Australian industrial sector poised for another robust year with unabated tenant demand

Industrial transactions are off to a good start with $1.5b in Q1.

Leading into 2021, Dexus Research says the outlook for the industrial sector looks strong. In a year where income preservation has been key for other sectors, the industrial sector has experienced solid demand; above average in Sydney and Melbourne. Robust tenant demand has fueled the need for more supply and given investors confidence to acquire and develop product. The fundamentals of industrial markets position it for another robust year.

According to Dexus Research, the transaction market is off to a strong start with $1.5bn in transactions over the past three months. Strong investment demand has led yields to tighten. GPT purchased an asset in West Melbourne on a sale and leaseback term to online retailer Vida Excel at a yield of 4.1%, while Dexus purchased 278 Orchard Road, Richlands at a yield of 5.5%. Yields across all key markets continue to tighten (Figure 13).

Here’s more from Dexus Research:

During 2020, speculative development levels fell significantly below average as developers took a more cautious approach. Prime vacancies also fell and given increased demand for modern, more specialised facilities from online retailers and logistics players, pre- lease rents grew a little faster than rents on existing premises (figure 15).

Land values continue to escalate in West Melbourne and Sydney as investors sought to secure key locations in close proximity to infrastructure and motorways. The lack of available land in inner locations has driven investors further west in Sydney, following the rezoning of land around Badgerys Creek and further North within the Melbourne market. Land values are likely to climb further given the strong demand outlook.

Over the past quarter we have seen rent growth in Outer West Sydney (+1.6%), South Brisbane (+1.1%) and South East Melbourne (+2.2%). Incentives in key markets appear to have remained relatively steady and, in some cases, declined.

Whether the recent sale of Blackstone’s ‘Milestone portfolio’ to ESR for $3.8 billion leads to an overall repricing of the industrial sector is something that will be keenly watched.