Miss the bus but there's another one

IT IS too late to buy industrial land in Brisbane and Melbourne in this cycle, but BIS Shrapnel said in the next 18 months there will be opportunity to buy properties at a substantial discount.

BIS Shrapnel’s reports Melbourne Industrial Property Prospect, 2008 to 2018 and Brisbane Industrial Property Prospects 2008 to 2018, found weak occupier demand, current rents and yields, an oversupply of land, development being unfeasible with current finance and construction costs, and strong competition among developers for tenant pre-commitment, are combining to conspire against the industrial property markets in Melbourne and Brisbane.

Report authors, senior project manager Christian Schilling and project manager Lee Walker said unless those with property for sale are forced to do so, and accept whatever is on offer, the sales markets in both cities will not clear.

“Many vendors in both markets are under severe pressure from lenders and investors to reduce gearing, so will have to sell at some stage.

“Forced asset sales will result in some bargains’ appearing in both markets. For those who can, or are willing to, buy, the next 12 to 18 months are likely to provide a chance to acquire property at well below replacement costs and at a substantial discount to current prices.

“On such bargains’, prospective investment returns will look much more attractive than are available at current prices,” Schilling said.

“Right now, a lot of property is for sale, but no one is buying. Owner and vendor expectations are still far apart and Australian Real Estate Investment Trusts have effectively left the market. At current prices, prospective investment returns do not meet institutional hurdle rates,” he continued.

The report found the availability of credit has contracted sharply, and where credit is available, the cost of that credit has markedly increased and this has had negative implications for development of new industrial property, as well as occupier and investor demand. As a result, the construction boom that has been under way since 2003 is coming to an end.

Walker said the strong business stock accumulation that underpinned an increase in warehousing projects in both Melbourne and Brisbane has come to an end.

“This accumulation was driven by strong population growth, the rise in the Australian dollar and buoyant economies in both states.

“These factors boosted retailer, wholesaler, importer and logistics operator profitability, however weakening consumer spending and slowing economic growth have now supplanted these factors and with higher interest rates and uncertainty about the global environment many industrial occupants, both owner-occupiers and tenants, are delaying new investment decisions,” Schilling said.

BIS Shrapnel predicts construction activity In Melbourne will fall by 40% by June 2010, and yields for prime industrial space to soften by another 90 basis points before June 2009. This will represent a total rise of 160 basis points over the peak in prices seen in December 2007.

Walker said secondary property will be even more severely affected, with a potential yield blow-out of up to 250 basis points over the December 2007 peak in prices.

“Softening yields will be accompanied by corresponding falls in prices, with a modest recovery expected from 2010. However, we do not think that yields and values will return to their pre-financial crisis levels in the foreseeable future.

“There will be little upside for market players in the short term and there is no way of knowing exactly how much longer the crisis will last, nor how much worse it will get. We are only just seeing the beginnings of its impact on the real economy,” Walker said.

In Brisbane, BIS Shrapnel forecasts activity to fall by 50% by the end of 2009 from its late 2007 peak, and yields in industrial space to soften by another 100 basis points before June 2009, representing a total rise of 160 basis points over the peak in prices seen in December 2007.

Secondary property in Brisbane will also be quite badly affected, with a potential yield blow-out of up to 300 basis points over the December 2007 peak in prices.

“What looks certain is that there will be more pain in the short term for owners, investors and developers,” Schilling concluded. “Demand for space and rental growth will weaken and the investment market will stay quiet.”

Australian Property Journal