Nick Crothers

Total completions, Melbourne industrial
(Grey: completions; yellow: under construction; red: proposed/mooted)

Industrial land values in Melbourne have grown steadily over the last five years as institutional investors and developers increased their focus on the industrial sector.

Land value growth has been driven by a combination of factors:
- Competition for existing investment-grade assets limiting the availability of stock for investment.
- Land banking activity by major players and new entrants to Melbourne trying to diversify their portfolios.
- Increased demand for industrial land in emerging markets as new transport infrastructure projects that will benefit access to them are first announced, begin construction, and are completed.
- Competition from residential development as land becomes scarce inside the urban growth boundary.

Rents rising fastest in the south east,then the north and west
The industrial rental market has been relatively benign in Melbourne during the early part of this decade. Although activity in the sector increased, the availability of new land for development early in the decade, along with falling capitalisation rates and rising land values, kept a lid on rental growth.

The last three years have seen rental growth pick up due to a combination of the completion of several new road infrastructure projects, a relative scarcity of new industrial space in the southeast in a period of rising demand, and a greater focus on the outer suburbs by occupiers. New sources of development land in the inner-city fringe market are scarce and less affordable, not to mention lot sizes that are too small to cater to the new styles of warehouse development that occupiers demand today.

In the year to March 2008, average prime net rents for traditional industrial space increased 16.9% in the south-east, 9.1% in the north and 4.4% in the west.

In the past five years, average prime net rents for traditional industrial space increased 7.1% in the south-east, 3.7% in the north and 2.9% in the west.

Average prime existing net rentals are $83/sqm p.a. in the south-east, which is higher than in the north ($72/sqm p.a.) and the west ($68/sqm p.a.), and they are likely to remain so in the near term. This is because of a supply/demand imbalance in the south-east at present, which is expected to become less pronounced as more development land becomes available in the south-east from 2009 onwards, in the City of Greater Dandenong and further at Pakenham.

Supply
New industrial construction in Melbourne has been ramping up consistently over the past decade. The industrial supply pipeline of expected completions for 2008 is over 861,000 sqm of traditional industrial space. This will be fairly evenly spread around the south-east, west and north.

This wave of new supply has been driven by active developers and investors seeking to capitalise on strong demand from occupiers in the transport and storage, wholesale trade and retail trade sectors. Steady growth in the Australian economy and population base, and Australians’ appetite for imported goods has increased the national freight task considerably. Many companies have outsourced these functions, which has also driven demand for new, efficient warehouse and distribution space.

An example of such a project is the Woolworths Liquor Distribution Centre at Leakes Road, Laverton North, which will include 68,510 sqm of warehouse and 1,990 sqm of office space and is currently under construction, due to complete later in 2008. Also currently under construction is the new Jayco National Headquarters at 449 Frankston Dandenong Road in Lyndhurst, which will include 55,000 sqm of warehouse space and is also due for completion in 2008.

Our analysis shows that since 2000, gross take-up by the transport and storage sector is up 104%, wholesale trade 148%, retail trade 91%, while manufacturing is up only 18%.

Significant areas of land being released for industrial development
The Victorian Department of Planning and Community Development (DPCD), through its management of the Urban Development Program (UDP), has estimated the available supply of industrial development land across metropolitan Melbourne and identified new areas for proposed major industrial development.

In its UDP Annual Report of 2007, the DPCD has estimated that there is approximately 2,709 ha of zoned industrial land available and another 3,496 ha of potential developable land that is unzoned (with an additional 784 ha of zoned land in Geelong). At average rates of consumption adopted by the DPCD, this works out to be an average 12 years of zoned supply and 25+ years of unzoned supply across metropolitan Melbourne. Overall, supply is most scarce in the Airport Node, with only 13 years or 232 ha of zoned supply left.

The West market has the most available developable land, but also has the highest rate of consumption. With 1,016 ha of zoned land and 827 ha of unzoned land, it accounts for almost a third of metropolitan Melbourne’s industrial land. However, it only has an estimated 12 years of zoned land.

Pakenham will become a focus of activity in the future. Zoned land is only expected to last four more years, but there is an identified 832 ha of unzoned development land, which would provide an additional 25+ years of development at current rates of consumption.
As such, there have been many sites identified in Melbourne that can cater to larger users going forward. In total, there are 156 sites of 10+ ha, another 38 sites of 5-10 ha, and 93 sites of 1-5 ha identified for future development.

Nick Crothers is national industrial analyst, research & consulting at Jones Lang LaSalle. Call (02) 9220 8525 or email nicholas crothers@ap.jll.com.



* Excerpted from Australasian Freight Logistics Issue 12, June/July 2008 (pp.22-3)

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