Interest rates may slow industrial owner occupier demand

THE RECENT interest rate rise may begin to put price ceilings on owner occupiers in the industrial sales market, according to Jones Lang LaSalle’s National head of industrial, Jeff Pond, though the market remains buoyant overall.

THE RECENT interest rate rise may begin to put price ceilings on owner occupiers in the industrial sales market, according to Jones Lang LaSalle’s National head of industrial, Jeff Pond, though the market remains buoyant overall.

“Overall, the Australian industrial sales market remains very tight, with a lack of available existing stock unable to meet demand. The investment market is likely to continue to be buoyant over the foreseeable future.”

Pond says that interest rates may, however, put somewhat of a dampener on the owner-occupier and private investor market, particularly parties interested in properties below the $5million mark, who may start to reassess the viability of leasing compared to buying.

“Historically interest rates remain low, but none-the-less, this was the seventh rate rise in a protracted tightening cycle that has now lasted over five years,” he said.

The first rise was in June 2002.

“While there is still strong demand for owner occupier stock, this added pressure may now start to put a cap on some of the aggressive prices that have been paid in the sub $5 million sector,” Pond explained.

He said there is a severe lack of stock, including either vacant land, investment grade stock or vacant possession properties in most areas around the country.

Jones Lang LaSalle Research & Consulting data also shows the dip in industrial sales transactions over 2006-07 largely reflects purchaser demand outweighing supply of land / investment stock.

In the second quarter 2007, the strongest sales activity was noted in the Sydney industrial market, which recorded sales transactions totalling more than $318 million, more than double the first quarter of 2007.

Pond said that strong investor demand for industrial property continues to push yields down, resulting in some level of yield compression across all industrial markets during the quarter.

“Nationally, industrial investment yields have firmed significantly over the last two years and yields have converged across the commercial property sector.

“Despite this, certain grades of industrial property and capital city industrial markets can still offer relatively high returns compared with the office and retail property sectors.”

In the June quarter 2007, Sydney’s Northern and Outer South Western precincts saw yields tighten by 25 basis points while in Melbourne all sectors except for the South East reported movement.

In Brisbane, only the Southern prime and high tech sectors remained unchanged.

Adelaide’s Inner West and Northern precincts firmed by 25 basis points, and Perth experienced compression of 25 basis points in yields for high tech and secondary stock.

According to the research & consulting company, there continues to be large amounts of new supply in the pipeline and completions are expected to hit a ten year high in 2007.

Approximately 2.8 million square metres of new industrial and high-tech industrial space is expected to be completed this year.

“The expanding transport and logistics sector, together with booming economic conditions in Queensland and Western Australia, have ensured that tenant demand remains strong across most industrial markets.

“Pre-lease activity continues to be the major driver of take-up,” he commented.

Amid fears of oversupply due to backfill space and speculative construction activity, preliminary figures indicate that over 60% of the forecast supply this year has already been absorbed by tenants and owner-occupiers.

Sydney and Brisbane are where pre-commitment levels are relatively low at 45 — 55 per cent, explained by speculative development, while Adelaide and Perth sit on the other end of the spectrum with pre-commitment levels as high 90 – 95 per cent.

Melbourne has achieved a 68% pre-commitment level, attributable to solid pre-lease activity in the South East precinct where the new Eastlink motorway will open to the public in 2008.

Industrial land values again showed the most growth in the Perth and Brisbane markets in the June quarter, driven by the buoyant in Western Australia and Queensland economies as well as soaring construction costs.

Growth was more subdued in the Melbourne, Sydney and Adelaide markets, with the exception of Sydney’s South, where infrastructure development as well as pressure from competing uses generated higher than average growth.