BING NEWS

Market Trends

I thought it would be useful to provide some observations from 2014 that will greatly impact market values and trends for 2015:

(1) STRONG TENANT DEMAND CONTINUES

The West continues to remain Melbourne’s best performing region. Leasing in Melbourne’s core western precinct for buildings in excess of 3,000m2 was at the top end of the five year average, with 251,141m2 leased in 2014. The most promising statistic from 2014 was the dramatic increase is pre-lease transaction secured in the precinct. 143,644m of industrial space was pre-committed to tenants in Melbourne’s west, which was a two-fold increase on 2013. This appears to be a trend that is set to continue with a number of major occupiers currently reviewing their supply-chain requirements which will result in a further upswing of activity in this sector. Interestingly, 40% of the yearly leasing activity happened in the final quarter of 2014, relieving concerns of an oversupply as 25% of a-grade vacancy over 10,000m2 was absorbed within a very short period of time.

(2) RENTS & INCENTIVES

Prime grade average net face rents remained stable and continue to range from $70m² to $75m² with incentives increasing marginally and currently range from 15% to 30%. It does appear that the appetite to provide historically high incentives of excess of 25% is reducing, as prime existing building supply tightens and levels of enquiry improve. It is likely there will continue to be examples of highly incentivised transactions in the market, but far more scrutiny in being placed on the quality of the covenant and lease terms required to solicit these attractive proposals. These additional incentives are often directly related to the difference in cap rate a blue-chip tenant offers over a tenant with a less impressive trading history.

Secondary grade average net face rents and incentives softened in the second half $50m² to $55m² with average incentives in this sector of the market ranging from 10% to 15%. This sector of the market is primarily dominated by private owners who value cash flow over a need to maintain specific face rental levels for valuation purposes, hence the sensible level of incentives on offer. As a general observation, we have seen the margin between prime and secondary effective rents narrow, which may place further pressure on secondary rents in 2015 should we experience an increase in building supply.

(3) LAND VALUES FIRMING AS LOCATION & ZONING DRIVES DEMAND

Land sales volumes in 2014 continued to improve, with the majority of sales being concluded within estates where longer settlement terms were available due to the timing of the delivery of infrastructure. The dominant buyer profile was small to medium end developers. Anecdotally this would suggest that the perception from these groups that understand the marketplace is that land values are likely to increase over the next 12 – 24 months.

There have also been some examples where main road sites, or land with zoning for a higher and better use than pure industrial, have archived outstanding sales results. Of particular note, a 31,000m2 of Commercial 2 zoned land was sold for just under $200m2 at Orbis Business Park Ravenhall. This sale sets a high water mark for land in this location, with the purchaser being an oversea investor that has a view to developing the land within the next 18 months