Sydney Industrial Market

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1 WINTER 2014 MARKET TRENDS Rent and land values largely stable. Tenant demand active particularly in the western submarkets. Supply still largely demand driven. Sales activity starts to pick up mid IN THIS REPORT Sydney Industrial Market Industrial supply and vacancy both remain low at the current time. Rents were largely stable and yields have firmed over the past six months. Sales activity started the year slowly but activity is expected to improve. Key industrial drivers of manufacturing activity and confidence remain low, however retail trade growth has improved significantly. Low interest rates, an improved housing sector and the easing of the Australian dollar are likely to result in positive growth in the key drivers of the sector over the short term. Demand for industrial space has been moderate in Sydney with activity levels strongest in the Outer and Central West submarkets. weight of capital in the market place as well as a competitive environment due to the limited number of prime buildings available for sale. Land values are likely to also see some growth as infrastructure improves and stocks of land reduce. Market overview 1 Key Influences 2 Demand, Supply, Vacancy 6 Rental market 8 Investment market 11 Key sales 14 Outlook 16 Prime net face rents and incentives were stable over the year to June 2014 while secondary rents rose slightly across a number of submarkets. Yields firmed while land values have been stable over the year to June Moving forward, we expect further yield compression. This is primarily due to the m3property undertook a valuation of Cumberland Green, Rydalmere KEY INDICATORS BY SUB MARKET Net rents ($/m 2 ) Incentives (%) Market yield (%) Capital value range Land values ($/m 2 ) Prime Secondary Prime Secondary Prime Secondary ($/m 2 ) 1-2ha lots Inner West ,350-1, Central West ,235-1, Outer West ,115-1, North ,640-2, North West ,270-1, South ,500-2, South West ,115-1, Outer South West , Source: m3property (June 2014).

2 KEY INFLUENCES Distribution is a key driver of the industrial market in Sydney. KEY INFLUENCES Distribution of goods and services is a driver of the industrial market and while the business requirements in this area have changed with time, the prime industrial localities have become increasingly associated with major road infrastructure and sites capable of accommodating large facilities. Sydney s industrial precincts are becoming defined in this manner with large distribution hubs supporting logistics users, while other localities service a combination of properties from smaller industrial units to manufacturing and general warehousing. Low interest rates expected to help drive growth in N.S.W economy. ECONOMIC GROWTH Australian gross domestic product (GDP) has remained fairly solid with seasonally adjusted growth of 2.8% over the year to December 2013 according to the ABS (March 2014). Domestic final demand was lower at 1.2% over the same period with State final demand for NSW reported to be much higher at 2.5%. It is expected that the NSW economy should continue to benefit from growth in sectors driven by low interest rates. Retail trade growth, particularly online growth drives logistics sector. Inventory levels still volatile. Manufacturing sector still third largest contributor to logistics revenue in KEY SECTORAL CHANGES The structural change to industrial markets where domestic knowledge based industries and logistics services increasingly take over as the key drivers of industrial demand at the expense of manufacturing firms continues. This has also been supplemented by increasing demand by international retailers for warehouses to store and distribute goods ordered online within Australia. Retail trade is the main driver of the logistics sector in Australia, contributing 32.5% of revenue according to IbisWorld (April 2014). Retail has gone through major changes over the past few years which has led to inventory reduction, outsourcing of non-core activities and retailers expanding or creating online services to compete and hence increasing demand for logistics services. The growth of online retailing has also led to growth in demand for warehouses to store and distribute goods. This demand is increasingly from overseas retailers who are aiming to reduce cost of delivery and delivery times of goods. Retail trade growth has been strong in NSW. From March 2013 to March 2014 growth was 8.6%, up from 4.6% over the same time last year. The continuing low cash rate combined with improved economic and political certainty and increased residential construction and prices has boosted consumers willingness to spend. Inventory levels have been volatile over the past few years. Over 2013 wholesalers decreased inventory levels by 3.3%. Given the improved retail turnover this is likely to result in inventories being run down and therefore stock levels will need to increase again in Wholesalers have taken over from manufacturing as the second largest contributor to logistics revenue in according to IbisWorld. The third largest contributor to logistics revenue is the manufacturing sector. Although it has been on the decline in Australia over the past 40 years it still contributed around 6.6% of gross value add to GDP in December 2013, but is down from 10.9% in December 1990 and 15.1% in September This is due to the overall trend towards off-shoring to countries with cheaper labour and other costs and over the past few years due to the high Australian dollar. The decline is likely to be offset by growth in the logistics sector from the corresponding import of manufactured goods, which requires storage and distribution. Comm3ntary Winter 2014 P2

3 Yields Total containers (000s TEU) KEY INFLUENCES Freight activity continues grow. FREIGHT ACTIVITY There has been positive growth in activity through Sydney Port (a leading indicator of demand for the logistics sector) for the past eleven financial years (Sydney Ports, March 2014). The year to March 2014 saw 4.2% growth. Estimates of up to 5% growth per annum in twenty foot equivalent units (TEUs) are forecast by Sydney Ports to This is set to buoy demand for logistics and storage. 1,400 1,200 1, Imports Sydney Ports total TEU trade Exports Forecasts m3property Research Source: Sydney Ports (March 2014) Low interest rates are driving growth of residential construction and retail trade. INTEREST RATES Interest rates have a dual impact on the industrial sector, firstly through retailing, which impacts manufacture, storage and transfer of goods and secondly through the investment market. The continued low interest rates have stimulated residential sales and construction as well as retail trade generally. This has had a positive flow-on-effect on demand for industrial accommodation to supply these industries and store and transport goods. Despite ten year bonds having increased over the past year and yields tightening, there is still a wide margin between investment yields and the risk free rate % 10.00% Sydney prime yields v 10 year bonds 10 year bond rate Sydney prime industrial yield 8.00% 6.00% 4.00% 2.00% 0.00% m3property Research and ABS Comm3ntary Winter 2014 P3

4 KEY INFLUENCES Recent rezoning is starting to address the issue of limited supply of employment land in Sydney compared to the growing population. PLANNING At the last survey by the NSW Department of Planning and Infrastructure in January 2011 there was 13,554 ha of land zoned employment, with 892 ha of undeveloped serviced land and a further 2,530.4 ha of undeveloped and unserviced land in the Sydney Metropolitan area. This equated to between 3-11 years of supply depending on take up levels with extremes of ha per annum used in the calculations. Subsequent to these figures further land has been released in West Menai, Austral, Leppington North, East Leppington, Catherine Fields, Huntlee, Schofields, Box Hill, Marsden Park and North Ryde. There are also likely to be significant changes to zoning in the Badgerys Creek area following its approval as Sydney s second international airport. Major road and rail infrastructure is set to open up new industrial areas and provide essential links to improve efficiency and travel times in existing areas. INFRASTRUCTURE In the south west the M5 is undergoing widening and has another tunnel planned longer term, this is likely to benefit industrial areas from Prestons to Peakhurst. The dedicated Southern Sydney Freight Line includes stations at Leumeah, Minto, Casula, Warwick Farm, Cabramatta and Sefton and will take a number of trucks off the road and reduce rail bottlenecks. WestConnex is Sydney s next major Motorway project. It integrates the project above, the expansion of the M5 East, to the M4 extension. This infrastructure is pertinent due to its importance in the movement of freight from the Port and Airport to Western Sydney and eventually from the second international Airport in Badgerys Creek. In the north, central and inner west the $885 million Northern Sydney Freight Corridor, due 2016, will improve freight access, take 200,000 trucks off the road each year and improve the reliability of commuter services from the Central Coast, inner west and northern Sydney. The Hexham passing loop has already been completed as part of this project. In the western precincts the government has put out to tender work on the Old Wallgrove Road upgrade, connecting with the new Erskine Park Link Road (completed in 2013) in the west and Wallgrove Road in the east. This will join existing and future employment areas in Western Sydney. NorthConnex M1-M2 project, which is at stage three of the assessment process and F6 extension, which has received limited funding, are longer term projects which would improve connections and travel times in the southern and northern areas of Sydney. Work on Sydney s Port Botany and intermodal terminal network is nearing completion with final support works being completed at Port Botany and Enfield Intermodal Logistics Centre (ILC) under construction and expected to be operational in the second half of 2014 according to NSW Ports. Further down the track the Sydney Intermodal Terminal Alliance (SIMTA) Moorebank facility is due to complete in stages between 2015 and 2031 and Moorebank Intermodal Terminal (MIT) is due in Other proposed intermodal terminals or extensions include: Chullora, Minto, Yennora, Villawood and Eastern Creek. The terminals would use the South and North Sydney freight lines using rail spurs to the locations and a Western Sydney freight line would also have to be established. Comm3ntary Winter 2014 P4

5 KEY INFLUENCES The recent announcement that Badgerys Creek will house Sydney s second airport is set to open up new employment areas in Western Sydney and relieve pressure on Kingsford Smith airport. SYDNEY S SECOND INTERNATIONAL AIRPORT The Federal Government has approved Badgerys Creek as the site of Sydney s second international airport. Construction is expected to commence in 2016 and the first flight is forecast to take off in the mid-2020 s. The airport is likely to deliver 60,000 new jobs by 2060 and contribute $24 billion to GDP according to government estimates. Western Sydney according to the NSW 2021 Regional Action Plan is Australia s largest manufacturing region in Australia. The Airport combined with other planned infrastructure such as the Moorebank and Eastern Creek intermodal terminals and the WestConnex motorway is likely to further increase demand for industrial space in the region. At current the key Western Sydney industrial estates are located in areas with good access to the motorways in order to reduce transport time to Kingsford Smith airport and Sydney port. With the Western Sydney Airport being developed new industrial areas should be opened up outside the current industrial estates. Comm3ntary Winter 2014 P5

6 Value of building approvals ($millions) Number of building approvals SUPPLY, DEMAND AND VACANCY Supply levels set to increase on back of increased value of approvals. SUPPLY AND DEMAND Strengthening building approvals by value over the past year is likely to result in industrial building supply increasing in 2014 and Number of approvals NSW Industrial Building Approvals Factories Agriculture & aquaculture blg Source: m3property and ABS (June 2014) Warehouses Other industrial Speculative building, while still low, has increased over recent years. Gross tenant demand falls due to reduction in large pre-commitment deals, which were prevalent over the second half of 2012 and early Demand over the past few years has been driven by two groups - major Australian retailers and overseas or online only based retailers. A greater number of projects in Sydney s industrial market have commenced speculatively over the past year. This strategy has proved successful for well appointed and located buildings. Examples include: DB Schenker occupying 16,000m 2 of speculatively built space at Kangaroo Close, Eastern Creek to manage H&Ms logistic requirements; Consortium Group leasing 15,500m 2 at Quarry Estate, 1 Basalt Road, Greystanes which completed in March 2014; and Beaumont Tiles leasing 8,140m 2 at 72 Huntington Road, Huntingwood, which completed in January Gross tenant demand in term of leases signed has fallen over the year to March 2014, compared to the year to March 2013 but is stronger than the same period in The year to March 2013 was a strong year for take-up with many large precommitments to warehouse and distribution space signed in the outer western areas of Sydney. Many tenants in or looking to enter the Sydney industrial market are looking for efficiencies through consolidation of activities, choosing the optimal location for supply chain efficiencies and/or automation of processes. Two main groups have driven this process over the past few years - firstly the major Australian retailers such as Officeworks, Bunnings and Greens General Foods and more recently overseas based or online retailers such as H&M and Office Max. Australian major retailers started the process in order to reduce costs to compete with the influx of overseas competition from online retailing by building or precommitting to large sites along the major motorways including the M4, M5 and M7. This resulted in the Outer South West and Outer West sub regions, in particular, witnessing strong demand for sites where tenants are able to design and construct their own premises. With the reduction of the Australian dollar and Australian retailers adjusting their offerings to compete more efficiently with online retailers, overseas and online only based retailers have looked to take-up warehouse or distribution centre space in locations where demand for their products is high. The aim of this, being to reduce freight costs and delivery times for consumers. This has resulted in a more even spread of demand across the City as smaller site areas can accommodate this demand. Comm3ntary Winter 2014 P6

7 Vacancy rate (%) SUPPLY, DEMAND AND VACANCY Outer and Central West sub regions account for the greatest portion of gross take up over the year to March Over the 12 months to March 2014, gross absorption of space was strongest in the Outer West (24.0%) with the Central West being close behind accounting for 23.5% of take-up and the North a far third with 12.7% of take-up. This compares with the previous year when Outer West dominated activity accounting for 32.0% of take-up with Central West (22.6%) and the South West (21.6%) following. Vacancy remains low but started to rise over the six months to December VACANCY Vacancy levels remain low in the Sydney metropolitan area. Based on our sample of prime properties in Australia s major A-REITs the vacancy rate was 3.6% at December In line with the slow down in gross take-up and increasing supply, this was up slightly from 2.3% in June % 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Industrial vacancy rate Source: Survey of industrial A-REITs MAJOR TENANT MOVES Property Tenant GLA (m 2 ) Comm Date Rent ($/m 2 ) Term (yrs) Building A, 5-9 Birnie Avenue, Lidcombe Fujitsu 10,894 Aug-14 $135 n 7y Interchange Drive, Eastern Creek Bunnings Distribution Centre * 43,180 Mar-14 $112 n 10y Recent large tenant commitments. 2 Glendenning Road, Glendenning EC4 Kangaroo Close, Eastern Creek Quarry Estate, 1 Basalt Road, Greystanes Good Living Global+ 4,400 Mar-14 $110 n 1y DB Schenker (H&M) 15,840 Feb-14 $114 n 10y Consortium Centre^ 15,500 Feb-14 $115 n 6y 1 Inglis Road, Ingleburn Jedda Road, Prestons Schneider Electric (Australia) 9,928 Feb-14 $90 n 3y Western Pet Foods 5,355 Jan-14 $115 n 5y 48 Airds Road, Minto Sebel Furniture 10,393 Jan-14 $84 g 5y 72 Huntingwood Drive, Huntingwood Beaumont Tiles^ 8,140 Jan-14 $ n 10y 62 Marigold Street, Revesby Australian Ports (NSW) Logistics 4,613 Jan-14 $88 n 5y Source: m3property *Pre-commitment deal, ^Design and Construct, +Sublease Comm3ntary Winter 2014 P7

8 Prime net face rents ($/m 2 ) RENTAL MARKET Prime rents and incentives have largely been stable over the year to June Secondary rents have seen slight growth over the past 12 months. RENTAL MARKET Despite the low rate of vacancy, prime net face rents have been stable over the past twelve months. This is largely due to continuing economic uncertainty and the ready availability of land for design and construct development. There have also been a number of positive factors offsetting the negatives including falling interest rates, growing online retail trade and an improvement to selected areas of the manufacturing sector following falls in the Australian dollar. Newer buildings in prime locations close to major road networks that are designed to accommodate warehousing, distribution and logistics operations have seen moderate demand and therefore stable rents and incentives. Alternatively, older buildings in secondary locations that are designed to accommodate manufacturing operations have seen very little demand with incentives remaining higher for this space. The take-up of secondary, slightly older style facilities reasonably well suited to warehousing has increased in recent times. This is partly due to the lack of availability of prime grade stock of this nature in desirable, central industrial precincts and partly due to the lower budget alternative that these facilities offer and the significant cost savings they present for distribution and logistics operations. All Sydney sub regions prime net face rents remain stable. $180 $160 $140 $120 $100 $80 $60 $40 $20 $- Sydney prime net rents Inner West North South West Outer West Central West South North West Outer South West m3property Research Comm3ntary Winter 2014 P8

9 RENTAL MARKET - SUBMARKETS Inner West prime rents were stable, while secondary rents rose slightly over the past six months. INNER WEST Net face rents were stable over the past six months for prime stock ranging from $115/m 2 to $135/m 2, while secondary rents rose slightly to range from $85/m 2 to $105/m 2 at June This submarket is likely to be stable over next six months as leasing activity, while improving, remains low with prime stock being tightly held. Stock in this submarket is largely small older workshops, ex-manufacturing facilities and warehouses of less than 3,000m 2. Enfield is an exception with some larger premises available in close proximity to the intermodal terminal. Vacancy is low in the area keeping rents steady. CENTRAL WEST Central West rents and incentives were stable over the past six months. Rents were stable ranging from $105/m 2 to $140/m 2 for prime and $60/m 2 to $95/m 2 for secondary stock over the six months to June Rents are expected to remain flat over the next six months as leasing activity has slowed following very strong activity over 2012 and start of 2013 as tenants signed up for new leases in the Greystanes and the Rydalmere areas in particular. A lack of new development over the past six months has resulted in modern, multiunit complexes having low vacancy and shorter letting up periods. A number of tenants have competed for space less than 4,000m 2 in size in the Silverwater/Rydalmere area over the past 12 months. The Smithfield/Wetherill Park area has been active with a range of deal sizes from larger facilities of over 10,000m 2 down to office/warehouses of less than 5,000m 2 in size. Outer West prime rents were stable while secondary rents rose over the past six months. OUTER WEST Prime rents were stable ranging from $95/m 2 to $115/m 2 while secondary rents rose slightly to range from $65/m 2 to $85/m 2 over the six months to June Rental growth is expected to rise over the next six months as demand remains strong albeit weaker than the previous 12 months. The Erskine Park/Eastern Creek area has seen particularly strong demand over 2013 and so far in 2014 and Glendenning has also seen a rise in leasing deals signed over the past year. North prime rents were stable while secondary rents rose over the past six months. NORTH Rents are highest in the North submarket, remaining in the range from $140/m 2 to $160/m 2 for prime stock and rising to $110/m 2 to $130/m 2 for secondary space over the six months to June Incentives continue to be higher than most other submarkets being stable for prime stock ranging from 12%-15% while secondary incentives dropped slightly to range from 12%-20% over the six months to June Demand has continued to improve in the North with a number of deals reported in the Gateway Estate at Mt Ku-ring-gai. Conversion of sites to multi-unit residential in Macquarie Park continues. The potential supply of land in the precinct along with height and floor space ratio changes may see further conversion to this use. Comm3ntary Winter 2014 P9

10 RENTAL MARKET - SUBMARKETS North West prime rents were stable while secondary rents rose over the past six months. NORTH WEST Rents have been stable ranging from $105/m 2 to $120/m 2 for prime stock, while they increased to range from $80/m 2 to $95/m 2 for secondary stock over the six months to June This submarket is forecast to see slight rental growth over the next six months as leasing activity has improved in the Seven Hills area over the past year. The metropolitan strategy pointed to Marsden Park as the next major new industrial area in Sydney. So far demand has predominantly come from the bulky goods retail sector with IKEA and Masters signing leases. This is due to the area being in close proximity to a proposed Town Centre and within the North West growth centre. South prime rents were stable while secondary rents fell slightly over the six months to June SOUTH Rents were stable ranging from $120/m 2 to $160/m 2 for prime, however they dropped slightly for secondary stock to range from $70/m 2 to $110/m 2 over the six months to June Continued conversion of older style industrial to residential and the lack of new industrial development has assisted to keep the South vacancy rate low over the past 12 months. Alexandria has seen the most leasing activity over the same period, however most of the deals are less than 1,000m 2 in size. South West prime rents were stable while secondary rents rose over the past six months. SOUTH WEST Prime rents were stable over the six months to June 2014 ranging from $95/m 2 to $110/m 2 while secondary rents rose to range from $70/m 2 to $85/m 2. Stable rents are expected over the next six months. Chullora, Bankstown and Prestons are likely to continue to see good levels of demand over the short to medium term. Outer South West prime rents were stable while secondary rents rose over the six months to June OUTER SOUTH WEST Rents are lowest in the Outer South West submarket remaining in the range from $85/m 2 to $95/m 2 for prime but rising to range from $65/m 2 to $75/m 2 for secondary stock over the six months to June The leasing environment remains sporadic in this area. Ingleburn and Minto are the best performing suburbs in the submarket. Activity in Smeaton Grange has also shown the strength of demand for new, modern, high clearance, fully sprinklered space of less than 10,000m 2. Incentives are slightly higher than most other submarkets and were largely stable ranging from 10%-12% for prime and 10%-20% for secondary stock over the past six months. Comm3ntary Winter 2014 P10

11 Sales ($millions) Sales volume ($millions) INVESTMENT MARKET INVESTMENT MARKET Sales activity was strong over 2013 due largely to a record final quarter of activity. Sales activity (above $5,000,000) was extremely strong in the last quarter of 2013 more than doubling the previous three quarters to lift the 2013 total to $1,979,305,800 (across 81 transactions). Sales activity has started moderately well in Sales over the first half of 2014 (to mid-june) totalled $462,853,800. Larger sales of over $20,000,000 dominated the total value and number of sales in NSW over the 2013 to June 2014 period. $2,500 $2,000 NSW sales by price range >$20 mill $10 mill -$20 mill $5 mill-$10 mill $1,500 $1,000 $500 $ * Source: m3property Research (*to mid-june, 2014) Sales over $5 million Unlisted funds accounted for the largest portion of purchases over Unlisted funds with 22.4% of sales, by value, accounted for the largest portion of sales over January 2013 to May 2014 (in sales over $5,000,000 in value). A-REITs were the second largest purchaser group accounting for 17.5% of sales over the 17 month period. Private investors followed accounting for 16.9% of sales. $2,500 NSW industrial sales, by purchaser type $2,000 $1,500 $1,000 $500 $ A-REIT Corporation Developer Government Owner Occupier Private Investor Syndicate Undisclosed Superannuation Fund Foreign Investor Unlisted Fund Source: m3property Research (*to mid-june, 2014) Comm3ntary Winter 2014 P11

12 Yield (%) INVESTMENT MARKET Portfolio sales activity moderate over the past 12 months. Portfolio sales involving Sydney industrial property continued to add to total sales volume despite the total number of portfolios reducing over the year to May 2014 to just three. These were the purchase of two properties by 360 Capital Investment Management from Commonwealth Managed Investments. The distribution centre at 457 Waterloo Road, Chullora ($17,185,000) was part of this sale. The other property was located in Melbourne. The second portfolio sale involved four assets sold by Cromwell Property Fund to GM Property Group for $100,850,000. This included Percival Road, Smithfield ($19,200,000). The third was the recent $106,750,000 sale of ten industrial properties in Sydney and Melbourne by Abacus Property Group and Abacus Income Fund II to Propertylink. Five of the properties were located in NSW. YIELDS With the exception of the final quarter of 2013 deals have been hard to achieve in the Sydney industrial market over the 18 months to mid-june 2014, demand continues to be positive with buyers outweighing sellers of prime grade assets. This has resulted in reported prime yields firming over the past six months. Yields have fallen over the past six months as owners are reluctant to sell quality, well located assets. While the gap has closed slightly the Sydney prime yield, which is generally within a range of 7.25% to 8.50% at June 2014, remains at a significant premium to the 10 year bond rate. The reluctance by owners to dispose of assets is widening the scope of motivated purchasers to consider quality assets with a shorter WALE or other elements of leasing risk or purchase assets with redevelopment potential. While yields have already tightened for prime, well located space, yields for more risky assets may also tighten, particularly for larger distribution facilities where such leasing challenges are considered able to be overcome % 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% Prime Sydney industrial yields Secondary m3property Research Comm3ntary Winter 2014 P12

13 INVESTMENT MARKET Secondary yields expected to tighten as investors, unable to purchase in the tightly held prime market, look to unlock higher returns in secondary buildings within desirable locations. Given the lack of prime grade opportunities for purchase, REITs will likely continue to unlock their large existing land holdings through pre-commitments to absorb the significant weight of funds looking to be placed in the industrial sector. However, where this is not possible, for private investors and syndicates who may not have large land banks, secondary assets are sought. This was demonstrated by the sale of Percival Road, Smithfield to Perth-based GM Property Group for $19.2 million. m3property undertook a valuation for the acquisition of Percival Road, Smithfield Secondary assets such as this in prime industrial localities were considered by such purchasers to have a higher potential for growth. The larger institutional investors focussing on prime grade assets have left these opportunities for smaller purchasers who may be more willing to invest the resources into managing these properties so as to add value and enjoy potentially much higher returns. Secondary assets located in desirable industrial locations can be seen as better value and there is the potential for more activity in this sector moving forward as demonstrated by the recent sale of the Abacus portfolio which contained a number of secondary grade assets. RECENT PROPERTY SALES Property Sales Qtr Price (millions) Market Yield IRR GLA rate /m 2 Purchaser Abacus portfolio Q2/14 $106.75m 9.40% NA $949 Propertylink 42 Airds Road, Minto Q2/14 $12.6m 7.91% 9.42% $1,170 Charter Hall 1 Johnson Road, Campbelltown Q2/14 $19.4m 8.11% 9.49% $1,165 Heathley Recent sales activity has seen a range of properties exchange. Properties not currently reported as development sites are listed Forrester Road, St Marys Lisbon Street, Fairfield 8 Herbert Street, St Leonards 29 Glendenning Road, Glendenning Q4/13 $72.85m 7.88% 9.25% $1,205 Q4/13 $65.0m 8.81% 9.74% $1,086 Q4/13 $38.5m 8.76% 9.24% $3,647 Q4/13 $29.5m 7.90% NA $1, Airds Road, Minto Q4/13 $25.88m NA NA $1,074 4 Pioneer Avenue, Tuggerah Stockland Property Group Aviva Investors, Prime Super & Access Capital Advisors Australian Unity Healthcare Trust Fife Capital Industrial REIT Q4/13 $18.0m 8.55% 10.25% $1,508 Sentinel Interface Aust Holdings Pty Limited 38 Pine Road, Yennora Q3/13 $43.6m 8.80% 9.49% $1,313 GPT Group South Street, Rydalmere Q3/13 $43.25m 8.83% 9.51% $1,239 Kingsmede Pty Limited Source: m3property (Sales to mid-june, 2014). NA Not available. Comm3ntary Winter 2014 P13

14 1-2 ha serviced lots ($/m 2 ) INVESTMENT MARKET Land remains scarce in inner subregions due to competition from alternative uses. Land values stable over the past year. Speculative activity low, but increasing LAND VALUES The land market in Sydney is increasingly within the outer suburban ring. Inner metropolitan precincts have limited sites available and larger redevelopment options that do come to the market are often converted to alternative uses, such as residential or commercial where planning regulations permit. Land values have been relatively flat since the trough of the market in There were some slight increases in land values in 2011 in the South and North submarkets as rents rose marginally and speculative activity tentatively recommenced, however these markets have also stabilised since. The average land value across Sydney, for one to two hectare allotments, as at June 2014 was in the order of $400 per square metre, this has been stable over the past year. Land values currently range from an average of $200 per square metre in the Outer South West up to $900 per square metre in the South, where land is in short supply and alternative use is more likely. Speculative activity, while having increased over the past few years, remains low. $1,400 $1,200 $1,000 $800 $600 $400 $200 $- Sydney land values South Inner West Central West South West Outer West Outer South West North North West m3property Research Large reported industrial development site sales over the past year. RECENT INDUSTRIAL DEVELOPMENT SITE SALES Land Sales Qtr Price (millions) Area (m 2 ) Land/m 2 Purchaser 60 Wallgrove Road, Eastern Creek 6 Hepher Road, Campbelltown 32 Swinbourne St, Banksmeadow 111 Quarry Road, Erskine Park Dunn Street, Smeaton Grange Q4/13 $55.05m 218,600 $252 Mirvac Group Q4/13 $6.5m 78,030 $83 Undisclosed developer Q2/13 $22.2m 54,640 $406 Q2/13 $10.66m 45,000 $237 Goodman International Limited Murray Goulburn Cooperative Co. Limited Q2/13 $6.65m 34,790 $191 Sloanbuilt Trailors Source: m3property (Sales to mid-june, 2014). Comm3ntary Winter 2014 P14

15 KEY SALES m3property analysis of 42 Airds Road, Minto 42 Airds Road, Minto Sale Price: $12,600,000 Sale Date: May 2014 Market Yield: 7.91% IRR: 9.42% Rate (per square metre): $1,170 WALE by area: 5.62 years m3property analysis of 1 Johnson Road, Campbelltown 1 Johnson Road, Campbelltown Sale Price: $19,400,000 Sale Date: May 2014 Market Yield: 8.11% IRR: 9.49% Rate (per square metre): $1,165 WALE by area: 5.45 years m3property analysis of Forrester Road, St Marys Forrester Distribution Centre, Forrester Road, St Marys Sale Price: $72,850,000 Sale Date: December 2013 Market Yield: 7.88% IRR: 9.25% Rate (per square metre): $1,205 WALE by area: 5.3 years m3property analysis of South Street, Rydalmere DB Industrial Estate, South Street, Rydalmere Sale Price: $43,250,000 Sale Date: August 2013 Market Yield: 8.83% IRR: 9.51% Rate (per square metre): $1,239 WALE by area: 4.19 years Comm3ntary Winter 2014 P15

16 m3property Research For more information please contact: OUTLOOK The outlook for the Sydney industrial market is positive. Research Contacts Jennifer Williams P M jennifer.williams@m3property.com.au Key Valuation Contacts James Farrugia P M james.farrugia@m3property.com.au John Rasaku P M john.rasaku@m3property.com.au The industrial property market in Sydney is expected to continue to strengthen over the next few years. Growth is likely to largely be driven by the high volume of export and import sales which are expected over the short term. Improving economic growth and strengthening residential construction and retail markets are also expected to benefit the sector. Supply of industrial property has increased over recent years although it remains low compared to long term averages. Supply predominantly relies on owners obtaining precommitments. This, combined with the gentrification of areas within the South sub region including: Alexandria, Green Square, Waterloo, etc are likely to result in supply being restricted in Sydney. OFFICES Adelaide Brisbane Melbourne Level 6 76 Waymouth Street Adelaide South Australia 5000 T 61 (8) F 61 (8) Level 2 15 James Street Fortitude Valley Queensland 4006 T 61 (7) F 61 (7) Level William Street Melbourne Victoria 3000 T 61 (3) F 61 (3) Perth Sydney Disclaimer 22 Hardy Street South Perth Western Australia 6151 T 61 (8) F 61 (8) Level 14 1 Castlereagh Street Sydney New South Wales 2000 T 61 (2) F 61 (2) Demand for industrial property is likely to improve over the short to medium term. In particular the merchandise trade, construction and manufacturing sectors are likely to result in growth in demand for processing, logistics and storage facilities within Sydney. While expected to remain subdued, in line with historical averages, rental growth should improve over the short term. Activity in the investment market is expected to remain moderate over the short term as many landlords look to hold onto assets. Investment yields are forecast to tighten by basis points across the Sydney sub regions over the next 12 months. info@m3property.com.au This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Definitions Submarket Inner West Definitions Central West Outer West North North West South South West Outer South West Suburbs include: Campsie Five Dock Kingsgrove Petersham Marrickville Fairfield East Greystanes Lidcombe Rydalmere Silverwater Smithfield Wetherill Park Arndell Park Eastern Creek Erskine Park Glendenning Huntingwood Mount Druitt Brookvale Frenchs Forest Gladesville Gore Hill Lane Cove Macquarie Park Blacktown Castle Hill Kings Park Norwest Seven Hills South Windsor Alexandria Botany Mascot Rockdale Taren Point Chullora Milperra Moorebank Prestons Regents Park Campbelltown Ingleburn Minto Smeaton Grange