Industrial rents & land values slowdown

WEAKER tenant demand is leading rental growth and land values to slowdown across major industrial precincts.

According to Jones Lang LaSalle’s June quarter statistics, there are evidences of falling land values in some precincts.

In the Brisbane suburb of Yatala, the average serviced 2,000 sqm allotment has fallen $30 per sqm to $330 per sqm this quarter and the average one hectare lot fell $10 per sqm to $275 per sqm during the same period. Falls in one hectare lots were also recorded in the Brisbane suburbs of Eagle Farm and Lytton.

In Sydney’s suburb of Seven Hills, land values have decreased for 2,000 sqm and one hectare lots, and for one hectare lots in Arndell Park.

JLL said land values have generally remained flat in Newcastle, Melbourne and Perth.

Generally, there has been very little rental growth around the country during the second quarter.

The standouts in terms of rental growth momentum are the rapidly expanding Perth South with 3.5% during the quarter, Melbourne’s South East which has benefited from strong demand activity as a result of the completion of the EastLink Motorway and as such recorded 1.2% rental growth this quarter.

And the fire in the bellows of Adelaide’s industrial market is just starting to stoke up with 7.5% rental growth in the West and Inner West on the back of increased economic activity and growth in the Defence and Engineering sectors.

JLL’s national industrial analyst Nick Crothers said there were two scenarios that could play out as a result of this environment.

“Firstly, rents could go up because of a rising cost environment that is making new development prohibitive. Secondly, land values begin to fall as development becomes less viable at current levels.

“We think the second scenario is most likely and there is already some evidence to support this. We see it as a reset button being pushed on the industrial property cycle. The market needs to be reset to allow a new wave of growth to happen in the future,” he added.

Based on the June quarter figures, a total of 670,800 sqm of new projects were completed during the quarter of which 71% or 474,100 sqm was absorbed by pre-committing occupiers. The majority new supply was completed in Sydney (174,000 sqm), Melbourne (160,600 sqm) and Perth (138,800 sqm). A significant amount of speculative development space was completed in Melbourne this quarter, with only 32% or 50,600 sqm of new stock this quarter pre-committed.

The latest figures support survey findings from JLL’s recent survey industrial occupiers and operators which found that higher oil prices are having a negative effect on transport companies’ profit margin and their willingness to expand or lease new space.

JLL’s regional director of industrial services Jeff Pond said the total figure of 1.7 million sqm of projects currently under construction in Australia and due for completion by the end of 2008 was concerning.

The majority of new supply currently under construction is located in Sydney (569,200 sqm). In Melbourne there remains 417,900 sqm under construction. In Brisbane, another 337,100 sqm is currently being developed, which will see a record amount of new supply this year developed in Brisbane. And in Perth the supply pipeline is ramping up, with 232,100 sqm currently under construction for 2008 completion.

“At present, pre-commitment for this stock is at 56%. However, as the hurdle rates for new developments are higher this year due to financing costs, we are already seeing many projects being delayed or put on hold indefinitely,”

Pond said many businesses were choosing to stay put and negotiate with their existing landlord for short-term lease rollovers.

He added that speculative developments are becoming scarce.

“Given the weaker demand environment, most landlords are happy to negotiate early to secure a tenant in this uncertain climate. As such, the pre-lease market has gone quiet.

“There are many options for prospective tenants to choose from as the industrial land supply pipeline remains quite big. We expect some downward pressure on pre-lease rents as developers compete to secure tenants from a thinner pool. We also expect land values to stall or fall a little as the development equation is harder to stack up with rising construction costs and easing yields,” he continued.

“As a result, our supply forecasts for 2009 and beyond have been revised lower and this should give the market some time to absorb any existing vacancy and supply overhang from projects being completed this year,” Pond concluded.

Australian Property Journal