Record trade activity helps drive growth

Philip Hopkins February 15, 2012

THE Melbourne industrial market is recovering as the high value of the $A pushes imports higher, driving demand for quality, well located industrial assets.

Large-scale retailers and logistics operators are very active due to imports creating record-breaking trade activity through the Port of Melbourne, according to the latest CBRE Melbourne Industrial MarketView. This demand for space is in turn placing upward pressure on rents.

CBRE global research and consulting analyst Chris Holgar said speculative development was also occurring despite restrictions on development funding, and this was likely to continue.

''A slight reduction in industrial production has been counterbalanced by growth in imports due to a high $A,'' he said.

''This resulted in the Melbourne industrial sector outperforming other Australian industrial markets over the course of 2011, as container traffic through the Port of Melbourne surged to a new national record.''

The west performed particularly well, finishing last year with a rise of 50 per cent in leasing activity on 2010, according to Colliers International, which also confirmed the role of speculative development.

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Recent long-term lease deals by Colliers included one with CEVA Logistics for 20,307 square metres at 64 West Park Drive, Derrimut, in an A-grade building owned and managed by Australand.

Colliers manager, Melbourne west, Nathan Bingham, said speculative development from major institutional developers, particularly Australand and Dexus, and a number of private developers, had underpinned a buoyant 2011.

About 85,000 square metres of supply was available that could be considered B-plus and higher quality warehouse space.

''For 2012, there is about 50,000 sq m of new speculative development planned, with practical completion dates set for the second and third quarters of the year,'' Mr Bingham said.

CBRE's MarketView report showed that Melbourne distribution centres recorded the biggest rent rises last year, at 5 per cent, followed by unit estates (4.3 per cent).

Mr Holgar said limited funding for new industrial centres had been the primary driver of this rental growth over the second half of last year.

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CBRE Victorian state director, industrial & logistics services, Dean Hunt, said development activity had been patchy last year. A total of 448,657 sq m of new industrial space was built, mainly in the west and south-east.

But development activity this year should improve due to demand and, linked to that, lower vacancy rates.

On the investment front, Mr Hunt said only 12 sales were recorded in the second half of last year for a total of $170.7 million, compared with $273 million in the first half.

Foreign buyers dominated activity in the $10 million-plus category, with strong interest from Australian real estate investment trusts in recent months.

Mr Hunt said foreign investors had become interested in industrial property for various reasons. These included adjusted pricing, strong cash flows coming from quality lease covenants, and the relative strength and transparency of the market. Key industrial indicators were also heading in a positive direction.

But Mr Hunt said due to fears about Europe, the market was likely to remain risk averse and employ a ''flight to quality'' approach.

''It would appear that the market will continue to lack urgency, with buyers aware that any significant firming in yields may not be imminent, hence affording them the luxury of waiting for an asset that fits their specific investment criteria,'' he said.

''On a positive note, yields are not expected to weaken over 2012 and if global markets stabilise, measured yield compression is likely to occur.''

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