Savills Research New South Wales Spotlight Sydney Industrial October 2014 Highlights  Approximately 794,400 square metres of industrial   accommodation was reported leased in Sydney in the 12 months to September 2014 Approximately $1.85 billion of industrial property transactions were recorded in the 12 months to September 2014 Indicative yields for prime and secondary industrial stock have broadly tightened in the 12 months to September 2014  Industrial land values grew over the last 12 months,   with signs of further growth in Western Sydney Prime rents in the Sydney industrial market remained stable over the last 12 months Australian Real Estate Investment Trusts acquired over $211 million of development sites in the Western Sydney precinct Savills Research | Sydney Industrial October 2014 Savills New South Wales Team Research Managing Director Divisional Director Simon Hemphill +61 (0) 2 8215 8892 Managing Director Simon Fenn +61 (0) 2 8215 8830 [email protected] [email protected] Research Industrial Sales & Leasing Analyst Houssam Yakzan +61 (0) 2 8215 8980 Divisional Director Darren Curry +61 (0) 2 9761 1304 [email protected] [email protected] Industrial Sales & Leasing Divisional Director Greg Cohen +61 (0) 2 8215 8864 Divisional Director Peter Steinhour +61 (0) 2 9761 1310 [email protected] [email protected] Divisional Director Ray Trimboli +61 (0) 2 9601 3100 Senior Executive Adam Micola +61 (0) 2 9761 1313 [email protected] [email protected] Valuation & Consultancy Executive Moshe Greengarten +61 (0) 2 9761 1302 Divisional Director Russell Nicolson +61 (0) 2 8215 8987 [email protected] [email protected] Corporate Real Estate Project Management Divisional Director John Mackenzie +61 (0) 2 8215 8982 General Manager David Nicholas +61 (0) 2 8913 4813 [email protected] [email protected] Savills New South Wales Level 7, 50 Bridge Street Sydney, NSW 2000 Australia +61 (0) 2 8215 8888 savills.com.au savills.com.au/research 2 Savills Research | Sydney Industrial October 2014 Introduction Sydney is Australia’s second largest industrial property market behind Melbourne in terms of the amount of zoned industrial land. Industrial users range from domestic service industries such as the local mechanic to larger scale users like transport, logistics and manufacturers. Savills Research refers to the Sydney industrial market across seven main precincts. These precincts and their respective municipalities are as follows: Precinct Suburbs South Sydney Botany, Mascot, Alexandria, Rosebery, Matraville South West Sydney Moorebank, Prestons, Chipping Norton, Liverpool, Revesby, Kingsgrove Outer South West Sydney Ingleburn, Minto, Smeaton Grange, Campbelltown Central West Sydney Chullora, Homebush, Rydalmere, Silverwater, Granville, Auburn Western Sydney Eastern Creek, Erskine Park, Arndell Park, Wetherill Park, Smithfield, Yennora, Girraween North West Sydney Seven Hills, Kings Park, Blacktown, Baulkham Hills North Shore Artarmon, Lane Cove, St Leonards Source: Savills Research Infrastructure In recent years significant ongoing improvements have been made to Sydney’s metropolitan transport infrastructure, including the M2 and M5 motorways which are currently being widened to accommodate increasing traffic volumes during peak periods. Sydney is linked by what is known as the Sydney Orbital Network, which connects the M1, M2, M4, M5 and the M7. This has allowed direct access from Sydney’s port and airport to all major warehousing and industrial hubs in the South West, Western and North West precincts. Sydney’s next key infrastructure project announced by the NSW Government will be Australia’s largest integrated transport and urban development known as WestConnex. The 33 kilometre project will bring together a number of Sydney’s freeways which together will form a vital link to the Orbital Network. The scope of works include the widening of the M4 east of Parramatta, a duplication of the M5 East and new sections of motorway to provide a connection between the two key corridors Transport for New South Wales is responsible for delivering transport infrastructure projects that meet time, cost and quality objectives, constantly conducts feasibility studies into seeking ways to improve the NSW rail networks. Transport for New South Wales cite the need for a number of infrastructure projects including the Northern Sydney Rail Freight Corridor, which will improve freight times from Sydney to Newcastle, north of Sydney. In order to support the growing demand for imports and exports, NSW Ports recently completed the expansion of the Intermodal Logistics Centre (ILC) at Enfield. The new terminal is located 18 kilometres west of Port Botany and is due to start operations in late 2014. When fully operational, Enfield will have capacity to handle 300,000 TEU port – rail capacity per year. Furthermore, Government studies into the potential development of an additional intermodal freight terminal at Moorebank in South Western Sydney would significantly increase freight movements onto the rail network. If developed, this will further help improve container movement within metropolitan Sydney and help reach Government targets of doubling container movement by rail to and from Port Botany to 40 percent. Development of the site is likely to begin over the next year. savills.com.au/research 3 Savills Research | Sydney Industrial October 2014 Leasing Activity Savills identified approximately 794,433 square metres of industrial leases (>500 square metres) in Sydney in the 12 months to September 2014. This is down on the record amount 12 months prior of 1,242,094 square metres and down on the five year average (931,820 square metres). The number of leases identified in the 12 months to September 2014 totalled 130. By comparison, a total of 187 transactions were recorded over the same period last year During the last 12 months, just over 275,875 square metres of space was precommitted. This is slightly less than the 301,800 square metres recorded in the previous year. The total number of precommitment leases in the 12 months to September 2014 totalled 17, down on the same period last year (14). The following tables detail the major leases reported throughout the past 12 months. Select Sydney Industrial Leases to September 2014 GLA (sq m) Rent $/sq m Tenant 1 Secombe Pl, Moorebank 5,332 120 N Invenco Pty Ltd Feb-14 62 Marigold St, Revesby 4,613 88 N Australian Ports Logistics (NSW) Feb-14 6 Wonderland Dr, Erskine Park 3,434 122 N BAM Wine Logistics Mar-14 3-29 Birnie Ave, Lidcombe 8,670 135 N Booktopia Mar-14 Unit C, 5-7 Murtha St, Arndell Park 7,278 110 N Ingram Micro Mar-14 Yennora Distribution Centre, Yennora 6,209 75 N Doble Transport Mar-14 Unit D, 5-7 Murtha St, Arndell Park 6,017 100 N Agility Logistic Apr-14 Shirley St, Rosehill 11,962 117 N The Winning Group Jun-14 5-7 Unwin St, Rosehill 19,338 115 N Couriers Please Aug-14 37 Bessemer St, Blacktown 10,052 85 N Amber Tiles Date Property Feb-14 Source: Savills Research Select Sydney Industrial Precommitments Leases to September 2014 GLA (sq m) Rent $/sq m Hepher St, Campbelltown 17,500 90 N Grace Records Apr-14 38-46 Bernera Rd, Prestons 13,917 258 N Ingham Apr-14 1-2 Turnbull Cl, Greystanes 8,000 137 N Supply Network Jun-14 Kangaroo Ave, Eastern Creek 41,200 98 N TT Industries (Ryobi) Jun-14 Lockwood Rd, Erskine Park 15,300 105 N Pelikan Artline Jun-14 Kangaroo Ave, Eastern Creek 13,400 100 N Fisher & Paykel Jun-14 52 Quarry Rd, Erskine Park 3,500 120 N DUT Transport Jul-14 Pembroke Rd, Minto 7,465 110 N Quantium Solutions Date Property Jan-14 Tenant Source: Savills Research na= not currently available Select Sydney ‘Build to Lease’ Industrial Leases to September 2014 GLA (sq m) Rent $/sq m Tenant Quarry Estate, Greystanes 15,516 115 N Consortium Group Feb-14 William Dean St, Huntingwood 8,140 118 N Beaumont Tiles May-14 Kangaroo Ave, Eastern Creek 16,845 115 N FDM Logistics Date Property Feb-14 Source: Savills Research savills.com.au/research 4 Savills Research | Sydney Industrial After a spike in leasing activity in the 12 months to September 2013, the Sydney industrial market experienced an increase in speculative development. Developers are building surplus space following a large precommitment to a site. In the last 12 months, Savills has recorded over 50,000 square metres of leasing activity in ‘build to lease’ developments. The Transport & Logistics industry leased the most industrial accommodation, taking 389,410 square metres or 49 percent of leased stock. The ‘Wholesale’ sector (including supermarkets, bulky goods, agricultural, textile, pharmaceutical, liquor, and furniture traders) accounted for 284,800 square metres or 36 percent of leased stock. Looking at the current levels of precommitment and enquiry in the market, Savills expects the ‘Transport and Logistics’ sector to dominate leasing activity in Sydney over the short to medium-term The remainder of the take up in the last 12 months was made up by the ‘Manufacturing’ and ‘IT and Telecommunications’ sectors. October 2014 Sydney Industrial Metropolitan Leases by Lease Size (sq m) Sep-04 to Sep-14 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 < 2,000 2,000 - 5,000 5,000 - 10,000 10,000 - 15,000 > 15,000 Source: Savills Research Sydney Industrial Metropolitan Leases by Lease Size (sq m and number) 12 months to Sep-14 60 450,000 400,000 50 350,000 40 300,000 250,000 30 200,000 150,000 20 100,000 10 50,000 0 0 < 2,000 2,000 - 5,000 sq m (LHS) 5,000 - 10,000 10,000 - 15,000 > 15,000 No (RHS) Source: Savills Research Leases in the Western precinct accounted for the majority of industrial stock reported leased in the 12 months to September 2014, with 471,462 square metres (including precommitments) or 59 percent. The Western precinct also recorded the majority of Sydney’s precommitment activity (237,300 square metres) for the past 12 months. The Western precinct has experienced a flurry of development in the last 12 months, which has been predominantly driven by precommitment activity. This is expected to continue with approximately 300,000 square metres of industrial space in the pipeline due to complete by the end of 2015 on sites owned by Goodman Group, Australand, DEXUS, GPT, Fitzpatrick Investments and Fife Capital. Industrial take up of warehouse space greater than 15,000 square metres represented the majority of industrial leases in the last five years, while leases in this region represented 51 percent of Sydney's reported leasing activity in the 12 months to September 2014. savills.com.au/research 5 Savills Research | Sydney Industrial October 2014 Sydney Industrial Average Prime Net Face Rents by Precinct ($/sq m) Sep-04 to Sep-14 $180 $160 $140 $120 $100 $80 $60 $40 South South West Central West Western North West North Shore Source: Savills Research Average net face rents remained stable across all precincts over the September 2014 quarter. Prime industrial net rents as at September 2014 in South Sydney range between $130 per square metre to $190 per square metre, secondary buildings ranged $90 per square metre to $115 per square metre. Prime industrial net rents in Western Sydney ranged between $100 per square metre and $120 per square metre and between $70 per square metre and $95 per square metre for secondary buildings. Rental levels above this range are being achieved for facilities equipped with specialised fit outs, with tenants paying a premium for technically advanced facilities that provide improved warehousing efficiency. According to the latest figures released by NSW Ports, YTD August for FY2014/15 total container trade reached 386,441 TEU, up by 3.4 percent when compared to the same period last year. Full import containers were up 6.4 percent against the same period last year with increases in ‘Miscellaneous Manufactured Articles’, which includes furniture, clothing and general consumables, ‘Machinery and Transport Equipment’ and ‘Paper and Paper Products’. Anecdotal evidence suggests the increase in container movement is a likely driver of speculative development and helping support current rental levels across Sydney. savills.com.au/research 6 Savills Research | Sydney Industrial October 2014 Sales Activity Savills recorded approximately $1.85 billion worth of industrial transactions in the 12 months to September 2014, up from $1.06 billion in the previous year; and up on the five year average ($1.25 billion). In the 12 months to September 2014. Savills recorded a total of 64 properties sold, up from the previous 12 months total of 45. The Sydney industrial investment market remains extremely strong as weight of funds from local REITs, coupled with overseas third party capital seeking to grow their portfolios, and has created a seller’s market. Exacerbated by the lack of investment grade stock available for purchase, prime and secondary yields have tightened throughout of 2014. Sydney Industrial Metropolitan Industrial Sales by Price Range ($m) (>$5m) Sep-04 to Sep-14 $2,500 $2,000 $1,500 $1,000 $500 $0 $5-$10m $10-$15m $15-$20m $20-$30m >$30m Source: Savills Research In the 12 months to September 2014, $738 million of reported transactions occurred in the South precinct, accounting for 42 percent of the industrial sales in this period. The Western precinct had the greatest number of transactions (17) worth $420 million or 24 percent of total recorded sales. Sydney Industrial Land Values ($/sq m) September 2014 Precinct 3,000 - 5,000 sq m 10,000 - 20,000 sq m 10ha + South Sydney 500-700 450-600 na South West Sydney 275-325 225-275 180-200 Outer South West Sydney 200-250 125-170 80-100 Central West Sydney 500-600 350-450 300-350 Western Sydney 275-350 225-350 200-250 North West Sydney 250-325 225-300 na North Shore 600-700 400-600 na Source: Savills Research -note: the above rates reflect benched and serviced land values. Select Sydney Industrial Land Sales to September 2014 Date Property Price ($m) Area (sq m) Price ($/sq m) Dec-13 60 Wallgrove Rd, Eastern Creek 55.05 218,600 252 Dec-13 6 Hepher Rd, Campbelltown 6.50 78,000 83 Jun-14 43-49 Stennett Rd, Ingleburn^ 72.50 280,000 259 Jun-14 QuarryWest, Greystanes 50.50 265,000 191 Jun-14 2-28 McPherson St, Banksmeadow 33.10 93,000 365 Source: Savills Research ^site includes small improvements and land lease savills.com.au/research 7 Savills Research | Sydney Industrial October 2014 The following table highlights a selection of industrial sales in the 12 months to September 2014. Select Sydney Industrial Investment Sales to September 2014 Date Property Price($m) GLA (sq m) Price ($/sq m) Yield (%) Oct-13 10-38 Forrester Rd, St Marys 21.16 18,363 1,152 7.80 Nov-13 52-88 Lisbon St, Fairfield East 65.00 58,828 1,105 9.00 Nov-13 29 Glendenning Rd, Glendenning 29.50 21,874 1,349 7.90 Dec-13 40-88 Forrester Rd, St Marys 72.85 60,439 1,205 7.75 Feb-14 28 Percival Rd, Smithfield 19.20 26,450 726 9.60 Mar-14 1 Inglis Rd, Ingleburn 13.80 9,928 1,390 11.59^ Jun-14 1 Johnson Rd, Campbelltown 19.40 16,642 1,166 7.80 Jun-14 30-32 Bessemer Rd, Blacktown 16.62 14,652 1,134 8.59 Jun-14 104 Vanessa St, Kingsgrove 12.62 7,121 1,772 8.90 Aug-14 50 Airds Rd, Minto 21.60 23,063 937 9.17 Source: Savills Research ^excluding surplus land Select Sydney Industrial Vacant Possession Sales to September 2014 Date Property Price ($m) GLA (sq m) Price ($/sq m) Oct-13 25 Bessemer St, Blacktown 6.00 12,900 465 Feb-14 133 Vanessa St, Kingsgrove 14.85 13,034 1,139 Apr-14 42 Birnie Ave, Lidcombe 12.20 8,070 1,512 Apr-14 24-32 Forge St, Blacktown 6.69 6,713 996 Sep-14 35 Bryant St, Padstow 14.00 36,850 380 Sep-14 67-77 Airds Rd, Minto 5.60 5,799 966 Source: Savills Research The most active purchaser in the market in the 12 months to September 2014 was the 'Trust' category recording $785 million (42 percent) worth of industrial property transactions. However, the 'Fund' category was the most active in terms of number of transactions recorded (17). The 'Developer' buyer category has become more prevalent in the last 12 months making up 19 percent of total investment ($359 million). With residential developers acquiring over $330 million of industrial facilities earmarked for residential redevelopment. Sydney Industrial Metropolitan Government Industrial Sales Buyer Profile (%) 0% (>$5m) 12 months to Sep-14 Private Investor 9% Undisclosed 0% Developer 19% Foreign Investor 8% Fund 14% Syndicate 1% Owner Occupier 6% Trust 43% Source: Savills Research savills.com.au/research 8 Savills Research | Sydney Industrial October 2014 A-REITs continued to acquire prime industrial assets across Sydney, with Goodman, Mirvac, Charter Hall, DEXUS, GPT, Australian Industrial REIT and 360 Capital all buying logistic type assets over the last 12 months. Savills expects this buyer pool for industrial property to remain acquisitive throughout 2015, further fuelling the argument of a seller’s market as assets available for purchase remain scarce. In the last 12 months industrial land has become highly sought after, with A-REITs shifting their attention from acquiring existing stock to acquiring land banks. This has been spurred on from the lack of investment opportunities available in the market. These land banks allow A-REITs to grow their funds management business organically by developing new stock through market demand. Savills has recorded over $297 million of land sales during this period, totalling approximately 117 hectares of gross site area. Stockland, Charter Hall, Australand, DEXUS, Mirvac and Goodman Group all acquired large land bank sites in the last 12 months. In June 2014, Stockland announced the acquisition of the 28 hectare Patrick Autocare industrial site in Ingleburn for $72.5 million. The site is located in Sydney’s Outer South West in close proximity to the M5 Motorway. With parts of the site leased back to the vendor for 3-10 years, this acquisition provides Stockland with a steady income whilst more importantly securing them a long term development pipeline. There are at least two significant sites (serviced and benched) expected to transact in the next six months, Savills anticipates high levels of interest from all the major industrial REITs for these properties. Sydney Industrial Average Prime Net Face Rents by Precinct ($/sq m) Sep-04 to Sep-14 $180 $160 $140 $120 $100 $80 $60 $40 South South West Central West Western North West North Shore Source: Savills Research Average prime yields for industrial stock tightened by 50 basis points in the 12 months to September 2014 across most precincts. Prime industrial yields in the September 2014 quarter typically ranged between 7.25% and 7.75%. Recent sales transactions at sub 8.00% are likely to place further pressure on yields over the next 12 months. Savills also recorded a tightening of average secondary industrial yields by 25 basis points for all precincts in the September 2014 quarter. Savills anticipates pressure on secondary yields over the next 12 months as lack of prime investment stock available for purchase has forced investors to turn their sights to well leased secondary assets. savills.com.au/research 9 Savills Research | Sydney Industrial October 2014 Sydney Industrial Average Prime Net Face Rents by Precinct ($/sq m) Sep-04 to Sep-14 $180 $160 $140 $120 $100 $80 $60 $40 South South West Central West Western North West North Shore Source: Savills Research Prime industrial capital values in September 2014 range between $1,625 per square metre and $2,533 per square metre net in South Sydney, between $1,290 per square metre and $1,600 per square metre net in the South West precinct and between $1,250 per square metre and $1,600 per square metre net in the Western precinct. When compared to the 12 months prior, average prime capital values in Sydney remained stable. Key Market Indicators Key Market Indicators - September 2014 South Sydney Prime Secondary Low High Low High Rental Net Face ($/sq m) 130 190 90 115 Yield – (% Net Face Rental) 7.25 7.75 8.25 9.25 IRR (%) 9.25 9.50 9.50 10.00 30 40 30 40 1,625 2,375 950 1,350 Outgoings – total ($/sq m) Capital Values ($/sq m) Source: Savills Research South West Sydney Prime Secondary Low High Low High 95 120 65 95 Yield – (% Net Face Rental) 7.25 7.75 8.25 9.25 IRR (%) 9.25 9.50 9.50 10.00 18 22 18 22 1,100 1,300 750 1,100 Rental Net Face ($/sq m) Outgoings – total ($/sq m) Capital Values ($/sq m) Source: Savills Research savills.com.au/research 10 Savills Research | Sydney Industrial October 2014 Outer South West Sydney Prime Secondary Low High Low High 80 100 65 80 Yield – (% Net Face Rental) 7.25 8.50 8.50 9.50 IRR (%) 9.25 9.75 9.75 10.25 Outgoings – total ($/sq m) 15 20 15 20 Capital Values ($/sq m) 850 1,150 650 850 Rental Net Face ($/sq m) Source: Savills Research Central West Sydney Prime Secondary Low High Low High Rental Net Face ($/sq m) 105 135 80 100 Yield – (% Net Face Rental) 7.25 7.75 8.25 9.25 IRR (%) 9.25 9.50 9.50 10.00 20 27 20 27 1,150 1,450 700 1,150 Outgoings – total ($/sq m) Capital Values ($/sq m) Source: Savills Research North West Sydney Prime Secondary Low High Low High 95 115 70 90 Yield – (% Net Face Rental) 7.50 8.00 8.50 9.25 IRR (%) 9.25 9.50 9.50 10.00 18 25 18 25 1,100 1,300 700 950 Rental Net Face ($/sq m) Outgoings – total ($/sq m) Capital Values ($/sq m) Source: Savills Research Western Sydney Prime Secondary Low High Low High Rental Net Face ($/sq m) 100 120 70 95 Yield – (% Net Face Rental) 7.25 7.75 8.25 9.25 IRR (%) 9.25 9.50 9.50 10.00 Outgoings – total ($/sq m) Capital Values ($/sq m) 18 27 18 27 1,100 1,400 700 1,100 Source: Savills Research North Shore Prime Secondary Low High Low High Rental Net Face ($/sq m) 135 190 105 130 Yield – (% Net Face Rental) 8.00 9.00 9.00 10.00 IRR (%) 9.25 9.50 9.50 10.00 40 50 40 50 1,500 2,300 1,000 1,300 Outgoings – total ($/sq m) Capital Values ($/sq m) Source: Savills Research savills.com.au/research 11 Savills Research | Sydney Industrial October 2014 Outlook Over the next 12 months Savills anticipates the Sydney industrial investment market to remain extremely strong as the weight of funds from local REITs, coupled with overseas third party capital seeking to invest in Australia, has created a seller’s market. The lack of A Grade investment stock available for purchase helped to tighten yields in 2014, which are expected to tighten further leading into 2015. This current yield compression has resulted in the increase of sale and leaseback investments on offer as companies seek to shift property ownership off their balance sheet to capitalise on improving market conditions. Savills expects A-REITs to continue to have a strong appetite for prime assets, as demonstrated by Goodman, Mirvac, Charter Hall, DEXUS, GPT, Australian Industrial REIT, 360 Capital and PropertyLink, all of whom acquired logistic type properties over the last 12 months. In the last 12 months, industrial-zoned land banks have become highly sought after as AREITs acquired over $225 million of sites focusing their attention on building their portfolios organically. Examples include Stockland, Goodman, Mirvac, DEXUS and Australand all purchasing 10 hectare plus sites. Savills believes land values for larger sites (>10 hectares) will lift as A-REITs compete to acquire well located land in Sydney’s Western precincts. These rates range anywhere between $225 and $300 per square metre for serviced and benched sites. Looking forward, Savills anticipates owner occupiers will continue to seek two to four hectare sites which will put further pressure on supply, as demand will continue to drive value. ‘Build to lease’ development remains active as DEXUS, Australand, Fitzpatrick Investment and Goodman are all developing facilities in Western Sydney without precommitments. Approximately 90,000 square metres of speculative space is expected to come to market between now and the final quarter of 2015. Over the last three months, new leasing enquiries have predominantly been from major logistic companies and retailers seeking circa 10,000 square metres of space in Western Sydney. However, Savills is aware of a couple of ‘mega shed’ requirements ranging from 40,000 square metres to 90,000 square metres. This demand is expected to be met through precommitments. Over the next 12 months, Savills expects to see rental growth for prime industrial stock in most Sydney precincts. Opportunities exist for developers as confidence in economic conditions and growing container movements point towards solid key indicators for the industrial markets. savills.com.au/research 12 Savills Research | Sydney Industrial October 2014 Savills New South Wales Team Our highly regarded research divisions are dedicated to understanding and giving indepth insight into the commercial, industrial & retail markets throughout Australia. We also provide in-depth consultancy services, ranging from tenant representation to property site selection for multinational businesses. 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