Q3 2017 Industrial Market Commentary Brisbane Executive Summary The Brisbane industrial market is showing tangible signs of improvement, after relatively soft leasing conditions in 2016. Gross take-up picked up in 3Q17, totalling 204,200 sqm. Average prime face rents have steadied after a period of decline over the past year. A number of smaller transactions occurred in 3Q17, with total sales volume of just $102.2 million. The year-to-date total is now $541.8 million. New Supply (sqm) (last 12 months) Gross Take-Up (sqm) (last 12 months) 341,200 492,500 Prime Yields 6.00% - 6.75% Average Prime Rents (AUD per sqm) Trade Coast North South 117 109 103 Source: JLL Research Key Indicators Key Indicators 3Q17 1Q17 12-Month Outlook Economic Overview
The Australian economy has slowed over the past 12 months, with year-on-year GDP growth at 2.0%. A number of factors have contributed to the weaker performance. Firstly, lower net export growth over that period, with exports remaining steady while imports continue to grow. Also, household consumption has started to moderate due to high debt levels, weak wage growth and the wealth effect from rising house prices subsiding. However, the labour market has shown positive signs in recent times, with job growth strong and the unemployment rate steadily declining. Queensland s economy experienced a strong quarter in 2Q17, with State Final Demand growth of 1.1%. This brings year-on-year growth to 2.0%, a significant improvement from this time last year. Household consumption, machinery and equipment investment and public sector spending have been the main contributors to this recovery. The negative effects from the fall in mining investment has flowed through the economy. A headwind is that residential construction investment appears to have peaked and will begin to fall. This is because many new apartment projects are struggling to achieve significant pre-sales, and therefore are unlikely to proceed in this cycle. This decline in residential construction is expected to be at least partially offset by an increase in infrastructure spending. The Queensland labour market has shown a material improvement in 2017, with 98,600 jobs created over the past 12 months to September 2017. Another positive sign is that 57,000 of those jobs created were full-time positions. The unemployment rate has subsequently fallen to 5.9%, yet is still above the national average of 5.5%. CPI (year ended %) Jun-17 1.9% 1.8% Real Retail Turnover Jun-17 1.8% 1.7% (s.a. y-y%) Unemployment rate (%) Sep-17 5.5% 5.9% Population (annual %) Mar-17 1.6% 1.6% Official Cash Rate (% p.a.) Oct-17 1.50% n/a Source: ABS, RBA, Deloitte Access Economics 2017 Themes Conditions in the Brisbane industrial market have improved in 2017, as occupier demand strengthens. Gross take-up was 392,000 sqm for the year to 3Q17, almost the same level as the whole of 2016. The recovering Queensland economy has likely contributed to the rise in leasing activity. Pre-lease activity has fallen in 2017, accounting for just 40% of total take-up, compared with 62% last year. Hilton Food Group committed one of the largest pre-lease deals this year in Q3 at LOGOS Heathwood Logistics Estate. The deal involves a purpose built meat processing facility, with a total area of 39,500 sqm. The facility is expected to reach practical completion in 2019 and will supply meat to Woolworths supermarkets in South-East Queensland. Gross Take-Up: Brisbane Industrial Container Trade (full) through the Port of Brisbane grew by 11.6% for the year to September 2017. This was a significant improvement on 12 months earlier when growth was 3.7%. The major contributor to this growth was exports of agricultural seeds and timber. The Port of Brisbane also experienced growth in imports, largely from electrical equipment, building products and household items. In September 2017, the Australian performance of manufacturing index (PMI) had a reading of 54. A figure above 50 implies that the manufacturing sector is expanding. The PMI has been above 50 for the past year, with a lower Australian dollar continuing to provide a boost to the sector., as at 3Q17 The Queensland economy is expected to continue its recovery, with SFD growth forecast to be 3.2% in FY17/18, the best result since FY11/12. Queensland: Key Indicators Period Australia QLD Economic Growth (y-y%) Jun-17 2.0% 1.7% 2
Select Industrial Transactions Queensland in 2017 Address Vendor Purchaser Precinct Date Coca-Cola DC, 260 Orchard Road, Richlands Volvo Australia Warehouse, Lot 2001 Boundary Road, Wacol Oji Fibre Solutions, Lot 22, 146 Pearson Road, Yatala Health World, 741 Nudgee Road, Northgate Northgate Logistics Park, Lot 1 17 Johnstone Road, Brendale The Brisbane industrial market has experienced an increase in supply in 2017, largely because of the pre-lease activity that occurred last year. In 3Q17, six projects completed, adding approximately 146,000 sqm to the market. Of the space completed so far this year, 88.3% had a tenant pre-commitment. Developers have generally been less willing to build speculatively this year compared to the past few years. Transaction activity has been relatively strong year-to-date, with $541.8 million worth of industrial stock sold. The most significant transaction in 3Q17 was Health World at 741 Nudgee Road, Northgate selling for $28.25 million. Trade Coast Seven major occupier moves occurred in 3Q17, totalling 52,200 sqm. Average prime existing face rents remained stable this quarter, after a decline over the past 12 months. Only one asset transacted in 3Q17, worth $6.25 million. Demand Coca-Cola Amatil Occupier demand was relatively strong in the Trade Coast in 3Q17. Gross take-up was 52,200 sqm across seven leasing deals (for occupier moves >3,000 sqm). The most significant deal was Inghams committing to a facility at 102 Trade Street, Lytton. The poultry company took 14,500 sqm of space at the facility owned by Fife Capital. The existing building is to be retrofitted to create a temperature controlled facility for Inghams. Year-to-date, the Trade Coast precinct has experienced improved leasing demand, with take-up of 148,000 sqm, well above the 105,000 sqm recorded for all of 2016. While the higher incentives being offered in the Southern precinct have attracted some occupiers to move away, leasing demand is still strong in the Charter Hall Core Plus Industrial Fund Trade Coast. Tenants continue to be attracted by the proximity to the Port of Brisbane and the Airport that the precinct offers. Supply S Jun-17 GPT Group Garda Diversified Property Fund S Jun-17 Equivalent Yield 5.19% (Initial) 6.24% (Initial) Price ($Million, rounded) $157.00 $35.25 Frasers Property Oji Fibre Solutions S Apr-17 $30.00 Ethical Nutrients Pty Ltd Augusta Capital TC Sep-17 $28.25 Northgate Group TJM N Sep-17 $16.00 There were two completions recorded in the Trade Coast in 3Q17, adding approximately 45,500 sqm to the market. The most significant completion was Bevchain s new 36,000 sqm facility at Tradecoast Central in Eagle Farm. The beverage distribution company pre-committed to the warehouse in early 2016, deciding to consolidate their operations from two facilities into one. The other completion was a 9,600 sqm warehouse at 157 Holt Street, Pinkenba, which was pre-committed by Savco Logistics. Only two projects (>5,000 sqm) are currently under construction, which will add 17,800 sqm to the market. All of the space under construction in the Trade Coast is pre-committed, highlighting the reluctance of developers to build speculatively at the moment. The most significant is the facility being built by the Brisbane Airport Corporation for Quality Food Services (11,260 sqm). Supply Pipeline: Brisbane Trade Coast Industrial 3
Two transactions occurred this quarter totalling $15.0 million. Demand The Southern market experienced strong occupier demand in 3Q17. Gross take-up reached 132,500 sqm for the quarter across six leasing deals. Year-to-date, take-up is 224,900 sqm and is on track to outperform last year s result. Like 2016, a significant amount of take-up this year has been construction led. Only 41% of occupier moves in the Southern precinct have been tenants committing to existing buildings. Asset Performance Prime existing face rents in the Trade Coast remained stable in 3Q17, averaging $117/sqm. Over the past 12 months, face rents have fallen 5.5% in the Trade Coast, largely due to the competitive pressures arising from the pre-lease market. Owners of existing assets have had to compete with developers looking to attract tenants into new buildings. Average incentives have remained steady between 10% and 15% in 3Q17, although have risen over the year. Land values steadied in 3Q17, with the average price in Eagle Farm at $600/sqm and $350/sqm in Lytton for 2,000 sqm lots. Average land values in the Trade Coast for 2,000 sqm lots have grown by 25% over the past 12 months. The main driver of this growth has been demand from small owner occupiers and private developers. Only one transaction occurred in the Trade Coast in 3Q17. The asset at Lot 4, 185 Queensport Road, Murrarie, was sold to a private owner occupier for $6.25 million. Transaction activity in the Trade Coast has been relatively subdued, with $97.5 million worth selling so far in 2017. A lack of stock coming onto the market has largely been the reason for the lower sales volume. The most significant deals this quarter were at LOGOS Heathwood Logistics Estate. Hilton Food Group pre-committed to a purpose built meat processing facility that will be approximately 39,500 sqm. This facility will supply meat to Woolworths stores in South-East Queensland. Woolworths also committed to a temperature controlled distribution centre on the site next door. The facility will have an internal area of 58,700 sqm. Supply Four projects completed in the Southern precinct in 3Q17, totalling 100,400 sqm. The largest development to complete was Super Amart s purpose built warehouse at Rochedale Industrial Estate (50,240 sqm). Supply in the Southern Precinct will be higher than previous years, largely due to the increased pre-lease activity that occurred last year. Approximately 122,100 sqm of industrial space is under construction in the Southern precinct at the moment. The most significant projects to complete by the end of 2017 are OJI Fibre Solutions facility at Yatala (23,600 sqm) and Asahi Beverages warehouse at Heathwood (18,800 sqm). All of the space currently under construction in the Southern precinct is pre-committed by a tenant. Supply Pipeline: Brisbane Southern Industrial Southern A total of six major occupier moves occurred in 3Q17 with gross take-up of 132,500 sqm. Prime net face rents were stable in 3Q17 at $103/sqm. Secondary rents were also steady at $82/sqm. 4
Prime net face rents declined slightly during the quarter to $109/sqm. Secondary rents remained steady at $81/sqm. Five transactions were recorded in 3Q17 in the Northern precinct, worth $81.0 million. Asset Performance Prime face rents were steady in 3Q17 in the Southern precinct, averaging $103/sqm. Face rents over the past 12 months have declined by 4.6% for existing assets, due to activity in the pre-lease market and the competitive effective rental rates being offered. Prelease face rents have remained steady over the past 12 months, although incentives have increased. Incentives in the Southern market have generally remained between 15% and 30% this quarter. Land values rose in Yatala to $275 per sqm (2,000 sqm lot), while in Acacia Ridge, the average rate was stable at $340 per sqm. Average land values have grown by 16% in the Southern precinct, largely driven by private investors and owner occupiers. Demand Three major occupier moves (>3,000 sqm) were recorded in 3Q17, totalling 19,500 sqm. The most significant move was TJM who will relocate from Geebung to their new facility at Lot 1, 17 Johnson Road, Brendale (12,000 sqm). Leasing activity for larger occupiers has been relatively subdued in the Northern precinct this year. A higher proportion of private ownership and the smaller scale of assets has meant that fewer major deals have been signed. Tenant demand for smaller industrial units in the Northern precinct has been relatively strong, particularly around North Lakes and Brendale. Supply There were no completions of industrial stock in the Northern precinct this quarter. However, four projects are currently under construction and due to be delivered in the next six months. Three of these projects are located at New Base Business Park in Brendale and are all being built speculatively by private developers. Supply Pipeline: Brisbane Northern Industrial Two transactions were recorded in 3Q17 in the Southern precinct. The most significant sale was 1699 Ipswich Road, Rocklea, for $9.2 million to a private investor. The asset was sold at a passing initial yield of 10.86% with a WALE of 1.92 years and leased to AHG. Transaction activity so far in 2017 has been strong in the Southern precinct ($351.8 million). Investor demand remains robust, although a lack of stock coming to market is a challenge for buyers looking to deploy capital. Part of the reason for the limited supply in the Northern precinct, is that pre-lease deals have been rare. The last major pre-lease deal to be signed was Nick Scali Furniture committing to Narangba at the end of 2014. Northern Three occupier moves (>3,000 sqm) occurred in the Northern precinct in 3Q17. Overall leasing activity of larger occupiers has been minimal in the Northern precinct over the past 12 months. Asset Performance Prime face rents declined slightly in 3Q17 and have fallen by approximately 6.9% over the past 12 months in the Northern precinct. Rents for secondary assets have also come under downward pressure and declined 5
by 5.8% in the past year. Prime rents for existing facilities are now averaging $109/sqm, while secondary rents are $81/sqm. Incentives have remained stable due to the high proportion of private ownership in the Northern precinct. Private owners generally prefer to offer lower rents rather than offer significant upfront payments for fitouts or rent-free periods. This is causing downward pressure on net face rents. Incentives in the Northern precinct are averaging between 7% and 15%. Land values remained steady in 3Q17, with a 2,000 sqm lot averaging $400/sqm. Land prices have experienced strong growth (8.1%) over the past 12 months, similar to the rest of the Brisbane industrial market. After a relatively subdued 2017, transaction activity picked up in 3Q17, with six sales recorded (>$5 million). The most significant transaction was Health World at 741 Nudgee Road, Northgate, selling for $28.25 million. The asset was sold by Ethical Nutrients to August Capital at a passing yield of 7.03%. Yields Prime yields stabilised in 3Q17 to a range of between 6.00% and 6.75%. Investor demand has remained strong, yet there is a lack of stock coming to the market, particularly prime assets. Investor interest globally appears to have increased over the past few years towards industrial assets, as online retailing continues to grow. As the market has become more institutionalised, foreign investors have shown an increased appetite for Brisbane industrial assets. The Brisbane industrial market still offers value compared to the Sydney market, with an average spread of approximately 88 basis points (bps) as at 3Q17. Therefore, some further yield compression could be experienced in the Brisbane industrial market, because of this relative value. Average Yields: Prime to Secondary Spread Average secondary yields were also steady this quarter, after some compression over the past 12 months. The lack of prime assets is forcing investors to increasingly consider secondary stock. There is also a reasonable amount of demand from private investors looking for high returns. The spread between prime and secondary yields remains elevated at 175 bps, highlighting the increased vacancy risk associated with secondary assets. Outlook Queensland s economy is expected to continue its recovery over the next 12 months. A major driver will be improved population growth, particularly from interstate migration, which should underpin confidence in the economy. An improved outlook for infrastructure spending will also help the construction sector. The labour market is also expected to continue to recover, which will assist with consumer spending in the state. One headwind will be the decline in inner city residential construction as the significant pipeline of projects reach completion. However, investment in the residential sector is just over one third of the investment that occurred at the peak of the mining boom. This means that the negative effects of a slowdown in residential construction will be significantly less than the impact from the end of the mining boom. JLL Research has identified a clear relationship between industrial take-up and population growth in Queensland. On average, each additional person triggers approximately 5 sqm of industrial take-up in the Brisbane market. Therefore, industrial leasing demand should improve with the rise in population and a recovery in the state economy. Australian consumers are continuing to increase their online spending. Nationally, online retail spending has grown by 24.8% for the year to August 2017. The Brisbane industrial property sector should benefit from this transition towards online retailing, particularly with the imminent arrival of Amazon. With the prospect of interest rates rising globally over the coming years, further yield compression in the Brisbane industrial market is unlikely. Rents are expected to stabilise over the coming 12 months after the recent period of decline. Incentives also appear to have peaked and could potentially decline in 2018. Author Tom Broderick Senior Analyst Strategic Research Australia 6
+61 7 3231 1802 tom.broderick@ap.jll.com JLL Brisbane Central Plaza One 33/345 Queen Street Brisbane QLD 4000 Tel: +61 7 3231 1311 Fax: +61 7 3231 1313 This document is confidential to the recipient of the document. No reference to the document or any part thereof may be published, stated or circulated in any communication with third parties without prior written approval from Jones Lang LaSalle. This document has been produced solely as a general guide and does not constitute advice. Whilst the document has been prepared in good faith and with due care, no representation is made for the accuracy of the whole or any part of the document. Jones Lang LaSalle accepts no liability for damages suffered by any party resulting from their use of this document. 7