Is Melbourne's property market due for a catch up in values?

Research and Conditions Point to Growth in Melbourne Industrial Property Values

The average value of industrial land in Melbourne is approximately half the value of land in Sydney, Brisbane and Perth, and significantly less than the value in Adelaide. At the same time, Australian Bureau of Statistics research shows that Melbourne is the fastest growing capital city in Australia.

This contradiction leads to the question: ‘Is Melbourne due for a “catch up” in industrial property prices?’

With an enormous five-year pipeline of infrastructure upgrades averaging $7.4 billion per year, increasing business investment confidence, and strong and growing offshore investment in industrial real estate, we think the answer to this question is ‘yes’. In addition, zoned industrial land that is ready to develop is drying up, so the formula certainly seems geared to an increase in values.

After ten years of very little capital growth, Drew Williams, Director of Rutherfords Real Estate, says ‘We are at the coal face with vendors and purchasers every day. What we are experiencing certainly reminds me of what we saw in 2005 and 2006. Over 50% of estates are often selling prior to being released to the open market. Owner occupiers are setting new records as they struggle to find existing stock that suits their requirements and then paying healthy prices when they find the right property. All of the forces seem set to drive prices up in the medium term, and we are seeing early signs of it now.’

Jones Lang LaSalle’s* 12-month industrial property outlook remains positive. Despite downside risks — such as the exit of the car manufacturing industry and dwelling approvals trending downwards recently — strong retail trade and a large pipeline of infrastructure projects suggest economic conditions in Victoria are positive and are expected to support demand for industrial assets in Melbourne.

The industrial supply pipeline in Melbourne over the next 12 months remains robust. Eighteen projects totalling 402,200 sqm are under construction and scheduled for completion in 2017. While there is limited scope for rental growth expected in the West, rental growth is forecast in the South East for 2017. JLL Research forecasts the yield compression cycle to be at its end. While recent material changes to global bond pricing will affect valuation and demand for industrial assets, demand for prime-grade assets with long WALEs (weighted average lease expiry) is expected to remain robust.

Considering the current circumstances, a ‘catch up’ in values over the next 2 to 5 years in the Melbourne industrial market seems likely after little overall capital growth in the past ten years. A significant increase in activity throughout the sector suggests strong results are ahead.

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