Industrial yields sharpen to 3.5pc

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A FEW years ago when industrial property yields were as high as 9.5%, if you told pundits yields would fall below 4% in 2021, they would have borrowed the line from The Castle and said “Tell em they’re dreaming!”.

Although industrial real estate transactions fell in the September quarter from the June quarter record of $8.3 billion, the $2.2 billion figure was still the fifth-highest on record as yields tightened further.

Cushman & Wakefield’s latest Marketbeat report showed prime yields continue to gravitate towards the 4% range in many markets. Sydney’s average yield is 4.1%, while Melbourne’s dominant western industrial market firmed to 4%.

Yields across Sydney sharpened to 3.50% and 4.50% across all segments and locations, except for the south precinct at between 4.05% and 5.0%.

In contrast, yields were as high as 9.5% five years ago.

Industrial sales (> $2m) for the 12 months to December 2015

        2015 5 year ave. Yields %
Adelaide $270m sales > $1m $277m 8.25 to 9.5
Brisbane $870m sales > $2m $651m 6.5 to 7.5
Melbourne $1,890m sales > $2m $1,700m 6.25 to 7.5
Perth $460m sales > $1m $623m 7.25 to 8.75
Sydney $1,670m sales > $5m $1,600m 6 to 7

Source: Savills

In Melbourne, all parts of the market saw yields firm during the quarter, with many seeing at least 100 basis points in difference. Larger prime sites in the south east tightened 120 basis points to come in just behind those in the west at between 3.75% and 4.50% on average.

Brisbane yields were mostly tighter. Trade Coast yields led the way, tighter by 19 basis points for assets under 4,000 sqm and by 12 basis points for larger sites, while the M1 Corridor recorded the same changes with the asset size range flipped.

New South Wales transaction volumes totalled $629 million in the September quarter. While this was a long way from the record $2.2 billion of the Q2 – helped by the Logos-led consortium’s $1.67 billion purchase of the Moorebank Logistics Park – it was not too far from the Q3 high of $773 million seen only last year. The $140 million purchase of Toplace’s 7.6-hectare Clyde Industrial Portfolio in Parramatta by Goodman anchored the quarter.

Prime net face rents across Sydney edged higher over the past six months. They averaged $127 per sqm each year in the north west, $131 per sqm in the south west, $134 per sqm in the outer west, $148 per sqm in the central west and $216 per sqm in the south, each seeing approximately 1% to 2% increases.

Incentives were largely unchanged at about 10% for smaller properties over the past six months, and lifted 250 basis points months to average 12.5%.

Melbourne’s industrial rolling annual sales volume hit $6.7 billion in the year to September. That included a record $4.1 billion was traded in the June quarter alone with foreign and domestic institutions such as GIC, together with ESR as part of the record-breaking $3.8 billion Milestone Logistics Portfolio deal, GPT, Aliro, Centuria, APN, and Charter Hall particularly active.

“Domestic and foreign institutions maintain a strong appetite for buying Melbourne industrial property either independently or in a joint venture situation,” Cushman & Wakefield head of research John Sears said, adding that sale and leaseback also remains popular on commercial terms as witnessed by Charter Hall’s deals with GlaxoSmith Kline, as well as Patties Foods.

Major portfolio transactions have been a feature nationally throughout the year and into the current quarter. GPT has just spent $682 million acquiring the Ascot Capital logistics portfolio, comprising 23 warehouses weighted to the eastern seaboard. The Australian has reported that Blackstone is in negotiations to take a 49% stake in the $3.5 billion Dexus Australian Logistics Trust.

Tony Crabb, national director of research at Cushman & Wakefield, told Australian Property Journal‘s Talking Property podcast that underlying demand for industrial real estate will continue to increase, underpinned by e-commerce, food storage, manufacturing, last mile logistics, and now data centres.

Sears said investment yields continue to tighten and may fall even further with the prospects for rental growth increasing investor appetite. Germany’s Institutional Investment Group splashed out $81.6 million for the inner Melbourne headquarters of Rathbone Wine Group on a low 3.6% yield.

Melbourne vacancies in the form of existing and speculatively built product is at historic lows of below 2%.

Speculatively built product has largely been leased over the past six months and vacancy remains tight in most markets, particularly the south east. Year on year face rental growth has risen in most precincts and most size ranges, and incentives have fallen in some markets.

“A shortage of existing and speculatively built stock is putting substantial and unprecedented upward pressure on land prices and should translate into substantially stronger face and effective rental growth in coming years,” Sears said.

Industrial investment in Queensland is also setting records. The June quarter was the fourth highest on record, at $363 million, and Q3 the second highest with $490 million. On a rolling annual basis Queensland industrial investment has never been higher, with $1.6 billion transacted over the past 12 months, topping the previous record of $1.3 billion recorded in Q2 of this year.

Brisbane saw its strong uplift in leasing activity and leasing enquiry continue through the year and combined with the strong transaction market, net face rents have started to climb, with all precincts recording an increase. Rents averaged $118 per sqm in the north, $139 per sqm in the Trade Coast, $118 per sqm in the south, $118 per sqm in the west and $100 per sqm in the M1 Corridor. Incentives increased significantly in the south and west but were stable elsewhere.

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