WINTER 2016 MARKET TRENDS Perth Industrial Market Rents have softened. Vacancy is increasing, particularly in older space. Land values have declined marginally over the last year. Sales activity was robust in the last quarter of 2015, but has been slow this year. Investor demand exists. Investment grade properties are in short supply. IN THIS REPORT Market overview 1 Key Influences 2 Demand, Supply, Vacancy 5 Rental market 6 Investment market 7 Key sales 10 Outlook 11 KEY INDICATORS BY SUB MARKET Vacancies are increasing in all sectors of the Perth Industrial market, but in particular for older secondary grade space as tenants seek to upgrade their accommodation requirements at favourable rentals. Rents and yields have both softened over the last year in response to the higher vacancies. The Western Australian economy continues to contract, with rising unemployment, stagnant wage growth, declining population growth and a high budget deficit. The slow-down in mining activity has had an impact on most sectors of the Western Australian economy, and further declines in business investment are expected. The housing construction market is responding to the slow-down in population growth with declines in the number of residential building applications approved and housing starts. Retail trade remains steady and, in an otherwise sluggish economy, the state is witnessing an unprecedented increase in new shopping centres and expansions to existing centres. Low interest rates have done little to improve consumer spending or confidence. Demand continues to exist in the core east and inner south estates, but land in this sector remains constrained. Demand is being driven primarily by tenants seeking either to upgrade and expand for future accommodation requirements at favourable rentals, or to consolidate and rationalise space requirements. Prime net face rents have softened slightly over the course of the last twelve months, and incentives have increased in most sectors of the market, with the effect of a slight softening in yields. Land values have also softened slightly in secondary markets over the last six months but are still high by national standards due to limited supply. Supply limitations for industrial land will continue to underpin values. Sales of properties greater than $5 million have been slow to date in 2016 after robust activity during 2015. Net rents ($/m 2 ) Incentives (%) Market yield (%) Capital value range Land values ($/m 2 ) Prime Secondary Prime Secondary Prime Secondary ($/m 2 ) 1-2ha lots Inner North 115-130 100-115 5-10 5-10 7.50-8.25 8.50-9.00 1,200-1,900 550 Outer North 80-95 70-90 10-15 10-15 7.75-8.75 8.75-9.25 810-1,400 300 Inner South 100-115 80-100 5-10 5-10 7.75-8.50 8.50-9.00 950-1,600 350 Outer South 80-95 70-90 10-15 10-15 8.25-8.75 8.75-9.25 810-1,300 250 Inner East 95-110 80-95 5-10 5-10 7.75-8.50 8.50-9.00 950-1,600 450 Outer East 80-95 70-90 10-15 10-15 8.25-8.75 8.75-9.25 810-1,200 250 Source: m3property (March 2016).
KEY INFLUENCES KEY INFLUENCES There has been a shift in economic activity in Western Australia from mining towards construction and retail. Demand in both of these industries has a knock on effect to demand in the industrial sector. However these industries are also showing signs of slowing growth, particularly residential construction. There is an increased demand for sites in the transport and logistics sector, underpinned by an increase in on-line retail habits. Growth in shopping centre space is providing some support to the construction industry. There are a number of shopping centre expansions due to commence during 2016 and 2017, which should provide some buoyancy in the construction sector. There are a number of metropolitan infrastructure and development projects underway or proposed in the Perth area which are likely to continue to support the industrial market, such as Perth City Link project; Forrestfield - Airport Link; Perth Freight Link; Perth Stadium; and the proposed Perth-Darwin Highway. ECONOMIC GROWTH The downturn in mining investment has had a major impact across most sectors of the Western Australian economy, and further declines in mining capital expenditure are expected. Gross State Product (GSP) is expected to increase by 1.00% in 2015-16, and 1.25% in 2016-17. In 2014-15 GSP increased by 3.50%. State Final Demand is only expected to return to positive growth by 2018-19. After a fall of 3.60% in 2014-15, State Final Demand (SFD) is expected to decrease by 4.25% in 2015-16, and by 3.75% in 2016-17. It is only expected to return to positive growth in 2018-19. Population growth in Western Australia has slowed considerably with continued declines in net overseas and interstate migration. At a rate of 1.3% over the year to September 2015, population growth has declined from a high of 3.7% in 2012. In April 2016 the unemployment rate in Western Australia, in seasonally adjusted terms, was 5.6% which was on a par with the national average. Despite the monthly rate falling since the start of the year, it has been trending up for the last four years. The 10 year monthly average for Western Australia was 4.4%. Seasonally adjusted retail trade rose by 0.6% in the March 2016 quarter in annual average terms. This was the second slowest growth of all states and territories. The national average was 2.9%. Building approvals in Western Australia, particularly residential, have been slowing over the past year. This has now started to affect the number of residential building starts, which were 12.0% down in the December 2015 quarter over the same quarter in 2014. INTEREST RATES Confidence in the economy remains low, and despite historically low interest rates businesses remain unwilling to invest. Continued low interest rates have done little to stimulate residential sales in Western Australia as witnessed by the decline in housing starts. The Reserve Bank of Australia cut the cash rate to an all time low of 1.75% at the May 2016 Board meeting. There is still a wide margin between the risk free rate and industrial investment yields. The 10 year bond rate is likely to reduce further given the interest rate cut in May. Comm3ntary Winter 2016 P2
Yields KEY INFLUENCES The gap between Perth s industrial prime yield and the 10 year bond rate remains wide. 12.0% 10.0% Perth prime yields v 10 year bond 10 year bond rate Perth Prime yield 8.0% 6.0% 4.0% 2.0% 0.0% Source: RBA and m3property Research Perth s industrial market is transitioning away from a reliance on the mining sector towards logistics based industries. Retail trade, and in particular on-line retailing, is a key driver of growth in Perth s industrial market. KEY SECTORAL CHANGES The decline in mining investment is reducing the demand for manufacturing facilities in favour of large warehousing, transport and infrastructure facilities. Growth in on-line retailing has led to growth in demand for warehouses to store and distribute goods. This demand is increasingly from overseas retailers who are aiming to reduce cost of delivery and delivery times of goods. While manufacturing is still an important contributor to the economy, its share of output is declining in relative terms. In 2014-15 manufacturing was 5.0% of GSP for Western Australia, compared with 7.5% in 1990. That said it still increased by 4.0% over the year, which was higher than the total of all industries at 3.5%. An independent review has recommended that LandCorp speed up the delivery of industrial land to the market to avoid a shortfall by 2030. PLANNING In April 2012 the state government released its Economic and Employment Land Strategy (EELS) for non-heavy industrial land in the metropolitan Perth and the Peel regions. This study identified areas of unconstrained land for the establishment of new industrial estates and the expansion of existing estates. The predominance of new development is in the northern precinct, with short term opportunities in Neerabup and longer term opportunities in Bullsbrook. The focus on the northern precinct was driven largely by the need for industrial infrastructure near transport routes to serve the north-west in support of the mining sector. An independent five year review of the operational effectiveness of LandCorp has recommended that LandCorp take measures to speed up delivery of industrial land in Perth and Peel due to an anticipated shortfall of up to 2,300 hectares of industrial land by 2030. Land supply has been constrained over the five year period, and while the pressure is reduced to an extent given the slow-down in mining activity over the last three to four years, there is still a requirement to expedite delivery of land in the areas identified in the EELS in order to ensure social and economic growth in Western Australia. In particular the recommendation is to prioritise development of the Western Trade Coast, which includes Kwinana, Rockingham, Henderson and Latitude 32; and to encourage stronger working relationships between agencies to facilitate the process. Comm3ntary Winter 2016 P3
KEY INFLUENCES Investment in infrastructure is expected to total $22.9 billion over the next four years. There are a number of infrastructure projects underway which will continue to support the Perth industrial market. INFRASTRUCTURE According to the 2016-17 State Budget, investment in infrastructure is expected to total $22.9 billion over the next four years. Northlink WA consists of two projects totalling $1.12 billion, funded by the Federal and State Governments, and will link to Gateway WA, improving traffic flow to commercial and industrial areas such as Malaga, Kewdale, Perth Airport and the Perth CBD. It consists of three distinct sections, the southern section from Guildford Road to Reid highway; the central section from Reid Highway to Ellenbrook; and the northern section from Ellenbrook to Muchea. Construction of the southern section is due to start this year with completion in early 2018; construction on the central section is also due to start this year with completion in 2019, and construction on the northern section is scheduled to start in 2017 with completion in 2019. The Gateway WA project has improved access to the new Perth Airport Precinct by delivering an efficient road and bridge network. The $1 billion project was driven by an expected doubling of freight and passenger air travel over the next decade. The project commenced in 2013 and was completed in March 2016 ahead of schedule. The Forrestfield-Airport Link is a new rail line that will connect Forrestfield to the CBD. This is a $2 billion project and will expose Perth s eastern suburbs to the rail network for the first time, and increase transport from the airport to the city. The design and construction contract was recently awarded to Salini Impregilo-NRW Joint Venture (SINRW) to build eight kilometres of rail tunnels and three stations. The Roe Highway extension (Roe 8), which forms part of the $1.6 billion Perth Freight Link, proposes a 5.2 kilometre extension from Karel Avenue in Jandakot to Stock Road in Coolbellup, connecting the industrial areas of Kewdale and Welshpool with Fremantle. The Western Australian Government recently appealed against a Supreme Court decision last year declaring an environmental assessment and approval invalid. A decision on the appeal is only expected later this year. Comm3ntary Winter 2016 P4
Value of building approvals ($millions) Number of building approvals SUPPLY, DEMAND AND VACANCY SUPPLY AND DEMAND The number of industrial buildings approved has been relatively stable on an annual basis since 2010, but has declined recently; and the value of industrial buildings approved in the twelve months to March 2016 is down by 1% on the previous year, with a clear trend visible since the peak of mining activity in 2012/13. The value of industrial buildings approved remains low as the number of buildings approved greater than $5 million continues to decline. 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 WA industrial building approvals (12 months) Factories Warehouses Agriculture & aquaculture blg Other industrial Number of approvals 1,200 1,000 800 600 400 200 0 Source: m3property and ABS (May 2016) The pipeline will be almost exclusively smaller warehouses and factories in the medium term. Some companies are using favourable leasing conditions to upgrade and increase accommodation space for future requirements. Other companies, particularly in the mining sector, are consolidating and reducing space requirements. There has been a significant reduction in the number of industrial buildings approved in the over $5 million sector (16 in the year to March 2016 compared with 25 in the previous twelve months). This suggests that the pipeline will be almost exclusively smaller warehouses and factories in the short to medium term. Land supply is severely constrained in the core eastern and inner south estates, and little or no opportunity exists for expansion in theses estates. The new Aldi and Kmart distribution facilities at Jandakot Airport have added around 100,000 square metres during 2016. In 2014 rare land became available in Canning Vale at the Swan Brewery Industrial Estate, and a limited number of lots have been released on the third stage of this development. Subdivision from the first two stages generated sales in excess of $70 million; and more than half of stage 3 has sold at rates between $385 and $435 per square metre depending on size. Stage 4 will be developed for a purpose-built facility, while lots in stage 5A will be released later this year. Real Estate Investment Trust (REITs), Australian Real Estate Investment Trusts (A- REITs) and overseas investors are active buyers, but are seeking premium investments and only limited prime stock is available to purchase. Continued low interest rates have done little to stimulate residential sales in Western Australia, and the number of new housing starts is declining. This will have a knock on effect to demand in the industrial sector. Continued demand exists in the core east and inner south estates on the back of limited supply; however, market conditions continue to soften. Demand is being driven by tenants seeking to cut costs, and taking advantage of favourable market conditions to upgrade accommodation. Many companies are using the opportunity to consolidate operations, while others are relocating to larger premises to suit long-terms business requirements. Backfill opportunities are being created in previously tightly held properties, such as the old Kmart distribution facility in Canning Vale. Vacancy levels have risen in core metropolitan estates over the past year, particularly within secondary space occupied by mining services businesses. However, larger well-configured properties in these estates, suitable for logistics or manufacturing, are still in demand. Comm3ntary Winter 2016 P5
Prime net face rents ($/m 2 ) RENTAL MARKET RENTAL MARKET Rents in core estates have softened slightly in the past year. With the exception of well-configured properties suitable for logistics and manufacturing, which are still in demand, rents in most areas have softened slightly in the past year. Prime rents have softened across most sectors of the market in the last twelve months by around 10% to 15%, and are now in a range between $80 and $130 per square metre per annum, dependent upon size and quality. Secondary rents have also softened and typically range between $70 and $115 per square metre per annum. $160 $140 $120 $100 $80 $60 $40 $20 $- Perth prime net rents Outer South Inner North Inner South Inner East Outer North Outer East Source: m3property Research Rents for quality space in northern estates range between $80 and $130 per square metre per annum depending upon size and quality; however, buildings are generally smaller in this sector, resulting in higher rates per square metre. The southern estates generally contain larger buildings in which prime rentals generally range between $80 and $115 per square metre per annum. Incentives have now become a standard feature of the market. Incentives have increased over the last 18 months in all sectors. Levels of between 10% and 15% have become standard in core markets. The transport and logistics industry were reportedly responsible for take-up of around 50% of leased space during 2015. Pre-commitment leasing has been a large feature of the market for the last two years. However in the last twelve months, as many of the projects near completion, there has been a decline in the number of pre-commitment leases, and an increase in the number of direct leases. There have been a number of sale and leasebacks over the last twelve months. There have also been a number of sale and leasebacks in the last twelve months, such as 54 Miguel Road in Bibra Lake. The leaseback is for a 10 year term with two five year options. SELECTED INDUSTRIAL RENTALS Property Tenant GLA (m 2 )* Date (Passing) Rent ($/m 2 )* 54 Miguel Road, Bibra Lake CTI Logistics 22,097 Oct -15 $96 Jandakot City Reece Plumbing 26,261 Dec -15 $86 15 Ashby Close, Forrestfield 14 Meares Way, Canning Vale Source: m3property ASCO Transport 11,416 Apr - 16 $131 N/A 942 Jan -16 $96 Comm3ntary Winter 2016 P6
Sales volume ($millions) INVESTMENT MARKET After experiencing robust sales in 2015, particularly in the last quarter, the first half of 2016 has been slow. INVESTMENT MARKET Despite business confidence remaining fragile sales activity was robust during 2015, and more than $700 million of sales of properties greater than $5 million were recorded. The majority of sales occurred in the final quarter of 2015. The sale of Stockyards Industrial Estate in Hazelmere to Charter Hall for $240 million in December accounted for 34% of the value of all sales during 2015, and is the highest value sale in the Perth industrial market in almost a decade. Stockyards is a master-planned estate with a net lettable area of 99,707 square metres. The sale reflected a rate of $2,407 per square metre, and a market yield of 6.51%. During 2016 m3property has identified just over $100 million of sales of properties greater than $5 million (up to the end of May). The largest improved sale was 15 Ashby Close in Forrestfield which sold for $18.41 million in April. $800 $700 $600 $500 $400 $300 $200 $100 WA sales by price range >$20 mill $10 mill -$20 mill $5 mill-$10 mill $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* Source: m3property Research (* to the end of May 2016) Sales over $5 million A low level of prime stock is preventing investors from becoming active. Substantial demand exists from REITs, A-REITs and overseas buyers; however, very low stock levels for prime grade property in the core estates has prevented these buyers from becoming active. Some larger sales in core markets in the past twelve months have represented redevelopment opportunities. These properties have been keenly sought given the very limited supply which exists in this sector. LOGOS Property has acquired several sites in Hazelmere on Talbot Road, Lot 11, Lot 152 and Lot 153, totalling approximately 21 hectares, for which they have paid a total of $48.8 million. The property is strategically located adjacent to the Perth Airport, with easy access to major arterial roads such as Roe, Tonkin, Great Eastern and Leach Highways. LOGOS plans to build a $130 million logistics park and has a pre-commitment from McPhees Distribution Services for a 20,500 square metre site. RECENT PROPERTY SALES Qtr Price (millions) Market Yield GLA rate /m 2 Purchaser 15 Ashby Close, Forrestfield Q2/16 $18.41 7.73% $1,613 Stockyards Industrial Estate, Hazelmere 300 Collier Road, Bassendean Source: m3property; *approximate Perdaman Industrial Property Pty Ltd Q4/15 $240.00 6.51% $2,407 Charter Hall Q4/15 $5.50 9.00%* $1,170* Hicon WA Pty Ltd 54 Miguel Road, Bibra Lake Q3/15 $26.00m 8.12% $1,177 CTI Freight Systems Pty Ltd Comm3ntary Winter 2016 P7
1-2 ha serviced lots ($/m 2 ) Yields (%) INVESTMENT MARKET Yields have stabilised this year after softening slightly in the latter half of 2015. YIELDS Yields have stabilised or softened slightly throughout the past twelve months on the back of higher vacancies, increasing incentives and generally subdued market conditions. The divergence between prime and secondary markets remains, based on the primary market drivers of quality, location, and lease covenant. Yields for prime assets are typically in a range of 7.50% to 8.75%, while yields for secondary assets are generally in a range of 8.50% to 9.25%. Perth Industrial prime yields 9.00% 8.75% 8.75% 8.75% 8.50% 8.25% 8.50% 8.50% 8.00% 8.25% 8.25% 7.50% 7.50% 7.75% 7.75% 7.75% 7.00% m3property Research (March 2016) LAND VALUES Land values have declined marginally over the last twelve months, particularly in secondary markets. Perth s industrial land values tend to remain high by national standards but this is driven predominantly by constrained supply. While land values have generally remained steady over the last three years on the back of limited supply, there has been a small drop in price noted recently in secondary markets. Perth land values (1-2 ha lots) $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $- m3property Research Comm3ntary Winter 2016 P8
1-2 ha serviced lots ($/m 2 ) INVESTMENT MARKET Demand has eased over the past twelve months as a result of softer conditions in resource markets and fragile business confidence; which in turn has reduced competition in the market and therefore the driver for growth. Secondary markets are showing lower levels of demand. Land values vary significantly depending upon size and location. The predominance of demand has been in the core or prime sectors in the east and inner south due to superior access to transport infrastructure; however, supply is constrained by limited opportunities for expansion of these estates. Generally secondary estates in the northern and southern precincts are showing lower levels of demand, a reduction in speculative development activity and a greater reliance on the non-mining economy. Estates such as Malaga are relatively tightly held and land supply is limited. Typically lot sizes are smaller, but some demand exists for larger sites for heavier industrial uses, and these are catered for predominantly in Neerabup to the north and Latitude 32 to the south. Land values vary significantly depending upon size and location. Freehold sites of around one hectare in the eastern precinct are selling in a range of $300 to $600 per square metre, while smaller sites will generally sell in a range of $400 to $800 per square metre. Perth average land values $550 $450 $300 $350 $250 $250 Inner North Outer North Inner South Outer South Inner East Outer East m3property Research (at March 2016) Some estates such as Forrestdale have been languishing in the market, predominantly as a result of a lack of an established hinterland, and in some cases poor marketing and development planning. However, renewed interest has been noted in Forrestdale driven in part by good road access as well as availability of some larger development parcels. RECENT INDUSTRIAL DEVELOPMENT SITE SALES Price Area Qtr Land Sales (millions) (m 2 Land/m ) 2 Lot 153 Talbot Road, Hazelmere Lot 11 Talbot Road, Hazelmere Source: m3property Q4/15 $17.50 69,024 $254 Q2/15 $19.30 76,889 $251 Purchaser Perpetual Corporate Trust Ltd Perpetual Corporate Trust Ltd Comm3ntary Winter 2016 P9
KEY SALES m3property analysis of 54 Miguel Road, Bibra Lake 54 Miguel Road, Bibra Lake Sale Price: $26,000,000 Sale Date: October 2015 Initial Yield: 8.12% Market Yield: 8.12% IRR: 8.81% GLA Rate (per square metre): $1,177 WALE by area: 10.0 years m3property analysis of 35-39 Baile Road, Canning Vale 35-39 Baile Road, Canning Vale Sale Price: $39,500,000 Sale Date: September 2015 Initial Yield: 6.99% Market Yield: 6.99% IRR: 8.25% GLA Rate (per square metre): $1,890 WALE by area: 10.3 years m3property analysis of 15 Ashby Close, Forrestfield 15 Ashby Close, Forrestfield Sale Price: $18,410,000 Sale Date: April 2016 Initial Yield: 8.15% Market Yield: 7.73% IRR: 7.74% GLA Rate (per square metre): $1,613 WALE by area: 3.1 years Comm3ntary Winter 2016 P10
m3property Research For more information on the WA industrial market please contact: infowa@m3property.com.au OUTLOOK The outlook for the Perth industrial market is currently subdued. Research Contact Janis McLaren P 08 6500 3600 janis.mclaren@m3property.com.au The industrial property market in Perth remains sluggish and is unlikely to experience any substantial growth over the next few years given the slow-down in the economy. Any growth is likely to be driven by an increase in transport and logistics based industries related to retail distribution. Demand is expected to be buoyed by tenants wishing to relocate to more suitable premises while rentals and incentives remain in their favour, but this will create backfill space, particularly in older, secondary grade space. It is likely that refurbishment will become a feature in this market, and this may provide an increase in activity in this market sector. Western Australia, there are a number of major infrastructure projects underway or due to commence over the next twelve months, such as, Forrestfield-Airport Link, Northlink WA and Perth Freight Link, which will continue to support the industrial market. There are also a number of shopping centre expansions planned which should give further support to the market. While vacancy remains lower in core estates, it is expected to increase in all sectors of the market, particularly with increases in backfill space. Higher vacancies, larger incentives and lower rents are likely to remain a feature of secondary markets for the short to medium term. Key Valuation Contacts Gavin Chapman P 08 6500 3600 M 0419 969 975 gavin.chapman@m3property.com.au Christopher Mackay P 08 6500 3600 M 0431 955 184 christopher.mackay@m3property.com.au The predominance of buyer activity in the market has been from high net worth individuals or syndications; however, REITs, A-REITs and overseas investors have emerged as active buyers. This increased competition may underpin core markets; however, limited opportunities exist to purchase prime investment grade assets in the industrial market at present. Investor preference is likely to remain in the core market sectors, where tight supply will continue to buoy values but constrain transactional activity. While business investment remains low in Definitions Submarket Inner North Definitions Outer North Inner South Suburbs include: Osborne Park* Balcatta* Bayswater Bassendean Malaga Neerabup Wangara Landsdale Canning Vale* Jandakot Airport* Booragoon Myaree O Connor OFFICES Adelaide Brisbane Melbourne Level 3 44 Waymouth Street Adelaide South Australia 5000 T 61 (8) 7099 1800 F 61 (8) 7099 1850 Level 2 15 James Street Fortitude Valley Queensland 4006 T 61 (7) 3620 7900 F 61 (7) 3620 7999 Level 29 600 Bourke Street Melbourne Victoria 3000 T 61 (3) 9605 1000 F 61 (3) 9670 1658 Perth Sydney Disclaimer Unit 2 168 Stirling Highway Nedlands Western Australia 6009 T 61 (8) 6500 3600 F 61 (8) 6500 3698 Level 23, MLC Centre 19 Martin Place Sydney New South Wales 2000 T 61 (2) 8234 8100 F 61 (2) 9232 5144 info@m3property.com.au This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Outer South Inner East Outer East Jandakot Cockburn Central Bibra Lake Henderson Forrestdale Kwinana Naval Base Latitude 32 Wattleup Belmont* Kewdale* Welshpool* Perth Airport* Forrestfield Hazelmere Redcliffe Midvale Bellevue *denote core estates