Sydney, Melbourne industrial markets driven by strong pre-lease activity

Pre-leasing accounted for 95% and 62% of take-up in Sydney and Melbourne, respectively.

A recent report by Dexus Research reveals that supply chain investment by retailers and continued growth in ecommerce is resulting in record levels of industrial take-up in Australia. 

Existing assets are benefiting from falling vacancy rates and the need for new stock is supporting high levels of development. 

The report further notes that demand for industrial space continues to remain at elevated levels with 800,000sqm absorbed over the past quarter. The Sydney and Melbourne markets enjoyed a strong start to the year, together accounting for three quarters of national demand. Pre-lease activity was the main driver of take-up across both markets reflecting 95% and 62%, respectively. 

Here’s more from Dexus Research:

The immediate outlook for rent growth looks strong with South-East Melbourne recording the strongest quarterly growth at +7.9% according to JLL. All Sydney markets experienced substantial growth with the South-West jumping a further 5.6%. 

Rising development costs are expected to add to pressures for rental growth. In FY22, industrial construction tender prices are estimated to have risen by more than 10% and land values in West Melbourne have doubled. In the past few years, rents have been shielded from rising land values and construction costs by yield compression, which underpinned values and allowed supply to come to market at a competitive rent level. Looking forward, if the rate of yield compression slows, rising development costs will have to flow through to higher pre-commitment rents. 

There continues to be a significant weight of capital looking to gain exposure to the industrial sector. Over the quarter around $2bn entered the industrial market, $400m above this time last year. Sydney land fetched the highest transaction value with 1 Augusta Street, Huntingwood for $201m ($928/sqm) and Badgerys Creek Aerotropolis for $140m ($583/sqm). The rate of yield compression appears to be slowing. Average prime Sydney Yields tightened a further 12bps across the board whereas Melbourne and Brisbane remained steady.