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Melbourne’s industrial land values surged faster than any other capital city in the past year, matched by a strong uplift in rents.
According to analysis from national valuation firm M3 Property, Melbourne’s industrial land values have skyrocketed to an average of $670 per square metre as of March 2022.
Supporting the sector’s growth has been a lack of suitably zoned sites, rising warehouse demand driven by retailers ramping up their supply chains to cater for the growth in online shopping and growing allocations of institutional capital to logistics projects.
Melbourne is forecast to deliver 1.35 million square metres of new supply in 2022, more than half of which is expected in the city’s west while almost 30 per cent will be in the south east.
Pre-commitment activity and take-up on speculative builds continues to dominate leasing volumes, accounting for nearly 60 per cent of leasing deal volumes.
The lack of new supply hitting the market pushed industrial property deals to record heights last year, with investors purchasing $6.7 billion worth of warehouses, an increase of 88 per cent from the five year average of $3.6 billion.
More than 250 industrial properties transacted above the $5-million price point across the Melbourne metropolitan area as offshore, institutional and listed groups piled into the sector.
Major deals recently include Aliro Group’s $44-million acquisition of 175 McKeller Way in Lalor and EG’s $58-million outlay for 15-33 Alfred Street in Blackburn.
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M3 Property director Matt Webb said sales volumes in Melbourne were now expected to decline through the year from the record highs of 2021.
“We have already seen a reduction in the number of industrial properties transacted during the start of the year,” Webb said.
“Despite concerns in the investment market due to inflationary pressures, recent transactions show land values continue to increase strongly.
“The market sees a persistent shortage of well located industrial zoned land in the major markets of the south east and western precincts.”
Record take-up of industrial space and very low vacancy rates have also put a rocket under industrial rents in Melbourne.
During the past 12 months, average face rentals increased within precincts where land supply shortages have been evident.
Prime industrial rents rose by an average of 14 per cent in 2021 while secondary rents increased by an average of 16 per cent.
Industrial net face rents ($ per square metre), Melbourne
| Prime | Seconday | ||||
|---|---|---|---|---|---|
| Mar-22 | 6-9 months | Mar-22 | 6-9 months | ||
| City Fringe | 150-300 | ▶ | 75-100 | ▲ | |
| North | 75-90 | ▲ | 60-72.5 | ▲ | |
| East | 90-115 | ▲ | 75-85 | ▲ | |
| South-East | 90-125 | ▲ | 75-90 | ▲ | |
| West | 80-100 | ▲ | 60-80 | ▲ | |
^Source: M3 Property - March 2022
“We expect that face rents will increase during 2022 as leasing demand remains strong and the availability of leasing options declines while incentives are likely to come back slightly,” Webb said.
“Strong investor appetite and the spread between property yields and interest rates exerted downward pressure on yields during 2021 into the first quarter of 2022.”
Prime assets are generally trading at yields between 3.2 and 5 per cent while average prime yields have tightened by 110 basis points over the past twelve months, with compression occurring across all precincts.
Secondary assets are now trading between 4.5 and 6 per cent, with the average secondary yield also tightening by circa 115 basis points during 2022.
While industrial is expected to continue outperforming office by some margin in the coming years, risk has begun to creep into the sector’s buoyant outlook.
BIS Oxford Economics principal economist Lee Walker said ten year bond rates have been rising in Australia over the last 18 months and are unlikely to return to the lows seen in recent years.
“As a result, the risk that industrial property yields will soon soften, and rise, looks increasingly likely,” Walker said.
“It looks like industrial property’s golden run will lose steam. Investors need to be aware that there is a risk that yield softening is not too far off.”
It follows average capital value growth of 26 per cent to 32 per cent per annum in Sydney and Melbourne over the last two years.
Walker said he was expecting prospective IRRs closer to 6 per cent per annum over the next five years for Melbourne and Sydney prime industrial property.
“It is still reasonable, but well below the 11 per cent or 12 per cent per annum of the last two years,” Walker said.
“Overall, industrial properties are unlikely to perform as strongly over the medium term as they have done in recent years.”
Prime net stated rents are forecast to rise by circa 30 per cent in Sydney’s Outer West and Melbourne’s South East over the next two years, working to offset the phase of yield softening.
