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Soaring land and construction costs to bite industrial tenants

July 11, 2018

The end is nigh for the decade-long favourable conditions enjoyed by industrial tenants. Photo: Supplied

Builder and developer Vaughan Constructions believes the end is nigh for the decade-long favourable conditions enjoyed by industrial tenants, as soaring land values and increased construction costs start to bite.

Vaughan director Mark Byrne said rents were not taking account the “sheer increase” in land values over the last 12 to 18 months, partly because of the time lag between developers acquiring land and the development commencing.

But he said it remained to be tested whether tenants would stomach a 10-15 per cent increase come rent review time. “We are at a transition point,” he said.

In Melbourne’s south east and western industrial market, land values have risen 50 per cent in the last 12 to months, having stagnated since the onset of the global financial crisis in 2008.

Mr Byrne said already compressed rental yields were unlikely to fall in a climate in which banks were increasing funding costs despite the Reserve Bank of Australia keeping official rates on hold.

Mr Byrne said prime rents in Melbourne’s south east were around $90 sq m, with land selling towards $350 sq m. At Truganina, west of the city, average rents were $75 sq m on land selling for up to $200 sq m.

“This is not feasible,” he said. “Rents must go up to offset the higher land costs and this is still yet to be tested.

“Sydney is in a similar situation in that land prices have increased from around $350 sq m 18 months ago to $550 sq m more recently and rents need to move accordingly.”

Mr Byrne said the tighter market was already reflected in incentives (inducements paid to attract tenants to new developments) now at 10-15 per cent, compared with a typical 30 per cent three years ago.

In recent years generous incentives have meant that desirable tenants have been able to pay the same – or even less – to move to brand-new premises.

“Now is the first time in eleven years people will have to pay more to move into a new building,” Mr Byrne said.

He said the Sydney market had been less “frothy” than Melbourne’s, but that was because values were higher in the first place.

“But it’s the same trend of land and building prices going up, yields staying the same and falling incentives.”

According to agent Colliers’ half year review of the industrial market, yields on prime grade Sydney stock are averaging 5-5.5 per cent, with secondary buildings yielding record lows of 6-6.5 per cent.

Colliers national director (industrial) Gavin Bishop said land values in most Sydney sub markets had doubled over the last two years. “Given the pricing that have been achieved for secondary industrial assets, we believe more industrial assets will come on to the market in the second half of 2018,” he said.

At Dandenong in Melbourne’s south east, Vaughan Constructions has inked three new deals at its Hammond Business Park, worth a collective $30 million.

The transactions, with fresh food distributor Bidfoods, Timber veneer distributor Timberwood Panels and an unnamed beverage maker, involve building 27,000 sq m of warehouse and manufacturing facilities.

The deals mean that 70,000 sq m of the 81,460 sq m park have been filled, with only one lot remaining.

The company bought the nine hectare site three years ago for around $15 million.

In Sydney, Vaughan Constructions is close to completing Fujitsu Australia’s new headquarters and distribution warehouse at Eastern Creek, an 11,000 sq m facility with a five-star green energy rating.

The company is also building a showroom and heavy vehicle servicing facility for Volvo Trucks at Prestons and a new HQ for Carpet Call at Seven Hills.

Nationally, the family-owned group is carrying out 25 building assignments totalling $150m.

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