The industrial sector is stable, but the drought in office demand is expected to end this year, from CFO August 2003.
If you are looking for industrial land, there is plenty around at a fair price. The right location and services, however, are difficult to find.
David van Aanholt, chief operating officer of the property trust Macquarie Goodman says: “Everyone can provide space. It’s a matter of wrapping service around the space.” He says all major industrial landlords share the same group of builders. The difference is in how each landlord packages the property.
Macquarie Goodman has 2.25 million square metres under management and develops $300 million worth of space each year. Van Aanholt notes that elsewhere in the world buildings are becoming taller and include thicker slabs and robotics. In Australia, however, he says: “The fact is that we are still fairly land rich, so facilities tend to go out rather than up.
“There’s not been that many great revolutions in buildings. Sheds are pretty basic now. In terms of office parks, we are just on the cusp in terms of the way they are being designed now. They are probably becoming a bit more like sheds – more modularised, more simple in their form.”
Tenants may have a long wish list of demands for the ideal property, but it comes down to cost for most. As van Aanholt says: “They are all cost-conscious. They are looking for good efficient space that can add to their bottom line.”
Peter Studley, head of research at DB Real Estate, wrote the paper The 10 key issues for real estate investors earlier this year. His first point was that the year would be mixed economically, and that overall tenant demand will be up relative to 2002 – but not by much.
“At the moment the industrial leasing market is not weak or strong – it’s kind of in the middle. It is being driven on the one hand by tenants exposed to the domestic market, who are doing a lot better than tenants exposed to the export market,” he says.
Investors are disheartened by the residential market, according to Marc Pallisco, research manager for property consultant DTZ. In Melbourne, in particular, investors are disheartened by the commercial market, which is one reason why they are pouring money into industrial. He says: “It is one of the only property sectors that is higher yielding than the bank lending rate.
“If borrowing rates are 6.5 per cent, people won’t go and buy a retail property at 4 per cent or an office building at 6 per cent. They will go and buy an industrial one, because it’s the only one that is at 11 per cent still.”
However, as with anything with a higher return, industrial property is a higher risk investment than commercial.
According to Studley, that risk is manifested in the plentiful supply of industrial property coming to the market and tending to keep rents flat.
In particular, there are new releases of land in Melbourne and Sydney around newly built transport infrastructure feeding into the supply-and-demand equation.
Malcom Tyson, national director, industrial, at the property consultant Colliers, reaffirms the industrial market’s position. He says: “The rents for industrial really haven’t moved now for four or five years. It’s a very flat market.”
What happens with industrial real estate, he says, is that as soon as demand builds up there is a release of new land, and new infrastructure comes along to release the pressure.
Driving all markets has been investment in new road networks opening up new tracts of land. While many of these tracts of land may be further from the city centres, new freeways have dramatically cut transportation times. For example, in Sydney the M5 has made the south-east precincts of Campbelltown and Moorebank only 30 minutes from Sydney, compared to an hour-and-a-half drive a few years ago.
According to DTZ there is $6 billion of major infrastructure projects either planned or under way in Sydney, bringing closer links between land releases, transport, housing and employment zones. These projects include:
• The $1.5 billion Western Sydney Orbital linking the M5 in the south-west to the M4 in the north-west. Work begins this year and should be completed by 2007.
• The $680 million City Cross Tunnel. Work began earlier this year and will finish in 2005.
• The $815 million, 3.4 km Lane Cove Tunnel, connecting the Gore Hill Freeway at Artarmon with the M2 in East Ryde. Work is expected to begin later this year and be completed in 2006.
Also there is the $1.6 billion Epping to Chatswood rail link, with plans for a $40 million bus-rail interchange in Chatswood, and the $800 million Liverpool-Parramatta bus way, which began operations earlier this year.
In Melbourne, the Ring Road opened up the Laverton area giving access to the ports and the Hume Highway. Tyson says: “There is a big swing for the major industrials to relocate at Laverton.”
According to DTZ, Melbourne hosts the highest concentration of manufacturing in Australia – 30 per cent of the country’s industrial zoned land. This is 51 per cent more than in Sydney and more than double the amount in Brisbane.
DTZ says industrial land remains cheaper to rent in Melbourne than in any other Australian city: “Melbourne is the national hub for manufacturing and also has a strong services sector typical of a mature, developed industrial economy.”
The most significant development in the market in recent years has been the investment in the Western Ring Road which, coupled with the Citylink toll road, has improved access to the inner and outer west.
The only significant infrastructure project on the drawing board is the proposed $1 billion Scoresby Freeway, which will stretch 34 km from the Maroondah Freeway to the Mornington Peninsula/
Carrum Downs. Because of wrangling
between the State and Federal governments, the freeway may become a tollway.
About 30 per cent of Melbourne’s workforce lives along this corridor, and it is estimated that the project would create 9000 jobs nationally – 4000 in Victoria, where the economy would benefit to the tune of $200 million.
A total of 2727 hectares of industrial zoned land will be affected.
In Melbourne in 2002, 499,000 square metres of industrial space was completed, according to Jones Lang LaSalle’s market overview, compared to 304,000 square metres in the previous year. More than 71 per cent of new industrial supply was in the north west of the city, compared to 59 per cent in the previous year.
The most popular place for industrial developments was Laverton North, which accounted for 34 per cent of completions, compared to 25 per cent in the previous year. Because of a lack of new sites in Laverton, only 4 per cent of industrial construction is situated there.
Benefiting from new construction is the Melbourne Airport Business Park and the Aerolink industrial estate. At present, 18 per cent of new construction is in Tullamarine and most new buildings are traditional industrial space with less than 40 per cent devoted to office space.
DB Real Estate’s Studley says: “In those areas, tenants are looking at those transport nodes as good places to put their business because of the access it gives to both their customer base and their suppliers.”
Studley says the industrial sector is relatively stable compared to the commercial sector: “We’ve had a two-year period in which office demand has been very weak right across the major markets, including Melbourne and Sydney. It’s not to do with the domestic economy as much as with the global economy and the effect that has had on the finance sector and on the multinationals.” This is combined with the knock-on effect of the 2000 tech wreck.
However, DB Real Estate in its report was bullish about office demand. It said: “The drought in office demand is expected to end this year, but it will be a trickle rather than a flood.” This, in turn, could lead to an increase in rents, reaffirming the point that now is a good time to lock into new office space.
Studley says: “The good news is that we have seen white-collar employment growth begin to turn up now, and we are expecting that over the next two years the global economy will strengthen. That will help the market along and we shall see demand
increasing.”
The industrial sector also has a lot to offer the tenant. According to Colliers’ Malcom Tyson: “You may have been in your building for five or six years or even longer and it is getting a bit old. You can move from there to a new property at a fraction more rent on new infrastructure.”
And, Tyson says, the thing about property situated around transport nodes and in business parks is that there is a plentiful supply on tap, which can help to keep rents in check. As Tyson puts it: “There is always someone across the road that can be just as competitive.
“If you were a tenant sitting in a building, you would view the market as being at the bottom of the cycle,” he says.
Tyson warns that it’s not a time to be pushed into a deal. He says: “Owners are being very accommodating to tenants requirements.”
Although he can’t see rents going down any further. “I guess from a tenants’ viewpoint it would be a very attractive time to do something. The product’s good. The locations are good. The infrastructure helps that.”