Challenging year ahead for Illawarra and Newcastle industrial markets, but some bright spots: HTW

The key regional industrial NSW markets of the Illawarra and Newcastle are set for a tough year in 2012, according to the latest Herron Todd White property market report.

Local Herron Todd White agents say steel producer BlueScope’s decision to close its No. 6 blast Furnace in Port Kembla in August last year (and axe 800 local jobs) will continue to impact on demand for industrial space in the Illawarra.

“While the closure will not have a direct impact on the level of supply, with the facilities likely to remain in BlueScope’s hands, the impact upon the support business will no doubt see a reduction in demand for industrial space within the Illawarra,” the report says.

“With letting-up periods already a concern, any further reduction in demand may result in rental downgrades over the coming 12 months.

“Coupled with the shutdown of the Port Kembla furnace, investors remain uncertain about the overall outlook for the broader economy and the direction of the Illawarra commercial market.”

According to Herron Todd White, commercial investors who require yields greater than 9% have been priced out of the market by owner-occupiers, “who are willing to pay a premium to secure long-term stability”.

And with commercial lending rates forecast to rise, Herron Todd White does not expect an increase in investor activity during 2012.

“However, it’s not all bad news for the Illawarra; quality properties and properties with strong lease covenants, while scarcely traded, remain in demand and will continue to secure higher capital values over 2012”.

North of Sydney, Herron Todd White reports that 2012 has brought uncertainty for the Newcastle and Hunter industrial property markets.

“Having one eye firmly fixed on well publicised global economic troubles, investors are well aware of the continued reliance on the coal trade in Newcastle to prop up the local industrial market,” says Herron Todd White.

However, plans by Nathan Tinkler’s Hunter Ports to create a new rail link to its $2.5 billion coal and remove about 90% of coal trains from residential areas is expected to resolve some of the oversupply issues in and around Newcastle.

Hunter Ports is currently acquiring industrial land adjacent to the Hunter River for the new railway corridor.

“The oversupply has seen land values fall consistently since 2008. However, in 2012 we expect to see this fall in value flatten out, as land is slowly taken up, with no major releases in the pipeline,” says Herron Todd White.

“The slow rate of take-up has been exacerbated by commercial lenders’ inability to lend speculatively on property without pre-commitments in place.

“The general weakening of industrial property values in Newcastle is illustrated by the sale of a fully tenanted complex in the established industrial locality of Cardiff.

“The property has recently exchanged for $4.3 million. The same property previously sold in April 2007 for $5.2 million, indicating a fall in value of 17% and a yield softening of 2.93% since the previous sale.”

Not all areas are performing poorly.

Herron Todd White reports that Beresfield and Thornton continue to remain the most solid areas locally due to the New England Highway and their location midway between Newcastle and Maitland.

“These areas are situated at the intersection of the F3 freeway to Sydney and the New England Highway which provides access to the greater Hunter Valley including mines in Muswellbrook and Singleton.

“Beresfield remains the number one position for distribution companies in the area due to the ease of access to the above mentioned highways.”