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Robust growth fundamentals have driven Australia’s industrial and logistics property markets to new records, according to research from JLL.

The latest Australian Industrial Investment Review 2017 (IIR) report shows all-time highs for industrial transaction volumes, portfolio sales and inbound cross-border capital over 2016.
More than AU6.89 billion in industrial sales was posted for the year, surpassing the 2015 all-time high of AU$6.56 billion and well above the 10-year average of AU$3.57 billion.

“Industrial annual sales volumes have had nine consecutive years of growth, with new records reached every year since 2014,” says Michael Fenton, JLL’s Head of Industrial in Australia. “Indeed, transaction volumes mirrored domestic economic activity, with a focus on the Sydney and Melbourne markets, which accounted for more than 68 percent of the national sales volume.”

In the Asia Pacific region, Australia’s industrial market was second only to Japan (US$6.95 billion in sales) in terms of transaction volumes for the year. And, Australia was Asia-Pacific’s preferred destination for cross-border capital, accounting for more than AU$2.68 billion of inbound capital investment.

“Offshore investment has grown in lockstep with sales, rising by 107 percent per year since 2014,” Fenton says. “Due to the Australian dollar’s gradual devaluation since 2013, Australian assets – including industrial – have provided good value for foreign buyers.

The most active industrial markets in 2016 were Sydney Outer Central West, Melbourne West, Melbourne South East and Brisbane Southern – all of which received substantial levels of investment underpinned by high levels of absorption and supply. By contrast, the Perth South and Melbourne North markets had high levels of supply which outweighed take-up.

With investment interest high, prime yields have compressed uniformly across almost every market. Average national prime industrial yields have now reached a record low of 6.42 percent, 10 basis points (bps) lower than Q4 2007. Record low levels were set in every city except Perth and Adelaide – yields in Sydney, Melbourne and Brisbane fell to 6.35 percent, 6.38 percent, and 6.63 percent respectively.

Unlisted property trusts were the most active investors over the year, involved in more than AU$3.66 billion of transactions while private companies, investors and developers capitalised on the strength of market pricing to end the year as net sellers.

On the supply side, low interest rates, robust economic fundamentals and the drive for income will likely ensure a sustainable pipeline. JLL forecasts more than 1.70 million square meters of industrial floorspace will be delivered to Australia’s industrial property market in 2017, the highest annual amount of since 2008.

“This year’s forecast supply is comparatively measured,” Fenton says. “Even if all proposed developments are delivered, supply will be well below the previous construction peak, when 2.56 million square meters was delivered annually over 2007 and 2008.”

“More importantly, more than 36.9 percent of the built stock in that period was vacant upon completion. In 2007, only 14.9 percent of the pipeline under construction is without pre-lease, a figure likely to decline as developments are leased before completion.”

The Melbourne and Sydney markets will account for around 76.9 percent of the total supply.

And, JLL’s outlook for industrial property in 2017 is reasonably positive.

“Sydney and Melbourne will remain high-growth markets, however pricing will be accordingly sharp,” Fenton says. “In these markets, secondary yield compression hasn’t occurred to the same intensity as that for prime over the past few years and value-add opportunities in the form of weathered assets or those with developable land will be sought after.”

“Yield spreads in Sydney and Melbourne are likely to narrow in the near-term. Brisbane and Perth will present counter-cyclical opportunities, with rental contractions subsiding in the year.”

JLL believes current pricing levels will spur vendor motivation, although an increased number of transactions will likely occur off-market.

“Given the stage of the cycle, non-traditional players – such as corporates – will look to capitalise on current pricing to sell existing properties, and will be more dominant as net sellers of logistics assets,” says Fenton. “However, fund managers will continue to pay premiums for stabilised income profiles, bringing forward more sale-and-leaseback transactions.”

“Sale-and-leasebacks are appealing because, traditionally, they offer strong covenants, long-term leases, and strong growth profiles, which will be attractive to both domestic and offshore investors and further fuel further yield compression for core product.”

“Moreover, the limited investable opportunity and pricing will ensure AREITs focus on land acquisitions to bolster forward development pipelines.”

For more, please access the Australian Industrial Investment Review 2017 (IIR) report, here.

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Michael Fenton

Head of Industrial, JLL Australia

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