SUNSHINE FOR BRISBANE, MELBOURNE; RENTS TO RISE 20 PC OVER FIVE YEARS!

Brisbane and Melbourne prime industrial rents are forecast to rise between 16 and 20 per cent over the next five years to compensate for rising land costs and weaker returns, according to the latest forecasts from BIS Oxford Economics.

This “significant turnaround” will follow five years of almost no change in rents with higher prices likely to be supported by rising demand from e-commerce providers and third-party logistics operators, appetite which has helped boost the profits of Amazon landlord Goodman Group and others.

“Growth will reflect cost pressures from rising land values and softening yields – both of which affect the feasibility of construction,” said report author Christian Schilling.

Mr Schilling said a strong period of leasing activity combined with high construction levels to satisfy demand meant developers had to re-stock their dwindling land banks at higher prices.

“The prime reason for rising land values is competition for land amongst an increasing number of developers, concentration of land ownership which limits the amount of land offered for sale, and, in the case of Melbourne, planning uncertainty and delays in the rollout of infrastructure needed to service land,” Mr Schilling said.

As a result of this competition, land values in Brisbane’s Trade Coast region increased by 30 per cent over the past two years to almost $500 per square metre and are now back to pre-GFC boom levels.

In Melbourne’s south-east, land values have increased by 50 to 65 per cent on parcels less than five hectares to reach new record prices above $350 per sq m. Yields are around six per cent in both markets down from more than 8 per cent.

“[Those higher land costs] should have been reflected in rising rents, as the higher cost of land is usually passed on to tenants. However, face rents have barely moved,” Mr Schilling said.

He said this was due to cheap land accumulated before the GFC, firming yields that allowed developers to build at lower rent and the ability to offer attractive leasing incentives without affecting the end value of a project.

“Now, land values have risen to levels at which some developers are struggling to make construction stack up.

“Further increases in the cost of land will need to be passed on to tenants in the form of higher rents. “Rents will need to rise or developers will have to stop building”, Mr Schilling said.

Higher rents are likely to be supported by rising demand, with consultants TM Insight forecasting that demand for industrial property in excess of 10,000 square metres will exceed 3 million-square-metres this financial year.

TM Insight’s director of property Nathan Bingham said online sales was the key factor to this growth, with retailers now prioritising executing a successful omni-channel retail and fulfilment strategy.

“Over 75 per cent of the demand in warehousing space over 10,000-square-metre is being driven by bespoke design … with the focus on what’s happening inside the shed rather than the shed itself,” he said.

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