Research and Forecast Report. Accelerating success. INDUSTRIAL. Second Half 2017

Transcription

1 Research and Forecast Report Accelerating success. INDUSTRIAL Second Half 2017

2 EXPERTS IN PROPERTY DATA & INSIGHTS Colliers Edge is a subscription service developed by our in-house property research specialists, drawing on the expertise of our national network of operators. DEEPER INSIGHTS Largest data set on market today LIMITLESS SUPPORT Analyst not operators FAIRER PRICING Tailored to your needs Want better insights, faster? Talk to a Colliers Edge expert today Anneke Thompson National Director Research anneke.thompson@colliers.com colliers.com.au/colliersedge Accelerating success.

3 CONTENTS Industrial snapshot 4 National overview 5 Sydney 6 Melbourne 10 Brisbane 13 Adelaide 16 Perth 18 Newcastle 20 New Zealand 22 Our experience Industrial 24 Industrial Research & Forecast Report Second Half

4 INDUSTRIAL SNAPSHOT NET FACE RENTS ($/SQM H2 2017) Prime Grade Secondary Grade SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE 4% 1% 1% $140 $117 $107 $73 $106 $85 $76 $65 $96 $60-1% -3% -1% -5% -7% To To note: note: Percentage Percentage change change reflects reflects YoY YoY YIELDS PRIME GRADE H H % 5.73% 6.97% 6.27% 6.88% 6.55% 6.93% 7.30% 8.28% 8.16% SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE YIELDS SECONDARY GRADE H H % 7.13% 6.66% 7.31% 8.28% 8.26% 8.00% 8.15% 9.81% 9.78% SYDNEY MELBOURNE BRISBANE PERTH ADELAIDE SHARE OF SUPPLY TO BE DELIVERED 2017 TO 2020 AVERAGE LAND VALUE RANGES ($/SQM H2 2017) 4% 4% 1% NSW ADELAIDE AVG: $247 AVG: $252 H H % 49% VIC QLD SA PERTH BRISBANE AVG: $225 AVG: $237 AVG: $388 AVG: $380 21% WA NT To Note: H reflects Q data, and H reflects Q data. MELBOURNE AVG: $470 AVG: $490 SYDNEY AVG: $829 AVG: $890 $100/sqm $300/sqm $600/sqm $900/sqm $1,200/sqm $1,500/sqm To Note: Average land values reflect 2.5 ha serviced sites

5 NATIONAL OVERVIEW By Sass J-Baleh Manager Research Summary Industrial property investment demand remains strong; however, this is not being met by supply. Over 2017 (YTD) around $3.2 billion industrial sales was recorded nationally (for sales over $5 million), below the five-year annual average of $6.0 billion, reflecting fewer assets available on the market. The most notable investment sale transaction was the Cope portfolio sold to Ascot Capital for $31.5 million over a 12-year triple net lease at a 7.08 per cent yield. There was a combination of over 20 bids for the portfolio in one line and individual bids on individual assets from both privates, syndicators and institutional investors, demonstrating the strength of the market for core plus assets. Most of the market transactions in the second half of 2017 were from domestic purchasers (approximately 70 per cent), and the remainder from offshore investors mainly stemming from the USA. Over the past few years the share of offshore investors in Australia s industrial property market has increased, and this is expected to continue over the next few years - supported by the improvement in the global economy and projected rise in demand and investment growth in the major advanced economies and in the high-income economies of Asia. The biggest challenge in our view is attaining scale, as accessing products is becoming increasingly limited. The bulk of the industrial market s asset sizes are between $15 million and $30 million, and therefore the weight of demand for the industrial market will continue to be best met by portfolios as they offer both scale, and diversity by geography and tenant mix. Limited property portfolios are however expected to reach the market over the next 12 months, further raising the competitiveness for purchasing assets. Investment choices in logistic-type assets will continue to play a dominant role. In the medium to long-run however we project that the industrial property acquisition mandates will broaden to include more than pure logistics to encompass other more traditional industrial uses. Infrastructure Projects Project Value (AUD Billions) $70 $60 $50 $40 $30 $20 $10 $0 NSW VIC NZ Rail Road Social Infrastructure Water & Sewerage Energy Other Number of Projects To note: Projects included have the following status; prospective pipeline, credibly proposed, announced, under procurement, preferred bidder announced. Source: ANZIP Australia & New Zeland Infrastructure Pipeline / Colliers Research Conditions in the industrial property market remain strongest in Sydney and Melbourne, which is consistent with the relatively higher economic growth in these states. Although the Eastern Seaboard is the focus both nationally and globally, there is a heightened interest in Sydney. Sydney continues to perform above all cities, in terms of capital growth (15 per cent and 26 per cent YoY growth for prime and secondary grade assets, respectively), with the level of committed infrastructure investment over the next ten years a key driving factor. Over the next six months it is anticipated that yields will remain stable (currently averaging at 6.80 per cent nationally), with the long run growth in industrial property values (land, capital, and rent) within the Eastern Seaboard states expected to continue to be supported primarily by the following: Major infrastructure projects Long-term leases - typically backed by multinational corporations A diversified source of capital (local privates, institutions, and super funds, as well as offshore buyer groups). QLD WA SA Number of Projects Industrial Research & Forecast Report Second Half

6 Research & Forecast Report SYDNEY Industrial Second Half 2017 By Sass J-Baleh Manager Research MARKET HIGHLIGHTS Existing and planned infrastructure supporting industrial use have, and will continue to, lead to land value uplift across several sub-markets above historic long run annual average growth rates A lack of stock continues to be an issue across the Sydney market, with several transactions occurring off-market this trend is expected to continue over the next six months A constrained supply of serviced land will limit the amount of development activity post-2018 Speculative developments will occur on a controlled basis within core markets where there is a distinct lack of supply for space over 15,000 sqm Overview Record growth rates in land values across several sub-markets over the past six months has been a key indicator of the positive spillover effects made by large investments in infrastructure within Metropolitan Sydney. Land values in both the inner sub markets (i.e. the South, North, and Inner West) as well as the outer sub-markets (i.e. Central West, South West, North West, and Outer West) have experienced significant growth driven mainly (but not solely) by two types of transport infrastructure: 1. Infrastructure boosting residential amenity (e.g. CBD and South East Light Rail Network), in turn increasing the potential for rezoning industrial sites for higher and better use (i.e. mixed use developments) as urban renewal opportunities are created. 2. Infrastructure boosting industrial precincts access and connectivity (e.g. Moorebank Intermodal Terminal and Northern Road upgrade). The overall Sydney average YoY growth in land values has been approximately 22 per cent (as at Q3 2017), above the five and tenyear annual averages of 12 and 5 per cent respectively. Annual growth rates over the next six months are projected to remain in double digits as the construction phase of major infrastructure projects continue to progress and as serviced land supply is further depleted. The lack of stock on market available for rent and sale, coupled with a limited and diminishing supply of industrial zoned land within the North and South sub markets (representing 3 per cent and 13 per cent, respectively, of total Sydney Metropolitan supply), will continue to be a contributing factor to the rise in land and rental values for these sub-market, in turn, raising the overall Sydney average. As land in these markets are constrained, it is projected that the development of multi-level industrial strata buildings will become ever more attractive to maximise floorspace ratios and market values particularly as small businesses continue to demand space near the CBD. Although the Western sub-markets combined make-up the largest share of industrial zoned land supply (84 per cent) relative to the total Sydney Metropolitan Area s supply, there is currently a lack of serviced land within the outer sub-markets and uncertainty around the land release schedule of employment land (i.e. not yet zoned industrial). The new state planning framework for NSW Towards Our Greater Sydney 2056 due for release at the end of the year is anticipated to provide clarity on the Western Sydney Employment Area land use and release strategy. The current State s strategy is outlined in A Plan for Growing Sydney and supports the takeup of land in outer Sydney. The movement of traditional industrial operations toward Sydney s western industrial precincts allows users to reap the following benefits: Relatively cheaper land values and net face rents average land values in the west are currently at $525/sqm, around 6

7 40 per cent lower than the Sydney average at $889/sqm, and prime grade net face rents at $121/sqm are 14 per cent lower than the Sydney average (as at Q3 2017) Availability of large sites Availability of custom built facilities to meet modern industry requirements, as well as purpose built infrastructure to accommodate large heavy vehicles. It is also important to note that against the backdrop of a growing ecommerce industry coupled with the fact that major ecommerce players are projected to have a strong presence, there will be an increasing need to position logistic/warehouse facilities dedicated for the last mile within Sydney s inner/middle ring precincts. However, finding and securing an optimally located industrial space within this inner area will be a major challenge going forward. Against a backdrop of strong market demand in attaining a limited pool of industrial assets across Sydney, investors are now chasing secondary stock and this reflected in the stronger yield compression recorded for secondary assets relative to prime grade assets. Prime and secondary yields currently average 5.73 per cent and 6.66 per cent, respectively, with secondary yield compressing by 118 bps versus 91 bps for prime over the past 12 months to September Compression rates over the second half of 2017 has however declined, and it is expected that yields will remain stable over the next six months. Submarkets West The Western market, comprising the Inner West, Central West, North West, South West, and Outer West sub markets, will benefit from the large investments being made in transport infrastructure. The positive spillover effects from infrastructure investment are continuing to be observed throughout 2017 as projects construction phases commence. Land value uplift has been mostly realised within the South West and Outer West submarkets where annual growth rates have averaged 45 per cent and 40 per cent YoY, respectively. Although rental growth rates for prime grade stock across the western sub-markets have remained stable, the greatest growth in rental values over 2017 has been recorded for secondary grade assets. The Western market annual growth in secondary grade stock was around 9 percent, as fueled by a combination of extremely low levels of stock and tenant displacement within the Inner West industrial precincts. It is projected that rents will continue to remain relatively unchanged, particularly within the Outer western markets for Sydney Average Land Value Trend Land Value ($/sqm) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Average Land Value Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Average Annual Growth Rate To note: Average land values reflect 2.5ha serviced sites Source: Colliers Edge Sydney Average Net Face Rent & Incentives Rent ($/sqm) $160 $140 $120 $100 $80 $60 $40 $20 $0 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Prime Incentives Secondary Incentives Secondary Net Face Rents Mar-13 Prime Net Face Rents Prime Net Face Rents Forecast Secondary Net Face Rents Forecast Source: Colliers Edge Share of Development Supply to be Delivered in % 25% 3% 10% 39% Sep-13 Mar-14 16% Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Mar-17 Central West Outer West North West Inner West South North South West To note: Share based on floorspace. Only developments over 5,000 sqm included Source: Cordell Connect / Colliers Research Sep-17 Sep % 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% prime grade assets, as the competition between private land owners and established developers remain. To secure large tenants incentives have risen within the South West and Outer West sub-markets over the past few months, rising from an average of 10 per cent at the end of 2016 to 13 per cent (as at September 2017). Competition between developers and private land owners is expected to remain high over the next 6 to 12 months due to continued levels of development activity. The majority (around 93 per cent, or 722,900 sqm) of Sydney s industrial development is expected to be delivered in the Western markets over 2018 compared to 80 per cent in 2017 (for developments over 5,000 sqm). Mar-18 16% 14% 12% 10% 8% 6% 4% 2% 0% Annual Growth Rate (%) Incetive (%) Industrial Research & Forecast Report Second Half

8 Major developments (speculative) include: Calibre Eastern Creek (Mirvac) - a speculative development. This project is to be delivered over five stages, adding 120,000 sqm of industrial space. The site has already secured two logistic tenants CEVA Logistics (19,000sqm) and Sheldon Hammond (31,000 sqm). The total project is expected to be complete by the end of 2018 Oakdale Industrial Estate at Eastern Creek (Goodman), comprising of Oakdale Central and Oakdale South. This project will deliver 241,200 sqm of industrial space by Currently around a quarter of this supply was completed this year. Approximately 36,600 sqm is expected to be delivered in early 2018 pre-committed by Reckitt Benckiser, and 46 per cent of the floorspace to be delivered over the remainder of 2018 Eastern Creek Logistics Facility by GPT is currently under construction and expected to add 25,600 sqm to the industrial supply pool toward the end of Tenant demand over the past year for pre-lease space has been strong as tenant relocation options have been more attractive than the renewal of leases. Large industrial operators have been seeking to increase their supply chain efficiencies demonstrating the current and continued strength in the market for core plus assets. Sites that have the following features will become increasingly important as they offer opportunities for increasing efficiency: Access to the metropolitan population as well as other key stakeholders (e.g. suppliers) Proximity to existing industrial infrastructure Strong accessibility into/out of site easy movement of large freight vehicles and areas surrounded by B-double access routes Internal flexibility in the movement/flow throughout the facility Scale in terms of cubic capacity - supply chain costs are greater than rental costs, and therefore sites that are more space efficient will boost profit margins for many industrial users Scope to cater for current and future technology (e.g. automated material handling and racking systems), therefore can adapt to the changing nature of facilities now and into the future. South Strong competition to find and secure sites within the South sub-market continues to be the main factor driving land and rental values. Land values in the South remain the highest rates relative to all other Sydney sub-markets and have now reached an average of $1,925/sqm, reflecting a 10 per cent YoY increase, over double the Sydney average of $889/sqm. Net face rents have also risen since 2016 above the 10-year annual average growth rate - for both prime and secondary assets and currently average $178/sqm and $139/sqm, respectively. It is projected that land value and rental growth rates will remain positive over the next 6-12 months, although not reaching the same high levels recorded in the past 12 months. Strong take-up of industrial space in this sub-market has been a direct cause of: Record-breaking investments in state significant infrastructure (e.g. the Westconnex Motorway, Sydney Metro City and South West, and the CBD and South East Light Rail) Availability of multi-storey industrial strata units to satisfy the needs of a mix of users (increasingly from creative users) that also require an office component 5 Inglis Road, Ingleburn, NSW Leased on behalf of CS Logistics 8

9 Giraween, NSW Project Managed on behalf of Caleven Pty Ltd Provision of existing and planned residential amenities enhanced by NSW Government s identified urban renewal corridors and the Green Square Town Centre development Access to two (of four) of Sydney s Transport Gateways i.e. Sydney Airport and Port Botany Greater diversity and critical mass of employment users in the area. The extremely low level of stock on market, as well as a continuing depletion of industrial zoned land, has led to more users seeking to locate toward the Outer southern market of the Sutherland Shire where industrial space options are greater. Industrial users from the Inner West who have been forced to relocate have also shown increasing interest to occupy space within the Sutherland Shire. The Sutherland Shire s average strata building and land sales record a large price differential relative to the Inner South market (i.e. precincts of Alexandria, Mascot, Botany etc.) even though the Sutherland Shire values have grown significantly - around 50 per cent growth over the past three years. Current sale rates recorded for the Sutherland Shire include: Strata building sub 500 sqm = $4,000-$4,750 / sqm Freehold building above 500 sqm = $3,000-$4,200 / sqm Land values = $1,000-$1,400 / sqm. The Sutherland Shire is well-positioned to continue attracting industrial users who are relocating from Inner Sydney sub-market due to the critical mass and diversity of business activities in the area and relative short-distance to Sydney Airport and Port infrastructure. Most of the recent industrial developments in the South market have been multi-story industrial units to maximize floorspace ratios and market values. There has been strong take-up for these smaller industrial units, encompassing co-located warehouse and ancillary office space, with demand from a mix of users, and increasingly from creative users (e.g. IT, media, and retail sectors) that have relocated from city locations (such as Surry Hills, Pyrmont, and the CBD) due to rental premiums. It is expected that multi-level industrial buildings will continue to be developed over the next few years to meet the growing demand. North Similar factors that are present in the South market continue to affect the North market. As a result, land and secondary grade rental values have risen significantly relative to historic long-run averages. Due to the lack of transactional evidence for prime grade rental stock, average net face rents have remained at $200/ sqm since the beginning of 2017 still the highest rental rates compared to all other Sydney sub-markets. Net face rents for secondary grade assets however have recorded significant growth throughout the year, currently averaging $164/sqm reflecting almost 20 per cent YoY growth, above the 10-year annual average growth rate of 0.2 per cent. It is projected that rental growth in secondary assets will remain positive over the next six months as limited stock on the market continues to place upward pressure on rents and downward pressure on incentives. The scarcity of stock with long-term leases will however increase the migration of industrial operations (particularly medium to large scale which do not have a localized focus) to move to alternative locations including toward precincts that lie within the North West sub-market. Land values have risen significantly with record breaking YoY growth of 34 per cent, currently averaging $1,675/sqm. As the NorthConnex nears completion (early 2019) and more industrial sites are realised for higher and better use it is expected that average land values will continue an upward trend over the next 12 months. Industrial Research & Forecast Report Second Half

10 Research & Forecast Report MELBOURNE Industrial Second Half 2017 By Anika Wong Manager Research MARKET HIGHLIGHTS Uptick in pre-commitment levels in the West Opportunities above 10,000 sqm continue to remain limited with demand remaining strong Majority of new supply projected to be delivered in the North and West sub-markets Overview There is approximately 336,551 sqm of industrial floorspace currently under construction or have development approval for the remainder of This is well below the five-year annual average of 419,854 sqm. Approximately half of the development activity is expected to be delivered within the North sub-market (51 per cent) with the remainder fairly shared within the East and West sub-markets. Positive tenant demand levels are projected to continue throughout 2017 and into Tenants looking for space this year will find their options severely constrained, given the lack of supply. Moving forward, net absorption will remain positive as development supply remains limited between 2017 and 2019 where 70 per cent of the floorspace supply expected to be delivered in 2018 is in early planning stages of development and therefore not committed. The total volume of investment sales has been increasing over the first, second and third quarters of However, the supply of stock on market has decreased compared to the previous year. The limited opportunities on the market and continued demand from offshore capital has led to yields tightening across all asset classes. Average yields for both prime and secondary grade assets across the Melbourne sub-markets have compressed 13 basis points to 6.27 per cent and 50 basis points 7.31 per cent, respectively. Increased infrastructure spending has impacted property values positively. Projects such as the widening of the Tullamarine freeway, Monash freeway and beginning of the western distributor project have assisted transportation and logistics businesses throughout metropolitan Melbourne by alleviating congestion and improving road efficiency. Submarkets City Fringe The Fishermans Bend Framework plan, due for release end of 2017 is expected to outline the urbanisation investment within Port Melbourne through apartment development as an expansion of Melbourne s CBD residential accommodation and development opportunities in the precinct. In combination of the change in zoning to Capital City Zone in Port Melbourne, land values in the city fringe recorded an increase of 4.3 per cent in the six months to September 2017, raising the average land value to $1,225/sqm. Net face rents in the City fringe for prime and secondary grade stock has remained subdued over the course of 2017 averaging at $166/sqm and $99/sqm, respectively. Incentives have remained at 13 per cent since Q for prime grade whilst incentives reduced slightly for secondary grade now averaging 15 per cent. The next development to be delivered in the City Fringe is The Bund Business Park in Port Melbourne due to complete second half of 2018 and first half of 2019, with 9,767 sqm of industrial space expected to come on the market. This development represents 3 per cent of total supply in Melbourne and therefore will not relieve supply constraint pressures currently effecting the City Fringe sub-market. As a result, we anticipate upwards pressure in rents and land values for both prime and secondary grade stock over the next 12 months. North The North sub-market has seen continued strong tenant demand for prime grade stock. Net face rents increased 3.2 per cent over the course of 2017 now averaging at $80/sqm. Similarly, secondary grade industrial space increased by 4.0 per cent over 10

11 the quarter, after remaining unchanged since mid-2016, currently averaging $65/sqm. Growing tenant appeal within the Hume City Council has seen a surge in land take-up by manufacturing operators, mainly stemming from the food and beverage, logistics and packaging industries since the Government has provided financial incentives for new businesses relocating to Hume as part of the Hume Investment Attraction Framework. Approximately 412,100 sqm of new industrial supply is expected to be added in 2018 within the North sub-market. Much of the development is from the completion of Merrifield Business Park, expected to be delivered in the second half of Across all four major sub-markets, the North is expected to account for over 72 per cent of new supply over the course of 2018 underpinned by the strong demand from food groups seeking sites within the Hume/Whittlesea council areas and attraction of location with substantial infrastructure (power and gas). Prime grade opportunities above 10,000 sqm continue to remain limited against a backdrop of strong demand. Direct Couriers recently secured a 10-year lease at South Centre Road, Melbourne Airport (14,082 sqm) where previously this year, The Workwear Group secured a 10 year lease (26,517 sqm) at 120 Link Road, Melbourne Airport. Share of Supply to be Delivered in % 18% 72% Source: Cordell Connect / Colliers Research Industrial Sales Volume by Quarter 2017 Total Investment Sale (AUD Millions) $800 $700 $600 $500 $400 $300 $200 $100 $0 North South East West 2016 Q Q Q Q Q Q Q3 To note: includes only sales over $5 million Source: RCA / Colliers Edge The tightening of prime grade industrial stock available has also resulted in secondary grade assets transacting and becoming more sought after. Emerging businesses catering to local and export markets are also further boosting owner-occupier activity for established stock as locations with substantial infrastructure remain attractive. As a result, yields for prime grade assets have compressed by 33bps since Q however have compressed greater for secondary grade stock over the same period by 113bps Net Face Rents and Incentives by Grade Net Face Rent ($/sqm) $160 $140 $120 $100 $80 $60 $40 $20 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% Incentive (%) West The Inner West sub-market is experiencing high levels of net consumption as supply tightens and occupier demand for space in the premises increases in popularity. Prime effective rents in the West precinct grew 3.1 per cent since the last quarter of 2016 with secondary grade supply increasing 10.9 per cent in the same period. Capitalizing on pent-up demand, secondary grade incentives reduced from 20 per cent to 15 per cent. The highly-constrained supply particularly for prime grade assets sees demand for retail and infill development sites at an all-time high as pre-lease opportunities particularly this year have been limited. This saw positive net absorption levels for established stock (particularly sites more than 10,000sqm). This is evident in the recent leases of 18,000 sqm at 600 Geelong Road, Brooklyn, 9,000 sqm at 28 Salta Drive, Altona and 15,000 sqm at 77 Millers Road, Brooklyn being quickly absorbed. Strata developments have also experienced activity in pre-commitments, most recently $0 0% 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 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Prime Incentives Secondary Incentives Prime Grade Secondary Grade Source: Colliers Edge demonstrated with Cubed Developments Stage 2, now over 50 per cent sold prior to practical completion. Limited availability has also seen landlords opting to redevelop existing sites and re-strategise their uses where there is a large demand for smaller lots particularly in the Inner West. The West sub-market currently has 84,377 sqm of development supply in the pipeline for the remainder of 2017 including West Park Industrial Estate (37,177 sqm) due for completion in December Over the next 12 months, the West sub-market is expecting an additional 100,390 sqm of new industrial space. On an annual basis, the West has outperformed all other submarkets with land values surging 43 per cent over the year to September Prime locations within the West sub-market have recorded land value rates up to $275/sqm due to industrial Industrial Research & Forecast Report Second Half

12 users preference for strong accessibility to major road networks. Increasing interest for strata property types are prominent in the sub-market with limited land supply pushing up prices in the area. Secondary grade yields compressed by 50 bps to 7.25 per cent however lack of available prime grade stock in the West saw no compression over the quarter. One of these transactions being Marshall Court, Altona including sqm of industrial facility purchased by Logos for $18.75 million reflecting an equivalent reversionary yield of 7.26 per cent. South East and Outer East Large-scale occupier enquiry has focused in the Eastern submarket where larger parcels of land options are available. The Monash precinct has experienced a wave of buyer appetite with owner-occupiers, developers and land-bankers wanting to secure quality space in the tightly held precinct. This is demonstrated in the recent sale of 1513 Centre Road, Clayton and Hardener Road, Mount Waverley transacting a total over $30 million in the second half of Prime face rents in the Outer East recorded 2.7 per cent growth over the course of 2017, with secondary grade rents rising by a similar rate at2.9 per cent. Net effective rents now average $84/sqm and $61/sqm for prime and secondary grade assets, respectively. Net effective rents in the South East increased 2.3 per cent and 1.2 per cent for prime and secondary grade stock respectively over the same period. Incentives for both prime and secondary assets in the Outer East are averaging 13 per cent over the last six months to September Prime incentives in the South East have remained unchanged, however incentives for secondary grade stock have reduced to 13 per cent since June This is contributed by the tightening supply of land within the City Fringe and Eastern submarkets shifting tenant s requirements towards the use of existing available stock. The South and Outer East sub-market accounts for most of the industrial development supply in Melbourne (51 per cent) with over 172,768 sqm of new space delivered over the course of Woolworths Distribution Centre in Dandenong South expected to complete Q will deliver 58,000 sqm of industrial space. Over the next 12 months, an additional 56,146 sqm of industrial supply is anticipated to come online with many of these projects at development approval stage and yet to commence construction. Increased appetite for strata title warehouse units has become a noticeable trend within the last 18 months particularly in the Outer Eastern markets. Strata developments are providing investors with a cheaper alternative to offices and storage focused within the new estates accessible to major arterials and amenities. Opportunities lie within brownfield and infill sites to make better use of existing stock and alternative redevelopments. Owneroccupiers and investors are refitting space to capitalize on the pent-up demand for prime space and as well as accommodate the changing market conditions such as the increasing population growth within the area, particularly in Mount Waverley. Food and manufacturing operators have been active in investment activity as the East continues to appeal to users with the opportunity to host for larger developments whilst providing direct access to major arterial roads. The most recent transaction 4-8 Ricketts Road, Mount Waverley (13,384sqm) a major foodmanufacturing facility which experienced a variety of purchaser types showing significant interest. In the three months to September 2017, the East transacted a total of $303.5 million across nine sales. One of the largest transactions in the second half of 2017 across the Melbourne market was Ferntree Business Park at Notting Hill. Regarded as one of Australia s premier business parks, the 39,000 sqm site was purchased by MTAA for $168 million and is leased to highprofile tenants on a WALE of 6.2 years. A grade yields in the Outer East and South East precinct reduced by 25bps whilst B grade stock in the Outer East fell 50bps and South East fell 75bps over the same period. 52 Dunmore Drive, Truganina Leased on behalf of Goodman Group 12

13 Research & Forecast Report BRISBANE Industrial Second Half 2017 By Helen Swanson Manager Research MARKET HIGHLIGHTS Volume of sales hindered by limited stock available for sale over the first half of 2017 Yields have compressed consistently over the last four quarters but remain unchanged over the most recent September quarter 2017 Signs of improvement in volume of leasing deals as landlords meet market conditions and incentives rise slightly Rental growth remains modest and is expected to remain this way for the remainder of the year Overview Total sales of industrial property across greater Brisbane priced $5 million and above, thus far this year (September 2017) totalled $683.3 million. This compares to $928 million of industrial sales which sold for the 2016 calendar year. Whilst offshore investors still show a keen interest in Brisbane s premium industrial assets, the lack of quality stock to come to the market has reflected a decline in activity from these buyers. Consequently, the percentage of domestic buyers have increased their market share from representing 67 per cent in 2016 to 83 per cent for 2017 year to date whilst offshore representation has declined equivalently from 33 to 17 per cent. The following chart overleaf shows the average prime and secondary grade initial yield for Brisbane industrial property from September quarter 2007 to September quarter 2017 along with the relevant spread. Despite prime grade initial yields tightening significantly from September 2015 onwards, the spread between prime and secondary grade yields has widened to currently sit as at 161 basis points. Secondary grade yields have remained relatively stagnant since September 2015 hence resulting in the increase yield spread, to date. The reluctance of investors to move up the risk curve and seek secondary grade assets may be a result of sluggish economic conditions, particularly within the resource sector, along with the persistently high vacancy rate recorded for this grade of product across most Brisbane industrial precincts. On the leasing front, activity for prime grade warehousing remained buoyant whereas secondary grade stock remains relatively subdued. Overall 125,000 sqm of new warehousing stock was completed for the first half of 2017, of which almost all was leased upon completion. The greater willingness of landlords to accept market expectations has helped improve leasing activity over the first half of the year. Tenants took advantage of the beneficial market conditions, with many moving from older and less efficient facilities into modern warehouse facilities, as well as taking up space in brand new speculative developments. A competitive pre-leasing market saw the average net face rent for prime grade warehousing across greater Brisbane (including Yatala Enterprise Area) remaining steady over the June to September quarter to sit at $105/sqm. On average, incentives for prime grade warehousing sat at 16 per cent as at the September quarter 2017 up from 14.7 per cent recorded in June quarter Subdued conditions also in the secondary grade market saw net face rents fall slightly from $86/sqm in June quarter 2017 to $84/sqm in September quarter Secondary grade net face rents have now consistently fallen over the first three quarters of this year. Submarkets Australian TradeCoast The industrial market in Brisbane has experienced significant leasing activity in the first half of this year, particularly within the TradeCoast region recording over 100,000 sqm of leasing transactions (for warehouses 5,000 sqm and above, over 2017YTD) occurring. Industrial Research & Forecast Report Second Half

14 Prime grade net face rents in the Australia TradeCoast precinct increased by 3.1 per cent YoY to September 2017 to sit on average at $116/sqm. Lack of quality stock has meant movement into new warehouses with occupiers moving from older and less efficient facilities into modern warehouse facilities, as well as taking up space in the brand new speculative developments providing easy access to major road networks and associated infrastructure. Considering existing modern warehouse facilities are tightly held in this precinct, the demand for design and construct product will increase, ensuring those developers that have land banks leverage this benefit in the foreseeable future. Recent examples of the flight to quality warehouses include: Goodman Estate, 96 Export street Pepsi Co (19,783 sqm), Deliver Group (6,438 sqm), MRC (3,734 sqm) Port West Industrial estate Stora Enzo (5,950 sqm) Airport Industrial Park QFS (11,260 sqm) TradeCoast Central Chemist Warehouse (25,860 sqm) Driving growth for industrial product in the Australia TradeCoast precinct is the significant investment in infrastructure projects underway, including the duplication of the runway at Brisbane Airport and the upgrading of Kingsford Smith Drive which will help improve the productivity of the region. Consequently, there remains strong competition from both private, syndicates and REITs for quality industrial assets in the ATC. Some major transactions which took place in Q2 and Q3 this year include: 360 Lytton Rd, Morningside $15.5 million 48 Alexandra Place, Murarrie $12.3 million 21 Metroplex Av, Murarrie $12.1 million 17 Breene Pl, Morningside $9.1 million 43 Holt Street, Pinkenba $6.3 million North and Outer North Leasing activity in Brisbane s North remains relatively modest with vacancy rates still high particularly for secondary grade and/or inferior industrial property located within non-strategic locations. There has however been signs of uplift in leasing activity for prime grade warehouse. Newer built warehouses in Brisbane s Outer North that have been recently leased include: L5, 133 South Pine Road, Brendale 1,600 sqm leased to Pan Asia for a 6+5 lease term 354 South Pine Road, Brendale 1,700 sqm leased to EJ Australia for a 5+5 lease term 14 Business Drive, Narangba 3,300 sqm leased to Hitec Glazing for a 5+5 lease term Prime grade warehousing in Brisbane s North and Outer North is currently achieving between $105/sqm and $115/sqm net face and have been steady over the past year. On average, incentives for this style of asset are currently sitting at 15 per cent. Brisbane Industrial Sales 2007 to 2017YTD Total Sales (AUD Millions) $1,400 $1,200 $1,000 $800 $600 $400 $200 $ * To note: Reflect sales equal to and greater than $5 million *reflects sales upto and including Q Source: RCA / Colliers Edge Brisbane Industrial Yields Prime vs Secondary and Differential Yield (%) 12% 10% 8% 6% 4% 2% 0% Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Source: Colliers Edge South West Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Differential Prime Yield Secondary Yield Driving demand for industrial product, particularly in the South- Western region of Brisbane, is the significant infrastructure underway along with strong population growth. One of the major infrastructure project is the Ipswich Motorway Upgrade: Rocklea to Darra Stage 1. The Australian and Queensland Governments have committed to provide a total of $400 million in funding on a 50:50 shared basis for the upgrade. Expected completion is December Upon completion, the project is anticipated to help improve congestion and road safety along the motorway. Not surprisingly given the major projects under construction and significant population growth in the region, there has been a significant tightening of large lot land supply in Brisbane s South Western industrial corridor particularly for sites larger than 5 hectares located with immediate access to the Logan, Ipswich, Gateway and M1 corridors. Driving this has been the limited opportunities on offer for large lot land sites to develop. Occupiers and developers are now planning up to 10 years ahead and looking for sites to build on that are situated adjacent to existing transport nodes or future network upgrades. Additionally, occupiers who have less flexibility in choosing a location are now starting to look to brownfield sites that provide short to medium term income and that are available for future re-development. The largest sale in the South-Western corridor region for the first half of 2017 was the Coca Cola Amatil s main Brisbane Sep-16 Mar-17 Sep Differential (bps) 14

15 manufacturing plant at Richlands which sold for $157 million to Charter Hall. Spread across 24.9 hectares, the site at Orchard Road will have more than 81,000 square metres of space in two facilities by the end of this year. The Charter Hall fund has taken over the property with a 20-year lease back to Coca-Cola Amatil with 3 per cent annual rent rises. South Demand for industrial property in Brisbane s South for the first quarter of 2017, was quite subdued with major drivers of this being the limited stock of quality investment product available for purchase and greater competition of speculative and precommitment facilities available in strategic locations such as the Australia TradeCoast region. However more recently we have seen this trend turnaround with improved demand over the June and September quarters. Two examples of this are recent preleases in the region to Mitre 10 circa 30,000 sqm and Hilton Food Group circa 45,000 sqm. Logistics property specialist, Logos have been active in the Brisbane s South, recently purchasing a circa 10 hectare parcel of vacant land at 19 and 20 Hashim Place, Berrinba for $22.1 million. The latest acquisition expands the group s development pipeline in Brisbane where they are also undertaking the Logos Heathwood Logistics Estate. A major plus for the region and for industrial property, will be Transurban Queensland s $512 million Logan Enhancement Project. The project will include upgrading parts of the Logan and Gateway Extension motorways, improving key congestion hot spots (Mt Lindesay Highway/Beaudesert Road interchange and the Wembley Road/Logan Motorway interchange) and constructing new south-facing ramps at Compton Road. The project is anticipated for a 2019 completion date. Yatala Enterprise Area (YEA) The good news story for the YEA is that demand for industrial allotments remain strong. Meeting this demand will be the release of stage 6 and future stages of Empire Industrial Estate located at Yatala. On average land rates currently sit from $220/sqm (1ha+) up to $300/sqm (0.2ha) depending upon size and useable area. Major supply additions to come online this year for the YEA region will be the currently under construction Beaulieu Carpets (23,000 sqm) and the OJI warehouse (24,000 sqm) at Yatala, being developed by Frasers Property. Leasing activity remains relatively stable across the YEA region mainly due to tenants now preferring to be owner occupiers and buy rather than lease. A contributing factor to this trend is the record low interest rates on offer resulting in the tenant profile shifting towards owner occupiers. Additionally, whilst there is a lack of quality stock readily available there is enough existing stock in the market to satisfy current demand and consequently rents have remained steady. This trend is anticipated to continue in the short to medium term. Industrial sales in the region have been inhibited by limited availability of stock especially existing freehold built product sized 1,000 sqm plus. Construction activity and the many infrastructure projects underway on the Gold Coast are helping to fuel the demand for strata units sub 500 sqm, which continue to be in demand by both investors and owner occupiers Platinum Street, Crestmead Managed on behalf of Primewest Industrial Research & Forecast Report Second Half

16 Research & Forecast Report ADELAIDE Industrial Second Half 2017 By Kate Gray Associate Director Research MARKET HIGHLIGHTS Industrial vacancy falls Supply pipeline expected to pick up pace Rental growth likely to improve Business conditions improve South Australia is seeing an improvement in the unemployment rate which fell to the lowest level in 5 years at 5.7 percent. State GDP is also expected to pick up pace with total growth forecast at 1.9 percent for There have been several positive announcements recently which are likely to have a positive flow on effect on the Adelaide industrial market. The purchase of Arrium and a majority stake in Zen energy by Sanjay Gupta, the expansion of the Olympic Dam by BHP and the investment in battery storage by Tesla are some of the large announcements in the past six months. Vacancy continues to fall Vacancy has fallen again with a total market vacancy rate of 2.88 percent down from 3.08 per cent in March. There have been consistent falls in vacancy since the peak of 6.4 per cent in March The Outer North market has remained tight with vacancy recorded at 0.56 per cent. This tight vacancy in the Outer North is expected to be short lived however with Holden closing the Elizabeth Plant in October. Several suppliers in the surrounding area expected to vacate in the months following this closure, which will see vacancy rise. However, there is still significant demand for large scale space in the market, and with most of this space of prime grade it is expected to lease. Industrial change of use The Adelaide market is likely to see several current industrial sites rezoned for mixed use over the next two to three years. Two inner city sites have been earmarked for likely rezoning. The first is the Caroma site at Norwood, which has been purchased by a local private developer and will be redeveloped in to a mixed use, medium density development. The second is expected to the Coca Cola Amatil site at Thebarton which has been announced to be closed in This site has been rezoned to mixed use and it is expected that this is likely to be redeveloped due to its close proximity to the CBD and the tram line into the city, making it a very attractive residential medium density development site. Investment market The Adelaide industrial investment sales market has seen below average sales volumes with total industrial sales of $138 million over 2017 (for sales over $5 million). This is below the $226 million in sales in There however appears to be more activity with several large transactions likely to settle by the end of the year. Yields have remained broadly stable, but it is expected that there will be some tightening in the next 6 to 12 months. One noteworthy transaction to come is the Holden site, which has been offered to the market with bids closing in September. At time of writing there is no deal reported for the sale of this site. Settlement however is not expected until 2018 as Holden decommissions the plant and equipment post closure. New supply completions above average New supply to be completed during 2017 is expected to total 66,552 sqm, which is just above the average from Although the pipeline in 2018 is looking rather low, there are several projects which are likely to come to the market over the next few months which will significantly boost supply into next year. It is also expected that DNCS will need to build a facility in the Techport to house the future submarine project, although a construction timeframe has not been announced at this stage. 16

17 The Federal government acquired the TechPort facility in May for $230 million and projected to spend $1.2 billion in infrastructure development with an expected completion in This will further cement Adelaide as the heart of the defence industry in Australia. Leasing markets have remained stable with enquiry continuing to improve. There are several large requirements in the market which are unlikely to be met with current supply leading to further design and construct activity into next year. The tenant groups which are driving demand are manufacturing and logistics with logistics taking up shorter term leases over the last 12 months. North South Corridor Two of the next stages of the North-South Corridor are under construction. The Torrens to Torrens project which joins Torrens Road to River Torrens is expected to be complete by then end of The second is the $620 million Darlington upgrade which will see the Southern Expressway and Tonsley Boulevard and direct access from Main South Road to the Southern Expressway. Two of the eight bridges will be moved into place in October and November this year. This project also includes the extension of the train line from Tonsley to Flinders University. Construction is expected to complete in Industrial Market Outlook The outlook for the industrial market is more positive into The supply pipeline is likely to improve over the next two years because of a tightening in vacancy and an improvement in demand. The tight vacancy rates are expected to result in some higher than average rental growth over the next two years. Adelaide Industrial Supply Floorspace (sqm) 250, , , ,000 50, Complete DA Applied DA Approved Under Construction Source: Source: Cordell Connect / Colliers Edge Adelaide Industrial Vacancy Vacancy Rate 7% 6% 5% 4% 3% 2% 1% 0% Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Source: Colliers Research Demand for investment grade stock is expected to remain high with the buyer pool strengthening, and therefore there is scope for yields to possibly tighten further for prime grade investment stock with long lease terms. There are however some headwinds due in the next 12 months with the closure of Holden and the mediumterm prospect of some of this space being offered back to the market which will increase vacancy in the Outer North over the medium term Senna Road, Wingfield Sold on behalf of Wingfield R Pty Ltd Industrial Research & Forecast Report Second Half

18 Research & Forecast Report PERTH Industrial Second Half 2017 By Quyen Quach Senior Research Analyst Research MARKET HIGHLIGHTS Vacancy remains stable Expected contraction in building activity Initial signs yields are starting to soften Overview Vacancy stabilising alongside economy Perth s industrial market is showing more signs of stability, with vacancy now trending downwards. A recent survey by Colliers revealed robust absorption over the nine months to the end of September 2017 for buildings >2,000 sqm. This has brought the vacancy rate down to 8.3 per cent with 796,375 sqm of vacant space, compared to 9.7 per cent and 891,190 sqm in January Vacancy in larger buildings (>10,000 sqm), continued to moderate, falling to 4.4 per cent down from 6.7 per cent in January Larger building vacancies remain concentrated in the South and East regions, where most this stock is located. The East had a total of 93,010 sqm of >10,000 sqm vacant, while the South had 103,045 sqm. There were no larger vacancies recorded in the North Region. At the smaller end of the scale, warehouse stock between 2,000 sqm and 5,000 sqm experienced a marginal decrease in vacancy, falling to 15.0 per cent from 15.4 per cent in January. Approximately 52 per cent of total vacant space above 2,000 sqm was between 2,000 and 5,000 sqm. Supply expected to moderate In terms of new supply, 165,795 sqm of industrial space with 2,000sqm or more was built in the Perth metropolitan region over the past nine months to September Another 35,645 sqm are under construction and expected to be completed in Q This will push 2017 total supply to 201,440 sqm, down from 248,965sqm in Going forward, the supply cycle for the next two years is likely to be constrained by soft demand. However, there is increasing confidence in a resources sector resurgence with continued demand for materials generated by China s One Belt One Road initiative. This is in addition to the recent surge in exploration and investment in lithium projects. This could boost demand for Design and Construct activity and deliver a better than expected supply cycle. Strong competition see rents moderate The robust supply volume for 2016 and 2017, continued to generate strong leasing competition. Average Perth metropolitan Prime warehouse face rents contracted to range between $68/ sqm and $85/sqm, representing an average fall of 1.6 per cent over Q Secondary face rents, having declined 7.1 per cent YoY, was stable between $55/sqm and $75/sqm over Q Tenants seeking better digs Tenants are continuing to benefit from the soft demand and increased options presented by the increase in stock over the past five years. Mirroring the Perth office market, this has underpinned a flight to quality. Prime space vacancy declined by 91,055 sqm in the nine months since January On-the-other-hand, Secondary grade vacancy declined just 7,045sqm, and accounted for approximately 65 per cent of total space available for rent; up from 60 per cent in January

19 Signs emerge of potential yield softening Average market yields have been historically sharp over the past 18 months, as the global yield hunt rippled through to the Perth market. This has been a product of robust demand stemming from persistent low interest rates, coupled with limited opportunities to acquire securely leased investment grade assets. The strong investment demand and tight yields have driven some large transactions and portfolio divestments over the past year. However, agents are reporting a softer yield environment is emerging. This is likely a result of the anticipated shift in the interest rate environment. In the three quarters to the end of September 2017, there were 26 industrial investment sale transactions over $5 million totalling $400.4 million. Compared to the same period in 2016, transaction volumes were weaker having fallen 27 per cent from 33 sales totalling $359.3 million however the total value has increased due to large transaction sales. Land values stable Land values have been stable over the first half of Demand for well-connected and well-located land remains robust. Recent land releases in established industrial precincts have been reasonably well received. However, those on the outskirts of the metropolitan region have continued to experience a slower uptake. Perth Industrial Face Rents Re nt ($/sqm) $120 $100 $80 $60 $40 $20 $0 Sep-07 Mar-08 Sep-08 Mar-09 Source: Colliers Edge Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Prime Net Face Rents Perth Industrial Floorspace Supply (Buildings over 2,000 sqm) Total Floorspace (sqm) 400, , , , , , ,000 50,000 0 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Secondary Net Face Rents Mar-16 Sep-16 Mar-17 Sep-17 Source: Cordell Connect / Colliers Edge Delstrat Portfolio (23 Destiny Way, 50 Triumph Avenue, 56 Triumph Avenue) Wangara, WA Sold on behalf of Delstrat Pty Ltd Industrial Research & Forecast Report Second Half

20 Research & Forecast Report NEWCASTLE Industrial Second Half 2017 By Julie Farmer Associate Director Operations MARKET HIGHLIGHTS Estimated $6.5 billion in federal, state and private projects currently underway or completed, continue to underpin the industrial market in the Hunter Region Residential construction and renewed confidence in the mining services sector were key drivers in the first half of 2017 Increased leasing and selling activity in prime industrial areas has resulted in improved rental rates, lower incentives, increase capital values and yield compression The low supply of existing freestanding workshop and warehouse for sale has resulted in a faster take-up of industrial land Construction & Resource sectors continue to drive growth Residential construction and renewed confidence in the mining services sector were key drivers in the first half of 2017 and will continue to drive growth and demand for industrial assets in the second half of The number of building approvals for residential and non-residential construction in the Hunter Region has been amongst the highest levels experienced over the last 17 years. Coking coal spot prices still remain high, in the vicinity of $US85.67 / tonne, up from a low of $US53.43/ tonne in Rio Tinto s sale of their Hunter Valley mining assets in the first half of 2017 to Yancoal for $3.5 Billion after a bidding war with Glencore further demonstrating the continued confidence in the Hunter Region s mining sector and infrastructure. In addition to the above, there is currently an estimated $6.5 billion in federal, state and private projects currently underway or completed in the Hunter Region. This spending has created renewed confidence in the region from many sectors, with investors and developers seeking to leverage from the opportunity presented from a region undergoing sustained urban renewal. Incentives Incentives within the Newcastle market are tightening and are typically associated with the leasing of larger facilities for lease terms greater than three years and range between 5 per cent to 10 per cent. The majority of leases transacted during the first half of 2017 in prime industrial areas have featured incentives less than this particularly with freestanding workshops between 600 and 1,200 sqm. Speculative investors purchasing vacant properties Investor demand for industrial assets continues to remain strong. A lack of supply of investment assets with long WALEs and quality tenancy covenants has seen a compression in yields of A grade assets in the prime industrial areas around the Port and the M1 Motorway. Further strength in the market has seen investors competing with owner occupiers for vacant properties with strong fundamentals such as location, low site coverage, high clearance, Heavy vehicle access and parking and future development potential. Demand for land outstripping supply Demand for industrial land has gained further momentum since the first half of 2017 and strong enquiry has been received on all available industrial estates. Existing estates that have provided a steady supply of industrial sites are now experiencing a tightening of supply and commencement of final stages of these projects has begun. Examples include the Freeway Business Park in Beresfield where 60 per cent of the lots released in stage 3 are now sold. Stage 3 of the project was released in early 2017 and 20

21 comprises of twelve lots ranging from 2,800 sqm to 2.0 hectares with prices ranging from $150/sqm to $170/sqm. Another example is the Steel River Business Park where approximately 75 per cent of the lots within the business Park precinct are now sold. Steel river Business Park was released in late 2016 and comprises of Lots ranging in size from 4,000sqm to 9,000sqm with prices being achieved ranging from $145/sqm to $175/sqm. Owner occupier market dominates Historically low interest rates, improved confidence in the region and increased activity from SMSF has seen occupiers continue to drive activity in the market for < 1,500 sqm building size (as reported in the first half of 2017). Furthermore, the number of new service based companies from outside of the region establishing in the Hunter Region has increased significantly in recent years with the majority of these companies now wanting to invest in their own business premises. This has further added to the demand for owner-occupier industrial assets and is expected to continue into Further in the strata market, recent strata warehouse unit development projects have seen increases in capital values as pent-up demand from owner occupiers seeking premises in the sub 500 sqm has resulted in a number of projects being successfully sold off-the-plan - for example 4 Frost Drive Mayfield West purchased by National Auto Glass Hunter Region Building Approvals Building Approvals (AUD millions) $1,200 $1,000 $800 $600 $400 $200 $ Residential Non Residential Source: ABS / Colliers Research Leasing activity strengthens A fast paced regional economy, strong residential construction activity and improved confidence in the mining sector has seen an increase in the enquiries received and the number of leases being transacted in the first half of The improved activity and lack of speculative development of buildings has also seen increased construction activity for industrial buildings with new purposebuilt facilities recently constructed for Mainfreight, GE Mining, FLSmidth, Crown Forklifts. Furthermore, pre-lease construction activity looks set to continue into 2018 with a number of major briefs expected to be released to the market during the second half of Metal Pit Drive, Mayfield West Leased on behalf of Protector Alsafe Pty Ltd Industrial Research & Forecast Report Second Half

22 Research & Forecast Report NEW ZEALAND Industrial Second Half 2017 By Leo Lee Manager Research & Consulting MARKET HIGHLIGHTS Investment activity has been driven by robust occupier and buyer demand, with a shortage of good quality opportunities driving up prices Further development is being hindered by a lack of well-located industrial land, along with rising construction costs All major economic indicators signal an expansionary outlook for the New Zealand economy and the industrial sector Overview The New Zealand industrial market has powered on throughout 2017, with continued upward momentum in all centres. It comes as no surprise that record low yields, high rental growth, and strong capital appreciation have been the outcomes. Investor confidence remains strongly positive with the industrial sector continuing to hold higher net positive confidence than both the office and retail sectors nationally. Industrial building consents issued in the year to Q in New Zealand totalled over $440 million in total value, a 51 per cent increase from Q2 2016, signalling further expansion. However, increasing land values and construction costs will moderate the amount of new industrial development over the short to medium term in some centres. Despite positive investment conditions over the past 12 months, industrial property sales ($5 million or more) have eased from the year to June 2016 peak of over $1.3 billion, indicating a lack of selling pressure rather than a lack of demand. Provisional data for the year to June 2017 shows an aggregate of $869 million of industrial property sold from a total of 72 sales. Submarkets Auckland Demand from both tenants and owner-occupiers has been consistently strong during 2017 as businesses continue to expand off the back of a strong economy. We are now seeing increased demand for larger, higher quality buildings, as well as businesses seeking design-build premises. Approximately 185,000 sqm of development has been completed over the past year. This has played catch up to the excess demand rather than tipping the scales towards oversupply. Another 125,000 sqm is currently under construction. Given the current conditions, some developers or owners with suitable land are going ahead with speculatively built premises. With vacancy dropping to historically low levels, there has been significant pressure on rents, which are expected to grow in the short to medium term. Average prime warehouse rents are now at $119/sqm for September 2017, the same level as 12 months ago, with secondary at $98/sqm, up from $91/sqm. Incentives are still being offered, but at low levels. With limited options available to lease, some tenants are opting to become owner-occupiers where land and building packages are being offered. High investment demand along with a shortage of opportunities has caused yields to remain firm. Average prime yields for September 2017 are 5.8 per cent, with secondary at 7.0 per cent, both the same level as 12 months ago. A recent $7 million sale of 3 Stonehill Drive, Wiri, reflected a strong yield of 4.9 per cent. Over the next 12 months, yields are expected to remain firm, with many cashed-up investors waiting for a chance to buy. Wellington Tenant and owner-occupier demand in Wellington has grown even stronger over the past year, keeping prime vacancy at record lows. Expanding businesses have struggled to find suitable space with some moving into two or three different sites. Further development is being hindered by a lack of available land in the more centrally located precincts, along with rising construction 22

23 costs. This is putting further pressure on the current supply demand dynamic, and driving rents upwards. Prime combined gross rents increased by 6.3 per cent in the year to September 2017 reaching $128/sqm, with secondary increasing by 8.2 per cent to $101/sqm. Major infrastructure projects currently underway will create new efficiencies through improved journey times and connectivity, and in the long term, change the relative merits of various precincts. The Transmission Gully motorway, expected to open in 2020, will service the need for an additional and more reliable route between Wellington and the lower North Island, strengthening accessibility to Wellington as an industrial hub. Christchurch The prime industrial market in Christchurch has remained tight over 2017, stemming from steady tenant demand for high stud premises. The competitive construction industry in Christchurch is keeping building costs in check. Most recent developments have been built for owner-occupiers. Asking rents for newly built prime stock have also been competitive. This has enabled some tenants to expand into newly built premises at a similar rate to an existing property. New build rents are expected to stay at current levels over the short to medium term. In the secondary market increasing vacancy is hindering rental growth, particularly for low stud height buildings. Prime average net warehouse rents remained at $103/sqm in September 2017, the same level as 12 months ago, with secondary also remaining steady at $77/sqm. Incentives for existing buildings are now starting to be discussed more regularly in negotiation. Over the next 12 months, the current level of development is expected to ease. Although fundamentals are encouraging, some constraints on debt availability and uncertainty around rental growth may make developers pause before taking the plunge Auckland Industrial Vacancy Vacancy Rate 4% 3% 2% 1% 0% Overall nehunga/penrose osebank/avondale Source: Colliers Research Mt Wellington Airport Corridor Manukau/Wiri Major Industrial Sales by Value Transactional Value (NZD millions) $1,000 $800 $600 $400 $200 $0 East Tamaki Auckland Wellington Christchurch Rest of NZ FYE16 Mairangi Bay FYE17P To note: Property of NZD $5 million or more only, Provisional for FYE17 Source: CoreLogic / Colliers Research New Zealand Investor Confidence - by Sector Net Percent 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 North Harbour Overall Office Industrial Retail Sep-15 Wairau Valley Mar-16 Sep-16 New Lynn Mar-17 Henderson Sep-17 To note: Annual to June 2017 Source: Stats NZ / Colliers Research Industrial Building Consents (New) - Value and Number Value of Building Consents (NZD millions) $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 1, Number of Building Consents $ Value Number 0 To note: Annual to June 2017 Source: Stats NZ / Colliers Research Sistema Property, 221 Ihumatao Road, Mangere, Auckland Valued on behalf of Lindsay Trust Ltd Industrial Research & Forecast Report Second Half