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The rise of the robots 5

Our perspective – Industrial 12

Industrial market overview

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3Industrial | Research & Forecast Report | Second Half 2015

Coles Chilled Distribution Centre, 3 Roberts Road, Eastern Creek NSWSold on behalf of Goodman

4 A Colliers International publication


The rise of the robots? The growing sophistication of our warehouses

By Nerida Conisbee National Director | Research [email protected] Changing occupier requirements are the main driver behind the growing sophistication of industrial property. Warehousing has historically been one of the more passive property types however growth in eCommerce and the globalisation of logistics have driven innovative changes to internal fit out requirements. This is leading to greater complexities for occupiers and developers.

Distribution centres are now far more dynamic – goods are moving faster, higher clearances are required and there is greater demand for natural light and better performing slabs. Occupiers are changing with third party logistics (3PL) experiencing enormous growth and supermarket groups becoming more sophisticated in how they move goods through their distribution channels. Ecommerce providers frequently require specialist internal design and fit out of their warehouses.

While change is occurring, there is still a wide variation in how occupiers are utilising their space. From highly automated picking systems requiring very little human interaction to boxes on the floor with paper based systems tracking stock levels, the evolution depends on the rate of change in the industry in which the occupier operates.

Change 1: eCommerceGrowth in eCommerceMore retail trade is moving to eCommerce, although it still remains relatively small compared to traditional bricks and mortar retailing. Although in recent months the weakening of the Australian dollar and the implementation of Goods and Services Tax (GST) on goods bought online from overseas has led to a slowing of eCommerce, it is forecast that for some product types, there will continue to be erosion of spending in traditional bricks and mortar retailing.

The biggest challenge for eCommerce in Australia is the cost of getting goods from the warehouse to consumers. The vast distances that need to be covered and the insatiable demand from consumers to get goods quickly can make delivering goods particularly expensive. For many operators, rent on a warehouse is a secondary consideration compared to the cost of logistics.

For traditional retailers with an eCommerce presence, the majority of purchases are still filled out of store. There are generally no specialist online warehouses or special systems developed within existing warehouses to fulfil orders. An exception to this is for particularly large items (e.g. fridges) that are delivered directly from a warehouse to customer rather than from a store when an online order is made.

This is starting to change for larger retailers. Major supermarket chains previously filled online orders from a store hub but are now starting to use “dark supermarkets”; basically a supermarket in a warehouse, inaccessible to consumers, where staff fulfil online orders. The perishable nature of grocery items means that it is likely that these dark supermarkets will need to be located in each capital city, as opposed to just one location.

For pure eCommerce groups, the way that they warehouse their goods and handle delivery depends on the type of product they sell, the size of the business and where they source their goods. For most groups, a 3PL service is utilised. The extent to which they use 3PL differs with some using them for delivery only, with others using them for the full end to end service. At its most complete level, 3PL can be used for an


eCommerce provider to provide a service from when a consumer presses “buy” on an online site to delivery or even return if the item.

For large groups selling non-perishable goods that can be delivered in a small parcel, having only one warehouse in Australia makes the most sense. The cost of delivering goods in Australia is generally not dependent on distance and the nature of eCommerce means that it is difficult to predict where the next order will come from. Most products are produced offshore and hence close proximity to a major port is also generally a requirement for occupiers.

CASE STUDY: eCommerce

Catch of the Day

Catch of the Day is part of the Catch Group, Australia’s largest eCommerce group. Originally started in 2006 as an Australian “flash” sale site , Catch of the Day sold goods at low prices in a daily deals format. Over the years the business has grown and sales strategies have changed and the business now fulfils approximately 10,000 orders per day with up to 18,000 per day during peak times.

Catch Group manage their own warehouse but use Australia Post for the end delivery to customers. Their main reason for using Australia Post is that they offer the most comprehensive “last mile” delivery solution to customers.

Catch of the Day operate from a 26,000sqm warehouse in Truganina in Melbourne’s west having previously utilised a mix of in-house and outsourced, 3PL services. The business however considers fulfilment is a key differentiator in the provision of service and are now at a size and stage in their growth cycle in which it makes more sense to operate their own warehouse. The group experienced strong growth in their early days and went through four warehouses in five years and have spent more than $15 million automating their warehouse operations in the last 12 months. The operation now utilises manual narrow aisle forklifts, extensive pallet storage and a highly advanced automated picking system. This investment has allowed Catch to improve the storage capacity and facilitate greater movement of goods through their warehouse.

With the improvements in efficiency in the operation the business considers it unlikely that they will need more space in the near future however growth in this market is not easily predictable. Catch have also considered geographic diversification and the operation of satellite sites in each state however given the current sourcing and selling strategies it does not make sense to split shipments to different ports as it is never certain as to where they will be sending individual orders.

The growth of parcelsThe growth in online retailing has led to an increase in parcel delivery services. Australia Post, in particular, is one group that has continued to change its business model to account for fewer letters and more parcels. Parcel delivery has emerged as a high volume business and companies operating these services are one of the major beneficiaries of eCommerce.

For eCommerce, the main focus of parcel delivery is the “last mile”. Australia Post have benefitted from having a large post office network – most Australians are located relatively close to a post office and if a parcel cannot be delivered in person, they can be collected from the closest Australia Post depot. Australia Post has also developed a network of parcel lockers where parcels can be left and picked up by the recipient. Toll now uses local newsagencies to provide a last mile service.

CASE STUDY: Delivery Instacart – the disruptor to traditional parcel delivery?

Instacart is considered to be a major disruptor in the way that online orders are delivered. The company uses a web based platform mostly via a smartphone app to match a personal shopper with a purchaser. The personal shoppers, who are mostly independent contractors, collect from where the eCommerce provider stores goods (retail store or warehouse) and deliver these to the purchaser, with same day delivery service. Payment is handled by Instacart.

In the start-up phase of the business Instacart charged both a delivery fee and a mark-up on the items purchased of between 10-20 per cent. As the company has grown this model has changed

5 Inglis Road, Ingleburn NSW Leased on behalf of Altis Property Partners



at distribution centres now in excess of 75,000sqm. This trend to larger facilities, able to handle greater quantities, is expected to continue to be a trend in global warehousing. In Asia, most cutting edge facilities are now at least 150,000sqm with the Interlink in Hong Kong comprising 213,000sqm and Logistic Republic – Taipei Park in Taipei expected to comprise 264,000sqm on completion.

CASE STUDY: LogisticsAustralia Post – Australia’s changing national postal service

Australia Post is a government owned entity, initially established to provide postal services, both within Australia and overseas. With the rise of email and the move towards digital billing, the postage business has seen significant decline in mail volumes over the last decade. This has resulted in the letter business posting a $328.4 million loss over the 2013-2014 period. With the decline in the letter business set to continue Australia Post has needed to both diversify and restructure to continue to operate.

Australia Post, as with many businesses, has experienced significant market disruption due to technological advances. This has resulted in the need for the business to evolve and innovate. A key challenge has been the restructure of the letter business to stem the growing losses. The true cost of daily delivery and low cost of postage have all needed to be addressed as part of this review. Australia Post does however have some key advantages which are the strength of the retail network and the reach of their delivery network. This is unrivalled in Australia and allows for a significant competitive advantage. A key part of Australia Post’s strategy to diversify is to leverage both of these assets to provide continued communication services across Australia.

Australia Post has an unrivalled retail network of over 4,000 stores with more than half of these stores located in rural areas.

with Instacart now charging a delivery fee, with a cut of the total order being paid for by retailers. Retailers have seen an opportunity to partner with Instacart as an opportunity to grow sales.

Delivery fees for orders above US$35 can be as low as US$3.99, dependant on the delivery time specified. The advantage of Instacart is that it collates orders across retailers and can therefore reduce its costs accordingly.

As with Uber which has surge pricing, Instacart has ‘busy’ pricing. This is when there is a higher price charged for busy periods to encourage more personal shoppers to work during these periods. This is applied for shoppers that have a short delivery window in busy periods. Shoppers which are regular users can opt for a yearly subscription with an annual fee of US$99 which offers free two hour delivery and waves any ‘busy’ pricing fees.

This company has grown dramatically over the last 12 months, although they are yet to start up in Australia. The number of employees has grown from 50 employees a year ago to over 200 in the middle of 2015 with expectations that this will grow to over 500 by the end of 2015. The current valuation on the company in May 2015 was US$2 billion.

Change 2: Globalisation of logisticsLogistics has gone global and is becoming more complex and sophisticated in how it operates. There have been some major changes to ownership in the logistics industry. Toll Group has now become part of Japan Post, Australia Post is now the sole shareholder in Startrack and has been rapidly reinventing itself as a logistics service provider, while global giant Brookfield has made a takeover bid for Australian freight logistics company Asciano.

These changes to ownership structure, as well as increased usage of 3PL services in Australia has meant enormous growth in the amount of industrial floor space these groups occupy, as well as significant investment in more sophisticated and automated warehousing facilities. The forecast growth these groups expect is also aggressive. Many of them are now looking to partner with developers of industrial facilities, particularly those with significant land holdings, to ensure that they are able to access a pipeline of development.

A new term for very large warehouses has also emerged. Campus Style Distribution Centres are now a requirement for major groups such as DHL and CEVA, both of which are looking

1 Kellet Close, Erskine Park NSW (part of the GIC-Frasers Industrial Portfolio)Sold on behalf of GIC and Frasers Property Australia


This network of stores in rural areas is of critical importance to these communities and they have taken the opportunity to broaden the services that these post offices offer. Also as part of this they are building the capability of the ‘postie’ being able to deliver more than letters, which allow the business to leverage the current delivery network to higher margin products such as parcel delivery.

Other parts of the diversification strategy include;

• The development of a digital mailbox

• Growing the direct marketing business by providing targeted strategies using email, physical mail SMS and the digital mail box

• Development of Decipha which allows businesses to manage their inbound communications

• Extending services in the retail network, recent examples include passport & tax file applications, travel services (travel SIMs, insurance, foreign exchange and merchandise), and bill payment.

The logistics part of Australia post business has become increasingly important to the profitability of the business. In 2003, Australia Post and Qantas embarked on a joint venture to acquire StarTrack. During 2012 Australia post bought out the 50 per cent share of Qantas, and in exchange they divested their 50 per cent interest in Australian Air Express to Qantas. StarTrack has undergone a rebranding during 2014 and expanded the operations to include Messenger post couriers as part of the StarTrack brand.

Change 3: DesignWho are the leaders in warehousing design? Historically warehouses have been relatively simple buildings and there was very little focus put on the internal fit out. This has changed and the most sophisticated warehouses now have slabs that can handle greater loads, larger cubic capacity and high bays. To enable the best use of this space, greater use of robotics and high-tech picking systems are being implemented.

There is however still significant divergence from these highly advanced warehouses with more simplistic designs still commonly in use. At a broad level, it is primarily the large 3PL groups, as well as large supermarkets and fast moving consumer goods (FMCG) groups that are the most advanced. The scale required by these groups, as well as the speed required to move goods, makes significant investment in fit out worthwhile. They are looking to create improved efficiencies in better designed buildings.

Another driver of greater cubic capacity, as well as high bays, is the location of the warehouse. In a market such as Melbourne where land availability remains abundant, it is unlikely there will be as much demand. This contrasts to Sydney where land costs are significantly higher.

There is a greater focus on the indoor working environment of warehouses. This is to allow better working conditions for staff, but also better conditions for storing goods. Better ventilation, constant temperature and high security are a greater focus. The ability to operate the warehouse 24 hours a day is also frequently a greater consideration.

Sustainability continues to play a role and more facilities are moving to a 6 Star Green Star rating. The focus is however less on committing to minimum targets but looking to achieve demonstrable cost efficiencies. Developers are looking to add value to occupiers and this can include offering such inclusions as power off facilities, advanced monitoring and geothermal generation.

High tech retrieval systems start to make a mark There are still only a few occupiers that are using high tech retrieval systems. The capital costs are so high and hence this restricts investment for many occupiers. Spending on research and development of these systems is however continuing to increase and costs are expected to come down significantly over the next decade, to the extent that there will continue to be less people required to operate a warehouse.

There is a range of how sophisticated occupiers are being in the use if retrieval systems. At the most advanced level, automated robotics have the ability to completely do away with forklifts however these are too expensive for most occupiers. Mobile automation appears to be having quicker take up. An example of

66 Glendenning Road, Glendenning NSWSold on behalf of DEXUS Property Group



this is mini forklifts that are able to operate on any surface. These forklifts are highly mobile, allow for higher stacking and provide the ability to pick one item, instead of taking a whole pallet.

CASE STUDY: High tech retrievalSymbion Contract Logistics – utilising advanced retrieval systems Symbion is a major healthcare provider in Australia which provides logistics service to the healthcare sector, including a retail network of over 3,500 pharmacies and hospitals. There are three arms to the business which include Pharmacy Services, Hospital Services and Contract Logistics. The business was established in Adelaide in 1945, trading under the name Fauldings and has now grown to a healthcare provider with an annual turnover of over $6.1 billion across Australasia. In 2013, the New Zealand group EBOS acquired Symbion to create one of the largest Australasian healthcare providers. Symbion have a network of 12 major distribution centres across Australia. The business deals with over 550 manufacturers of both pharmaceutical and over the counter pharmacy products and carry over 15,000 product lines through their distribution network.

In November 2014, Symbion opened a state of the art 12,000sqm facility in Keysbourgh in Victoria. This logistics facility utilises advanced picking technology which services over 750 retail customers and 150 hospitals daily. The technology which is being used in this facility is able to automate the picking of pharmaceuticals at over 10,000 units per hour. Mini load cranes are also utilised to automatically replenish stock in the picking areas from high density storage areas which are up to eleven metres high. The picking technology is able to pick and collate pharmaceutical orders by customer directly to the operator. The use of this technology allows for less ‘picking’ errors and faster processing of customer orders.

The technology used to retrieve stock has been combined with a SHOP portal, allowing much better communication between Symbion and the customer. The SHOP portal is a service for both the pharmacy network and hospitals. It is an innovative way for the customer to track orders, determine stock levels, places orders and much more. Key innovations with this software include:

• Ability for the customer to place and track their order online

• The user can look at live stock levels and if out of stock select an alternative

• Manage all invoices and credit notes

• Retailers can also use this system to update all of their retail pricing

• Provision of Immediate Advanced Shipping Notices, which shows what the customer will be receiving.

The combination of online ordering with the logistics technology allows Symbion to provide faster, more accurate service to their customer network.

The risk of obsolescence With changes to the way warehouses are built, there continues to be risks of obsolescence. As a result the vacancy rate between secondary and prime grade stock has increased. In some areas, such as South Sydney, change of use to residential is allowing for take up of secondary space however for most industrial areas, there is limited demand for change of use. In addition, contamination can also be a problem.

Tenants also want greater flexibility in lease terms and this also contributes to a potential greater churn in tenants. Smaller operators want to be able to move easily, particularly if they are looking to expand rapidly. This may mean that they want lease terms to be shorter, or have the ability to take on over flow space at short notice.

16-28 Somerton Drive, Somerton VICSold on behalf of McPhee Developments (part of the McPhee Portfolio)


Adapting to changeDevelopers need to continue to evolve according to occupier requirements. In recent years we have seen greater demand for high bay logistics, increased use of robotics and automation, and a focus on cubic capacity.

Automation has the potential to change warehouses significantly. Historically we have relied on forklifts but robotics is now able to automate a lot of these processes. These changes are likely to lead to fewer people needed to work in warehousing. In the same way that labour costs in Australia led to offshoring of manufacturing, labour costs are leading to greater automation of many processes within warehouses.

ObsolescenceCharter Hall’s model is to buy, build and hold and as such, we are placing a greater focus on obsolescence. With the changes occurring to warehousing and the more complicated requirements set out by occupiers, this is becoming a greater risk factor. Tenants increasingly want more flexibility in lease terms which has the potential to lead to greater movement of tenants.

Globalisation of logisticsThe globalisation of logistics is leading to significant change. A lot of processes are becoming more efficient, the internet is increasingly used to speed up processes and distribution centres are dominating industrial property demand. A significant amount of money is being spent on research and development in increasing speed to market throughout the supply chain process.

eCommerce There is an insatiable demand to get products bought online immediately and in Australia, the travel distances make the cost of delivering quickly expensive. Those groups that invest in automation can reduce the cost of delivery and will leave behind those groups that don’t invest in the delivery process. So far however we are not seeing much purpose built development for eCommerce providers. It is still a small component of demand.

eCommerce Online shopping levels are still low in Australia relative to global rates. Right now, around seven per cent of total retail sales are from purchases made online. The rate of growth has also slowed and we have been sitting at this rate for the past two years. In comparison, online shopping rates in the UK are more than double this. We do expect eCommerce to continue to grow however it is unlikely we will get significant increases in penetration rates until more Australian consumers are doing weekly shopping online.

A significant amount of shopping online by Australian consumers is from offshore sites and the strength of the Australian dollar is a key determinant of shopping volumes. With the weak Australian dollar, we do not expect a large increase in online shopping volumes this year.

The main beneficiaries of growth in eCommerce have been 3PL providers. With most of the purchases coming from overseas sites, groups like Australia Post, Toll and DHL have seen increased demand.

Most purchases online from Australian eCommerce sites are generally being delivered from existing store networks, or if the store is a pure online retailer, a 3PL group is being used. There are very few purchases made from online Australian stores that are coming from specially designed warehouses.

Globalisation of industrial Australia is a popular destination for offshore capital. Year to date, around 30 per cent of industrial property by volume has been purchased directly by offshore groups with the largest transaction being the sale of the GIC-Frasers Industrial Portfolio to Singapore group, Ascendas, for $1.073 billion. In addition to this, there are many offshore groups that are looking to partner with local groups to tap in their expertise, as well as their land supply pipeline.

Globally, industrial warehouses are becoming more homogenised and this is part of the driver for more groups looking to acquire scale by buying globally. Australian group Goodman is now active in a wide range of markets from North America to Slovakia to Brazil. The most active global investor in industrial over the past 12 months has been GIC having purchased more than 500 properties worth more than $US7 billion in the US, UK and India. We expect that this growth in offshore capital, looking to build portfolios, will continue.

Malcom TysonManaging Director, IndustrialColliers International

David HarrisonJoint Managing Director Charter Hall



We consider there to be four major trends in the industrial property sector. These are automation, scale, collaboration and partnering and sustainability.

AutomationThere are still only a few groups using high tech retrieval systems. For most occupiers, the high capital cost will prevent them from using them. It is likely that mobile automation will have far quicker take up for smaller occupiers. For example, automated mobile materials handling units that can operate on any surface, making them suitable for a variety of warehouse types at a fraction of the cost.

SustainabilityFrasers have adopted a 5 star GBCA rating standard for our new facilities, however we are already starting to focus on the possible benefits of 6 star Green Star in some circumstances.

I see the management and fine tuning of industrial buildings throughout their operation life as the next step – this practice is already starting to emerge in some prime commercial buildings. We see there are two main benefits to a focus on sustainability. The first is how we can add value to our customers through initiatives such as power generation and advanced metering, and the second is an increase in the personal wellbeing of occupants.

ScaleThere is a push for larger facilities to be developed with many of the larger 3PL firms looking at campus type developments and we are noticing an increase in briefs for facilities in excess of 75,000sqm – such as the one we are currently building for Ceva in West Park in Melbourne. Internationally this is not unusual, with warehouses in excess of this size becoming more common in the main Asian markets. Smaller occupiers are looking at greater flexibility in their leases. Many of them want the ability to expand to larger premises as their businesses grow.

Collaboration/partneringThe lack of land supply in some markets, high capital cost of fitting out a new facility and the increasing complexity of delivering these projects is driving an increase in collaboration between occupiers and developer/owners much earlier in the development phase. This type of partnering relationship allows the occupier to secure the space required, build in expansion options more readily and to get an integrated, and in some cases financed, fitout. As the market increases in sophistication we see this approach becoming more important.

Changes to warehousesDistribution centres have historically been a passive property type. The building shell is still simple however the fit out is becoming far more complicated as business models continue to change and evolve. The operation of a centre is now far more dynamic and automated systems are increasingly being used. Modern warehouses now have better performing slabs, better ventilation; they operate 24 hours a day with an environment that requires good air quality and a constant temperature. Trucks need to get in and out of the building more efficiently. The outside design is now determined by the inside fitout.

Although we have seen increased automation, it is unlikely that there will be a significant impact on employment. This is partly because business lines that previously may have been located away from the warehouse, such as procurement and sales, are increasingly being integrated on site.

eCommerceOnline spending is still low in Australia. By far the majority comprises bricks and mortar. The main beneficiaries of growth in online spending have been 3PL firms. It is only when online retailers establish scale that it becomes worthwhile to operate entirely on their own. There are no Australian online retailers that are currently not using a 3PL at some stage of their delivery process. Overseas, Amazon are large enough to operate their own warehousing and distribution in some markets and are using 3PL providers in others.

For this reason the 3PL space is becoming very competitive and the globalisation in many of these companies is creating greater efficiencies.

Andrew WhitesideGeneral ManagerDEXUS Property Group

Reini OtterExecutive General Manager Commercial & Industrial Frasers Property Australia


OFFSHORE INVESTMENT NEW ACCOUNTS FOR 60% OF TOTAL VOLUME

Our perspective INDUSTRIAL AUSTRALIA AND NEW ZEALAND


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SECOND HALF 2015

SYDNEY

32.3% 32.2%

MELBOURNE

36.2%36.7%

ADELAIDE

5.3%5.2%

MELBOURNE TAKES THE LEAD FOR HIGHEST SUPPLY LEVELS

Sydney BrisbaneMelbourne Perth Adelaide

GIC-Frasers Industrial Portfolio $1.073 billion to Ascendas

7.2% 7%

SYDNEY

DEC 2007 SEPT 2015

7.3% 7.5%

MELBOURNE

DEC 2007 SEPT 2015

7.5% 8.1%

BRISBANE

DEC 2007 SEPT 2015

8% 7.3%

ADELAIDE

DEC 2007 SEPT 2015

7.4% 7.4%

PERTH

DEC 2007 SEPT 2015

250,694m²273,829m² 207,962m² 101,592m² 65,355m²

SOLD

Domestic $4.6 billion

$2.1 billion

2014$3.4 billion

$0.1 billion

2013

$1.5 billion

$2.7 billion

2012 $1.8 billion

$2.5 billion

2011 2015

$1 billion

$1.6 billion

Offshore

LARGEST EVER INDUSTRIAL TRANSACTION

MELBOURNE DOMINATES AUSTRALIA’S PORTS (% OF TOTAL TEU’S)

PRIME YIELDS HIT PREVIOUS MARKET PEAK (2007)

PERTH

9.8% 10.5%

BRISBANE

15.7%16%

OFFSHORE INVESTMENT NEW ACCOUNTS FOR 60% OF TOTAL VOLUME

Our perspective INDUSTRIAL AUSTRALIA AND NEW ZEALAND



For more information about Colliers Internationaland working with us visit:www.colliers.com.au

SECOND HALF 2015

SYDNEY

32.3% 32.2%

MELBOURNE

36.2%36.7%

ADELAIDE

5.3%5.2%

MELBOURNE TAKES THE LEAD FOR HIGHEST SUPPLY LEVELS

Sydney BrisbaneMelbourne Perth Adelaide

GIC-Frasers Industrial Portfolio $1.073 billion to Ascendas

7.2% 7%

SYDNEY

DEC 2007 SEPT 2015

7.3% 7.5%

MELBOURNE

DEC 2007 SEPT 2015

7.5% 8.1%

BRISBANE

DEC 2007 SEPT 2015

8% 7.3%

ADELAIDE

DEC 2007 SEPT 2015

7.4% 7.4%

PERTH

DEC 2007 SEPT 2015

250,694m²273,829m² 207,962m² 101,592m² 65,355m²

SOLD

Domestic $4.6 billion

$2.1 billion

2014$3.4 billion

$0.1 billion

2013

$1.5 billion

$2.7 billion

2012 $1.8 billion

$2.5 billion

2011 2015

$1 billion

$1.6 billion

Offshore

LARGEST EVER INDUSTRIAL TRANSACTION

MELBOURNE DOMINATES AUSTRALIA’S PORTS (% OF TOTAL TEU’S)

PRIME YIELDS HIT PREVIOUS MARKET PEAK (2007)

PERTH

9.8% 10.5%

BRISBANE

15.7%16%

The Sydney industrial market is characterised as a sea of capital bounded by a scarcity of stock. A market fuelled by historically low interest rates, investors scramble for safe havens to place capital. Underpinned by strengthening economic conditions, a limited land supply and a constrained pipeline the weight of capital has imposed downward pressure on yields. Given the reduction in global earnings growth, organisations have prioritised multi-asset purchases in efforts to reduce the acquisition costs and gain operating efficiencies. In May, Japan Post successfully completed the $6.5 billion takeover of Toll logistics and, more recently, the aforementioned $1.073 billion GIC-Frasers Industrial Portfolio was sold to Ascendas. In 2015, over $1.33 billion Industrial portfolio sales occurred nationally, comprising of 43 properties. Of these, the Sydney market accounted for $567 million of sales, approximately 44 per cent of national sales by value. This trend is set to continue with Colliers International appointed to sell the Premium Sydney Industrial Portfolio, Growthpoint Portfolio, and Charter Hall Portfolios which include eight assets from the Sydney industrial markets.

March 2015 to September 2015 was a period of exceptional sales conditions, continuing the momentum emerging in late 2014 and surpassing previous sales volumes. There were $1.66 billion of investment and vacant possession sales recorded in Sydney industrial market. Limited only by the availability of stock, sales volumes exceeded the $1.3 billion occurring between October 2014 and March 2015. Offshore buyers have becoming increasingly active, representing over $867 million of acquisitions. The GIC-Frasers Industrial Portfolio purchased by Singapore’s Ascendas included 12 assets from Sydney valued at $482.7 million. In June, a new benchmark was set for Australian industrial property values by the Singapore based Mapletree Logistics Trust acquisition of Coles Distribution Centre. This deal, the largest of the year, at Eastern Creek was a 55,000sqm cold storage facility with a 19.5 year weighted average lease expiry (WALE) to Coles. It transacted for $253 million at a passing yield of 5.6 per cent. This offshore demand is expected to persist in line with the decline of the Australian dollar and the comparatively higher return yielded by Australian industrial assets.

The limitation of stock compounded by the low cost of capital has resulted in the downward movement in yields. Yields are approaching levels similar to those before the letters GFC were first placed next to each other, however, economic conditions between these two periods are vastly disparate. There is positive spread between the all in cost of debt and income yield on property. Unlike conditions between 2006-2011, where the spread was negative, current property incomes can counterbalance a rise in interest rates or any deterioration in leasing conditions. Furthermore, strengthening economic conditions in NSW are expected to provide a platform for net effective growth. Vanilla assets offering size, location, strong covenant and long WALE remain in high demand. Prime yield have compressed 20 basis points since March 2015, ending at 7.08 per cent. Moreover the scarcity of stock has now pushed investors up the risk curve. Investors have shown a tolerance for vacancies, shorter WALEs and properties requiring capital expenditure. From March 2015 to September 2015, the average yield for secondary industrial properties in Sydney market compressed 31 basis points to finish at 8.25 per cent.

SYDNEY MARKET Assets sail on tailwinds of growth

Second Half 2015


127 Orchard Road, Chester Hill Sold on behalf of McPhee Developments (part of the McPhee Portfolio)



SYDNEY INDUSTRIAL YIELDS

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Sep-

05

Feb-

06

Jul-0

6

Dec

-06

May

-07

Oct

-07

Mar

-08

Aug

-08

Jan-

09

Jun-

09

Nov

-09

Apr

-10

Sep-

10

Feb-

11

Jul-1

1

Dec

-11

May

-12

Oct

-12

Mar

-13

Aug

-13

Jan-

14

Jun-

14

Nov

-14

Apr

-15

Sep-

15

Yiie

lds

(%)

Prime Secondary

Source: Colliers Edge

Leasing conditions have been comparatively subdued, facing headwinds caused by an economy emerging from a sub-trend period. Additionally, substantial rental growth in Sydney has been constrained by competitive offers in other markets like Melbourne, particularly with big box logistics. Notwithstanding this, limitations in space and a positive business outlook is beginning to drive rental growth and a reduction in incentives.

The intensity of demand for Sydney based industrial and logistics assets stems from an underlying confidence in the state economy. The New South Wales (NSW) economy continues to pace ahead of the other state and territories. The outperforming growth rate was driven by a surge in population growth, retail trade and new home construction. The most recent data released by the Australian Bureau of Statistics (ABS) indicated the NSW economy grew by 3.2 per cent in the last financial year, exceeding the national average of 0.9 per cent. Benefiting from this, the NSW retail growth in the year to July was five per cent, above the average growth of 3.4 per cent posted by the other states. The confidence in the economy was also translated in the labour market as the unemployment rate in NSW declined steadily this year, from 6.7 per cent January to 5.9 per cent in August. These trends are poised to continue as the NSW agricultural, good and services sectors become more competitive, domestically and regionally, in line with a fairer value dollar. Furthermore, the 2014-15 NSW budget delivered a record $2.1 billion surplus. The budget, moreover, forecasted a surplus of $2.5 billion for the 2015-16 financial year. The budget includes $68.6 billion of spending on infrastructure over four years. This unprecedented surge in

spending includes the WestConnex, NorthConnex, Badgerys Creek airport, Moorebank Intermodal and the North West Rail. These projects will directly support jobs and expansion in associated businesses and drive future industrial demand.

Sydney WestYields dig deeperThe Sydney West investment market continues to perform at record levels. The three tier market prevails, comprised of institutional grade stock with long WALEs, private investors and owner-occupiers. Properties with long-lease are king, with institutional investors paying premium for properties with long term wales and good quality tenants. Notwithstanding this, investors have moved up risk curve with sales limited by the availability of stock. Investors are now demonstrating a willingness to purchase properties on shorter leases provided they are readily lettable. However, the limitations in stock are beginning to emerge, where presently, no properties for sale or vacant possession between 8,000-12,000sqm are available. The lower yields achieved are a symptom of limitations in stock. This shortage was also evident in land sales, where interest remains unmet by supply. As an indication to the speed of the market, lower yields and shorter sales periods are being realised on comparable assets. In August, a property at 12 Birmingham Road in Villawood sold to a tenant relocating from the Sydney South market at a yield of 6.45 per cent after only 15 days on the market. This limitation in stock is expected to encourage further tightening in the yields and increases in capital value. Yields on Secondary assets, in particular, will compress further as smaller syndicators and high net worth move up the risk curve.

SYDNEY PRIME GRADE INDUSTRIAL MARKET

MARKET AVERAGE NET FACE RENTS ($/m² pa)

AVERAGE YIELD

AVERAGE LAND VALUES ($/m²)

H2 2015

H1 2016

H2 2015

H1 2016

H2 2015

H1 2016

Sydney west $123 6.9% $363 /

Sydney south $168 / 6.4% $1,650

Sydney south west $115 7.1% $290 /

Sydney north $175 / 7% $950

COLLIERS INTERNATIONAL RESEARCH FORECASTS


1A and 1B Raffles Glade, Eastern Creek (part of the GIC-Frasers Industrial Portfolio)Sold on behalf of GIC and Frasers Property Australia


The Sydney West submarket has been the recipient from owner

occupiers capitalising on the strong sales conditions to sell and

relocate from the South Sydney market. Since August, Colliers

International facilitated three such sales to operators relocating

from the South Sydney market. Speculative purchases continue to

occur in the inner west submarket. Properties in proximity to train

stations, bounding the Parramatta River, or in areas with potential

rezoning are in high demand. Like the outer west and inner west

submarkets, the north west submarket market is stock constrained,

with only four properties currently on the market. However,

industrial assets in this sub-market remain strategically paramount

to logistics networks servicing the north west priority growth areas.

Land values in this market are appreciating as developers seek to

capitalise on this undersupply.

Following the aggressive interest shown of GIC-Frasers Industrial

Portfolio, which sold at a yield of 6.1 per cent and capital value of

$1,700/sqm, attention now turns to Sydney West’s $350+ million

assets encompassed by the JP Morgan, Growth Point and the

Charter Hall portfolios. These portfolios will offer eight logistics

assets from NSW with circa 212,541sqm of building area.

A calm weathered storm The leasing market has remained subdued with significant uplifts

in rental growth constrained by concerns over a softer domestic

economic economy. Furthermore, competitive offerings from big

box logistics in the Melbourne submarkets restrict any significant

increases in rent. Notwithstanding this, displaced tenants from the

Sydney South and North Sydney market are active in the Sydney

West leasing market.

Prime properties offering clearance and size remain in high

demand. Over the last six months, in excess of 50,000sqm of space

was leased as a result of the recent hailstorms experienced in April.

This comprised of three properties located in Wetherill Park; 3 Davis

Road, 495 Victoria Street and 141 Newton Road.

A two tier leasing market has eventuated in the north west

submarket. Properties offering floorpspace above 5,000sqm are

readily available, with modest signs of rental growth. However,

properties under 2,500sqm are in a state of undersupply, and with

no current proposals in the pipeline. Existing properties in this size

range are experiencing rental growth and a reduction in incentives.

A steady supply of speculative prime floorspace is forecast to come

online over the next 12 months. This includes the developments by

Dexus offering 20,489sqm at Litton Close in Greystanes, Calibre

by Mirvac with approximately 19,000sqm at Eastern Creek, and

14,000sqm by Australand in Wetherill Park, of which 6,000 is

pre-committed.

Given the superior nature of the new generation developments

coming online, leasing conditions, particularly for secondary assets,

will be competitive as landlords seek to secure long WALEs.

Consequently, rental growth in and incentives are expected to

remain steady over the coming year.

Sydney SouthAn ever intensifying marketFaced with an increasing shortage of sites and high residential demand, the South Sydney market continued to experience increase in land values. As a symptom of this increased demand, at September 2015, the average prime industrial yields in the area compressed to their lowest point since June 2008, ending at 6.38 per cent. Due to the strength in sales conditions, transactions have moved off-market as buyers make unsolicited offers to secure a deal. Currently, there are no investment sales or vacant possession property above 1,500sqm on the market. Land values have been moving rapidly upwards since March 2013, growing by +81 per cent or +$650/sqm, from $850/sqm to an all-time high of $1,550/sqm in September 2015. On the lowest end, land values in Botany appreciated to a range between $600-$1,500/sqm whilst, on the upper end, land values in Alexandria have increased to $1,800-$2,500/sqm.

Traditionally, owner occupiers have dominated the local industrial market but with a reducing pool of available stock and the push from residential developers to acquire industrial properties with future residential development potential, many smaller occupiers are being forced to fight aggressively for vacant possession stock or move out of the area.

This reducing pool of stock coupled with continued steady demand has driven the demand for well-designed strata units. These developments have received strong demand from owner occupiers with buyers concentrating their interests into products that fully suit their needs. Such features include low office content, suitable access and circulation and on grade parking. This demand was evidenced by the performance of the McCauley business park. From the 30 units offered, 26 have been sold with construction yet to commence.

4A-4F Huntley Street, Alexandria Sold on behalf of Bricktop



• 17 per cent of existing industrial lot area or two million sqm of land will be lost. This comprises 1.74 million sqm or 14 per cent of the market lost to residential and 0.3 million sqm or three per cent of the market lost to WestConnex.

Furthermore, City of Sydney Council has progressed with Local Environmental Plan amendments in Alexandria and Rosebery at which significant volumes of general and light industrial land was rezoned to B6 Enterprise Corridor and B7 Business Park. Consequently, IN1 zoned land is now limited to two streets in Alexandrea.

The industrial market is expected to experience rental growth over the next year given tight supply, lack of development activity and the continual squeeze presented from residential redevelopment. Prime grade assets will continue to be highly sought after with tenant covenant and strong WALE being key value drivers. Incentives are expected to remain stable for prime quality and secondary grade space but these may well reduce as tenant demand increases as it becomes a ‘lessor’s market’. Additionally, prime grade yields are expected to remain firm in 2015 as the lack of prime grade properties for sale remains low, while the appetite of institutional and overseas investors remains healthy. Secondary grade yields will possibly tighten as investors look for value add opportunities.

Sydney South WestThe enticing alternativeThe Sydney South West market experienced significant growth in industrial activity following the recently completed upgrades to the M5 and Hume Highway. The M5 widening provided improved connections to the South-West with a direct link to the Sydney Port, Sydney Airport and the Sydney CBD. Moreover, the Hume Highway works benefited access to Canberra and Melbourne.

The featherweights weigh inLeasing enquiry above 3,000sqm was reasonable in the first half of 2015, but subsided towards the latter half of the year. However, the market demand for space of less than 2,500sqm has been relatively strong, particularly due to the eroding industrial stock. Looking forward, the strong sales market and shortage of vacant possession properties is expected to see leasing demand rise as owner occupiers give up their search to purchase a property and sign a lease instead.

Occupiers with operations non reliant on immediate proximity to the Port or Airport, will elect to move Sydney South West and Sydney West, where rents and outgoings are comparatively modest. The Sydney South warehouse users closer to the Sydney CBD will compete over the limited stock in a tighter market. More specifically, concrete plant and waste users with operations based out of Alexandria will be impacted by the limitations in choice.

Vacancy rates have fallen and average prime grade face rents in the South Sydney market and now range from $150-$180/sqm net, depending on the level of office content. Secondary grade space rents are now ranging from $110-$150/sqm net due to the diversity and condition of stock. Rates in Banksmeadow and Botany range from $135-$160/sqm for prime property and $105-$130/sqm for secondary stock. Incentives are anticipated to decrease with Lessor’s less inclined to offer incentives in the knowledge that tenant choice is limited, particularly for quality stock that is under 1,500sqm. Furthermore, rental growth in the sub-1,500sqm has eventuated in the last six months.

Significant volumes of industrial land from the South Sydney market is under threat from conversation to residential retail and other uses. Additionally, industrial land is earmarked for withdrawal to make way for the WestConnex road project. The redevelopment of former industrial sites across suburbs such as Waterloo, Zetland, Alexandria and Botany with residential and/or mixed use developments has put a further squeeze on the availability of industrial stock. This trend is likely to continue in the future as market conditions dictate the highest and best use value of existing industrial sites.

As part of the WestConnex project a new interchange will be delivered at St Peters to connect to the Airport. The St Peters Interchange will be located in the industrial area bounded by Canal Road, Burrows Road, Campbell Road and Princes Highway.

Taking into account the cumulative impact of the loss of industrial floorspace and land to residential and infrastructure uses, a recent study undertaken by Colliers International determined that:

• Twenty-one per cent of existing industrial floorspace in South Sydney will be lost, equivalent to 1.5 million sqm of floorspace. Residential uses will see 19 per cent of the market or 1.4 million sqm removed whilst WestConnex will see the loss of two per cent of 0.1 million sqm; and

141-145 Newton Road, Wetherill ParkLeased on behalf of Trimix Investments Pty Ltd


The Sydney South West offers a strong value proposition, as the market continues to receive displaced operators from the Sydney South market. Modern high clearance properties such as 90 Ashford Avenue in Milpera, sold to a private from the Sydney South at $10 million. In this instance the larger land component provided an enticing alternative for an owner faced with increasing capital values. The revitalisation of Liverpool CBD, development and operation of the Moorebank Intermodal, and proximity to the proposed second airport at Badgerys Creek have prompted an increase in speculative acquisitions. In the six months to September, over $51 million worth of acquisitions occurred with an anticipation of re-zoning to residential.

Prime properties with high WALE demonstrate a superior appeal. However, akin to the wider Sydney Industrial market, sales stock has been thin. As the competition for limited stock intensifies, shaper secondary yields are beginning to emerge. In June, an asset at 373 Horsley Road in Milperra boasting a nine year WALE transacted at a sharp yield of 6.77 per cent after receiving 22 offers at the end of the EOI campaign. Competition amongst domestic and offshore groups for secure, high-quality industrial assets met with a lack of stock has led to further yield compression. At September 2015, the yield range for prime assets was 6.5-7.5 per cent and eight to nine per cent for secondary assets.

Also experiencing elevated demand, ready-to-develop land, particularly less than one hectare, has received increased demand from both owner occupiers and developers with a pre-commitment in mind. Since March 2015, in excess of $114.5 million worth of vacant land sales were made in the Sydney South West market. The diminishing stock and increased demand pushed up average land price in the market to $450/sqm at September 2015.

The evolving marketTenant enquiry, albeit somewhat subdued, has demonstrated a gradual improvement compared to previous periods. Furthermore, lead times between enquiry and leases being signed has

shortened in the past 12 months. The persistent demand for high-quality space and reduced availability has led to an increase rents for prime grade assets, by as much as 3.5 per cent over the past six months. The highest rental growth has been seen in recently completed, speculatively built facilities, which have received strong demand and are now almost fully leased.

The industrial stock above 10,000sqm available for lease in South-west Sydney has tightened substantially in the previous 12 months. In the central region, surrounded by the intermodal terminal, the availability of stock is expected to further tighten in the lead up to opening of the intermodal terminal, forecasted for mid-2018. Notwithstanding this, properties circa 1,200sqm have received the greatest enquiry, as smaller size tenancies remain highly sought after.

In the period between March-September 2015, over 108,312sqm of industrial floorspace was leased at an average rate of $99.7/sqm net. The average rent range for prime assets was $100-$130/sqm net and $75-$95/sqm for secondary assets. Benign renal growth is expected in the coming 12 months as a healthy development pipeline of stock will be met by strong demand. Colliers International forecasts strong absorption from third-party logistics, transport, food, pharmaceutical and cold storage companies.

A major project that will occur in Sydney will be Qube’s Moorebank Intermodal Freight Precinct. The project, Australia’s largest intermodal freight precinct, is expected to include a subdivision plan for up to 850,000sqm over 240 hectares of land. The precinct is expected to accommodate the extra capacity from a new terminal at Port Botany, to be open in 2017. Furthermore, its aims to nearly double the freight carried by train to 28 per cent. The prime industrial land will be in the heart of the Sydney South Western growth corridor and in close to the entry points for the M5 and M7. The project is expected galvanise industrial activity South West through significant infrastructure expenditure and boost to employment.

Sydney NorthA scarce storyThe Sydney North industrial market remains extremely tight. The lack of stock has resulted in upward movements in capital values. The six months to September 2015 has been a solid period in sales, with over $130 million transacting. In this period, the sales achieved an exceptional average capital value of $2,469/sqm. Yields have continued to decline to an average 7.5 per cent for prime and 8.75 per cent for secondary grade assets. Despite the strength of the prevailing market, some owner occupiers remain cautious of selling their property, and subsequently re-entering an ever tightening market. However, others have chosen to downsize and retain management operations in the North Shore 5-9 Bridges Road, Moorebank

Sold on behalf of Joyce Corporations



market, whilst relocating the manufacturing and storage facilities to low cost markets in the west. Notwithstanding this, sale and leasebacks remain popular as current conditions have enticed owner occupiers to sell and re-capitalise their business.

Similar to the other market, the stock limitations have pushed investors up the risk curve. Speculative acquisitions continue to occur, as investors have shown a willingness to purchase on potential rezoning. More recently, the announcement of the Northern beaches hospital project earmarked for Frenches Forest has led to a flurry of speculative purchases seeking a potential rezoning uplift. Secondary stock has also received heavy interest from childcare operators looking to convert existing stock. In particular demand, assets with floorspace between 1,000-1,500sqm on lots with the potential to facilitate a playground are considered ideal to accommodate approximately 100 children.

Size mattersLeasing demand in the Sydney North is showing a recovery, as the limitation in stock has allowed landowners to push back on incentives. The market is dominated by smaller tenancies, with only two options above 4,000sqm available for lease. Enquiries remain focused on tenancies between 500-1,500sqm, which reflects the nature of demand from the market. Accordingly, in the over the six months to September 2015, 75 per cent of the leases signed were within this size range.

With no vacancies above 10,000sqm, larger uses will bypass the market and service the area from the Sydney West market. Given the demand from higher value residential, retail and bulky goods uses, it is unlikely any new industrial properties will come online in the near term.

The tightening of the market has discouraged the propensity to offer generous incentives. Average incentives have fallen to 13 per cent for Prime grade properties and 10 per cent of secondary grade assets. Average prime grade face rents in the market currently range from $130-$220/sqm net, whilst Secondary grade space rents are now ranging from $100-$150/sqm net.

Looking forwardThe upward momentum in capital values is expected to continue into coming 12 months as the erosion of stock and competition for the limited properties eventuates. Yields, particularly in the sub-$15 million, will further tighten as a result for competition amongst private and syndicate purchases. Secondary assets are forecast to compress with investors moving up risk curve combined with sustained demand from speculative purchasers.

The tightening of the market will persist with the limited development pipeline and further withdrawal of stock. Tenants seeking lower cost solutions will be pushed into north west and inner west sub-markets. Upon completion of the $3 billion NorthConnex road tunnelling project, scheduled for early 2019, newer development are expected to come online in beneficiary areas such as Mount Kuring-Gai. In the interim, leasing conditions in the Sydney North submarket are expected to favour landlords, with lower incentives and steady rental growth.

SYDNEY INDUSTRIAL LEASING INDICATORS

0%

2%

4%

6%

8%

10%

12%

14%

16%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Prime Secondary Prime Secondary Prime Secondary Prime Secondary Prime Secondary Prime Secondary Prime Secondary

North North West South South West Inner West Central West Outer West

Net Face Rent Gross Incentive

Net R

ent

($/s

qm)

Gros

s In

cent

ive

(%)


SYDNEY INDUSTRIAL MARKET AVERAGE YIELDS

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Sep-

04

Mar

-05

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Y iel

d/ R

ate/

Spr

ead

Spread to Bonds Prime Grade 10-Year Govt Bond Rate

Source: Colliers Edge / RBA Source: Colliers Edge

373 Horsley Road, Milperra Sold on behalf of GDI Property Group

How else can we help you? Speak to one of our property experts [email protected]

For further information please contact: Sas Liyanage Research Analyst | Research | Tel +61 2 9249 2039 [email protected]


MELBOURNE MARKET

Second Half 2015


The end of the resources boom in Australia began as a slow shift around 2014, and is now in full swing, evidenced by the dive in the value of the once all conquering Australian dollar. While the mining focussed states of Western Australia and Queensland will need to find new areas of economic activity to fill the void, Victoria is one state that will benefit from both the lower value of the Australian dollar, as well as historically low interest rates. Merchandise exports from Victoria took a deep dive in 2009-2010 as the dollar strengthened and our goods were seen as comparatively expensive on world markets. More recently however, our dollar is now helping manufacturers, and Victorian merchandise exports are rising as a result. After somewhat of a hiatus, the manufacturing sector in Victoria is slowly starting to re-emerge as a genuine demand sector again.

AUD/USD EXCHANGE RATE AND VICTORIAN MERCHANDISE EXPORTS

-30%

-20%

-10%

0%

10%

20%

30%-30%

-20%

-10%

0%

10%

20%

30%

Jun-

2000

Jun-

2001

Jun-

2002

Jun-

2003

Jun-

2004

Jun-

2005

Jun-

2006

Jun-

2007

Jun-

2008

Jun-

2009

Jun-

2010

Jun-

2011

Jun-

2012

Jun-

2013

Jun-

2014

Jun-

2015

Victorian Merchandise Exports AUD/USD (RHS) Source: Colliers Edge

The Port of Melbourne is a major driver of demand for industrial land in Melbourne, particularly from the transport and logistics sector. Monthly trade through the Port of Melbourne is now consistently higher than 200,000 Twenty-foot Equivalent Units (TEUs), and in the 2015 financial year, 2.58 million TEUs passed through the port. The Port of Melbourne maintains its ranking as the busiest port in Australia, despite servicing the 2nd largest city in Australia. Melbourne’s attractive land values, which are on average 43 per cent cheaper than land values in Sydney play a key role in maintaining Melbourne’s reputation as logistics capital of Australia.

According to the Victorian State Government’s Urban Development Program, just over 200 hectares of vacant industrial land was taken up in the 2014 financial year, which is broadly in line with the average annual post-GFC take up rate of 190 hectares per annum. Almost half of this land was taken up in Melbourne’s West industrial precinct, where, where average land values are $160/sqm, 37 per cent cheaper than the average industrial land value in Melbourne’s outer industrial markets.

Housing construction is also a strong supporter of industrial demand, and retail turnover growth in household goods in Victoria has been growing at double digit levels since October 2014. The strong housing sector supports demand in both Transport and Logistics and Retail and Wholesale Trade categories, and indeed, these two tenant categories have accounted for 72.5 per cent of industrial leases signed in 2015 year to date.

Demand drivers for Melbourne still strong

Lot 7A, 207 Sunshine Road, Tottenham Sold on behalf of Olex Australia Pty Ltd (Nexans Olex)



7 Grace Court, Sunshine West Sold on behalf of Rowe Property Investments Pty Ltd

VICTORIA HOUSEHOLD GOODS RETAIL TURNOVER

-10%

-5%

0%

5%

10%

15%

20%

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

y-o-

y %

cha

nge


Investors are continuing to see these positive upsides to both Melbourne and Australia’s positive industrial demand fundamentals. Colliers International were conjunctionally appointed to sell the 26 asset GIC Australian Logistics Portfolio, and have successfully concluded what is now the biggest ever industrial sale in Australian history. The portfolio sold to Singapore-based Ascendas for $1.073 billion, and reflected a blended yield of 6.1 per cent. Demand for the portfolio was extraordinary, with 15 bidders in total vying for the assets. Highlighting the strong regard that the Australian market is currently seen in on global markets, the top five bidders (by value) were all offshore groups. The nine Melbourne assets sold for a total of $336.5 million, at a blended yield of 6.1 per cent.

City fringeResidential developers constricting supplyThe Port Melbourne precinct continues to be characterised by a major change in usage - that is, from a predominately industrial area to one now highly sought after by residential developers. Many longstanding tenants in the area, particularly those in the automotive-related industry, as well as panel beaters and service garages, are finding their leases will not be renewed as the site is now worth more as a residential development. Finding any smaller warehouses in adjoining suburbs such as South Melbourne and Southbank, is also proving increasingly difficult for the same reason, and most of these tenants are now being forced to look outside of the city fringe to find appropriate space.

The industrial-zoned area of Port Melbourne continues to remain attractive to high-tech users, and the research and development industry. Lack of public transport, but good access to Melbourne’s freeway system, means the strata/hi tech suites are also attractive to those organisations that have a high proportion of travelling sales staff. Prime Grade net face rents in the employment precinct now range from $160 to $180/sqm per annum. Land values in this precinct range between $750 and $900/sqm. In comparison, land in the Capital City zoned Wirraway precinct will fetch an average of $1,375/sqm. The Sandridge precinct land values average $3,000/sqm, while Montague is attracting developers paying $5,500/sqm and above.

The major industrial site sale pending in Port Melbourne is GMH’s 37.7 hectares Port site at 241 Salmon Street. The site consists of five parcels bordered by Salmon St, Todd Rd, Lorimer St and Cook St and accounts for 30 per cent of industrial land available in Port Melbourne.

NorthInfrastructure upgrades improving access to the airportTwo major sales in the north have transacted in the Tullamarine and Westmeadows precincts, with both sites having high visibility to the Tullamarine Freeway and all through traffic to Melbourne Airport. Colliers International sold 31-69 Western Avenue on behalf of Fairfax Media Limited. The property is a 59,750sqm parcel of land home to 24,090sqm of improved facility of the highest quality, featuring significant infrastructure for manufacturing processes and data management. The facility itself – with quality, modern improvements and significant power supply – covered only 40 per cent of the site, leaving plenty of land for further development (STCA). The site was purchased for $16 million by Bobby Zagame, Managing Director of the Zagame


infrastructure enhancements announced include the widening of 23.8 kilometres of the CityLink Tullamarine corridor, running from the CityLink tunnels to Melbourne Airport. This upgrade will greatly improve road access from Melbourne, particularly the port precinct, to Melbourne’s north.

NATIONAL PORT CONTAINER MOVEMENTS

-

50,000

100,000

150,000

200,000

250,000

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov-

09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov-

10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov-

11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov-

13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov-

14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Mon

thly

TEU

s

SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE

Source: Colliers Edge, NSW Ports, Port of Melbourne Corporation, Port of Brisbane, Flinders Ports, Fremantle Ports

WestDairy industry a key new player in the marketThe west industrial market continues to be the dominant industrial market in Melbourne. Demand from both tenant and owner occupiers continues to be strong, as port container

Group. The second major transaction was Warrington Property’s purchase of DEXUS Wholesale Property Fund’s Melbourne International Airfreight Centre for $23.85 million in June 2015. The deal was transacted off-market and the sale price reflected an initial yield of 6.03 per cent. While the deal was sharp, the 5.6 hectare site was 31 per cent vacant at the time of sale.

The Transport and Logistics sector continues demand space in the North, and users are now competing for a dwindling supply of vacant stock over 5,000sqm. Net face rents for Prime Grade facilities have stayed steady over the past six months, averaging $78/sqm per annum.

Melbourne Market, Victoria’s new wholesale fruit and vegetable and cut flower trading centre, opened on a new 60 hectare site at Produce Drive, off Cooper Street in Epping. Partly as a result of increased demand from owner occupiers who wish to be near the markets, land values for 3,000sqm serviced lots in the north have increased from an average of $238/sqm in March 2015, to an average of circa $250/sqm in September 2015. At the upper end of the spectrum, lots are transacting for $270/sqm.

Infrastructure improvements are also adding to the attractiveness of the north and west precincts for logistics and transport users. A new $100 million road linking Melbourne Airport directly to the Western Ring Road opened in June 2015. The 3.3 kilometre road, known as Airport Drive, will save significant time for passengers and freight travelling from the west of Melbourne. Further

Warehouse A, 162 Australis Dive, Derrimut (part of the GIC-Frasers Industrial Portfolio) Sold on behalf of GIC and Frasers Property Australia



movements through the Port of Melbourne remain the highest of all ports in the country, and new housing construction sees growth in household goods retail turnover at its highest levels in recent history. As housing construction continues, the need to warehouse and manage household goods that consumers purchase to furnish these new houses continues to drive industrial demand.

One of the industries in Australia that has outperformed over the past year has been the agriculture industry. The west industrial market is experiencing a new wave of demand from this sector, as Asian consumers – particularly Chinese consumers – continue to demand our high quality and very safe agricultural produce. Demand for milk powder from China has significantly impacted demand for warehousing and storage space in the West, and there are a number of deals in motion that should highlight this trend over the upcoming months.

Reasonable supply levels in the west industrial market remain in place. In 2015, just over 100,000sqm of stock is expected to reach practical completion, the highest levels since 2011. Still, these supply levels are some way off the peak supply periods between 2007 and 2010.

Face rents have remained stable now for over five quarters, ranging between $70 and $80 for prime grade space as at September 2015. Well priced prime grade stock is driving demand from tenants who currently occupy secondary grade buildings in the north and west precinct, particularly around Campbellfield, to enquire on prime grade, more efficient buildings in Derrimut.

In terms of vacancy, the west currently has in excess of 500,000sqm of space available across 59 facilities. However, this availability is heavily concentrated in the sub-15,000sqm size range, and there is a noticeable shortage of stock above 15,000sqm.

Owner occupiers, however, continue to drive enquiry in our north west industrial office. Transport occupiers are still very active, and many have requirements for heavy duty hardstand and loading docks sub 5,000sqm.

The investment market continues to go from strength to strength, as a multitude of buyer types search for prime grade facilities to purchase with strong tenant covenants and reasonable WALEs. Prime Grade yields have contracted from an average of 7.3 per cent in March 2015, to seven per cent in September 2015. Seven of the 26 assets sold as part of the GIC-Frasers Industrial Portfolio were located in Melbourne’s West precinct, in Altona, Altona North, Truganina and Derrimut. Year to date, just over $400 million worth of investment sales had transacted in the West precinct.

MELBOURNE INDUSTRIAL AVERAGE PRIME GRADE YIELDS

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%

Sep-

10

Dec-

10

Mar

-11

Jun-

11

Sep-

11

Dec-

11

Mar

-12

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

Sep-

15

City Fringe North South East West Outer East Source: Colliers Edge

Warehouse A and B, 24 William Angliss Drive Laverton NorthLeased on behalf of Goodman



For further information please contact: Anneke Thompson Associate Director | Research | Tel +61 3 9940 7241 [email protected]

14 Ordish Road, Dandenong (part of the GIC-Frasers Industrial Portfolio) Sold on behalf of GIC and Frasers Property Australia

South & outer east Land supply in the south east industrial market is being rapidly consumed by local developers and owner occupiers, causing an upwards shift in the average price. An average 3,000sqm lot now retails for $280/sqm, up from $250/sqm in September 2014. Places Victoria’s Dandenong LOGIS, a 154 hectare eco-industrial business park, is already sold out, with other parks, such as Frasers Property’s The Key, Pellicano’s Innovation Park and Goodman’s Power Park all selling down retail lots of a rapid rate.

At the larger end of the deal spectrum, the logistics sector continues to drive the market. Many logistics and transport users are taking advantage of current market conditions and consolidating smaller facilities into bigger, newer and more efficient buildings. Activity is even more pronounced now, as the speculative building of facilities over 10,000sqm in the south east has all but stopped, and supply in this space is also dwindling. In the past six months, three buildings over 10,000sqm that had been on the market for up to eighteen months have now been taken up. As a result of the reduction in supply of larger facilities, the pre-lease market is also ramping up with pre-commitments over 10,000sqm being completed by Miele, Cyclone and AstralPool.

One of the outcomes of the reduction in speculative supply of larger buildings could be a moderating of incentives. Incentives for prime grade facilities in the south east currently range between 15 per cent and 25 per cent, but we expect these to cool slightly by the middle of 2016, as supply of large scale facilities starts to approach critical levels.

Investment sales deals in the South East has been led by two of the assets that formed part of the GIC-Frasers Industrial Portfolio sale – 14 Ordish Road and 35-61 South Park Drive, both in Dandenong South. As a result of this deal, plus yield evidence gained across a further $115 million worth of investment sales transactions, yields have compressed from 7.38 per cent at the start of the year, to an average of 6.88 per cent for prime grade facilities as at September 2015.

In the inner east, the biggest trend is the development and strong sales and leasing activity of high quality strata developments in suburbs such as Mt Waverley, Knoxfield and Oakleigh. Due to better infrastructure and transport access, large logistics and transport users are moving to locations in the south east, and their vacated brownfield sites are being redeveloped into high quality master planned estates such as Spectrum Business

Park and Industria Oakleigh. Owner occupiers continue to be the dominant purchaser type for established facilities, with low interest rates and scarcity of facilities to lease driving this trend. Due to the growth in higher quality industrial stock in the area, face rents are remaining firm at an average of $85/sqm per annum for prime grade stock, while a relative scarcity of stock have held average incentives steady at 13 per cent for the past two years.

MELBOURNE INDUSTRIAL LAND VALUES*

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

City Fringe North South East West Outer East

$/sq

m

Sep-14 Mar-15 Sep-15

Source: Colliers Edge *Retail lots average 3,000sqm



All Brisbane industrial markets are experiencing strong demand from domestic and international investors for investment grade industrial assets. This is continuing to have a tightening effect on prime and secondary yields. Appetite predominantly persists for prime assets that have long term WALEs with strong covenants in prominent locations. However, due to the scarcity of opportunity, increased investment activity is ensuing for products that either have vacant possession or those that offer short term lease expiry profiles.

During the first half of 2015, institutions dominated the investment landscape, accounting for $266.2 million of the total $359.5 million in transaction volume. The ATC recorded the greatest sales volume by value with around $140 million transacting across seven industrial properties. Portfolio sales have been a buoyant sector as vendors have sought to capitalise on strong investment demand, with the, ACFS, Altis, Super Retail Group, Inghams, McPhee, Valad and Scheinberg industrial portfolios changing hands over the 12 month period. Over the course of the year, portfolio sales are expected to remain a prominent element driving investment activity.

Singaporean institutional REITs were active over the period. Cache Logistics Trust made its first Australian acquisition in February 2015 outlaying nearly $75 million on the McPhee portfolio. Portfolio sales are becoming an increasing feature among offshore groups gaining a foothold into Australia’s property market. Risk diversification is achieved by investment made into a range of property asset classes, with enhanced geographical exposure and the realisation of economies of scale. Mergers and acquisitions were also a characteristic, with Frasers Centrepoint acquiring the Australand’s portfolio worth over $1 billion in industrial property.

Prime industrial grade assets continue to represent stable and strong investment opportunities. Compared to Sydney and Melbourne, yields in Brisbane are softer by 50 to 100 basis points. As the intrinsic investment risk is not necessarily reflective of this yield differential, starved investors and the impact of weight of capital chasing prime assets is expected to drive further yield compression in Brisbane. Yields are expected to follow suit to Sydney and Melbourne.

The push for scale combined with the strong investment market is leading to increases in the supply pipeline. Supply has gradually been increasing with institutional REITs Goodman, DEXUS and Australand driving supply in Brisbane with nearly 70,000sqm of supply due to be speculatively constructed in 2015 across several large industrial estates.

Consolidation has been a key theme in the market. Business operators have been undertaking below-line cost measures to improve their overall operational efficiencies focusing on smoothing out logistics, supply chains, inventory management and the cost of labour. Administration functions are also being centralised and these factors have been driving the appeal of large format, high quality industrial facilities. As Brisbane’s major industrial areas are well-serviced by the transport and arterial network, businesses are now looking beyond this factor and considering blue collar employment pools as part of their location decisions to draw on a larger local workforce.

BRISBANE MARKETInvestor appetite continues unabated

Second Half 2015


165 South Pine Road, BrendaleSold on behalf of Solingen Pty Ltd


Throughout the first half of 2015, leasing volumes in the Brisbane industrial market plateaued and were underpinned by the execution of large space requirements by Lindsay Australia, OI Glass and Tyres4U. The leasing market softened during the first half of 2015 with approximately 123,500sqm of floorspace leased (tenancies over 2,000sqm), a halving from the preceding six months. This in part has been a reflection of the limited supply of A Grade and to a lesser extent B Grade product and also to the marked decline in tenancy sizes sought. Tenant demand was most prolific in premises of up to 2,000sqm, down from the previous six month average. Leasing activity was dominated by logistics based industries representing a significant share of the total leasing volume (40.6 per cent).

Although vacancy is generally low, the dampened leasing market coupled with the development supply pipeline will hamper rental growth in the short term, with isolated increases in incentives continuing. Despite the softened conditions, tenant demand is expected to improve in the medium term as confidence continues to build following a stabilised interest rate environment and recalibration of the Australian dollar. Positive growth in retail spending together with the completion of the Legacy Way Tunnel and ongoing construction of the Gateway North Upgrade will also support the industrial market fundamentals.

Australia TradeCoast Logistics dominate leasing activityLeasing activity in the Australia TradeCoast (ATC) - includes the north-side suburbs of Eagle Farm and Pinkenba and south-side suburbs of Morningside, Colmslie, Queensport, Murrarie, Hemmant, Lytton and Fisherman Islands - has remained stable across 2015 led by transport and logistics operators. Direct access to the airport, The Port of Brisbane, Gateway Motorway and CBD represent key elements drawing businesses to the precinct. Queensland Rail were among businesses expanding into this precinct, executing a lease across 7,900sqm at Hendra on a five year initial lease term.

285 Lavarack Avenue, PinkenbaSold on behalf of OneSteel

Logistics operators, Silk Logistics and Yusen, also pre-committed to warehouse space of 30,960sqm and 8,950sqm respectively in Goodman’s Lytton Motorway Estate which was completed in second quarter of 2015. The total 39,910sqm of speculative space in the estate was fully committed prior to development completion. This demonstrates strong demand for quality warehouse facilities that have access to key transport infrastructure. Transport and logistics operators, in particular, will continue to generate demand for industrial space in the ATC, as the precinct is well-positioned to cater for retrieval and handling activities for import and export air and ocean freight.

COMPOSITION OF LEASING ACTIVITY

40.6%

28.4%

2.7%4.7%

23.6% Logistics

Machinery/Auto

Manufacturing

Services/Other

Wholesale/Retail


Note: Figures represent market averages as at end of Q1 2015. For more details see the Data Tables.Source: Colliers Edge

BRISBANE PRIME GRADE INDUSTRIAL MARKET INDICATORS

REGION AVERAGE NET FACE ($/m² pa)

AVERAGE YIELD


H1 2015

H2 2015

H1 2015

H2 2015

H1 2015

H2 2015

Australia TradeCoast $115 7.6% $275

North $110 7.8% $238

South $103 7.9% $225

South west $103 7.9% $225

Yatala $103 7.9% $200




NorthAppeal towards larger scale A defining market feature has been the appeal of larger format, high quality industrial facilities located in sought after transport node locations. The north precinct (includes the suburbs of Hendra, Northgate, Banyo, Virginia, Geebung, Zillmere, Brendale, Strathpine, Lawnton, North Lakes, Narangba, Deception Bay, Burpengary, Kippa Ring and Clontarf) is transitioning from manufacturing and service oriented industries to more storage and warehousing facilities, as reflected by the area’s attraction of large format warehouse and distribution centres. Aldi is the latest retail giant to locate in the area and is developing a 49,000sqm distribution facility on a 17.1 hectares site in Brendale, due for completion in the second half of 2015. The distribution centre will support its retail stores in greater Brisbane including those north of Brisbane.

Repositioning assets becomes keyMajor owners of large format estates within the inner north, such as Goodman, Charter Hall and Stockland, are combating site availability in the outer north by refurbishing and repositioning existing assets within the Traditional North precinct to provide occupiers with more functional facilities without commanding the premium rentals required by new development sites.

Charter Hall have invested heavily in their asset at 180 Holt Street, Pinkenba, with a substantial refurbishment helping to secure AP Eagers on a long term lease commitment across 8,000sqm. Stockland are also in the final stages of completing a refurbishment of Kmart’s ex distribution centre at Hendra, with a reconfiguration of the dock access and substantial façade works leading to 30,000sqm being taken up by Kmart and Bevchain. Goodman are planning a refurbishment of a 16,000sqm tenancy previously occupied by Yusen Logistics at 370 Nudgee Road, Hendra which will add to the considerable repositioning spend undertaken on these assets during 2013-2015.

Institutional investors activeInvestor appetite for ATC assets is showing no signs of abating. Yield tightening was evidenced through a number of asset sales. Institutional investors are primarily attracted to prime assets with strong lease covenants in place. There is virtually no supply of prime grade investments being offered to the open market within this precinct outside of assets included in a major portfolio sale being undertaken by Charter Hall. Demand however remains particularly buoyant in this sector and it is expected the weight of capital, both onshore and offshore, will continue to focus on new logistics facilities and retail warehouses in strategic logistics precincts such as the ATC. Demand for these properties will continue to be supported by tenant needs to relocate and consolidate to improve efficiencies.

As investment opportunities are relatively constrained with the REITs building speculative stock and holding on to these assets, other investors are moving up the risk curve and investing in more complicated assets. Altis Property Partners’ purchased a leasehold interest on Fisherman Island at the Port of Brisbane as part of the ACFS portfolio which was completed in the third quarter of 2015. Given the leasehold structure underlying the asset, it is expected to achieve a softer yield of 7.5 per cent. Further cap rate compression in the ATC is anticipated as investment appetite continues.

Properties in the Australia TradeCoast continue to remain tightly held with well-located assets providing strong underlying leasing fundamentals being particularly sought after. 285 Lavarack Avenue, Pinkenba traded in May 2015 for $14.5 million with a one year sale and leaseback to OneSteel representing a yield of nine per cent. 92-116 Holt Street, Pinkenba was also subsequently sold for $16.4 million on a yield of just over eight percent with just over two years remaining on the lease to BlueScope Steel.

62 Sandstone Place, Parkinson (part of the GIC-Frasers Industrial Portfolio)Sold on behalf of GIC and Frasers Property Australia


Investment grade opportunities within this precinct are sought after, highlighted by, Altis Property’s acquisition of a 5,500sqm property at 165 South Pine Road, Brendale for $16.2 million at a yield of around 7.75 per cent when allowing for the development site component. This asset was sold on a 10 year sale and leaseback to The Crest Group, which will underpin a showroom and warehousing development with an expected end value of $50 million.

Analogous to the leasing fundamentals, acquisition opportunities will be limited by the lack of stock in the north’s development pipeline.

BRISBANE INDUSTRIAL INVESTOR BY PURCHASER TYPE

0

0.2

0.4

0.6

0.8

1

2010 2011 2012 2013 2014 YTD 2015

Domestic Oshore Source: Colliers Edge

SouthStrong lease covenants and long WALEs drive investmentInvestment activity in the south (encompassing the suburbs of Acacia Ridge, Salisbury, Rocklea, Coopers Plains, Larapinta, Berrinba, Heathwood, Parkinson and Browns Plains) was dynamic in the first half of 2015. Investment opportunities between $5 and

92-116 Holt Street, PinkenbaSold on behalf of The GPT Group

$10 million were pursued, accessible to many groups, including REITs, investment managers and private investors who were all active buyers. Industrial investment in the area has been underpinned by substantial portfolio sales including the McPhee Portfolio and GIC-Frasers Industrial Portfolio trading which included assets such as Ceva’s 40,000sqm distribution centre at Berrinba.

Development sites in demandInstitutional demand continues with pace to secure long term development sites located within core logistics locations. Key examples of this trend include GPT’s acquisition of 20 hectares at South West 2 at Berrinba, Dexus’s acquisition of 4.8 hectares at Larapinta and Logos’s rumoured purchase of 24 hectares of the long-time mooted Heathwood Logistics Park. This development activity highlights the strong investment demand for quality assets in this precinct, and with a lack of readily available investment opportunities being offered to the market it is anticipated that this development activity will continue with pace.

Mixed leasing demandLeasing demand has been mixed in the south with leases signed for a range of business uses and tenancy sizes. Beaumont Tiles signed the largest lease, pre-committing to a 13,164sqm warehouse on a 12 year term in Goodman’s new Rochedale Motorway Estate, which is scheduled for completion in the first quarter of 2016. Beaumont Tiles will be the first tenant in the new estate. Lindsay Australia also signed a precommittment for 12,000sqm of high quality warehousing on 4.67 hectares of land at Postle Street, Acacia Ridge which should be delivered in the first half of 2016. There were a handful of smaller leases signed among the wholesale and retail, transport and logistics and manufacturing based operators including Tyres4U (10,500sqm), Medline (4,100sqm), AGCO Corporation (3,311sqm) and Ruralco (8,000sqm). As developers compete to secure suitable tenants into speculative stock, prime grade net rents in the south are expected to remain stable and average between $95-$115/sqm while secondary grade net rents average between $70-$85/sqm.

South West Investment options constrainedProperties are tightly held in the south-west precinct (comprises the suburbs of Darra, Wacol, Richlands, Redbank, Carole Park and Ipswich). Investors have been active within the sector, attracted by strong links to major inter and intrastate transport infrastructure. This is highlighted by Cache REIT’s reported purchase of 203 Viking Drive, Wacol in September 2015 for $27 million, representing a passing yield of just over seven per cent.



Larger and stronger During the first half of 2015, major transport and logistics operators Northline and TNT Express moved into their new purpose-built premises in Goodman’s Redbank Motorway Estate, joining DB Schenker. Northline, occupying 12,485sqm of space, located from its former Pinkenba facility while TNT had requisite for a 30,000sqm custom-designed facility. Corresponding to the theme of consolidation, relocations have enabled these tenants to improve operational and client efficiencies through better access provisions to major transport links, consequently broadening access to supply chain partners. Other benefits, including reduction in freight turnaround times have also been reported for select tenants who move the majority of their product via interstate road networks. As competition amongst the REITs to lease property ensues, net rents have softened with prime grade rents ranging between $95-$110/sqm and secondary grade rents ranging between $70-$90/sqm in the precinct.

BRISBANE INDUSTRIAL PRIME GRADE – AVERAGE NET FACE RENTS

112.5107.5

100 10092.5

0

20

40

60

80

100

120

140

ATC North South South West Yatala

($ p

er s

qm p

a)

Sep-14 Mar-15 Sep-15



For further information please contact: Peter Willington Manager | Research [email protected]

Yatala Enterprise Area Leasing activity muted The Yatala Enterprise Area (including Yatala, Stapylton and Ormeau) has experienced a wave of activity compared to subdued demand post-GFC, which saw little major construction activity across the period 2009-2014. This precinct has always enjoyed the benefit of a central location along the south-east Queensland growth corridor, being situated halfway between Brisbane and the Gold Coast, and leasing demand is improving as a result. Warehouse and logistics based operators have typically been attracted to the area, with users from the land constrained Gold Coast and price sensitive users from Brisbane being attracted to this precinct.

The recent 30,000sqm precommittment by OI Glass underlines the remergence of the precinct, satisfying both logistics requirements and the commercial savings sought after by key corporate decision makers. With major institutions such as Fraser’s (who are developing OI’s facility), Charter Hall/CIP and Stockland all having substantial holdings within this precinct, renewed focus from tenants is expected, primarily being driven by cost competitive leasing deals compared with the Logan Motorway and Australia TradeCoast precincts.

Sale and leaseback There were two transactions in the Yatala Enterprise Area. The first property transacted for $8.5 million in November 2014 at Lahrs Road Ormeau within the Motorway Business Park. The 6,430sqm warehouse facility represented a modern structure with high bays and was sold fully leased on a ten year leaseback. It is understood the property sold within a month of being on the market reflecting a sharp yield of 7.43 per cent. The second transaction was for a modern industrial facility at Burnside Road Ormeau for $17.5 million. The property, configured to provide ten separate freestanding industrial buildings ranging between 572sqm up to 3,592sqm, was sold fully leased aside from one building resulting in a WALE of 3.01 years and a yield of 8.49 per cent. Over time, as land in Brisbane’s other main industrial precincts becomes exhausted, investment activity in the Yatala Enterprise Area is expected to grow.

99 Radius Drive, Larapinta (part of the GIC-Frasers Industrial Porfolio) Sold on behalf of GIC and Frasers Property Australia


PERTH MARKET

Second Half 2015


Perth’s industrial market has continued to soften during the September 2015 quarter, after experiencing some moderation in rents and land values over the first half of 2015.

Available space has increased and limited net tenant demand is leading to longer vacancy periods in some assets. This is exerting downward pressure on rents. Lower business sentiment and moderating domestic demand has been the main driver of low tenant demand.

Despite challenging conditions, the Western Australian economy is still supported by $38 billion of private investment spending, robust export income and continued activity in residential construction. Unemployment is above the five-year average, however, at 6.1 per cent is still marginally below the national level of 6.2 per cent.

There are green shoots appearing in some areas that can drive industrial demand. Over the past two years a lower Australian dollar has delivered positive impacts to non-mining exports from WA. This was evident in the full export container movement through Fremantle Port, which was eight per cent higher in 2014-2015 compared to 2013-2014, driven by strong volumes in the September and December 2014 quarters.

Export container movement softened over the second half of the 2014-2015 financial year, however this looks to be a result of seasonal factors. Future improvement in exports is expected, should the Australian dollar creep lower against the US dollar and major trading partner currencies.

The robust performance of prime or institutional-grade assets and low interest rates has seen investor demand remain strong for tenanted assets or vacant assets, with good leasing prospects, causing yield compression. Recent transactions are showing market yields of between seven and eight per cent. However, recent portfolio transactions indicate that yields under 6.75 per cent are achievable for certain assets. Colliers International stresses that this tightening is mostly evident among institutional-grade assets.

Competition for tenants remained high in the first half of the year, evident by moderating rents. Rental contraction continues to impact small to medium-sized assets, more so than larger assets. This is due to the differing stock levels of the two asset classes. However, larger assets are now experiencing falling demand and the increase in vacancies is impacting rents.

The fall in demand for hardstand across rates of the metropolitan area is causing rental levels to return to pre-boom between $10/sqm and $20/sqm.

Australian Bureau of Statistics (ABS) data showed a surprising recovery in mining sector employment in the September 2015 quarter. The figures indicate mining sector employment increased 12.3 per cent year on year, to 105,200 in the September 2015 quarter. Putting aside short-term volatility, mining sector employment continues to be 14.3 per cent lower than its September 2012 peak.

Lower Australian dollar creating opportunities to diversify economic base

1 Sudlow Road, Bibra LakeSold on behalf of Aspen Group



60-62 Bannister Road, Canning Vale Sold on behalf of Parasiliti

The construction sector saw a 13.7 per cent increase over the year to September 2015, driven by previous building approval numbers. The sector employed 162,900 people in the September 2015 quarter according to ABS data.

There was also a strong improvement in employment in transport and storage, rising 18.4 per cent year on year. This is likely to be driven by the overall increase in construction activity, non-mining exports and population growth.

Prime warehouse rents have continued to trend downwards to range between $75/sqm and $100/sqm. Secondary rents were marginally softer, sitting between $65/sqm and $85/sqm. Leasing enquiry volumes continue to be low. Landlords are seeing the bigger economic picture and beginning to lower their expectations.

During the boom years a lack of available space caused some large tenants to disjointedly expand their footprint. However, lower rents and an increased availability of space is providing tenants with the opportunity to amalgamate and centralise their tenancy. This is an opportunity for landlords to target tenants with dispersed operations to fill large empty spaces in a low net demand environment.

When compared to rents, average land values have been relatively stable since the GFC correction. Nonetheless, average land rates have moderated in recent quarters, as lower tenant demand drives a vacancy increase and weakens rents.

Industrial land values for fringe locations with lower quality infrastructure connectivity were marginally less in the September 2015 quarter, ranging between $180/sqm and $385/sqm. Values for land or developable holdings in more central precincts ranged between $350/sqm and $555/sqm.

Preliminary vacant land transactions were softer over the first half of 2015, with a total of 32 lots changing hands for $41.6 million. This was around half the volume seen in the first half of

2014, where 64 lots were transacted for $92.6 million. However, established precincts with tightly held land supply still generated interest.

The volume of major transactions (those over $3 million) has trended downwards since the June 2014 quarter. The revised March 2015 quarter volume was 21 transactions totalling $218.4 million. The preliminary June 2015 quarter volume is 11 transactions valued at $138.5 million. The September quarter has so far yielded four transactions totalling $80.4 million.

The current low interest rate environment continues to attract investors to higher yielding assets such as property, and this is continuing to generate some yield compression for quality assets. Yields being achieved range between 6.5 and eight per cent for prime assets. This is a by-product of the weight of capital chasing quality assets in a low-yield, low interest rate environment with moderating market rents. Secondary yields have also tightened since 2013, and were between 7.5 per cent and nine per cent in the September 2015 quarter.

SouthStrong interest for major assetsPerth’s South industrial region has seen the highest volume of major transactions in the eight months to the end of August 2015. Seventeen major assets (over $3 million) changed hands with an aggregate value of $279.5 million.

Recent major transactions included; Pickles Auctions purchase of Aspen Group’s Sudlow Road, Bibra Lake asset for $35 million, and Property Link’s $14.8 million purchase of 7 Modal Crescent, Canning Vale. Crescent Capital Partners sold their Leath Road, Naval Base asset for $21.5 million. The latest transaction to occur in the South was 35 Baile Road, Canning Vale, which was sold as part of a GIC-Frasers Industrial Portfolio disposal of 26 assets across Australia to Singapore-based Ascendas for $1.073 billion.

There were 21 vacant lot transactions in the South region totalling $22.9 million as at the end of August 2015. Demand for land has softened and Colliers International estimates the average vacant land rate for the South region has declined 9.3 per cent over the year to September 2015, to range between $375/sqm and $500/sqm, in core industrial precincts such as Canning Vale. However, strategic locations such as the Swan Brewery Industrial estate are still in demand.

Rental rates in the South region have been impacted by a 37.5 per cent increase in available warehouse space over 2,000sqm since the same period in 2014. Colliers International estimates average Prime grade rents have contracted 10 per cent over the year to September 2015.


NorthGood absorption reduces available spaceThe north region saw the second highest volume of major transactions to the end of August 2015 with 10 assets changing hands for a total of $68.5 million. Activity is significantly lower in comparison to 2014, when 21 transactions totalling $203.3 million were executed in the same period.

Recent major transactions in the north region include 14 Collingwood Street, Osborne Park, which sold for $4 million to Joyce Corporation Ltd, and 19 Leadership Way, Wangara, which sold for $6.5 million. The largest transaction so far in 2015 has been the Edith Cowan University purchase of the Motor Traders Association training facility in Joondalup for $21.8 million.

The North saw net absorption of around 15,000sqm over the twelve months to August 2015, reducing available space by 14 per cent to approximately 92,000sqm of warehouse space over 2,000sqm. Due to relatively soft demand and strong competition, however, rents for Prime warehouses have also moderated in the North region by approximately 10 per cent, to range between $75/sqm and $100/sqm in the September 2015 quarter.

There were 12 vacant lot transactions totalling $13.3 million in the eight months to the end of August 2015. Eight of these transactions were in the Wangara/Landsdale precinct. Based on these transactions, estimated land values in the North region for the September quarter ranged between $350/sqm and $525/sqm.

EastLarge vacancies increasingThere were nine major transactions in the east region in the eight months to the end of August 2015. This was the lowest volume of the three regions and much lower than in the corresponding period in 2014. However, two large transactions of over $25 million helped push the total value to $89.1 million, significantly higher than the north region.

Major transactions this year included Ceva Logistics’ $25 million purchase of 1000 Abernethy Road, Forrestfield from Australia Western Railroad Pty Ltd, and Charter Halls purchase of 279 Railway Parade, Bassendean for $32.78 million.

Vacant land transactions in the east region have been limited so far in 2015. There is a lack of available vacant land in the region, as precincts are well established and further development to the east is constrained by the Darling Scarp. Just six lots changed hands to a total value of $2.78 million.

Colliers International estimate land values in the east region to be between $385/sqm and $555/sqm in the September 2015 quarter. Although this has contracted from 12 months ago, values have been more stable than the other regions due to limited availability of land and generally strong demand from industrial users.

Vacancy is continuing to increase and Colliers International estimates there is approximately 305,000sqm of industrial space available for lease as at the end of August 2015. This is 15 per cent higher than at a similar time in 2014. This has resulted in average rents falling 7.7 per cent over the year to September 2015.

170 Railway Parade, BassendeanSold and leased back on behalf of Bradken


For further information please contact: Misha White Manager | Research | Tel +61 8 9261 6675 [email protected]



ADELAIDE MARKET

Second Half 2015


Adelaide industrial market sees mixed resultsThe Adelaide industrial market has seen mixed results over the last six months. On the positive side construction for large scale industrial assets is forecast to be at the highest rate in five years. Over 85,000sqm of space expected to be completed by the end of the year. This level of construction has not been seen since 2010 and is well above the five year average of 56,700sqm.

However vacancy across the Adelaide industrial market has increased from 4.6 per cent to 6.4 per cent over the last six months. Vacancy has increased in most markets with the exception of the south which saw a decline in vacancy. The largest market of the inner north witnessed an increase in vacancy from 3.7 per cent to 4.9 per cent. Significant vacancy has been recorded in the outer north market with a large jump recorded this half with a vacancy rate of 19.9 per cent. This vacancy rate has increased consistently since March 2013 when vacancy for this precinct was first recorded at six per cent.

Sales volumes for industrial property over $5 million have been subdued during 2015 with only two sales recorded this year with a sales volume of $28 million. This follows a record year for sales volumes during 2014 with a volume just under $330 million. The largest sale this year was the sale of 3 Pope Street, Beverley, a three unit fully leased development, which sold for $20.8 million

this quarter. This property was sold off market by Australand and purchased by Growthpoint. Institutional investors have been an active purchaser of industrial assets over the last three years, with a particular interest in Prime Grade assets with a long lease to a secure tenant. The majority of the institutional investment in the Adelaide market has been from domestic sources. The only foreign capital to be invested in industrial market over the last three years was the acquisition of the Australand property portfolio to the Singaporean held Fraser Centrepoint.

The Adelaide industrial investment market has continued to see improvements in enquiry, with the depth of enquiry on campaigns improving during most of 2015. This is driven by a range of investors, both institutional and private. With the current low interest rate environment and less reliable returns in the share market and cash has resulted in a significant weight of capital looking to invest in the property sector. With this weight of capital in the market and the comparatively higher yields achieved in the Adelaide industrial market over eastern seaboard states, sales volumes are expected to improve. Prime quality assets are experiencing improved demand and it is therefore expected that yields will continue to tighten for this grade of assets over the next 12 months. This is in line with the investment trends witnessed on the east coast.

Enquiry has improved over the last six months with the assets above 2,000sqm seeing the strongest demand in this period. the second strongest enquiry is for space between 500sqm to 1,000sqm. Manufacturing and retail trade tenants have seen the strongest enquiry with most siting the need to relocate as the reasons for enquiry. This improvement in enquiry is likely to lead to stronger sales and leasing volumes over the next six to 12 months and therefore vacancy is likely to tighten over this period.

Although there are some positive aspects to the performance of the Adelaide industrial property market, this market is in a state of transition and therefore faces some challenges over the medium term. With the closure of the automotive industry and the uncertainty surrounding defence contracts there is a move away from the traditional manufacturing base of the industrial 22-24 Tikalara Street, Regency Park

Leased on behalf of R McMillan Properties Pty Ltd


pipeline will continue over the next 12 months. We understand that there are around 80,000 to 100,000sqm of requirements currently in the pipeline with several looking at design and construct options. The size of new construction in the Adelaide market tends to be of a smaller scale than the east coast with much of the new construction pipeline falling in the 2,000 to 5,000sqm. Despite vacancy rising, there is still a ‘flight to quality’ by many occupiers which is likely to continue to support the strength in the construction pipeline over the next 12 months.

ALDI distribution centre nears completionThe largest project under construction is the distribution centre for Aldi in Regency Park. This $70 million project is a 30,000sqm distribution centre which is due for completion in early 2016. This distribution centre will service a network of new Aldi retail stores in Adelaide. Aldi currently have plans for 19 stores across metropolitan Adelaide with plans are to open between 40-50 stores in the South Australian market over the longer term.

Adelaide SouthTonsleyThe development of ‘pods’ under the main assembly roof of the Tonsley project continue to take shape. The main assembly building has seen several retailers open and construction commencing on the numerous “pods” under the main assembly building roof. These pods are located between the TAFE and the Flinders University and will provide flexible and modular spaces which can be used for a wide range of high value industrial commercial, recreational and retail uses. The road infrastructure is now in place, and enquiry for space at Tonsley continues to improve. The Tonsley precinct is being developed by Renewal SA

market. While there are opportunities in the mining, gas, energy and technology areas these are likely to take some time to develop and therefore this may dampen demand in the short to medium term. The Outer North market which is home to the automotive industry has seen vacancy jump significantly, but this is offering tenants prime quality assets for competitive rents, with incentives for longer term leases and for purchasers with sufficient capital or equity.

Inner north/ outer northHeadwinds for the outer north marketVacancy in the outer north market has consistently climbed since the first vacancy survey in March 2013. The current vacancy rate in this market was recorded at 19.9 per cent. With the planned closure of the Holden manufacturing plant in 2017, the outer north market which has traditionally been dominated by automotive manufacturing will undergo significant structural change of tenant types. Both rents and yields have begun to come under some pressure over the past six months. Prime rentals have fallen by 5.8 per cent over the last half with secondary rents holding stable. Incentives for prime grade assets have remained stable and ranged between 10 to 20 per cent. Secondary incentives have also remained stable and ranged from 15 to 25 per cent. With these headwinds however come significant opportunities for both investors and occupiers.

Construction pipeline expected to remain strongWith the construction pipeline having strengthened during 2015 and completions expected to be at a five year high, requirements in the Adelaide industrial market suggest that strength in the construction

11 Marker Avenue, MarlestonSold on behalf of Alan Charles Grace & Christina Eleanor Grace




For further information please contact: Kate Gray Associate Director | Research | Tel +61 8305 8806 [email protected]

and is an advanced manufacturing hub which will employ 6,300 people and educate 8,500 students per year. CIC Australia will develop the residential component of the Tonsley project. This is expected to house 1,200 people once the project is completed. Siemens are now operational at Tonsley with construction of the Core drills library well underway.

The next stages of the north south corridorThe next stage of the upgrade of the north south corridor is planned to commence this year with a total investment of $896 million in this upgrade. This project addresses the 3.7 kilometre section of South Road between the Torrens River and Torrens River and is therefore called the Torrens to Torrens project. The scope of this project includes the lowering of a 2.5 kilometre section of road, an overpass of the Outer Harbor line and upgrades to the Torrens Road, Hawker Street, Hurtle Street, Port Road, Grange Road/Manton Street and Ashwin Parade/West Thebarton Road intersections. This road will have no traffic lights and will see three lanes run in both directions and is due to complete in 2018. This is part of the greater strategic plan to improve transit and commuter times along the north south corridor. The Darlington upgrade project which will

address the section of Main South Road between the Southern Expressway and Ayliffes Road. This project has $620 million of funding but is still in the planning phase. The State and Federal governments recently announced joint funding of $985 million of for the Northern Connector project. This will join the Northern Expressway, Port Wakefield Road, South Road Expressway and the Port River expressway and will bypass six busy intersections along South Road.

ADELAIDE INDUSTRIAL SUPPLY

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012 2013 2014 2015Complete Contract Let DA Applied DA Approved Under Construction


ADELAIDE INDUSTRIAL VACANCY

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Total Market

Outer North

Inner North

West

South Sep-15

Mar-15


22-24 Furness Avenue, EdwardstownLeased on behalf of John Weir & Deborah Ann Weir

ADELAIDE PRIME GRADE INDUSTRIAL MARKET INDICATORS

REGION AVERAGE NET FACE ($/m² pa)

AVERAGE YIELD


H2 2015

H1 2016

H2 2015

H1 2016

H2 2015

H1 2016

Outer north $80 8.3% $75

Inner north $110 8% $210

Inner west $140 7.3% $425

Inner south $115 7.9% $425

Outer south $78 9% $70




NEWCASTLE MARKETWarehousing, logistics and the port driving growth

Second Half 2015


Increased demand for warehousing• Increased demand for warehousing and logistics facilities is

being driven by increased activity in the construction sector and a trend towards online retail spending. Furthermore, the Port of Newcastle is experiencing increased volumes in general cargoes and bulk product other than coal.

• The regions network of major arterial routes, rail and port facilities and affordable industrial land are key drivers for companies looking to base their operations in the Hunter region.

• ALDI has secured a site in the Freeway North Estate at Beresfield upon which to build a proposed 32,000sqm RDC, with construction expected to commence in the first quarter of 2017 depending on market conditions.

Demand for warehousing absorbs workshop vacanciesDemand for warehousing is directly responsible for increased rental rates and the absorption of vacant space within prime industrial locations such as Beresfield, Thornton, Mayfield and industrial suburbs surrounding the Port of Newcastle.

Impact of mining downturn

• Increased sub leasing activity for workshops.

• Demand for industrial workshops has eased. Colliers International recorded five work shops greater than 2,000sqm have been leased during 2015 to date, with net rental rates for workshops ranging from $70/sqm to $88/sqm.

• Colliers International note however demand for facilities from mining services related industries has remained steady and still comprises a large proportion of demand within most of the industrial estates within the region.

NEWCASTLE INDUSTRIAL RENTS - WORKSHOP VS WAREHOUSE RATES

$80 $80 $81

$80 $78

$80

$85 $88 $88

$90

$93$95

$100$98

$90$88

$50

$60

$70

$80

$90

$100

$110

2008 2009 2010 2011 2012 2013 2014 2015

Rate

per

m²

Warehouse $/m² Workshop $/m²


IncentivesIncentives within the Newcastle market are typically associated with the leasing of larger facilities and for lease terms greater than three years. Incentives currently range between eight to 10 per cent of the lease term certain.

The majority of lease deals negotiated in the first half of 2015 in prime industrial locations do not include any incentives. The only evidence of incentives have been for older industrial facilities situated in secondary and fringe industrial locations.



Industrial enquiry – first half of 2015Colliers International has experienced improved enquiry from owner occupiers during the first half of 2015, compared to 2014. The emergence of owner occupiers is driven by the current low interest rate environment, together with stable industrial land values throughout the region.

Despite the increased activity levels from owner occupiers, enquiries from tenants represent the largest proportion of overall enquiries received by Colliers International during the first half of 2015.

OWNER OCCUPIERS VS TENANTS

Tenants

Owner Occupiers

34%

66%

Source: Colliers edge

Investment sales transactionsThe demand in the investment market for high quality industrial assets in the region in our opinion, back to pre-GFC levels. In a broader sense, large industrial assets in prime locations with strong lease covenants are typically achieving yields between 8.04 per cent and 8.95 per cent.

Recent notable industrial sales indicate strong demand exists from high net worth investors and wholesale funds. The main attributes investors are looking for in the Newcastle market include location, covenant strength, lease term/Weighted Average Lease Expiry (WALE), lease provisions and building age depreciation benefits.

Recent notable transactions within the Newcastle region during 2015 are listed in the table below:

Industrial land sales transactions improveDemand for industrial land during the first half of 2015 has steadily improved following a decline in sales volumes during 2013-2014. Improved demand has primarily been from owner occupiers looking at site specifics and value for money offerings, however access to labour is also a key driver in the Hunter market.

Serviced industrial land supply is limited to around six key industrial precincts with Beresfield, Cardiff and Mayfield West experiencing the strongest demand.

The outlook for the Newcastle industrial market remains strong and we expect demand for industrial land to continue to improve.

Largest industrial freehold land sale in the Port of NewcastleColliers International has successfully sold the Australian Tube Mills property in Newcastle on behalf of Arrium Limited. The property has been held by Arrium (OneSteel) and BHP entities for over 70 years since it was first developed by BHP in 1935.

This transaction represented the largest freehold land sale in the Port of Newcastle in the last decade. The site comprises 39 hectares of SP1 Special Activities (Port) zoned land incorporating rail access, positioned adjacent to other significant port zoned land holdings.

Approximately 75 per cent of the property (by area) will be leased back by Arrium Limited businesses on an initial 12 year lease term, together with three five year options. The balance of the site comprises a combination of office accommodation and hardstand areas, currently listed for lease with Colliers International.

ADDRESS SALE PRICE DATE LETTABLE AREA (SQM) INITIAL YIELD WALE (YEARS)

Lot 225 Industrial Drive, Mayfield Confidential Jun-15 122,685 8.95% 9.2

1-15 & 2-14 Kings Road & 33 Newton Street, New Lambton $20,950,000 Jan-15 9,877 8.45% 3.63

24 Spit Island Close, Mayfield West $8,350,000 Jan-15 5,257 8.04% 6.1


For further information please contact: Mark Yazbeck Research Analyst | Research | Tel +61 2 4915 4033 [email protected]


NEW ZEALAND MARKETIndustrial’s strong performance continues

Second Half 2015


Demand for occupying and purchasing industrial premises is at record highs across most parts of the country. Developers are keen to alleviate the pressure for tenants needing new space by increasing construction activity, but the low vacancy rates and rising rents indicate the response has not been enough to satisfy demand. New Zealand investors’ love affair with the industrial sector continues, with strong levels of demand pushing yields past previous record lows. Demand from listed and private sector investors continues with owner-occupiers and syndicators also relishing the low interest rate environment.

AucklandVacancy at record low, againThe overall vacancy rate is just 2.2 per cent as at August 2015, down for the seventh consecutive six monthly survey. There is 248,000sqm of industrial space available across Auckland, with only 38,000sqm considered to be high quality, modern space. Secondary grade space availability is also at all-time lows. Forecasts are for further industrial employment and business growth in response to economic expansion, particularly in residential and commercial construction activity and distribution and storage requirements. Net absorption – which tracks changes in net supply and space availability – continues to be high. Net absorption rates would likely be higher if more industrial space had been constructed, but land for development remains limited to a handful of owners – two of the most prominent being Goodman and Auckland Airport.

AUCKLAND REGIONAL INDUSTRIAL VACANCY RATE

0%

1%

2%

3%

4%

5%

6%

7%

8%

Aug-

96

Aug-

97

Aug-

98

Aug-

99

Aug-

00

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Aug-

11

Aug-

12

Aug-

13

Aug-

14

Aug-

15

Source: Colliers International Research New Zealand

More space neededThere is a healthy development pipeline with just over 109,000sqm of industrial space under construction and proposed through to late 2016. This is slightly below last year’s total pipeline of supply.

30 Highbrook Drive, East TamakiLeased on behalf of McPhersons Consumer Products



However, vacancy rates are at all-time lows, soaking up much of the new supply as it becomes available. This includes design builds and speculatively-led developments. Approximately 84 per cent of the new supply is in Manukau, with Goodman Property Trust and Auckland Airport continuing their dominance in building activity.

Prime rents risingThe increase in demand has led to an increase in rents. Face rents for existing supply are edging up, however new build customised industrial premises are growing at a faster rate. Prime rents have increased by an average of four per cent over the past year, now at $132/sqm. Not only is demand causing rents to rise, but increases in construction costs and rising land values are characteristics entrenched in the current environment, and forecast to continue. While land prices above $400/sqm in established industrial precincts have been achieved, evidence is limited. The forecast is for further land value rises, in line with rising rents and firming yields.

Yields firm furtherThere are more industrial properties sold in Auckland each year than in any other non-residential property sector, with almost half of all transaction activity. This is a reoccurring trend since Colliers started tracking sales in 1998. Auckland’s industrial property sales

5 Reliable Way, Mount WellingtonSold on behalf of Delmaine Properties Ltd

represent one third of New Zealand’s industrial sales activity and one fifth of all commercial office, retail and industrial sales. Low interest rates have fuelled debt purchasing and yields are firming to new record lows. One recent example is 3-5 Harbour Ridge Drive, Wiri which sold to a private investor for $8.2 million at a 5.88 per cent yield.

WellingtonRising tenant demandThe recent rise in requirements for storage and distribution activity, combined with the trend towards higher production levels, work orders and employment rates have kept tenant demand for industrial space strong in Wellington over 2015. Wellington’s industrial vacancy rate reached 5.6 per cent in late 2014, but the solid and increasingly broad nature of the tenant demand is expected to push vacancy closer to five per cent by the end of 2015. Recent major leasing examples include Brentwood Transport that leased the 12,144sqm former Colgate Palmolive Distribution property in Barnes Street, Seaview for seven years from September 2015. Retko Logistics leased a property in Bell Road South for nine years from January 2015. The premises comprises 10,469sqm of warehouse; 487sqm of office; 183sqm of canopy; 1,300sqm of yard; and 22 carparks.


Rents start to pick upGross rents for higher quality industrial warehouse and office space have risen by approximately five per cent over the past year to $113/sqm. Landlords are more confident about the operating environment of their tenants and the reduction in supply currently available for tenants searching for new or expansion space. Some tenants that managed to secure rental rates in the lows of 2011–2012 are experiencing significant rent increases as market activity rises. For tenants of older, existing premises, the rise in gross rents over the last two years to $67/sqm is up almost 17 per cent albeit from a low base.

Sales activity risingThe recent rise in institutional demand for industrial premises in Wellington has been matched by local private investors, owner-occupiers and syndicators. Purchasers are taking advantage of the low mortgage rates, Wellington’s comparatively softer yields and the demand for higher returns by investors in a low interest rate environment. One of the most recent sales includes Maat Consulting’s purchase of the former Todd Motor Group complex at 15 Seddon Drive, Porirua for $33 million with $3 million in capital expenditure expected. The property will be syndicated with

an initial return to investors of 9.25 per cent. Premises recent leased by Brentwood Transport and Retko Logistics mentioned previously, have both sold recently for $6.1 million and $6 million respectively. Investment yields were 9.42 per cent and 8.86 per cent respectively. The sale of 10 hectares of land zoned for special business for approximately $100/sqm to a private investor for subdivision into smaller lots provides further evidence of future demand for industrial space.

ChristchurchDemand eases, but remains strongChristchurch’s economy continues to outperform New Zealand overall reflecting the continuing progress in rebuild activity. Over the year to March, Infometrics estimate that Christchurch GDP was up 4.7 per cent compared to the previous figure of 4.9 per cent. The construction sector remains a key component of this growth profile. This has kept vacancy rates low in the industrial sector, which have halved since 2011. As the rebuild takes shape, lower output rates are expected, which will moderate the abnormally high levels of growth achieved in the last four years.

232 Cavendish Drive, WiriSold on behalf of GEK Property




For further information please contact: Chris Dibble Associate Director | Research | Tel +64 9 359 7919 [email protected]

291 East Tamaki Road, East TamakiSold on behalf of Cerebos Greggs Ltd

This will likely ease demand for industrial space to more moderate levels over the long-term, but short to medium term space requirements remain strong.

CHRISTCHURCH INDUSTRIAL VACANCY

0%

1%

2%

3%

4%

5%

6%

7%

Overall Hornby/Islington Middleton/Sockburn Sydenham

Sep-14 Sep-15

Source: Colliers International Research New Zealand

Rental growth moderatesNew build rents now average $120/sqm which increased only marginally in the past 12 months as the market stabilises and becomes accustomed to the rents that are approximately 30 per cent above pre-earthquake rates. Warehouses with rents closer

to $95/sqm are in high demand and receive strong tenant interest when they become available, but the popularity has reduced available supply.

Investment activity robustInvestment trends in Christchurch remain consistent with other markets around the country, with a number of private, owner-occupier and syndicators actively pursuing opportunities. The recent provision of Goodman Property Trust premises for sale with an expected combined value above $40 million has received significant interest from purchasers nationwide. Investment yields for sub $5 million stock remains tight, with yields now pushing towards six per cent on a more regular basis. Rapaki Property Group recently announced the purchase of Silver Fern Farm’s 43 hectares of land adjoining Rapaki’s 23 hectares site acquired in 2012. The undeveloped land is expected to cater to businesses requiring larger land sites of between 2.5 hectares and 20 hectares. Indicative pricing is between $40 and $90/sqm for the raw land and provides a significant opportunity for industrial users in a market with limited options.


Our experience INDUSTRIAL



IN THE LAST 18 MONTHS

leased 300-310 Treasure Road Welshpool, WA30,400m²

On behalf of SGJ Group

Site 5, Keylink South Minto, NSW12,250m²

On behalf of Goodman

37 Freight Street Lytton, QLD30,000m²

On behalf of Goodman

more than 765 transactions covering 2.32 billion square metres

sold1 Sudlow Road Bibra Lake, WA$35 million

On behalf of Aspen Group Management Pty Ltd

494 Rosebank Drive Avondale, NZ$20 million

On behalf of Whau Nominees Ltd

GIC-Frasers Logistics Portfolio NSW, VIC, QLD, SA, WA $1.073 billion

On behalf of GIC and Frasers Property Australia

$5.86 billion of industrial assets

managed35 Bryant Street Padstow, NSW33,980m²

On behalf of Nicker Miles Holding Pty Limited

General Motors Holden Australia HQ 191-197 Salmon Street Port Melbourne, VIC21,763m²

On behalf of Altis Property Partners

300 Manchester Road Auburn, NSW141,200m²

On behalf of private client

more than 1.47 million square metres

valuedPort Air Industrial Estate Botany, NSW90,662m²

On behalf of Goodman Industrial Funds Management Limited

Brisbane Gate Industrial Park, Estate A Hendra, QLD 44,115m²

On behalf of Goodman Funds Management Australia Limited

593 Grand Junction Road Gepps Cross, SA 23,850m²

On behalf of BankSA

over $6.4 billion worth of industrial space

project managedRefurbishment & modernisation Girraween, NSW10,000m²

On behalf of Caleven Pty Ltd

35 Bryant Street Padstow, NSW7,000m²

On behalf of Lincoln Electric

5 Inglis Road Ingleburn, NSW6,000m²

On behalf of CS Logistics

projects delivered by our award winning team

Our experience INDUSTRIAL AUSTRALIA AND NEW ZEALAND

For more information about Colliers Internationaland working with us visit: www.colliers.com.au

IN THE LAST 18 MONTHS

Warehouse C, Beverley Industrial Estate, Pope Street Beverley, SA5,290m²

On behalf of Frasers Property Australia Pty Limited (Australand)

4 Henderson Place Penrose, NZ11,363m²

On behalf of Argosy

9-15 Strezlecki Avenue Sunshine West, VIC7,528m²

On behalf of McNamara Family Group Holdings

more than 765 transactions covering 2.32 billion square metres

The Age Facility 31-69 Western Avenue Tullamarine, VIC$16 million

On behalf of Fairfax

34-44 Jonal Drive Cavan, SA$10.2 million

On behalf of Mirvac

92-116 Holt Street Pinkenba, QLD$16.4 million

On behalf of The GPT Group

$5.86 billion of industrial assets

19 Corporate Avenue Rowville, VIC12,298m²

On behalf of Australian Unity

148B Newton Road Wetherill Park, NSW4,681m²

On behalf of Redsands Equity

1A Queen Street Auburn, NSW16,996m²

On behalf of Australian Executor Trustees Limited

more than 1.47 million square metres

Citilink Industrial Estate Port Melbourne, Vic 23,214m²

On behalf of DEXUS Funds Management Limited

706 Mowbray Road Lane Cove, NSW17,259m²

On behalf of Charter Hall

82 Belmore Road Riverwood, NSW 16,168m²

On behalf of Lend Lease Investment Management (Australia) Pty Limited

over $6.4 billion worth of industrial space

38 South Street Rydalmere, NSW1,200m²

On behalf of Tyco

Industrial expansion Girraween, NSW1,200m²

On behalf of Trend Windows & Doors

201 Alexander Road Perth, WA1,000m²

On behalf of 3M

projects delivered by our award winning team


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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © Colliers International 2015.

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