While a shortage of industrial property still exists in the Sydney market, there has been some cooling in demand in line with interest rate rises, which have impacted consumer sentiment and spending leading to a slight reduction in the space required by occupiers.
While a shortage of industrial property still exists in the Sydney market, there has been some cooling in demand in line with interest rate rises, which have impacted consumer sentiment and spending leading to a slight reduction in the space required by occupiers.
Some would-be buyers are now sitting back on the sidelines waiting to see what will happen over the next six to 12 months, and some are experiencing difficulties in raising capital, but this is creating opportunities for buyers that can – and are willing – to be active.
We are noticing that some buyers are encouraged by a reduction in competition and as a result our sale campaigns have been well received by the market – while there are fewer potential buyers, there are still multiple parties vying for properties.
Reduced competition is one advantage of buying now, but for investors we also think it’s a great time to buy because the ongoing shortage of stock means rents are still rising and demand from tenants is still high.
Knight Frank’s latest Australian Industrial Review Q1 2023 found Sydney was the tightest industrial market with 43,759sq m of available space following a 51 per cent contraction. Just 10 per cent of the remaining available space across the Eastern Seaboard cities is in Sydney now.
The shortage of space has led to prime industrial rents in Sydney rising by 8.2 per cent over the first quarter of this year, the second highest rate of growth after Brisbane at 8.6 per cent. Over the past 12 months rents have risen by more than 38 per cent, the highest of Eastern Seaboard capitals.
With demand cooling a little and more supply coming online, with 807,641sq m expected to be delivered in Sydney this year, rental growth will likely soften to single-digits, but we believe rents will continue to move upward.
Anecdotally, we are seeing asking rents continue to increase and now very commonly breach the $200/sq m level, due to almost solely to the complete lack of available leasing stock at present. Most Western Sydney locations continue to boast vacancy rates of below two per cent.
For owner-occupiers now is also the time to buy because it’s a great opportunity to stop paying rent and find a more suitable property to create greater efficiencies in your business. We are still commonly seeing tenants renewing leases in a current premises that isn’t really suitable for their business because they are unable to find a better space at a rental they can afford, putting gains in efficiencies and business practices under pressure,
Will there be an oversupply?
There are a lot of advantages to buying in the current market, but there is a question mark over whether there will be an oversupply of industrial property in the future in Sydney that will impact land values and rents. There has been a lot of talk about this, but we believe it won’t come to fruition, or certainly not to the extent that has been suggested.
In Western Sydney there will be undoubtedly be significant tracts of land opening up in particular around the new Western Sydney International Airport, in the Aerotropolis, in years to come. However, the continued delay in providing services to zoned land is combining with planning delays to ensure the bottleneck of future supply remains a major challenge.
In addition, zoning and servicing on their own won’t generate leasing stock. Construction prices remain stubbornly elevated, while inflation, interest rate rises and global economic slowdowns means that not all zoned serviced land will automatically and instantly be developed.
While we don’t believe there will be a dramatic and significant oversupply, to safeguard values in the future, some of the best stock to buy at the moment is value-add properties – that is, either brownfield sites or vacant land in established industrial markets.
By James Reeves.