Savills Research Western Australia Briefing Perth Industrial Highlights The Perth industrial market is firmly in recovery with green shoots emerging in regards to labour market job growth and business sentiment; Half of the sales exchanged during 2017 were for assets $20 million or above, leading to a change in vendor composition; Investment volumes are trending above average with the weight of capital chasing asset continuing to drive Prime yield compression in the Core; Prime Averages (Core Market) Latest 12mo Diff Outlook Rental N.F. ($/sq m) 85-5.6% Incentives (%) 12.5 n/c Yield Market (%) 6.75-13bps IRR (%) 8.38-25bps Capital Values ($/sq m) 1,500 +1.7% Land Values ($/sq m) 425-5.6% There are a number of mandates being tabled in Perth, underpinned by strengthening outlooks in the resource sector, which may improve industrial leasing volumes and growth outlooks in the medium term.
Report Contents Executive Summary 2 Leasing Activity & Demand 3 Rents and Development 5 Sales Activity 6 Infrastructure & Outlook 8 Key Indicators 9 Key Contacts 10 Associate Director Research Katy Dean kdean@savills.com.au For our latest national reports, visit savills.com.au/research To join Savills Research mailing list, please email research@savills.com.au Executive Summary Mining investment is now back to levels prior to the boom year (2012/13), albeit marginally higher and key market indicators are stabilising. While there are signs that a two-tiered market exists between Prime and Secondary space, the market is firmly in recovery with green shoots emerging in regards to job growth. Employment conditions have improved markedly since the end of 2016 and although coming off a low base, industrial sector job advertisements is showing its highest year-on-year growth rate since June 2012. In-demand land supply has mainly been concentrated in the Core and East precincts, with development ready land in Jandakot Airport, Perth Airport, Hazelmere and more recently, Maddington and Forrestfield absorbing the majority of this demand from the pre-lease market. In terms of leasing volumes, tenant demand has contracted when compared to the previous 12 months. The demand cycle through this period has predominantly been shaped by renegotiations and renewals rather than increases in demand for new space. In turn, driving down overall leasing volumes in the short-term. More than half of the sales exchanged in the 12 months to December were for assets $20 million or above. Prime industrial yields have been compressing since 2014, however are now stabilising in all markets except the Core, which has tightened on average a further 13 basis points in the 12 months to December 2017. Perth Markets Summary - Prime Warehouse Precincts N.F. Rent ($/sq m) Market Yield (%) IRR (%) Cap. Value ($/sq m) Land Value ($/sq m) PER - Core 85 (-5.6%) 6.75 (-13 bps) 8.38 (-25 bps) 1,500 (+1.7%) 425 (-5.6%) PER - East* 80 (-8.6%) 7.38 (-13 bps) 8.88 (-25 bps) 1,400 (+16.7%) 388 (+18.3%) PER - North 85 (n/c) 7.50 (-38 bps) 8.50 (-25 bps) 1,300 (n/c) 388 (n/c) PER - South* 78 (n/c) 8.00 (n/c) 9.13 (n/c) 1,125 (n/c) 275 (-12.0%). NB: 12 month change shown in brackets, land values reflect serviced & benched sites (3,000-5,000 sq m). n/c = no change * Please note, there have been some material changes to report methodologies, including precinct suburbs, and material 12 month growth numbers may appear savills.com.au/research 2
Leasing Activity & Demand In the 12 months to December 2017, Savills identified approximately 336,201 square metres of leasing activity (>1,000 square metres) in the Perth Industrial market. This figure is just below the five year average of 383,436 square metres. Occupiers in the transport & logistics and manufacturing/ engineering, followed by construction, mining & agri were the most active takers of space during the 12 months to December 2017. Leases in the Core and East accounted for the majority of industrial stock reported leased in the 12 months to December 2017, covering close to 47% of total leasing volumes through the year. Leasing Activity by Precinct 800,000 Core East North South Non-Metro 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - Direct - existing leases accounted for the majority of reported industrial transactions in the 12 months to December 2017, with renewals/ renegotiation of existing tenancies accounting for the second largest proportion of deal activity at 34%. Approximately 19% of transactions reported were pre-lease deals. Savills closely monitors existing space (5,000sq m+) for lease in the Perth market and has tracked approximately 220,000 square metres of warehouse space currently available in the market. It is estimated that around 16% of this space has been on the market since 2015 and approximately 25% since 2016. Leasing Activity by Industry Type Transport & Logistics - 226,895sqm - 67.5% Manuf/Engineering - 49,883sqm - 14.8% Construction, Mining & Agri - 32,699sqm - 9.7% Undisclosed - 14,080sqm - 4.2% Wholesale - 10,044sqm - 3.0% Leasing Activity by Lease Type 800,000 700,000 Direct - New Direct - Existing Precommit Renewal 600,000 500,000 400,000 300,000 200,000 100,000 savills.com.au/research 3
Western Australia is seeing a resurgence in regards to job growth, with job advertisement numbers on the rise since December 2016. Although coming off a low base, industrial logistics job advertisements is showing its highest year-onyear growth rate since June 2012 the peak of the mining boom. With 106,502 employed in the sector as at 2016-17, according to the Department of Mines, Industry Regulation and Safety, direct employment in Western Australia s mining sector is above the peak of 2012-13 (106,315). However, when looking at direct employment in the sector compared to 10-years ago, it is significantly higher. In 2007-08, approximately 66,000 people were employed in the sector. Logistics Job Advertisements (12 mo Growth % to Nov-17) SA 22.6 WA 21.9 QLD 20.9 AUS 11.5 ACT 9.9 VIC 8.2 TAS 6.5 NSW 4.3 NT -0.6 Source: DOE / Savills Research Top 10 Leases (by Area Leased) Property Tenant Date Area Leased (sq m) Type Rent Term 310 Spearwood Ave, Bibra Lake AWH Oct-17 44,296 r 70 8 28 Sudlow Ave, Bibra Lake AWH Oct-17 39,485 r 62 8 Talbot Rd, Hazelmere Toll Oct-17 20,000 p 88 5 7-11 & 18-25 Gauge Cct, Canning Vale Bevchain Oct-17 19,000 d-e n.a 3 23 Selkis Rd, Bibra Lake Orora Feb-17 18,235 r n.a 5 2 Bannister Rd, Canning Vale AHG (Automotive Holdings Group) Feb-17 17,001 d-e 85 8 11 Carolyn Wy, Forrestfield Salini Impregilo-NRW JV Feb-17 14,374 d-e 95 3 Clifford St, Maddington Yusen Logistics May-17 12,915 p n.a 7 15 Modal Cres, Canning Vale Cope Sensitive Freight Oct-17 9,619 d-e 98 12 7 Modal Cres, Canning Vale Silk Logistics Sep-17 8,161 d-e 85 3 ; Leasing Types: p = Pre-commitment, d-n = Direct New, d-e = Direct Existing, pl = Pre-Lease, s = Sub-Lease, r = Renewal savills.com.au/research 4
Rents As at December 2017, Prime industrial net face rents typically range from $70 to $100 per square metre per annum in the Core and North, $60 and $95 per square metre per annum in the South, and $70 to $90 per square metre per annum in the East. The market has been rebasing its rental levels since the peak of the resources boom in 2012/13. While both average Prime and Secondary grade rents have declined between 10 and 15% between 2013 and early 2016, the last 12 months have shown some signs that rents are close to stabilising. The trend suggests that the first signs of recovery has emerged in the market and while this is yet to translate into higher leasing volumes over the last 12 months, there are indications that tenant demand is gaining some momentum on the back of an improved business sentiment and job growth. Average Prime Net Face Rents by Precinct Average Prime Net Face Rents by Precinct 130 PER Core PER East PER North PER South 120 110 100 90 80 70 60 Supply / Industrial Development Recent pre-lease development has mostly been on private land in Maddington and Hazelmere, as well as continued expansion at Jandakot Airport. Makita s new circa 3,900 square metre warehouse near the Bunnings site in Maddington was completed recently, while new warehouses for Frucor (3,300sq m) and Yusen Logistics (12,915sq m), also nearby, are now under construction for completion timed in 2018. Confidence is returning to the mining and resources sector and a number of producers are looking at new project investments. There s also been a strong growth in jobs recently, particularly in the industrial logistics sector. While there are still a number of macro indicators still undergoing recovery, there are encouraging signs that major leasing activity in Perth is turning a corner with a number of active tenant mandates being tabled for timing in 2018/19. Toll has recently precommitted to lease a circa 20,000 square metre warehouse in Hazelmere with Logos. In-demand land supply is likely to remain concentrated in the East where private development ready land is available. Kenwick in particular is likely to become a significant component of this demand due to plans to build a major new industrial estate adjoining the Midland to Kwinana/Fremantle freight railway. In the North, development ready land is available in areas such as Wangara East and Gnangara. Additionally, with Austral Bricks selling off their former Brickworks site in Malaga recently, it is expected that the 11 hectare site will be sold off as subdivision increasing options for owner occupiers and speculative developers in the North. Completed Development and Pipeline (sq m) 300,000 Completed Under Construction 250,000 200,000 150,000 100,000 50,000 0 ce: Cordell/Savills Research NB: includes new/addition speculative, precommitment, owner occupier development types. Source: Cordell/Savills Research NB: includes new/addition speculative, precommitment, owner occupier development types. savills.com.au/research 5
Sales Activity Savills identified approximately $468 million worth of industrial property transactions (> $2 million) in the 12 months to December 2017. This is below the $732 million identified in 2016, and below the five-year average of $640 million. Half of the sales exchanged in the 12 months to December were for assets $20 million or above. This has led to a change in vendor composition with more private investors offloading assets than the previous period. Growthpoint Properties acquisition of the Desmar Portfolio at Perth Airport for $46 million was one of the largest for 2017 but included four separate yet adjoining properties. Ascot Capital, a Western Australian developer and syndicator, acquired Cope Sensitive Freight s industrial portfolio on a sale and leaseback arrangement for $31.5 million. The portfolio included seven assets across Australia, the largest being 15 Modal Crescent in Canning Vale on apportioned basis of $15.2 million. Ascot Capital also picked up three separate fully leased properties in Wangara for more than $25 million. In August 2017, following a restructure of their WA operations, Brickworks offloaded its Austral Bricks Malaga plant for $19.2 million. The former brick making site was acquired by Aigle Royal Super, a local investor/developer. The site covers approximately 11 hectares and is expected to be sold off as subdivision. Sales Activity by Price $800m $2m - $50m $50m - $100m >$100m $700m $600m $500m $400m $300m $200m $100m $0m Vendor & Purchaser Composition Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Foreign Investor Private Investor Other Yield Spread to Bond & IRR Perth 12% 10yr Bond Rate Average Prime Yield Average Prime IRR 10% 8% 6% 4% 2% % Source: RBA/ Savills Research savills.com.au/research 6
By precinct, average Prime yields in Perth Core range between 6.00% and 7.50%, compared to 6.75% to 8.25% in Perth North. It is noted that there is recent examples of properties in the North in the sub $20 million market with long WALEs trading on market yields of between 6.25% and 6.50%. Capital values have generally held stable since mid-2016. However, investment volumes have been relatively buoyant through 2017 and capital is still seeking investment opportunities, particularly in the Core and East precincts. Please note there have been some material changes to report methodologies, including precinct suburbs, which may affect 12 month figures reported. Prime Average Market Yield by Precinct 10.0 PER - Core PER - East PER - North PER - South 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 Top 10 Sales Property Type Price ($m) Date GLA Yield Type $/sq m 13-39 Pilbara Rd, Welshpool Warehouse 52.02 Apr-17 31,291 7.20 e 1,662 Perth Airport Desmar Portfolio Warehouse 46.00 Jun-17 31,949 7.49 e 1,440 National Storage REIT Portfolio, Rockingham Warehouse 30.00 Jan-17 11,000 n.a n.a 2,727 28 Sudlow Rd, Bibra Lake Warehouse 28.00 Oct-17 39,485 8.49 e 709 10 Bonner Dr, Malaga Warehouse 19.20 Aug-17 25,680 n.a v 748 15 Modal Cres, Canning Vale Warehouse 15.20 Oct-17 9,619 6.17 e 1,580 23 Destiny Way, Wangara Warehouse 15.10 Sep-17 4,570 6.25 e 3,304 285 Collier Rd, Bayswater Factory 12.65 Nov-17 8,911 n.a n.a 1,420 92 Robinson Ave, Belmont Warehouse 11.20 Aug-17 8,542 8.06 e 1,311 13 Modal Cres, Canning Vale Warehouse 10.10 Nov-17 5,477 9.90 r 1,844 ; i = Initial, r = Reported, e = Equated, v = Vacant, dev = development savills.com.au/research 7
Infrastructure The $2.2 billion Forrestfield-Airport Link is a new train line that will open a new rail corridor to Perth s eastern suburbs and connect the City to Perth Airport by rail. Three new stations will be built, including the domestic and international terminals and one at Forrestfield. Constructing works are advancing quickly, with the first train expected to be running by 2020. The $1.12 billion NorthLink WA will be constructed in three sections, all integral to improving freight efficiencies and travel time between Perth metropolitan areas and the north-west of Australia. It is expected to support more than 1,000 jobs during construction, reduce travel times and potentially open up access to previously underutilised employment land. Key Infrustructure Project Summary - Perth Project Est. Cost Status Completion Forrestfield-Airport Link $2.2bn U/C 2020 NorthLink WA $1.1bn U/C 2019 Roe Highway & Kalamunda Road Interchange Armadale Road upgrade $86m Approved 2020 $145m Approved 2021 Source: MainRoads WA, Savills Research. U/C = Under Construction; Works for Stage One, the Southern section started mid-2016 to provide a non-stop transport route from Collier Road through to Reid Highway via the Tonkin Highway. Stage Two began in June 2017 and involves the construction of a free flowing link between Reid Highway and Ellenbrook. Works for Stage Three (Northern section) started in November 2017, with completion anticipated by mid-2019. Outlook Leasing enquiry is expected to trend upwards for opportunities in the traditional, more established precincts, with a steady increase in transactional activity likely as a result. It is anticipated that this demand will be mostly in the sub 10,000 square metre segment for existing supply. Activity in the pre-lease sector has lifted recently, with a number of firms currently undertaking or looking to scope out market options for upcoming requirements. We may see further improvement in leasing volumes as 2018 plays out. Speculative development has been limited, largely in the less established regions and this trend is unlikely to change in the short-term. We may begin to see an increase in the refurbishment or repositioning of older-style facilities due to the shortage of Prime quality facilities in the Core and East as owners look to reposition assets on the back of a brighter outlook for jobs growth and business climate. Yield compression has begun to slow in some of the precincts for Prime investment assets, however there is at least 50 basis point spread between the Prime eastern seaboard markets and Perth, potentially indicating that there is still some compression to come. We do note that there are examples of Prime assets with strong lease covenants trading on market yields closer to 6.00%, below the average Prime yield range. Although there is still some weakness, there has been a general improvement in the state economy as reflected in the jobs market and continued strong export growth. Recent signs of recovery in key market indicators are expected to continue, with a two-tiered market between Prime and Secondary likely to continue. Flight to quality may compound this divergence between Prime and Secondary next year, most likely in the traditional precincts first. savills.com.au/research 8
Perth Industrial Key Indicators (Q4-2017) Perth Core (Belmont, Canning Vale, Kewdale, Welshpool, Jandakot Airport, Perth Airport) Prime Secondary Low High Low High Rental Net Face ($/sq m) 70 100 55 85 Incentives (%) 5 20 10 20 Yield - Market (%) 6.00 7.50 7.25 9.00 IRR (%) 7.75 9.00 8.50 9.25 Outgoings - Total ($/sq m) 20.00 35.00 15.00 30.00 Capital Values ($/sq m) 1,000 2,000 500 1,300 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) Land Values 10 ha and above ($/sq m) 350 (low) 500 (high) 275 (low) 400 (high) 200 (low) 325 (high) Perth North (Balcatta, Joondalup, Malaga, Wangara, Landsdale) Prime Secondary Low High Low High Rental Net Face ($/sq m) 70 100 55 80 Incentives (%) 5 20 10 20 Yield - Market (%) 6.75 8.25 7.25 9.00 IRR (%) 8.00 9.00 8.50 9.50 Outgoings - Total ($/sq m) 20.00 35.00 15.00 30.00 Capital Values ($/sq m) 900 1,700 650 1,100 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) Land Values 10 ha and above ($/sq m) 275 (low) 500 (high) 200 (low) 400 (high) 100 (low) 325 (high) Perth East (Kenwick, Forrestfield, Maddington, Hazelmere, Bayswater, Bassendean, South Guildford) Prime Secondary Low High Low High Rental Net Face ($/sq m) 70 90 55 85 Incentives (%) 5 20 10 20 Yield - Market (%) 6.25 8.50 7.50 9.25 IRR (%) 7.75 10.00 9.00 10.25 Outgoings - Total ($/sq m) 15.00 35.00 15.00 30.00 Capital Values ($/sq m) 800 2,000 500 1,300 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) Land Values 10 ha and above ($/sq m) 300 (low) 475 (high) 175 (low) 325 (high) 150 (low) 250 (high) savills.com.au/research 9
Perth South (Forrestdale, Bibra Lake, Henderson, Jandakot, Kwinana, Naval Base, O Connor, Rockingham, Latitude32) Prime Secondary Low High Low High Rental Net Face ($/sq m) 60 95 45 80 Incentives (%) 10 20 10 25 Yield - Market (%) 7.25 8.75 7.75 10.00 IRR (%) 8.50 9.75 9.25 10.50 Outgoings - Total ($/sq m) 15.00 30.00 15.00 30.00 Capital Values ($/sq m) 750 1,500 650 900 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10 ha and above ($/sq m) Land Values 10 ha and above ($/sq m) 150 (low) 400 (high) 125 (low) 300 (high) 100 (low) 200 (high) Key State Industrial Contacts Research Katy Dean +61 (0) 2 8215 6011 kdean@savills.com.au Industrial Sales & Leasing James Condon +61 (0) 8 9488 4169 jcondon@savills.com.au Industrial Sales & Leasing Matthew Hopkins +61 (0) 8 9488 4119 mhopkins@savills.com.au Valuations Mark Foster-Key +61 (0) 8 9488 4145 mfosterkey@savills.com.au Asset Management Jason Ridge +61 (0) 8 9488 4118 jridge@savills.com.au Project Management Graham Nash +61 (0) 8 6271 0306 gnash@savills.com.au The Savills Research & Consultancy team has years of experience, and is supported by our extensive agency, property management and valuation professionals. For national-level consultancy or subscription requirements please contact: Capital Strategy & Research Chris Freeman +61 (0) 2 8215 6093 cfreeman@savills.com.au Savills is a leading global property service provider listed on the London Stock Exchange. Trusted since 1855, we have extensive experience across the Asia Pacific, with over 50 offices, and in Australia, we have over 800 staff focused on meeting all your property needs. This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills. savills.com.au/research 10