Investor demand to remain strong for Sydney industrial property

Investment demand is expected to remain strong for Sydney’s prime-grade industrial assets that have solid lease convents as investors look for risk-free assets, according to Colliers.

As a result prime-grade industrial yields (currently between 7.75% and 8.75%) are expected continue to tighten over 2012 as a limited supply of such assets remains in place.

Over the past six months prime-grade yields have tightened by as much as 25 basis points, estimates Colliers in its industrial outlook report for the Sydney market for the second half of 2011.

The report notes a number of large high-quality asset transactions occurring in Sydney’s southwest market (Liverpool, Fairfield, Auburn, Campbelltown, Bankstown, Parramatta) over the past six months, bucking the trend of the other Sydney markets and providing evidence that prime-grade yields in the region have begun to tighten by as much as 25 basis points.

One of the most successful developments in this market has been Mirvac’s Hoxton Distribution Park, one of Australia’s largest industrial developments consisting of two state-of-the-art logistics facilities.

Aviva Investors Australian Logistics Property Trust acquired 50% of Hoxton Distribution Park for $97.4 million, the largest industrial transaction this year, equating to a yield of 7.5%.

The industrial park is 100% pre-leased to Woolworths, with Building 1 comprising a 88,914-square-metre purpose-built facility for Big W and Building 2, at 43,317 square metres, to be the national distribution centre for Dick Smith Electrical.

Yields for secondary-grade assets will continue to remain at current levels of between 8.5% and 11% until the risk appetite of buyers returns, Colliers says.

According to Colliers, yields softenened by as much as 50 basis points over the past six months.

Land values continue to remain stable on the back of subdued demand, with the majority of transactions occurring in the sub one-hectare market. 

“These sales were mainly purchases by owner-occupiers who could not find a suitable existing property to acquire or lease and have turned to developing a purpose built asset,” says Colliers. 

A positive development for the market this year has been the record number of industrial construction starts in June 2011, which reached $156 million during the month. 

The short-term forecast shows a rise of 22% in the value of industrial construction over the next three months while the longer-term forecast suggests a rise of 44% in the total value of starts over the next 12 months.

Overall the outlook for Sydney is one of stability over the coming six to 12 months with the two major drivers the high Australian dollar and the lack of quality stock in the market for sale or lease.

“New development and supply is expected to be subdued, over the next 12 months, as lending and finance remains tight ensuring that only a handful of new developments enter the market during 2012,” Colliers says.