Fringes of Melbourne will see growing demand for industrial properties: Colliers

Victoria continues to attract both local and off shore investors due to the strong growth of the local economy, record low interest rates, booming infrastructure investment and growing population, according to Colliers International’s latest report.

Average yields have compressed by 50 basis points over the year to 6.75% across the Melbourne metropolitan area, from the combined effect of strong offshore capital inflows and high demand from onshore investors.

However, super prime assets with long WALES and exceptional tenant covenants are attracting sub-6% yields.

Colliers expect strengthening demand to translate into further yield compression over the next 12 months, given that there is plenty of capital with fewer investment opportunities.

“So far this year, more than $900 million worth of sales have transacted in Colliers negotiated deals alone, half of which was attributed to portfolio transactions including $460 million worth of Melbourne industrial assets from the Goodman portfolio, $68 million from the Charter Hall portfolio and the Alex Fraser portfolio ($44 million). Portfolio transactions have continued to gain favour in the industrial market, given that the majority of buyers comprise of institutions looking to purchase larger assets worth over $100 million,” the report stated.

If booming infrastructure investment and ongoing structural change in Port Melbourne are any indication, the next few years are going to be a defining period for industrial property located on the cusp of all this activity.

Infrastructure assets continue to attract investor appetite, with the Port of Melbourne being particularly attractive, primarily due to its sheer scale and underlying potential for development.

Fisherman’s Bend has seen a number of significant developments which are likely to change the course of the industrial property market and underpin growth over the foreseeable future, particularly for properties within close proximity to the port. This includes the acquisition of the Port of Melbourne on a 50 year lease for $9.7 billion by a pool of four investment funds (Future Fund, QIC, Global Infrastructure Partners and Canadian pension group OMERS), which, while providing greater access to capital should also transform the landscape for freight and logistics through proposed automation and transport links, bolstering productivity while benefitting trade and attracting investor demand.

The state government has also taken significant interest in the Fishermans Bend precinct, with one such measure being the purchase of the GM Holden facility as an aerospace, defence, marine and automotive design precinct for $130 million.

The state government recently released a report on its vision for the Fishermans Bend precinct which outlines major urban renewal particularly in the Lorimer, Montague and Sandridge precincts, a proposed high frequency East-West rail linking Fishermans Bend to the CBD and further links to Melbourne’s transport network through light rail and high frequency bus routes.

"Assets with shorter lease expiries have continued to gain momentum in the market, particularly for properties with a redevelopment potential. Areas such as the Montague and the Sandridge precinct have been seeing strong tenant demand for leases with short WALES varying between two to three years, where much of the properties within this region serve as holding income for investors seeking to redevelop these assets and are awaiting permits," the report stated.

As these residential conversions come to fruition, surrounding areas such as Cook Street, Lorimer and the Fisherman’s Bend Employment precinct should see a significant take up in industrial space, given the flow on effect of tenant demand from the more tightly held mixed use areas.

Average net face rents for Prime Grade assets are currently at $180 square metre and given that there is limited new supply in the pipeline, industrial assets should continue to see growth over the medium to long term, as supply remains limited on the back of increasing residential conversions.

Developers have been hotly pursuing land with a redevelopment upside for purposes of conversion to commercial or residential use. This has resulted in a large take up of land within the city fringe area and as such, the demand for land largely exceeds the in flow of supply, which has led to land values soaring by more than 33% in the last 12 months alone.

The same trend has been seen across the industrial property as a whole, particularly for institutional type investors looking to purchase industrial assets above 5,000 square metres, given that there has been little or no supply coming onto the market.

In this environment, yields compressed 38 basis points over the year to be in 6-7% range, with scope for further compression in the next 12 months, as growing demand continues to outstrip supply.