Our growing appetite for on-line shopping is helping fuel a proliferation of industrial development in the eastern seaboard’s capital cities as distributors, retailers and logistics operators seek to establish the best and fastest supply-chains.
And in a major shift, leading institutional investors have joined private developers in the sector, significantly boosting allocations as they seek to stabilise returns through the development of logistics and other high-demand assets.
A record high for speculative industrial development projects was set in 2018 with close to 422,000 sqm completed across Sydney, Melbourne and Brisbane, a Knight Frank report released this month states.
There are no signs of a slowdown either, with up to 560,000 sqm of spec projects underway or proposed by the end of this year.
Click-happy consumers are largely driving the activity, their on-line shopping habits placing increased pressure on traditional shopping experiences and viability of physical retail stores.
Online retail sales in Australia were this week forecast to shoot past the $30 billion mark for the first time this year, to around $30.9 billion. JLL head of research Sass J-Baleh was reported as estimating this would rise to about $33.2 billion over 2019.
Such growth is triggering strong competition between retailers for modern warehousing and logistical assets outfitted with cutting-edge operational facilities for fast and efficient delivery.
“Same day delivery has already transformed into same hour delivery in some countries,” Knight Frank Head of Research and Consulting Ben Burston notes. “By improving local supply-chains for last-mile delivery and creating hubs to meet the demand for industrial and logistics space, development is playing an integral role in this evolution.”
Of the three capital cities, Sydney led spec developments in 2018 - the city hitting its highest number of projects in 10 years, almost 200,000 sqm above the historic average and a whopping 238% higher than usual annual figures.
This year though Melbourne is most likely to surge into first place. Knight Frank forecasts the city’s number of spec projects in 2019 to be double those in 2018, and even now demand for industrial premises in some Melbourne areas is outstripping supply. This is taking place most notably in the coveted western corridor which has the greatest capacity for expansion. Furthermore, over half the upcoming spec stock due in Melbourne’s West is already under offer.
“Demand for prime grade industrial [in Melbourne] remains very high and to a large extent unsatisfied particularly in the West and South-East corridors... reflected in the increasing pressure on land and rental values,” the report states.
Major institutional investors now taking advantage of this unprecedented shift in the industrial sector include Dexus, Stockland, Mirvac and GPT. In the last 18 months all have invested significant amounts of capital to snap up development sites in Sydney and Melbourne.
These institutions are now “actively increasing their exposure to the industrial / logistics asset class, potentially diversifying away from retail’” Mr Burston says.
The major institutions are especially attracted by the fact strong demand has shortened take-up periods, usually before or upon practical completion. “Institutional owners have recognised the upside of this and are growing increasingly confident in investing in spec projects,” Mr Burston says.
Other large-scale acquisitions in Sydney include the purchase by Logos Property of the 15.3ha Villawood site occupied by logistics giant Toll in February this year. This has involved a partial leaseback to Toll while Logos redevelops the remaining 11.3ha into a $200 million logistics and intermodal hub. Logos’ Australian and New Zealand portfolio includes assets and developments across NSW, Victoria, Western Australia, Queensland and Auckland, with a total development pipeline of $2 billion. In Melbourne, Frasers Property acquired a 41.3 ha site in Dandenong South for around $80 million (about $200/sqm).
In more encouraging news for those involved in the sector, growth in online retail coupled with the rising population along eastern seaboard markets will continue to drive the situation according to Knight Frank, as well as see distribution facilities in infill locations in Melbourne and Sydney.
“Amazon wants to make one-day delivery the default for its Prime-Now subscribers and Google’s drone company Wing launched their project phase in Australia recently,” Mr Burston points out. “This suggests that improvements to supply-chain efficiencies to the last-mile will remain at the vanguard of the logistics sector in the immediate term.”