Savills Research Queensland Briefing Brisbane Industrial Highlights After a record 2016, leasing volumes in Brisbane industrial have softened, resulting in subdued rental growth; On the back of a buoyant pre-commitment market, supply in the Brisbane industrial market is expected to reach 395,000 square metres in 2017 - a 19% increase on the year prior; Local REITs were the most active purchaser type in the year ended December 2017, purchasing 32% of reported sales; Prime Averages (Trade Coast) Latest 12mo Diff Outlook Rental N.F. ($/sq m) 133 n/c Incentives (%) 10.0 n/c Yield Market (%) 6.63-38bps IRR (%) 8.50 n/c Capital Values ($/sq m) 1,925 (-0.7%) Land Values ($/sq m) 475 (+11.8%) Improvements in commodity prices and the positive outlook for exports, has helped stimulate job advertisements for the industrial sector.
Report Contents Executive Summary 2 Leasing Activity & Demand 3 Rents and Development 5 Sales Activity 6 Infrastructure & Outlook 9 Key Indicators 10 Key Contacts 10 Senior Analyst Research Houssam Yakzan hyakzan@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 Major project completions in the mining sector have helped to stimulate Queensland's economic growth, with growth in State Final Demand for the 12 month period rebounding above long term averages. Ongoing mining projects in Queensland are likely to see continued positive effects on the Queensland economy and thus spill over into the industrial sector, aiding leasing demand. Indeed, we are already seeing a notable rise in speculative supply in Brisbane s industrial market in 2017, as a result of the improving economic conditions and positive sentiment around tenant demand. Following a period of record high leasing activity in 2015 and 2016, leasing activity showed signs of stabilisation in 2017. Prime net face rents remained stable over the 12 months to December 2017. The Trade Coast precinct led the other major industrial areas in terms of net rental levels, with net face rents typically ranging from $115 to $150 per square metre per annum. Looking at transaction activity, local REITs were the most dominant purchaser type, accounting for 29% of total industrial assets sales in Brisbane s industrial market over the 12 months to December 2017. Sales activity over the latest 12 month period has remain positive with over $972 million reported transactions.there appears to be a renewal of interest in industrial assets in Brisbane, on the back of positive forward looking indicators; such as record high corporate profits in the mining sector, above average employment growth (especially in engineering jobs) and major project starts in Queensland which are likely to boost the leasing market and aid largely stagnant rents. Brisbane Markets Summary - Prime Warehouse Precincts N.F. Rent ($/sq m) Market Yield (%) IRR (%) Cap. Value ($/sq m) Land Value ($/sq m) BRI Southside 118 (n/c) 6.63 (-50 bps) 8.75 (n/c) 1,725 (+3.8%) 298 (+5.3%) BRI Northside 120 (n/c) 6.63 (-50 bps) 8.50 (-25 bps) 1,750 (+2.9%) 338 (+8.0%) BRI - Trade Coast 133 (n/c) 6.63 (-38 bps) 8.50 (n/c) 1,925 (+0.7%) 475 (+11.8%) BRI - M1 / Logan Cor. 113 (n/c) 6.63 (-50 bps) 8.88 (n/c) 1,700 (+7.1%) 263 (n/c) BRI West 105 (n/c) 6.88 (-38 bps) 9.13 (n/c) 1,525 (+4.3%) 203 (n/c) ; Note: 12 month change shown in brackets, land values reflect serviced & benched sites (3,000-5,000 sq m). n/c = no change savills.com.au/research 2
Leasing Activity & Demand Subdued leasing activity was recorded over the 12 months to December 2017, following a period of record high leasing activity in 2015 and 2016. Savills identified approximately 355,000 square metres of industrial space leased in the 12 months to December 2017. This is down on the five year average of 656,500 square metres. The Wholesale category was the most dominant, accounting for 70% of total leasing activity (or 321,300 square metres). The majority of leases were transacted in Brisbane s Southside precinct accounting for 183,645 square metres or 59% of total leasing activity. The Southside precinct was also notable for the most number of leases, as smaller occupiers took advantage of more affordable leasing agreements. Leasing Activity by Precinct 1,000,000 West Southside Northside Trade Coast South East 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - New leases to existing buildings accounted for the majority of industrial stock leased in the 12 months to December 2017, accounting for over three-quarters of total leasing activity, absorbing vacant space and thus driving down vacancy rates in Brisbane s industrial market. The pre-commitment market was similarly subdued over the same period, with only 104,800 square metres precommitted to new buildings. The most significant of these was Super Amart who pre-committed to approximately 50,000 square metres in Goodman s Rochedale Motorway Estate. It is important to note that with a number of precommitment enquiries yet to be signed, there will be an uplift in pre-commitments over the first quarter of 2018, leading to a recovery in tenant demand in 2018. Leasing Activity by Industry Type Wholesale - 249,120sqm - 70.2% Transport & Logistics - 58,033sqm - 16.3% Manuf/Engineering - 43,318sqm - 12.2% Property & Business Services - 1,335sqm - 0.4% Construction, Mining & Agri - 1,170sqm - 0.3% Leasing Activity by Lease Type 1,000,000 Direct - New Direct - Existing Prelease Precommit Renewal 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 savills.com.au/research 3
Regarded as a lead indicator for tenant demand, logistics job advertisement numbers grew by 20.9% over the 12 months to November 2017. This growth in industrial job advertisement for the sector points to stronger future demand and may provide the impetus for business expansion. 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 15 Leases (by Area Leased) Property Tenant Date Area Leased (sq m) Type Rent Term 220-260 Orchard Rd, Richlands Coca-Cola Amatil Dec-17 81,008 pl 101 20 Rochedale Motorway Estate, Rochedale Super Amart Jun-17 50,585 pl 105 20 Bld 1 & 2, 96 Export, Lytton Pepsico Jun-17 19,738 d-n 120 3 9 Anton Rd, Hemmant Winning Appliances P/L Jul-17 18,289 d-e 95 5 102 Trade Street, Lytton Inghams Jul-17 15,500 d-e 230 15 Bld C, 62 Stradbroke St, Heathwood Toll Oct-17 14,467 d-e 100 1 Gilmore Rd, Berrinba QLS Logistics Dec-17 12,300 d-e 108 7 39 Kerry Rd, Archerfield Culture Kings May-17 9,508 d-e 80 7 30 Bellrick St, Acacia Ridge Rocket Logistics Mar-17 8,494 d-e 95 3 Eucalyptus Dve, Brisbane Airport Miele Australia Oct-17 7,065 pl 130 7 B, L102 Wayne Goss Dve, Berrinba PACCAR Australia Oct-17 6,293 d-e 110 5 Portwest Wstate, Lytton Stora Enso Jul-17 5,950 pl 129 7 1A, 836 Boundary Rd, Coopers Plains Market Direct Group Jun-17 5,877 d-e 90 5 30 Fox Rd, Acacia Ridge Concept Logistics Nov-17 5,724 d-e 105 2 4 Formation St, Wacol Truss Corp Oct-17 5,684 d-e 76 10 ; 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 Average Prime Net Face Rents by Precinct Prime industrial net face rents remain stable, with the Trade Coast precinct remaining the most expensive area to lease in, typically ranging from $115 to $150 per square metre per annum. By comparison, the average rate for the Southside and Northside precincts remain lower, at $118 and $120 respectively. Competitive rents offered by developers in the precommitment market are also holding back Brisbane s rental growth, with a large number of tenant inquires receiving competitive rental rates along with attractive incentives. 140 130 120 110 100 90 80 70 BRI - Southside BRI - Trade Coast BRI - M1 / Logan Cor. BRI - Northside BRI - West 60 Supply / Industrial Development Brisbane s industrial market delivered approximately 395,000 square metres of new or additional space in 2017, this was a 19% increase over 2016 (331,800 square metres). Following record levels of development after Queensland s mining boom in 2012, industrial supply has slightly tapered off since 2016. However, with a resurgence in mining sector corporate profits and new project starts in Queensland, it is likely that there will be a positive effect on supply levels with a possible rise in speculative development over 2018. For the 2017 calendar year, new supply was driven by pre-commitment activity, accounting for 55% of all new supply. Large users led the way in this respect, with Super Amart (50,585 square metres), BevChain (35,935 square metres), and Bailleau Carpets (23,051 square metres) all pre-committing to new space in 2017. With competitive rentals being offered by developers in the pre-commitment market, development of new supply is expect to remain strong as tenants seeking new space take advantage of favourable rents and attractive incentives. Speculative development remains limited, with only 40,000 square metres built in 2017, accounting for just under 10% of the supply. Owner occupier activity has been relatively modest at 4% of total supply levels. Sigma Pharmaceuticals (14,990 square metres) was the most significant owner occupier to build in 2017. The first half of 2018 will see the completion of approximately 181,500 square metres, comprising of developments such as the Coca Cola Amatil expansion (30,500 square metres) and the Hilton Foods meat processing facility (39,454 square metres). Completed Development and Pipeline (sq m) 600,000 500,000 400,000 300,000 200,000 100,000 0 Completed Under Construction Source: Cordell/Savills Research NB: includes new/addition speculative, precommitment, owner occupier development types. savills.com.au/research 5
Sales Activity Savills recorded $972 million of reported industrial property transactions (> $5 million) in the 12 months to December 2017, up from the $965 billion recorded in the year prior and up on the five year average of $888 million. Over the current 12 month period, a total of 57 properties were transacted, down from the previous 63 month total. Local REITs (Trusts) were the most active purchaser type in the year ending December 2017, accounting for 29% of total reported sales. The most significant single transaction for the year was the sale of the Coca Cola Amatil manufacturing plant at Richland, purchased by Charter Hall for $156 million. On 24.9 hectares, the site at 220-260 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% annual rent rises. Sales volumes were also boosted by the sale of a number of national portfolios, with Goodman Group s divestment of $1.285 billion (nationally), with approximately $167.2 million transacted across various Queensland assets (including 105-139 Magnesium Dr, Crestmead for $126 million). The other notable portfolio sold over the 12 months to December 2017 was the Blackstone acquisition of Charter Hall s CPIF portfolio. The portfolio included four Queensland assets totalling about $67 million. Sales Activity by Price (> $5 million) $1,200m $10m - $50m $50m - $100m >$100m $1,000m $800m $600m $400m $200m $0m Vendor & Purchaser Composition (> $5 million) Vendors Purchasers 0% 20% 40% 60% 80% 100% Fund Trust Developer Owner Occupier Government Syndicate Yield Spread to Bond & IRR Brisbane 12% 10yr Bond Rate Average Prime IRR Average Prime Yield 10% 8% 6% 4% 2% % Source: RBA/Savills savills.com.au/research 6
Brisbane Prime industrial yields as at December 2017 typically range between 6.25% and 7.00%, tightening 50 basis points, on average over the year. Brisbane s Trade Coast continues to have the tightest investment yields at an average 6.63%. Prime industrial capital values as at December 2017 are estimated to range from $1,400 to $1,926 per square metre for buildings in the Southside precinct and between $1,467 and $1926 per square metre for buildings in the Northside precinct. Average capital values for properties in the Southside precinct are $1,663 per square metre, with no increase over the year. Similarly average capital values across all precincts remained unchanged compared to a year ago. The Trade Coast continues to record the highest average capital value with $1,921 per square metre as at December 2017. Prime Average Market Yield (%) by Precinct 10.0 BRI - Southside BRI - Northside BRI - Trade Coast BRI - West BRI - M1 / Logan Cor. 9.0 8.0 7.0 6.0 5.0 Significant uplift in industrial land values were recorded in Brisbane s Trade Coast precinct in the year to December 2017, as limited supply and the competition for land continues to place upward pressure on values. Average industrial land values in the Trade Coast precinct, as at December 2017, ranged between $400 per square metre to $550 per square metre (for sites ranging between 3,000 and 10,000 square metres). Top 15 Sales Property Type Price ($m) Date GLA Yield Type $/sq m 220 Orchard Rd, Richlands Factory 156.00 Jun-17 81,006 5.20 r 1,926 146 Kerry Rd, Archerfield Warehouse 68.45 Jul-17 32,499 n.a na 2,106 69 Tingira Street, Pinkenba Warehouse 50.12 Sep-17 26,675 n.a n.a 1,879 920-928 Nudgee Rd, Banyo Warehouse 36.66 Nov-17 17,000 n.a n.a 2,157 Lot 2001 Metroplex Westgate, Wacol Warehouse 35.25 Jun-17 9,994 6.30 r 3,527 1123 Beaudesert Rd, QLD Warehouse 31.37m Jul-17 9,893 n.a n.a 3,171 Lot 21, 146 Pearson Rd, Ormeau Warehouse 28.43m Apr-17 24,125 n.a n.a 1,178 741 Nudgee Road, Nudgee Warehouse 28.25m Aug-17 8,764 7.03 i 3,223 160 Robinson Rd E, Geebung Warehouse 27.00 Apr-17 17,379 8.50 r 1,554 84 Lahrs Rd, Ormeau Warehouse 22.00 Aug-17 7,646 n.a n.a 2,877 Captain Cook Dr, Arundel Warehouse 22.00 Oct-17 12,646 n.a n.a 1,740 245 Somerset Rd, Rockhampton Warehouse 15.10 May-17 7,000 n.a n.a 2,157 3 Production St, Wacol Warehouse 14.65 Jun-17 n.a n.a n.a n.a 38 Westgate St, Wacol Warehouse 13.50 Nov-17 9,525 n.a n.a 1,417 34 Jutland St, Logan Warehouse 11.30 Jul-17 9,585 n.a n.a 1,170 ; i = Initial, r = Reported, e = Equated, v = Vacant, dev = development savills.com.au/research 7
Infrastructure The Kingsford Smith Drive Upgrade connects Brisbane CBD to the Port of Brisbane and Australia Trade Coast. The project will involve the widening of Kingsford Smith Drive from four to six lanes between Theodore Street at Eagle Farm and Cooksley Street at Hamilton and road improvement works between Cooksley Street and Breakfast Creek Road at Albion. It will also include cycling and pedestrian facilities and public transport options. The project is to be completed over five stages with the initial works on the $650 million project commenced in mid- 2016. The project is anticipated to be completed in 2019. Gateway Upgrade North (Nudgee to Bracken Ridge / Deagon Deviation) involves the upgrading of the motorway from four to six lanes between Nudgee and Bracken Ridge. There are also additional pavement and safety works through to Bracken Ridge. The upgrade is currently under construction with completion anticipated in late 2018. The project was jointly funded at a total cost of $1.143 billion ($914.18 million from the Federal Government and $228.54 million from the State Government). Key Infrastructure Project Summary - Brisbane Project Est. Cost Status Completion Kingsford Smith Drive Upgrade $650m U/C 2019 Gateway North Upgrade $1.14bn U/C 2018 Inland Rail $9.3bn Planning 2025 Source: QLD-Department of Infrastructure, Local Government and Planning Inland Rail is a proposed 1,700 kilometre rail freight route between Melbourne and Brisbane via regional Victoria, New South Wales and Queensland. It is to be constructed by Australian Rail Track Corporation Ltd (ARTC). The development of the rail route will include 700 kilometres of existing track, upgrade of 400 kilometres of track and construction of 600 kilometres of track. The Australian Government, through the Australian Rail Track Corporation (ARTC), is delivering the multi-billion dollar infrastructure project in partnership with the private sector. The Government has committed $8.4 billion, on top of the previously funded $900 million. Works will commence in 2017, and based on the 10-year delivery schedule developed in 2015, the first train is expected to operate in 2024-25. Outlook While many of Queensland's infrastructure projects have remained in the planning stage for some time now, 2017 saw the start of some significant projects get underway creating employment opportunities and increased demand in construction and thus the industrial sector. The approval of the Logan Enhancement Project will mean safer and greater efficiency of one of Southeast Queensland s major arterial road networks. In addition the beginning of the Queens Wharf project is set to provide a much needed boost to both business and consumer confidence. The upcoming Gold Coast Commonwealth Games and the strengthening construction sector, is set to provide continued support to the industrial property market. Major infrastructure projects will also benefit industrial precincts, such as the duplication of Kingsford Smith Drive which will greatly improve traffic flow, providing more efficient access to Brisbane Airport and the Trade Coast industrial precinct. Institutional industrial land owners are recognising the recent lift in leasing demand particularly in well positioned locations closer to major arterial roads, which is seeing speculative developments coming back to the forefront. Demand for such developments is evident from the low letting up periods seen over 2017 <7 months on average time on market, with 30% fully leased prior to completion. While both leasing and sales activity were down compared to the previous year, a rebound is expected in 2018. savills.com.au/research 8
Brisbane Industrial Key Indicators (Q4-2017) Northside (Zillmere, Geebung, Northgate, Banyo, Virginia, Morayfield, Caboolture, Brendale, Strathpine, Petrie, North Lakes, Burpengary, Deception Bay and Narangba) Prime Secondary Low High Low High Rental Net Face ($/sq m) 110 130 65 100 Incentives (%) 8 15 10 15 Yield - Market (%) 6.25 7.00 8.00 9.00 IRR (%) 8.25 8.75 9.00 9.75 Outgoings - Total ($/sq m) 20.00 25.00 15.00 20.00 Capital Values ($/sq m) 1,500 2,000 800 1,300 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) 350 (high) 275 (low) 275 (high) 200 (low) Trade Coast (Hendra Eagle Farm, Pinkenba, de, Murarrie, Hemmant, Lytton, Fisherman Island, Tingalpa, Wakerley, Cannon Hill) Prime Secondary Low High Low High Rental Net Face ($/sq m) 115 150 90 110 Incentives (%) 5 15 8 12 Yield - Market (%) 6.25 7.00 8.00 9.00 IRR (%) 8.25 8.75 9.00 9.75 Outgoings - Total ($/sq m) 22.00 28.00 17.00 23.00 Capital Values ($/sq m) 1,550 2,300 1,000 1,450 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) 550 (high) 400 (low) 375 (high) 300 (low) Southside (Yeerongpilly, Salisbury, Rocklea, Archerfield, Willawong, Acacia Ridge, Coopers Plains, Eight Mile Plains, Rochedale, Seventeen Mile Sumner, Darra, Oxley, Wacol, Carole Park, Richlands, Shailer Park, Slacks Creek, Springwood) Prime Secondary Low High Low High Rental Net Face ($/sq m) 105 130 65 90 Incentives (%) 12 17 15 20 Yield - Market (%) 6.25 7.00 8.00 9.00 IRR (%) 8.50 9.00 9.25 10.00 Outgoings - Total ($/sq m) 20.00 25.00 15.00 20.00 Capital Values ($/sq m) 1,450 2,000 750 1,300 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) 345 (high) 250 (low) 250 (high) 200 (low) savills.com.au/research 9
South East (M1 / Logan Motorway Corridor) (Crestmead, Marsden, Browns Plains, Meadowbrook, Berrinba, Loganlea, Loganholme, Heathwood, Larapinta, Parkinson, Underwood, Springwood, Yatala, Stapylton, Kingston, Beenleigh, Eagleby, Hillcrest) Prime Secondary Low High Low High Rental Net Face ($/sq m) 95 110 70 95 Incentives (%) 12 17 10 15 Yield - Market (%) 6.25 7.00 8.00 9.00 IRR (%) 8.50 9.25 9.50 10.00 Outgoings - Total ($/sq m) 15.00 25.00 15.00 20.00 Capital Values ($/sq m) 1,450 1,950 800 1,300 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) Land Values 10 ha and above ($/sq m) 300 (high) 225 (low) 250 (high) 200 (low) 210 (high) 150 (low) West (Goodna, Springfield, Redbank, Bremer, Ebenezer, Willowbank, Mutdapilly, Purga, Swanbank, Ipswich, New Chum, Wulkuraka, Amberley, Bundamba, Raceview, West Ipswich) Prime Secondary Low High Low High Rental Net Face ($/sq m) 95 110 50 85 Incentives (%) 10 15 10 15 Yield - Market (%) 6.75 7.25 9.00 9.75 IRR (%) 8.75 9.50 10.00 11.00 Outgoings - Total ($/sq m) 15.00 20.00 15.00 20.00 Capital Values ($/sq m) 1,300 1,750 600 1,050 Land Values 3,000-5,000 sq m ($/sq m) Land Values 10,000-50,000 sq m ($/sq m) Land Values 10 ha and above ($/sq m) Key State Industrial Contacts Research Houssam Yakzan +61 (0) 2 8215 8980 hyakzan@savills.com.au Sunshine Coast Scott Gardiner +61 (0) 7 5313 7514 sgardiner@savills.com.au Valuations Leigh Atkinson +61 (0) 7 3002 8852 latkinson@savills.com.au Gold Coast Kevin Carmody +61 (0) 7 5509 1700 kcarmody@savillsgc.com.au 230 (high) 175 (low) 225 (high) 150 (low) 190 (high) 120 (low) Industrial & Business Services Callum Stenson +61 (0) 7 3002 8832 sbobridge@savills.com.au Project Management Ken Ng +61 (0) 7 3018 6705 kng@savills.com.au Asset Management Howard Chapman +61 (0) 2 8215 8870 hchapman@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