Weak signs for industrial property in Melbourne

UNDERLYING demand for industrial property in Melbourne is set to weaken over the next 12 months in line with the Victorian economy, according to the forecaster BIS Shrapnel.

By InvestSMART · 19 Sep 2012

By InvestSMART ·
19 Sep 2012

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UNDERLYING demand for industrial property in Melbourne is set to weaken over the next 12 months in line with the Victorian economy, according to the forecaster BIS Shrapnel.

In contrast, the outlook for Brisbane's industrial market is more positive, although demand remains narrowly focused, says BIS Shrapnel's latest report, Melbourne and Brisbane Industrial Property Market Forecasts and Strategies 2012 to 2022.

Despite the poorer forecast for Melbourne, speculative building is still going ahead, particularly in the industrial west, an analysis by Savills Australia has found.

BIS Shrapnel's senior project manager, Lee Walker, the report's author, said two out of three key drivers of demand would decline over 2012-13 in Melbourne. Business stocks, the big driver of warehouse demand, would be hit by a downturn in construction, joining declining public-sector investment and slowing private consumption.

Second, the high Australian dollar would continue to undermine the competitiveness of Victoria's tradeables sector, and stymie manufacturing output and depress demand for factory space.

However, some demand for new and more efficient premises would come from tenants wanting to upgrade. "Upgrader demand is likely to place a floor under leasing demand, particularly driven by retailers and logistic providers, but does not necessarily add to net demand for industrial property," he said.

Mr Walker said the saving grace for Melbourne was constrained supply with construction activity still 40 per cent below the previous peak and little improvement expected in the short term. This should keep vacancies (in premises above 5000 square metres) fairly well contained. "However, there will be limited pressure on rents to rise because of the weakness of demand," he said.

Overall, Mr Walker said the Melbourne industrial market would muddle through the next 12 months before an upswing from 2013-14.

In Brisbane, BIS Shrapnel said, the booming resources sector was leading strong demand for industrial space. However, companies not benefiting from the mining industry were struggling with turnover growth and low confidence, and were concentrating on cutting costs.

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Frequently Asked Questions about this Article…

What is the Melbourne industrial property outlook for the next 12 months?

BIS Shrapnel forecasts that underlying demand for industrial property in Melbourne will weaken over the next 12 months, with the market expected to 'muddle through' before an upswing from 2013–14. Constrained supply should help contain vacancies but demand is likely to be subdued.

Why is demand for industrial property in Melbourne expected to weaken?

The report’s author, Lee Walker of BIS Shrapnel, says two of three key demand drivers will decline in 2012–13: business stocks (hurt by a downturn in construction), falling public‑sector investment, and slowing private consumption. Those factors together are expected to reduce warehouse and factory demand.

How does the high Australian dollar affect Melbourne’s industrial and manufacturing demand?

BIS Shrapnel notes the high Australian dollar undermines the competitiveness of Victoria’s tradeable sector, which can stymie manufacturing output and depress demand for factory space in Melbourne.

Will industrial property rents and vacancies in Melbourne be strongly affected?

According to the report, constrained supply—construction activity still about 40% below the previous peak—should keep vacancies for larger premises (above 5,000 sqm) fairly contained. However, weak demand means there will be limited pressure for rents to rise.

Is speculative industrial building continuing in Melbourne despite the weaker outlook?

Yes. An analysis by Savills Australia found speculative building is still going ahead in Melbourne, particularly in the industrial west, even though overall demand is forecast to be weaker.

What parts of tenant demand could support leasing in Melbourne even if net demand falls?

BIS Shrapnel identifies 'upgrader' demand—tenants seeking newer, more efficient premises—as a floor under leasing activity. That demand is likely to be driven mainly by retailers and logistics providers, though it may not add to net industrial demand.

How does the Brisbane industrial market compare to Melbourne right now?

BIS Shrapnel describes a more positive outlook for Brisbane, where the booming resources sector is driving strong industrial space demand. However, businesses not benefiting from mining face weak turnover growth and low confidence, focusing on cost cutting.

What should everyday investors know about short‑term prospects for industrial property in Melbourne and Brisbane?

Investors should expect Melbourne to experience weaker demand and limited rent growth over the next 12 months, with supply constraints helping to limit vacancy deterioration. Brisbane looks stronger due to mining‑linked demand, but that strength is uneven across sectors. These are the findings reported by BIS Shrapnel and supported by Savills Australia’s observations.