prime Industrial Yield 10-year Govt Bond Rate TWENTY YEARS OF TOTAL RETURNS Total Returns (%) Dec-03 Jun-04 Dec-04 Retail Retail 20 yr avg Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Source: IPD/Colliers International Office Office 20 yr avg Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Industrial Industrial 20 yr avg Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 M1 & M2 Industrial Estate, Melbourne Sold on behalf of Pellicano Property Trust 3 6 A Colliers International publication

7 Metro Office INDUSTRIAL A typical REIT strategy is to use their development and leasing capabilities to deliver new or repositioned properties to increase capital values and generate earnings accretion and boost total returns. While total returns are drawing the Institutions attention, the income component of the return provides a most compelling feature. Of the total return of 11% recorded in the December quarter 2013, 8.7% was generated from the income with capital appreciation providing the balance. Income therefore represents 79.6 % of the total return. On average over the past four years income has represented an average 86.3% of Industrial s total return. This is markedly above the income return proportions for retail and office which for both is around 75%. If income is the component of the total return that matters most to the investor, then industrial should clearly be the preferred property option. As well as having a higher income component, the way that the income return is generated for Industrial is equally as important. Income from Industrial assets tends to be primarily generated from leases. This feature provides reliable and predictable contractually based income which increases over fixed periods, often at the rate of CPI or CPI+ X. In an economy where growth is below trend, how income is generated matters. Other asset classes may have multiple income sources that combine to become to produce a total income or yield. Multiple income streams may provide diversity and reduce risk. Multiple leases attached to the single asset are generally more associated with Retail and Office properties. And multiple tenancies may require a more involved approach to management. Higher management fees represent a cost that can erode returns. Often Industrial assets feature a single lease which may create a level of risk due to the lack of alternative income streams generated by the property. However, for investors who do not seek convoluted investments industrial property provides a streamlined and relatively straightforward investment. And for Institutions, a high quality industrial facility located in a sought after transport node location leased to a national blue chip logistics or retailing business represents a justifiable investment. Because these types of assets are delivering leading property market returns that are based on stable income streams with structured growth, and are provided by reputable tenants on long term leases Institutions have adjusted their portfolios to accommodate a higher share of industrial property. The significance of the REITs Within the Australian development pipeline, there is over 660,000m 2 of industrial facility (+10,000m 2 ) floor space under construction. Meanwhile New Zealand has 49,200m 2 under construction, a return to levels recorded a year ago. The REITs are the major contributors to this additional stock. In recent years, Australian REITs and in particular Goodman, Dexus and Charter Hall have sustained a high level of development of industrial estates and large scale industrial facilities. Brisbane has 113,046 m 2 of floor space which is under construction. Goodman (54,507m 2 ) and Dexus (34,872m 2 ) are active in Brisbane South West while Australand (9,773m 2 ) are active in the South. Combined these groups account for almost 88% of Brisbane s new supply under construction. (+10,000m 2 facilities). Sydney has 273,530m 2 of additional floorspace which is under construction. Goodman (104,000m 2 ) and Dexus (18,250m 2 ) are active in Sydney s West where they account for 45% of this new supply. And in Melbourne s West 111,493m 2 of additional floorspace is under construction. Goodman (73,930m 2 ) and Australand (37,563m 2 ) account for all of this new supply. Throughout the most sought after industrial precincts of the eastern states, they have built up solid industrial development pipelines and have tended to deliver product for logistics and retail customers. Australian REITs focus their industrial property activities sharply on locations situated near to major arterial roads, ports, airports and distribution hubs. The quality of product that Australian REITs build attracts Institutional investment. This quality grows out of their business models which are generally based on a BOOT (build, own, operate and transfer) approach which ensures continuity from development stage to the property management phase. They also are strong on environmentally sustainable design. A snapshot of some of the leading Australian REITs current projects provides insights into their number of development fronts, locations and end users of their product. Goodman s recent developments include Bungarribee Industrial Estate on the Great Western Highway, Huntingwood, Interchange Park on Interchange Drive and Oakdale Industrial Estate on Old Wallgrove Road both in Eastern Creek and the new Redbank Motorway Estate on Monash Street, Redbank, QLD. Later this year, Goodman will deliver a 32,000m² D&C facility for Logistics firm DB Schenker in this estate. Industrial Research & Forecast Report First Half 7

8 Charter Hall has a portfolio valued in excess of $1.2 billion which includes industrial properties leased to blue chip retail and logistics tenants. Charter Hall is another salient example of an Australian REIT with a background in the delivery of quality industrial real estate. They have a 50% interest in industrial prelease developer CIP who have developed a total building area in excess of 1,060,000m², with projects under construction for major occupiers such as Toll, Fosters, Caterpillar, Linfox, Schenker and Grace. Charter Hall have also partnered with a large range of external developers and corporates to acquire and develop prime institutional grade assets. In the last seven years, they have been involved in the ownership and construction of 20 property assets valued in excess of $600 million which represent approximately 410,000m² of floor space. Clients for Charter Hall s projects include market leading retailers and logistics firms such as Woolworths, Coles, Australia Post, Volkswagen, Toll and Electrolux. Current projects include sites at 15 Long Street Smithfield NSW, Blackwoods Logistics Facility Mackay QLD, Electrolux Distribution Centre Beverley SA, Logan Motorway Business Park Berrinba QLD, LoganLink Industrial Park Berrinba QLD, Sherbrooke Industrial Estate, Willawong QLD. DEXUS Property Group (DEXUS) invests directly in high quality Australian industrial properties and manages properties located in key Australian markets on behalf of third party capital partners. DEXUS also develops industrial properties in Australia, and have provided more than 1.8 million m² of industrial accommodation. They specialise in premium business parks, industrial estates and logistics and distribution facilities. With a portfolio is valued at $2.6 billion DEXUS concentrates its industrial investments in the key metropolitan markets of Sydney, Melbourne and Brisbane, locating its properties close to multi-modal infrastructure and employment hubs where there is tenant demand is strong. DEXUS has been particularly active over the last four years developing premium grade industrial properties including facilities such as Quarry Industrial Estate, Reconciliation Drive at Greystanes, Erskine Park in NSW and DEXUS Industrial Estate, Laverton North in VIC and 255 & 295 Archerfield Road, Richlands in QLD. What have institutions invested in over H1? Institutions continued to respond to the REITs quality product during the last six months. Over the year to March, Institutions invested over $1.4 billion in Australian industrial property (+$5 milllion). The chart below which presents the shares of this total by the Institutions shows that Charter Hall accounted for 28%, followed by Goodman with 23%, Australian Industrial REIT at 12% and Dexus with 9%. SHARES OF TOTAL INVESTMENT BY INSTITUTIONS - 12 MONTHS TO MARCH 7% 6% 9% 15% 12% 28% 23% Charter Hall Goodman GPT Group Australian Industrial REIT Dexus Propertylink Holdings Others Wembley Road, Berrinba Leased to CEVA Logistics 8 A Colliers International publication

9 Metro Office INDUSTRIAL In Sydney, growing Institutional demand, coupled with a strong capital markets environment is driving strong yield compression across all Sydney markets. In Sydney s South notable sales included the $37 million Dunning Avenue, Rosebery sale to Goodman by the City of Sydney. In the Western and Northern markets, the impact of this weight of capital chasing assets has resulted in strong yield compression. Institutions such as Dexus have recently been active, acquiring 4 Inglis Road for $34.5 million and Bunnings Property trust paying $40 million for Lyn Parade in Prestons. Sales volumes for the North have been led by the institutional players including Dexus, Investa and Stockland all contributing significant sales in the North over the past 6 months. The largest sales were $71.8 million to Stockland in Waterloo Road North Ryde and the $40.5 million sale to Dexus in Pittwater Road Brookvale. Key drivers for these purchases are the attractive yields on offer as well as the scarcity of industrial stock. In Melbourne Investment sales activity in the North has been dominated by Australian Industrial REIT, who purchased three properties in this precinct in the last six months. Their first acquisition in the North was Stanley Drive, Somerton which is a 24,350m² warehouse occupied by Bluestar Logistics. Australian Industrial REIT paid $23.7 million for the property in October 2013, representing a yield of 8.50%. More recently, another two assets were acquired as part of a wider five-asset portfolio acquisition. Colliers International handled the portfolio sale on behalf of the vendor Primewest. The biggest investment sale to occur in the South East was Pellicano Group s sale in early of 50% of M1 & M2 Industry Park to AMP Capital, who were acting on behalf of Sunsuper. As part of the Primewest portfolio sale of five (5) assets to Australian Industrial REIT, 324 Frankston Dandenong Road, Dandenong South was sold for $24.2 million in March. In Brisbane, investment sales increased sharply with institutions accounting for almost 75% of the sales volume and driving the market direction. In the Australia TradeCoast, Dexus and Charter Hall acquired properties. For $39.6 million the Dexus Property Group acquired a facility in Hemmant while Charter Hall also undertook a $25 million acquisition of a facility in Pinkenba. In the North, ISPT invested $18.06 million in Interchange Industrial Estate in Narangba. Dexus Wholesale Property Fund invested $27.4 million in a property located in Nudgee Road Hendra. Meanwhile in the South and South West Sydney based institution Propertylink Holdings bought two properties in a portfolio transaction from Dexus. And in Yatala, GPT Group purchased a 40,782m² facility at Lots 4-5 Quarry Road Quarry Road Stapylton for $44.5 million. In Adelaide, the largest sale in the year was the new Rand facility which sold in August for $32.3 million. This was sold by the developer Pacific Group to Cromwell property trust. This was the third sale in the Adelaide industrial market which was purchased by an institutional investor during Institutional investors have been largely absent from the Adelaide market during 2008 to 2011, but since 2012 Charter Hall, 360 Capital, Ascot Capital and Cromwell have purchased assets. Can institutions appetite be satisfied? Deloitte Access Economics anticipates Australian GDP growth will be subdued at around 3% on an annual basis for the next five years. This compares with about 3.3% over the long term. In a climate of below trend economic growth, property investment continues to grow as an attractive option for institutions. The sustainability of current levels of investment by the institutions in the Australian industrial property market looks set to continue over the near term. It s uncertain whether Industrial property can continue to deliver market leading total returns or whether institutions will maintain their share of total industrial investment purchases at the current +70%. However, underpinned by requirements from logistics and retailers seeking competitive edges in an ecommerce world, the REITs and other developers will continue to have a compelling reason to construct pre-leased and speculative facilities. Developers that are successful in obtaining some of the current pre-lease requirements will benefit from this trend, with many buyers seeking out blue chip tenanted stock with attractive WALEs. Although, the income component is an important aspect of the rationale supporting investment, there are other drivers of Industrial property investment. All investors will continue to compete with each other on account of these drivers which include: the increasingly generic built form with the tendency toward the big box type of facility which has developed from the rise of logistics and as a more homogenous product has been well received by investors; the tendency for industrial facilities to maintain their functionality and require less capital expenditure to upgrade than alternative investments such as office towers or retail centres; the land rich nature of Industrial property. Under evolving planning conditions industrial land can be put to higher and better uses such as residential as in the case in South Sydney and Melbourne City Fringe. Looking forward, for all these reasons investors including Privates and Syndicates will remain enthusiastic towards Industrial property although it is likely to become harder to compete with the Institutions on price. For Institutions looking for a more balanced portfolio through investment in the form of high end, quality industrial facilities that deliver steady and stable returns, Industrial property ticks the box and will do so for the foreseeable future. Industrial Research & Forecast Report First Half 9

10 Our perspective INDUSTRIAL WHO IS BUYING? National Industrial Market Purchaser Profile 100% Institution 80% 60% Occupier/Developer Private Syndicate Other Market conditions fuel competition among investors. INDUSTRIAL OUTPERFORMS OTHER COMMERCIAL PROPERTY ASSETS OVER LAST 20 YEARS Retail Retail 20 yr avg Office Office 20 yr avg Industrial Industrial 20 yr avg 40% 10 20% 5 0 Industrial market fundamentals are strong: Steady and strong income returns Generic built form Tendency for industrial facilities to maintain their functionality Land rich nature of industrial property 28% Charter Hall YTD Institutions Still Dominate 23% 12% 9% Goodman GPT Group Australian Industrial REIT* 7% Dexus 6% Propertylink Holdings TOTAL INVESTMENT $ 1.48 BILION *REITs respond to demand from retailers and logistics along the eastern seaboard. 15% Others Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Source: IPD / Colliers International Jun-07 CONSTRUCTION ACTIVITY INCREASES (facilities +10,000sq.m) Under Construction Dec-07 Jun-08 H H1 Sydney 75, ,530 Melbourne 128, ,998 Brisbane 67, ,046 Perth * 64,841 79,136 Adelaide* 74,400 85,997 Auckland* 8,450 49,200 Total (Australia) 410, ,707 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 * Facilities with floorspace + 5,000sqm Accelerating success. How else can we help you? Speak to one of our property experts today. au.industrial@colliers.com

11 AUSTRALIA AND NEW ZEALAND FIRST HALF TRANSACTION ACTIVITY - (+$5 MILLION) H H1 In Millions Number of sales steady, as transaction value picks up $329.3 $416.7 $331.8 Total Value H H1 660,938,412 Count: 47 1,009,961,116 Count: 47 Largest Sale AMP Capital purchase from the Pellicano Group 50% share of a property at M1 & M2 Industry Parks Dandenong for $76 million. $213.4 $163.3 $115.3 Sydney Melbourne Brisbane Perth ($5m+) Adelaide Auckland * Development Hotspots * Properties transacted at + $1 million 1 Sydney 2 Melbourne 3 Brisbane SYDNEY WEST: MELBOURNE WEST: BRISBANE SOUTH WEST: Eastern Creek, Chullora, Greystanes Ravenhall, Truganina, Altona, Derrimut Richlands, Redbank Plains SYDNEY SOUTH: Pagewood MELBOURNE SOUTH: BRISBANE SOUTH: Berrinba SYDNEY SOUTH WEST: Campbelltown Dandenong South & Keysborough SYDNEY NORTH: Rooty Hill $7.9 $31.3 $45.0 $16.7 $159.4 $41.6 INVESTMENT ATTRACTED BY STEADY & MODEST RENTAL INCREASES Australian Prime Grade Industrial Incentives 16% 14% 12% 10% 8% 6% 4% 2% Melbourne Adelaide Sydney Brisbane Auckland Perth Average Net Face Rents $145 $135 $125 $115 $105 Melbourne $95 $85 Perth Brisbane Sydney Auckland Christchurch Adelaide Wellington 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 $75 H H H1 H2 (f) H1 2015(f) For more information about Colliers International and working with us, visit;

12 Research and Forecast report First Half SYDNEY MARKET Institutional competition for prime assets high as cashed up investors seek opportunities Growing institutional demand, coupled with a strong capital markets environment is driving strong yield compression across all Sydney markets. However, the scarcity of quality stock is leading to intensive competition for assets amongst institutional investors, keen to establish a foot hold in the market. The impact of this weight of capital chasing assets has resulted in strong yield compression, most notably in the Western and Northern markets. Prime yields have fallen by up to 50 basis points in some markets as institutional investors increase their ownership footprint. Prime indicative yields now average 7.5% to 8% across Sydney, with the sharpest yields seen in Western Sydney. Yields are forecast to fall further during while interest rates remain favourable and investor demand chases a shrinking pool of prime quality assets. Private investors seeking to exploit the favourable spread between yields and cheaper borrowing rates are expanding their risk profile to incorporate high quality secondary assets as part of their portfolios. The WALE profile of these assets are typically shorter, however existing tenants can be retained if the right rental and incentive rates can be negotiated. Land acquisitions have not been immune from the spike in investor activity. The scarcity of land in Sydney s industrial zoned areas is leading to strong growth in land values. The lack of zoned land is driving investors to acquire large englobo parcels in Sydney s west, whilst in Northern Sydney, highest best use considerations are seeing land parcels pass to residential developers. Land values in Sydney now range from $250/m² in the South West to $900/m² in the North. In December 2013, Mirvac paid a record $250/m² for an englobo site in Sydney s west. As large developable sites remain tightly held in Sydney s Western precinct, Mirvac s recent acquisition of 60 Wallgrove Road will provide them with a strong medium to long-term industrial development pipeline. The lack of land supply will, in the longer term, lead to falling vacancy in secondary markets as occupiers take up the newly developed space. We anticipate that land values will experience solid growth in the short to medium term as investors continue to actively pursue development opportunities. From an occupier perspective Logistics and warehousing remains the engine of growth of the Sydney industrial sector and while this cannot grow above underlying economic activity in the long term, the focus on cost management and supply chain efficiencies in sectors such as retail, are supporting above average growth. Traditional industrial segments such as manufacturing and utilities continue to show weaker growth, however high tech manufacturing enquiry is rising in the sub 5,000m² market. Looking ahead, institutional investment will be the market leading indicator for Sydney industrial market going into the second half of. Economic indicators point to rising demand from service based sectors such as transport, warehousing and construction overtaking manufacturing. The scarcity of quality prime assets will be met in the short term by a rising development pipeline in the west, however limited land supply will drive tighter vacancy levels in prime and secondary markets in the medium to longer term. COLLIERS INTERNATIONAL RESEARCH FORECASTS SYDNEY PRIME GRADE INDUSTRIAL MARKET MARKET AVERAGE NET FACE RENTS ($/m² pa) H1 H2 H1 AVERAGE YIELD H2 AVERAGE LAND VALUES ($/m²) H1 Sydney West $ % $330 Sydney South $ % $850 Sydney South West $ % $250 Sydney North $ % $900 H2 Note: Figures represent market averages as at end of Mar-. For more details see the Data Tables. Source: Colliers Internationa 12 A Colliers International publication

13 Metro Office INDUSTRIAL Sydney West Yield compression continues as investors compete for assets in tight supply market The low cost of debt and a limited supply of quality industrial sites is compressing prime and secondary yields across Sydney s western markets. Average prime yields are 7.5% in the west, down from 8% in H Yield compression in secondary markets has also been present, with secondary yields across the west compressing to three year lows of 9% as investors broaden their risk appetite. However, weaker manufacturing conditions are expected to widen the divergence between prime and secondary yields. Traditionally manufacturing companies occupy secondary grade space while warehouse services firms occupy prime locations due to their larger size and storage volume capacity. Buyer enquiry for space in the sub 2,000/m² market has been strong, with low interest rates proving attractive to owner occupiers where the gap between rents and loan repayments has narrowed. Domestic institutions have led the demand for industrial land and assets over $5 million. Notably, the $55 million land purchase in Eastern Creek by Mirvac in December 2013 for an average rate of $250/m² was hotly contested by other institutional players. Assets with long WALE profiles that can attract occupiers from the transport, warehousing and logistics sectors continue to remain a top priority for investors but conditions remain challenging due to a limited supply of available prime assets. Land values firmed slightly in some markets due to limited supply of developable space, Renewals keeping a lid on secondary vacancy Prime rents are expected to see growth in the short to medium term while secondary grade rents are expected to remain unwavered. Supply conditions in the west are strong, with high levels of pre-commitment underwriting deals; however leasing deals in the 5,000m² plus space remain challenging putting upward pressure on incentives in the short to medium term. Average prime rents in the western market range from a low of $95/m² in the South West to $145/m² in the inner west. Secondary rents remained steady, ranging from $75/m² to $115/m² respectively. Weakening conditions in the manufacturing sector and rising incentives from developers of A Grade facilities may lead to vacancy in secondary markets rising in the short term, however, existing tenants are reluctant to move operations due to high moving costs and are signing new, shorter lease renewals to retain their current premises. 1 Bellevue Circuit, Greystanes Leased to Blackwoods Land supply levels tighten as institutional investors strengthen their land holdings Institutional investors have been hotly contesting large greenfield development sites in Sydney s west, leading to land values rising across all parts of the west. Average serviced lot prices now range between $200/m² to $550/m². However englobo sites are also rising in value, with Mirvac paying $250/m² for a total of $55 million for a site in Eastern Creek. The last large englobo parcel sold in 2009 for $145/m². The limited availability of land will lead to further supply shortages of A Grade warehouse stock, putting downward pressure on secondary vacancy in the medium term. SYDNEY INDUSTRIAL SALES BY BUYER TYPE Sales Volume ($ millions) $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $ (YTD) Domestic Buyer Offshore Buyer Industrial Research & Forecast Report First Half 13

14 Sydney South Leasing demand rises as space scarcity continues Leasing activity if the 3,000m² plus market remains slow, as occupiers seek smaller spaces but are constrained due to a lack of available stock. Smaller businesses are driving lease activity, cost and consolidation is the primary driver behind the movement of tenants to new premises. A number of tenants have also moved in order to revert back to a market rent, after contractual rent reviews push their current rent above market. The rising level of owner occupiers due to the low cost of borrowing is taking stock that would otherwise be used for leasing out of the market. High tech manufacturers, transport and storage companies were the key industry drivers of space occupation in the southern market. One of the larger transactions to occur were 53,000m² at Port Botany, sale and lease back to Australian Container Freight Services. Demand for smaller sites, sub 3,000m² has been driven by smaller retailers, distributors and warehouse operators. Investment demand continues to gather pace Institutional buyers continue to search for properties in the tightly held South Sydney market however only a limited number of large investment sale assets have come to market over the past 12 months. The lower cost of debt is attracting a growing number of owner occupiers to the market, keen to exploit the discount between market rents and loan repayments, however the limited availability of stock in the sub $10 million is driving some investors to consider other markets. Consequently, the strata market has been servicing most of this demand as the only market with any real supply. Conversions of facilities to be more supportive of occupation by warehousing, storage and logistics firms are also underway. Notable sales for this market SYDNEY INDUSTRIAL SALES 2013 & (YTD) BY BUYER TYPE TYPE Occupier/Developer 22% Syndicate 3% Institution 46% Private 29% have included the $37 million Dunning Avenue, Rosebery sale to Goodman by the City of Sydney. Planning and zoning set tone for longer term play Rising demand for residential land near inner city employment hubs is driving changes to the existing planning regimes in South Sydney. The conversion of commercial and industrial sites to residential dwellings is beginning to have a major impact on the South Sydney industrial market, as the economics of highest and best use drive developers to look at residential options over the traditional industrial developments due to rising residential demand. The shift toward residential re-zoning will however be a longer term proposition, but some developers and investors may start positioning themselves by purchasing strategic holdings with a view to residential development upside later on. Linfox Portfolio, Lenore Lane, Erskine Park Sold on behalf of Linfox Australia Pty Ltd 14 A Colliers International publication

15 Metro Office INDUSTRIAL Sydney South West Bigger is better tenants driving demand for larger sheds Rising tenant enquiry has seen sales for industrial warehouses over 10,000m² is leading to rising supply levels in the South West, but on a larger scale. Significant leasing transactions over 10,000m² included 20,000m 2 to Salmat and a 10,400m² warehouse facility in Minto to Sebel furniture. Cost consolidation and attractive incentives for new facilities are a key driver of tenant moves for this market. Demand for high quality older assets is also high, as tenants with expanding warehouse requirements seek new space at a lower cost leading to a tightening secondary market. Smaller tenants are also active in the market, with demand for assets in the sub 2,000m² space growing. Prime rents for this market now average $108/m² and secondary $78/m². Sales demand continues to rise Sales volumes are off to a strong start for in the South West. Significant deal flows, and ongoing strong enquiry levels make this a popular location for investors. All types of industrial properties have been in demand from buyers with competitive offers from multiple buyers being recorded for the majority of sales campaigns. Institutions such as Dexus have recently been active, acquiring 4 Inglis Road for $34.5 million and Bunnings Property trust paying $40 million for Lyn Parade in Prestons. Private investors, taking advantage of the low interest rate environment and tax structure of self managed super accounts are also actively pursuing strata and sub 2,000m² facilities. This demand, combined with a lack of suitable properties for lease, has seen owner occupiers begin to offer a premium to purchase the right property. Despite rising demand, yields remained stable at an indicative 8.15% for prime assets and 9.25% for secondary. However, deals at sub 8% have been concluded, it is expected that the ongoing low interest rate environment will keep demand levels elevated and drive higher values over the next six to 12 months resulting in moderate yield compression. Supply rises as developers re-enter the market Developers have also seen a rise in sales and leasing demand for stock currently under construction and have moved to secure sites, or existing properties, for future projects. Demand for land has also risen with owner occupiers and developers now actively seeking sites for greenfield or strata development. With competition for sites high, unconditional offers are being made in some cases. Low borrowing costs have also had a positive effect for owner occupiers with some looking to purchase land in order to develop a purpose built facility for their business with financing costs now making it economical to do so. In September 2013, Modernco paid $11.5 million for a land site in Charles Street Canterbury and CIP Commercial paid $6.5 million for a Hepher Road Campbelltown on 2.3 Ha. Strong demand for sites is anticipated to continue into the second half of as investor appetite and enquiry remains strong. SYDNEY INDUSTRIAL MARKET AVERAGE YIELDS (Equiv. Rev. Yield) 12% Secondary Grade 10% 8% Prime Grade 6% 4% 2% 0% Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar Wallgrove Road, Eastern Creek Sold on behalf of Afteron Ltd Industrial Research & Forecast Report First Half 15

16 Sydney North Supply levels fall short of strong demand for industrial space The North shore market hasn t seen any new industrial assets 5,000m² complete in recent years. Tenants are in the market for strata unit and high-tech facilities, subduing tenant activity for other assets. The implementation of recent zoning changes has resulted in a shift in investment interest around high-tech developments. Investment interest in land within the Macquarie Park market is dominated by office requirements. The ongoing conversion of industrial sites to bulky goods retail, showrooms or residential properties continues to be a major driver behind the shrinking availability and lack of options for industrial space in Sydney s North. Major road corridors across the North have seen the bulk of this conversion with former industrial assets being converted to their highest and best use which, due to recent planning and zoning changes, is residential apartments. Institutions lead major sales transactions Sales volumes for the North have been led by the institutional players, seeking to position themselves in a tightly held market. Dexus, Investa and Stockland all contributed significant sales in the North over the past 6 months. The largest sales were $71.8 million to Stockland in Waterloo Road North Ryde and the $40.5 million sale to Dexus in Pittwater Road Brookvale. Key drivers for these purchases are the attractive yields on offer as well as the scarcity of industrial stock. In the long term, rezoning to office services or residential may form part of the strategy behind these investment decisions. Owner occupiers and private investors are also leading purchaser interest in the, focusing on the suburbs of Meadowbank, North Ryde and Chatswood for residential rezoning and conversions. Yields sharpened to an indicative 8% for prime locations and 10% for secondary, though some secondary deals have been at sub 10% as the appetite for sites from investors has seen them move up the risk curve. Smaller tenants driving improving leasing conditions Leasing demand for assets over 3,000m² remains weak due to a lack of available stock, driving some tenants into the western market where newer facilities, with attractive incentives are on offer. However, demand for industrial sites with low office content sub 2,000m² is still seeing strong demand. Small retailers, warehousing and high tech manufacturing facilities are driving the majority of enquiry for space. The proximity to residential areas is appealing to occupiers looking to attract and retain staff. Overall, rents and incentives have remained stable over the past six months. However a shortage of, in demand, smaller space for lease is expected to put upward pressure on rents over the medium term. Significant leasing deals for the period include 2,100m² to Westpac Banking Corporation in Lane Cove, and 4,900m² to Life Health Food in Berkeley Value. Rents remained stable at an indicative $175/m² for prime assets and $130/m² for secondary. SYDNEY INDUSTRIAL PRIME GRADE AVERAGE NET FACE RENTS Warringah Corporate Centre, Rodborough Road, Frenchs Forrest Valued on behalf of Blackstone Real Estate Advisors L.P for Australiagen Office Portfolio Hold TC Pty Ltd ($ per sq m pa) $200 $180 $175 $160 $150 $140 $120 $120 $108 $100 $80 $60 $40 $20 $0 North South West South West Mar- Mar-2013 Mar-2012 How else can we help you? Speak to one of our property experts today. au.industrial@colliers.com For further information about our research please contact: Luke Dixon Associate Director Research Tel luke.dixon@colliers.com 16 A Colliers International publication

17 Research and Forecast report First Half Metro Office INDUSTRIAL MELBOURNE MARKET Motor vehicle industry shutdown how will it impact Melbourne s industrial market? The announcement in late 2013 and early of the end of local manufacturing of vehicles by both Ford and Toyota generated a lot of publicity particularly around Australia s perceived inability to compete against cheaper manufacturing nations. While our manufacturing sector is certainly going through a period of significant structural change, the logistics and transport sector is filling the demand void left behind, and this is very evident when looking at demand trends in the industrial property sector. The continued contraction of manufacturing in Melbourne will be replaced by direct logistics and 3PL users, as the growing population demands goods, such as cars, that were once made locally and are now imported. All these goods require land for and infrastructure for storage and transportation. In the Northern Industrial market, a number of major logistics users are currently in negotiations to lease around 120,000m² of space, while the West is now a hub for some of the largest distribution centres in the country. Melbourne also has some of the strongest population growth in the country - over the year to September 2013, the population grew by 110,500 - and the revitalisation of the residential market, particularly the land subdivision market, also is increasing demand in this sector. The shutdown of motor vehicle industry will have a flow on impact to the parts manufacturers currently supplying parts to Ford and Toyota. Interestingly, the South East precinct has the highest concentration of impacted industrial space in Melbourne, at almost 370,000m². Even though the South East does not house any major manufacturers producing cars, there is a large parts supplier industry, which is a leftover relic of the days when Holden and others used to manufacture in the area. Today, major parts suppliers such as Nissan Casting Plant produce parts for both the local and international manufacturing sector. The Outer East also has about 270,000m² of space occupied by parts suppliers, the biggest of which is believed to be ANCA plant in Bayswater, which employs around 400 people. This plant also exports a large proportion of its product, and is expected to be largely unaffected by the local shutdowns. All up, it is estimated the car manufacturers and car suppliers occupy almost 1.6 million sqm of industrial space throughout Melbourne and Geelong. About 650,000m² of this space is occupied by the three (3) major manufacturers, leaving a further 950,000m² of space occupied by parts suppliers. Implications specific to the shutdown of the motor vehicle industry in Victoria may not be felt for some time, as production is not due to fully cease until However, many affected firms will already be assessing their future, and any property disposal requirements will be key to these plans. Colliers International estimates that approximately 260 Ha of land in total is due to be vacated by car manufacturers in Victoria, 205 Ha of which is in Melbourne itself. The closure of the manufacturing plants, while providing some challenges to the market, also represents opportunity. The greatest opportunity lies in Toyota s site in Altona North, and Holden s and Toyota s sites in Port Melbourne. The Altona North market is notoriously tightly held, and it is expected that a number of industrial developers will be eyeing the opportunity to redevelop or redeploy the site for alternative manufacturing uses. COLLIERS INTERNATIONAL RESEARCH FORECASTS MELBOURNE PRIME GRADE INDUSTRIAL MARKET INDICATORS REGION AVERAGE NET FACE ($/m² pa) H1 H2 AVERAGE YIELD H1 H2 AVERAGE LAND VALUES ($/m²) H1 City Fringe $ % $713 North $ % $238 South East $ % $245 West $ % $160 Outer East $ % $288 H2 Note: Figures represent market averages as at end of Mar-. For more details see the Data Tables. Industrial Research & Forecast Report First Half 17

18 It is difficult to quantify just how many of the parts suppliers will shut down and/or vacate their premises, given that many now export their product and have diversified, and may be able to continue on without the local car manufacturing market. One estimate suggests that around 30% of these parts suppliers will be able to survive in the long term. If this figure is accurate, then about 665,000m² of space around Melbourne and Geelong could be vacated. The biggest impact will be in the South East and Outer East, as these have more scattered plants, and no large manufacturing sites that could be converted to other uses. City Fringe Structural changes continue The City Fringe market will be particularly impacted by the closure of the motor vehicle manufacturing industry in Australia, given that both Holden and Toyota have significant presence in Port Melbourne. The Holden site in Port Melbourne sits within an area that is being gradually converted to more high-tech industrial use. Given that Port Melbourne will become even more tightly constrained as the Fishermans Bend precinct moves to more residential use, it is expected that the Holden site will also hold appeal for industrial and commercial developers alike. The Toyota site in Port Melbourne sits within the Sandridge precinct of the recently rezoned Fishermans Bend Urban Renewal Precinct. All available sites in this area will be looked at for future residential or other commercial use by major developers. It is also unclear at this stage whether Toyota and Holden will relinquish their Port Melbourne sites, given that both firms will presumably still require a local Australian Headquarters. Sites within the Fishermans Bend Urban Renewal Precinct have already begun to transact to residential developers. In 2012 we saw the purchase of 4 Ha at 14 Woodruff Street by local developer Harry Stamoulis for $25 million. And now in early Little Projects has paid $18.5 million for an 8,800m² for an industrial site at 85 Lorimer Street. The site has potential for up to 1500 apartments. In total, 22 applications for residential apartment developments have been submitted for approval in Fishermans Bend, totalling more than 12,500 apartments. Once development gets under way, the landscape of Port Melbourne will change significantly, and existing industrial uses within the identified Urban Renewal precinct may see the benefits in relocation. North Major deals to Logistics firms imminent The Melbourne North industrial leasing market is characterised by increasing demand for smaller office areas as well as larger areas of hardstand. This is a direct result of the increasing prevalence 650 Lortimer Street, Port Melbourne Leasing by Colliers International 18 A Colliers International publication

19 Metro Office INDUSTRIAL of logistics and 3PL users in the area, who are attracted to the excellent transport links to both Melbourne Airport and the Port of Melbourne. The continued growth in e-retailing has also driven demand in the Melbourne North market, as much of this product comes through the airport and quick delivery and turnaround times are absolutely essential for these businesses. That being said, vacancy of facilities 10,000m² or greater in the north have increased from about 170,000m² of vacancy in Q to 285,000m² of vacancy across 8 buildings as at Q1. The majority of this vacancy is in the Prime Grade market, and less expensive secondary grade warehouses are leasing quite well, with only three (3) currently available. Average Net Face Rents in the North are currently $78/m² for Prime grade space, and $50/m² for secondary grade space. While there has been limited leasing activity of Prime grade space, Colliers International is aware of three (3) impending major pre-lease deals in the North market. These deals will total around 120,000m² of warehouse space, and are being leased to major logistics firms as well as a large corporate occupier. A 5,868m² warehouse at 68 National Boulevard Campbellfield was also leased in January to a tenant that is currently undisclosed. Investment sales activity in the North has been dominated by Australian Industrial REIT, who has purchased three (3) properties in this precinct in the last six months. Their first acquisition in the North was Stanley Drive, Somerton. This is a 24,350m² warehouse occupied by Bluestar Logistics. Australian Industrial REIT paid $23.7 million for the property in October 2013, representing a yield of 8.50%. More recently, they have purchased a further 2 assets in the North, as part of a wider five-asset portfolio acquisition. These are 9 Fellowes Court, Tullamarine and 49 Temple Drive, Thomastown. The assets were purchased for $3 million and $21.9 million respectively. Colliers International handled the portfolio sale on behalf of the vendor Primewest. Prime grade yields in the North now range from a low of 7.00% for long term WALE, blue chip tenant stock, up to 8.50% for stock with shorter WALEs. This represents a reduction in yields in the North of 25 bps since September West Pre-commitment market heating up The pre-commitment market in Melbourne s west is heating up again, as major corporates look for opportunities to upgrade to new space and also to take on bigger premises. Colliers International is aware of around 220,000m² worth of pre-commitment requirements in the market. A number of these tenants are existing West-based businesses that are experiencing organic growth and benefiting from growth in the logistics and e-commerce sectors. Around three quarters of the pre-commitment requirement currently in the market are from companies that are warehousing/transport related. For tenants facing an upcoming lease expiry, there is currently great opportunity to secure brand new, purpose built premises with incentives that are generous by historical standards. Incentives in the West for Prime grade space now range from 15% up to 25%. There are examples of more generous incentives being offered, particularly by the institutional sector, but these tend to be more outliers. For the pre-commitment sector, innovative ESD initiatives are being marketed by the major institutions to potential tenants as a way of differentiating them from existing stock. While current vacancy in the West of buildings over 10,000m² is around 250,000m², Colliers International has received significant enquiry from tenants looking for space in that range. Given the range of supply available and the number of quality developers active in the West market, most of these requirements are for Prime quality space. One of the West s great strengths is its land availability and affordability relative to other markets, and these two factors are a significant driver of demand. It does leave secondary space, however, somewhat vulnerable, and owners of these facilities need to consider repositioning these assets to avoid prolonged vacancy. MELBOURNE AVERAGE EQUIVALENT REVERSIONARY YIELDS 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 North South East West Outer East City Fringe 49 Temple Drive, Thomastown Leasing by Colliers International Industrial Research & Forecast Report First Half 19

20 The englobo land sales market is also seeing renewed activity, as owner occupiers - encouraged by land prices that are lower than other markets in Melbourne, and indeed the country are returning to the market, and particularly enquiring on lot sizes that are around 1,000m² to 2,000m². The increase in demand for land has seen prices for lots increase from an average of $140/m² in Market 2013 to an average of $160/m² in March. While this is a 14% increase over the year, land values in the West are still by far the most affordable in Melbourne. Coupled with the precincts excellent transport links and proximity to the Port of Melbourne, this encourages many current owner occupiers to remain in the market, and also occupiers from other precincts to make enquiries. MELBOURNE INDUSTRIAL LAND VALUES $/m² $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 North South East West Outer East South & Outer East Continuing the transitition to a logistics based market Similarly to the West and North markets, leasing enquiries for industrial space in the Outer and South East markets now typically include a higher requirement for hardstand than in previous years. This is due to the transition of a strong manufacturing sector particularly around Dandenong to a transport and logistics based market. The South East and Outer East industrial market looks set to be particularly impacted by the shutdown of motor vehicle manufacturing in Australia in around While these markets are not home to any of the major car manufacturers, Colliers International estimates that almost 650,000m² of space in these precincts is occupied by car parts suppliers and manufacturers. These businesses are clustered around Dandenong, Clayton, Bayswater, Croydon and Hallam. While some of these businesses have diversified to export markets or to manufacturing of components for the non-vehicle sector, others are reliant on the business of the Victorian based Ford and Toyota manufacturing plants, and face an uncertain future. There is therefore plenty of scope for a number of these assets to be repositioned for other uses, and to take advantage of the current demand for logistics space. While cars will no longer be made in Australia, the car import market is now certain to grow, and this will increase the requirement of industrial hardstand in strategic locations to store these vehicles Saintly Drive, Truganina Leased to Encore Tissue 20 A Colliers International publication