Charter Research – SEQ Industrial Market Insight

Introduction

Research conducted by Charter shows that Queensland’s Industrial markets are experiencing low vacancy rates, strong demand for new space, a high percentage of sales of more than $10 million and tight supply of both new land and existing properties.

This is partly because of Queensland’s increasing population, which has led to a high level of domestic consumer demand. Therefore, there is strong demand from industry to invest in advanced new generation distribution facilities to meet the logistics challenges posed by a growing population.

However, the supply of prime logistics properties remains tight.  This, along with several major infrastructure developments, including Brisbane Airport’s second runway, the inland rail project connecting Melbourne and Brisbane, the Brisbane Metro and various road and intersection updates are contributing to the robust demand for Queensland industrial properties by both investors and tenants. All these factors combined are resulting in strong demand from institutional investors who are driving up land value rates as they snap up en-globo land and infill development opportunities.

Key Points

  • Sales volume for the past 18 months are down compared to 2017, but strong growth in the $10 million plus market is reflective of demand for premium grade properties and a tightening supply at more affordable end of market.
  • Institutional investors are highly active in the market, driving up prices of infill development opportunities and are also driving the market for prime leased industrial assets.
  • The three biggest industrial sales in 2018 were all to institutional investors.
  • Vacancy rates are at low levels, resulting in strong demand for available places and increased rental rates.

Sales

With figures showing low vacancy rates, tight yields and strong land values, data collected by Charter shows that Queensland’s Industrial Markets continued to perform strongly over the 18-month period to the end of June 2019.

While the total number of sales and overall value of the market is down (with 191 sales for a total of $1.407 billion over past 18 months compared to 237 sales for a total of $1.930 billion in 2017), this is reflective of fewer sales over $50 million, and a tightening in the supply of suitable properties for sale.

This is shown by the increased percentage of the number of properties selling for more than $10 million, accounting for 20.42% of all sales since the start of 2018, compared to 18% in 2017. This suggests a strong appetite among buyers for premium grade properties and a tightening of supply in the more affordable end of the market.

gRAPH oNE

The two strongest performing precincts are the Brisbane South corridor, where total sales value comprised 28% of the total Queensland Industrial market, and the popular Australia Trade Coast precinct, with 23% of the market. The majority of $10 million plus sales were in these two precincts, with the value of this market worth $201 million in the Australia Trade Coast precinct and $207 million in the Brisbane South corridor.

Graph Two Graph Three

 

Figures show that properties continue to trade with yields in the 6-8 percent range, with premium grade properties tending to trade at tighter yields in the 5 percent range. The strongest average yields were recorded in Regional areas (7.92%), followed by Brisbane East (7.69%), the Gold Coast (7.37%), and the Logan Motorway corridor (7.02%).

Graph Fou

A key trend noted for the past eighteen months is that opportunities to purchase en-globo land are almost exhausted, particularly in the inner southern industrial locations, with only 13.61% of all sales being for en-globo land.  As a result, purchasers are turning their attention to infill development opportunities. Land that is becoming available for development are generally properties with dilapidated buildings that are nearing economic obsolescence which are being demolished to make way for redevelopment.

Due to the scarcity of en-globo land and tight market conditions for existing properties, recent infill development site purchases and purchases of existing leased prime grade industrial properties have been led by institutional investors and developers, who have collectively recognised that there are limited opportunities to purchase suitable assets to fulfil investment mandates, and consequently are paying land value rates significantly higher than historical averages. Recent infill purchases by institutional investors are generally larger than 5 hectares in size to fulfil development mandates of an end product that would have a value in excess of $30 million.

Recent examples of such land purchases include Dexus’ purchase of 424-427 Freeman Road, Richlands for $300 per square metre; Fraser’s purchase of 296 Beatty Road, Archerfield for $268 per square metre and Fyfe Capital’s purchase of 43-91 Rudd Street, Darra for $295 per square metre.

Further, the top three sales recorded by Charter for the past eighteen months show that institutional investors are also highly active in the purchase of existing premium grade leased industrial space, with listed Singapore institutional investor Mapletree Logistics Trust Management Ltd purchasing 44 Stradbroke Street, Heathwood for $105 million; US based institutional and private equity company Blackstone purchasing 102 Trade Street, Lytton for $54.9 million; and Heathley Direct Medical Fund No 2 purchasing 11-19 Riverview Place, Murarrie for $41.6 million.

2018 TOP 6 Sales

Street Address Suburb Precinct Sale Price Sale Date Yield Vendor Buyer
1 44 Stradbroke Street Heathwood Logan Motorway Corridor $105,000,000 Oct-18 5.71% Lagos Properties Mapletree Logistics Trust Management Ltd
2 102 Trade Street Lytton Australian Trade Coast $54,919,717 Aug-18 6.10% Fife Capital Blackstone
3 11-19 Riverview Pl Murarrie Australian Trade Coast $41,600,000 Feb-18 6.15% Nafru Pty Ltd Heathley Direct Medical Fund No 2
4 420 Sherbrooke Road Willawong Brisbane South $38,730,000 May-18 n/a Charter Hall Long Wale REIT Grace Worldwide Logistics
5 71 Charles Ulm Place Eagle Farm Australian Trade Coast $35,500,000 Jul-18 5.99% OzTrail Australia TradeCoast Central Pty Ltd
6 1035-1051 Nudgee Rd and 10 Buchanan Rd Banyo Brisbane North $34,250,000 Nov-18 5.95% ISPT Private Investor

Coles Distribution Centre, 44 Stradbroke Street, Heathwood

Purchased from Logos Properties for $105 million at an initial yield of 5.71% by listed Singapore institution investor, Mapletree Logistics Trust Management Ltd, this property comprises a large single-level high clearance warehouse with ancillary office space. The property is leased to Coles on a 5-year lease expiring in January 2023, and is purpose built as a logistics facility, with 91 loading docks, excellent access for large trucks, and a high floor-to-ceiling ratio of 11 metres. The property sits on a 151,600 sqm site, which includes a 19,000 sqm parcel which is undeveloped. This undeveloped section will allow for future expansion of the site, or even potentially for a new warehouse.

 

82-102 Trade Street, Lytton

Situated on a 43,780 sqm site, this office/warehouse processing facility was purchased by US based institutional investor Blackstone. The property has a net lettable area of 14,479 sqm and was extensively refurbished and fitted out in 2017 by vendor Fife Capital as a state of the art production facility for lessee Inghams Group. Inghams Group committed to a 15-year lease expiring in July 2032, at an initial net rental of $230 per square metre. Blackstone acquired the property for $54.9 million on a yield of 6.1 per cent

11-19 Riverview Place, Murarrie

Comprising a 2-level office building and warehouse with a total net lettable area of 10,005 sqm and situated on a 23,800 sqm site, this property was acquired from Nafru Pty Ltd for $41.6 million by Heathley Direct Medical Fund No 2 at an initial yield of 6.15 per cent. The property is leased to QML Pathology on a long term lease, and is operated as a pathology laboratory.

 

420 Sherbrooke Road, Willawong

Grace Worldwide (Australia) Pty Ltd exercised their right to purchase this property at the market valuation of $42.603 million from vendor Charter Hall Long Wale REIT. The property comprises a large modern high-clearance warehouse with a net lettable area of 22,108 sqm and sits on a 33,850 sqm site. The site includes plenty of parking, access for large trucks and an area used by Grace for container storage.

 

71 Charles Ulm Place, Eagle Farm

This 38,860 sqm property was re-purchased by the original developers, Trade Coast Central Pty Ltd, for $35.5 million on a tight initial yield of 5.99%. TradeCoast Central Pty Ltd is owned by Bob Tucker and originally constructed the 21,100 sqm warehouse facility in 2013 for the local Whittaker family. The Whittaker family leased the property to OzTrail Australia, a company that they owned at the time, but later sold to Odssey Private Equity in 2017. The Whittaker’s retained ownership of the land, and OzTrail continued to lease the property on a 10-year lease expiring in 2013.

 

1035-1051 Nudgee Rd and 10 Buchanan Rd, Banyo

This property comprises two titles across a 37,868 sqm corner site and was sold by ISPT to a private investor for a total of $34.250 million. The property includes two buildings. Building 1 includes a two-storey 2,365 sqm office, 601 sqm of storage space and 7,219 sqm warehouse accommodation. Building 2 includes a two-storey 600 sqm office and 4,750sqm warehouse accommodation. The property is leased to Tradelink on a ten-year lease expiring June 2027 with a net passing rental of $111 per sqm and fixed annual rental increases of 3 per cent, and to Toro Australia on a five-year lease expiring November 2019 at a net passing rental of $138 per sqm and fixed annual increases of 3 per cent.

Leasing

The leasing market across Queensland’s industrial markets is highly competitive, with low vacancy rates, and limited vacant space available for lease. Vacancy rates were down below 14% for 2018, and there is limited supply of quality space in well located areas, with high demand among tenants.  This is turn is benefiting landlords by driving up rental returns, with the last six months in particular showing improvements in both rental rates and incentives.

The low vacancy levels, tight supply of quality space and tight yields are all combining to improve the feasibility of new projects, and this in turn is driving demand for development sites and contributing to institutional investors paying significantly higher rates than historical averages to secure land.

Figures show the strengthening of average rental rates achieved across all precincts, with rates of $133 per square metre recorded for the past 18 months, compared with $113 per square metre for 2017 and $106 per square metre for 2016. However, the total number of lease deals completed declined, with 166 leases recorded for 2018/19 compared with 165 for 2017 and 299 for 2016, which reflects the limited supply of space and the increased competitiveness of the leasing market.

Graph Five

When looking at the market on a precinct level, the Australia Trade Coast absorbed almost 46% of the new leases recorded over the past 18 months, while the strongest rental returns were recorded in Brisbane East at $182 per square metre; Australia Trade Coast at $155 per square metre and Brisbane North at $146 per square metre.

No of leases Annual Rental Price Per SQM average Percentage of total leases No of leases over $1m
Australia Trade Coast 76 155 45.78 2
Brisbane East 6 182 3.61 0
Brisbane South 48 114 28.92 3
Brisbane North 53 146 31.93 1
Logan Motorway 13 89 7.83 3
M1 Corridor 5 134 3.01 1
Regional (incl Sunshine Coast & Ipswich) 5 95 3.01 0

There were just 10 leases of premium grade properties that achieved a rental return of more than $1 million, with 3 of these leases recorded in both the Logan Motorway precinct and the Brisbane South precinct.

This shows a tightening of supply for premium grade space, as there were 18 leases with annual rates over $1 million recorded for 2017 and 20 recorded for 2016.  However, rates for the premium grade properties have tightened, with an average of $110 per square metre recorded for past 18 months compared with $114 in 2017 and $135 in 2016.

Graph Six

The largest lease recorded in the past 18 months was the lease of 14,250 sqm at an annual rental of $2.6 million by Silk Logistics for a new purpose-built logistics facility to be developed at Fisherman Islands in the Port of Brisbane.

Top 5 Leases By Annual Rent
  Estate Street Address Suburb Precinct Annual Rent Lessee SQM Date
1 Fisherman Islands Port of Brisbane Australia Trade Coast $2,600,000 Silk Logistics 15,250 Aug-18
2 134-160 Ingram Rd Acacia Ridge Brisbane South $2,300,000 Austube Mills 24,471 Jan-18
3 Port West Estate 7 Radar St Lytton Australia Trade Coast $1,917,600 Steelforce Australia 15,980 May-18
4 70 Fulcrum St Richlands Brisbane Outer South $1,547,900 Quatius Logistics 15,479 Jun-18
5 Berrinba Logistics 1 Siltstone Pl Berrinba Logan Motorway $1,291,000 Pinnacle 12,300 Oct-18

Key Points

  • Vacancy rates are at low levels, resulting in strong demand for available places and increased rental rates.
  • Feasibility for new projects is improving and contributing to high rates paid for infill development sites.
  • Biggest leasing deal was for a new logistics facility to be developed in the Port of Brisbane.

Pre-Commitments & Development Pipeline

Three factors have contributed to spur an increase in the number of new industrial developments. First, there are a high number of pre-commitments, enabling developers to commit to starting new developments. Second, new generation automated systems in logistics that enable accurate delivery, complete trackability and quick turnaround on a cost-effective basis are resulting in demand from tenants for new construction as existing facilities are often not suitable. Third, low vacancy rates and increased competition for available spaces among tenants has resulted in increased demand for new space.

During 2019, some 300,000 sqm of new space will enter the market compared with just 168,506 sqm in 2018. The 2018 figure was the lowest since 2010. Pre-commitments account for 74 per cent of the new space to be delivered in 2019, with Food Production/Distribution tenants accounting for 34 per cent of this space, while Transport and Logistics will absorb 22% of the space and Consumer Products will absorb 17 per cent of the space.

The pipeline for new developments over the next few years shows that institutional investors have secured a number of pre-commitments allowing them to commit to developing the new generation state-of-the-art automated facilities. The largest single pre-commitment for new space is from Coles for a new 66,000 sqm distribution facility at Redbank. Of note is that the three biggest pre-commitments are all in the Redbank Motorway Estate, located between Brisbane CBD and Ipswich.

Coles Distribution Facility, Redbank Motorway Estate

Coles has pre-committed to a 20-year lease for a purpose-built state-of-the-art distribution facility to be constructed by Goodman at the Redbank Motorway Estate. The 70,000 sqm centre will be able to distribute twice the volume of groceries while being half the size of existing facilities. The centre is due to be completed by 2022.

Australia Post, Redbank Motorway Estate.

Australia Post has pre-committed to a 15-year lease of what will be the largest parcel facility and delivery centre in the southern hemisphere. The facility will be developed by Goodman on a 13.5-hectare site and is due to be completed by October 2019.

Military Vehicle Centre of Excellence, Reheinmetall Defence Australia, Redbank Motorway Estate, Redbank

Reheinmetall Defence Australia has committed to leasing a new manufacturing facility at Redbank for production of 211 Boxer Combat Reconnaissance Vehicles for the Australian Armed Forces. The Military Vehicle Centre of Excellence will be built by Watpac at the Goodman developed Redbank Motorway Estate and is expected to open in 2020.