Strong investor demand for Melbourne industrial property in next year

Strong leasing activity and an increase in speculative development looks set to drive heightened investment demand for industrial property in Melbourne. 

Colliers International’s Melbourne Industrial Research & Forecast Report for H1 2012 has found the shortage of prime-grade stock we have observed in recent times is expected to continue over the next 12 months and result in increased activity in the middle-tier market. 

The combination of high tenant demand for prime-grade stock and limited speculative development in the current market is likely to result in an increased number of tenants seeking second-grade stock.

The majority of developers are now awaiting pre-commitments before starting new industrial projects in Melbourne, while a number of speculative developments in the west and south-east markets have been fully leased prior to completion. 

We expect this to lead to more speculative development occurring in 2012, although access to finance still remains an issue for many developers. 

As a result, limited new supply of premium stock is expected over the short to medium term. and we expect purchasers will turn their attention to the middle tier of the market, where the greatest opportunities will exist in the next 12 months. 

As demonstrated in the report, we believe the Melbourne industrial investment sales market is set for increased demand from investors over the remainder of 2012. 

The lack of stock on the market currently available for sale is likely to encourage capital values to increase over the second half of the year, and prime grade average yields are set to compress further. 

From a leasing perspective, the Melbourne industrial market remains robust, with more than 370,000 square metres leased between October 2011 and March 2012, an increase of almost 100% from the previous six months. 

Melbourne is expected to continue to have a shortage of prime-grade stock over 3,000 square metres due to strong tenant demand and limited new construction activity. 

Geographically, Melbourne’s West remains the best-performing market in Victoria, accounting for 52 per cent of the total area leased. 

Most demand for space is coming from tenants looking for warehousing and distribution centres, with the growth of online retailing also a key driver. 

Many tenants are now being forced to take up existing secondary grade stock as a result of prime-grade shortages. 

Developers are responding to the situation and, as a result, we are starting to see higher levels of speculative development. 

As indicated in our report, of the total 106,000 square metres of industrial stock currently under construction in Victoria, 60% is speculative. 

Net face rents have remained stable across all markets over the past six months, however, the shortage of available stock has resulted in a decline of prime grade incentives in the south-east, east and north. 

Increasing pre-lease rents have also become apparent from the stock shortage. 

A creeping increase in net face rents is possible over the next 12 months as a direct result of the current stock shortage. 

On the investment front, total activity has slowed significantly over the past six months. There were eight transactions, totalling $145 million, representing a decline in total volume of almost 50% from the previous six-month period. 

Institutions are now becoming more active in the Melbourne industrial market, with GPT’s recent purchase of Citiport Business Park in Port Melbourne from Salta Properties for $61million accounting for the majority of total volume. 

Capital values and yields have also remained stable over the last six months.

Tony Iuliano is national director of industrial for Colliers International in Victoria.