Fully priced to overpriced commercial property markets in factories and warehouses in Brisbane and Melbourne could lead to over-investment, overbuilding, higher levels of vacancies and leasing incentives and a decline in rents and property prices, a new report states.
In its Melbourne Industrial Property Prospects 2014 to 2024 and Brisbane Industrial Property Prospects 2014 to 2024 report, BIS Shrapnel said recent times had seen investors pour in to the sector amid a combination of higher yield compared with retail or office space, longer leases, fixed annual rent increases and relative ease of management as an investment, and that investor interest was so strong that developers were struggling to meet demand.
Such activity, however, along with an increase in ‘speculative’ construction, is set to lead to higher vacancy rates, a downturn in rents and property prices and a ‘blowout’ in incentives, report authors Christian Schilling and Lee Walker say, a situation which is set to be exasperated by weak demand in the struggling manufacturing sector.
“On our forecasts, industrial property markets are fully (Melbourne) to over-valued (Brisbane),” Shilling said. “On anything but a 10+ year holding period and 10+ year WALE (weighted average lease expiry), passive investment in prime industrial property in Melbourne and Brisbane will fail to meet investors’ current hurdle rates.”
While the warehousing and logistics sector in Australia has been bolstered in recent times by an increasing need to fulfil online retail orders, manufacturing has been battered by a persistently strong dollar as well as growing competition from low costs countries, and has cut the size of its workforce by almost 60,000 (ABS figures) over the past three years alone.
Along with Geelong and Adelaide, Melbourne has been particularly hard hit, and will be disproportionately affected by the closure of vehicle manufacturing plants in coming years.
As a result, leasing incentives in Melbourne have more than doubled over the past two years and face rents are at their lowest level in 35 years (adjusted for inflation) as manufacturers pare back on new building investment and seek instead to maximise use of existing space.
In Brisbane, meanwhile, the market is cooling following a boom last decade which saw rents surge to record highs, and tenants are now being offered attractive deals.
“The economy is struggling to make the transition from mining to non-mining investment, while the stubbornly high $A is continuing to cause hardship amongst trade-exposed industries, particularly the manufacturing sector,” Schilling said. “The pre-dominant business rationale is to cut costs in order to boost profit. Few industrial space users are expanding their requirements.”