Adelaide

South Australia’s economy has proven relatively insulated from the impacts of the pandemic. We estimate, Gross State Product (GSP) grew more than 5.0 per cent in the 2022 financial year, with the recent change of state government presenting upside for public demand growth.

The government remains a significant consumer, with defence programs based in Adelaide supporting growth in the medium term. The state has a large exposure to manufacturing, with the onshoring of supply chains and an increasing focus on technology supporting the outlook.

Adelaide prime industrial market indicators Inner West Inner North Outer North Inner South Outer South Net face rent ($ sqm) $127 $112 $91 $114 $81 Incentive (%) 7.0 7.0 11.0 7.0 12.0 Yield (%) 4.8 4.9 5.8 4.9 6.4 Capital value ($ sqm) $2,646 $2,286 $1,569 $2,327 $1,266

The industrial leasing market remains solid. As with many locations, demand for industrial space received a boost in Adelaide as a result of the pandemic. It has been further helped by recent improved population growth in South Australia (and associated demand for goods). The strength of occupier demand has reduced vacancy rates in Adelaide to low levels, in turn underpinning strong rental and land value growth.

Manufacturing and logistics have been key contributors to occupier demand, bolstered further by the growth in mining and e-commerce. Recent examples include Wine Storage & Logistics leasing 17,890 square metres of space in Edinburgh in the first half of 2022, while Mine Tech Engineering leased a further 17,078 square metres in Edinburgh. M3 Logistics, UCI Manufacturing and Baiada Poultry also secured leases in the first half of 2022, contributing to around 60,000 square metres of take-up in this period, most of which was concentrated in the Outer North.

Adelaide experienced very strong rental growth across most precincts and grades of industrial property space through the first half of 2022. Leasing incentives remained largely unchanged despite vacancies falling below 1 per cent. Average prime rents ranged from $81 square metres in the Outer South up to $127 square metres in the Inner West at June 2022. Secondary rents also rose slightly over the six months to June to reach an average of $77 per square metres. The growth in the secondary rental market was due to increased interest in the Inner North, Outer North and Outer South precincts, with greater availability of product,and a lower rental base for the latter two. Land values have trended up over the last couple of years, and this pattern continued in the first half of 2022.

The relatively affordable Outer North and Outer South, together with the much more expensive Inner North have recorded the strongest growth recently. The completion of the further sections of the North-South Corridor (motorway) as well as demand from owner-occupiers buying sites for new purpose-built premises have been key drivers.

The extent of increased demand for land has not only pushed up prices but also greatly reduced land availability. Prices range from about $150 per square metres in the Outer North and Outer South to around $620 (for lots under 5,000 square metres) in the site-constrained Inner South and Inner West.

Near term occupier demand is likely to be stronger than the underlying economic conditions with some companies actively looking for additional storage space, to allow them to store higher inventory levels to manage supply chain disruptions.

Public sector investment in road projects is expected to continue over the short term. This has indirect benefits through changes in the accessibility of different industrial areas and could boost gross leasing demand. Following the completion of the Regency Road to Pym Street section, work on the North-South Corridor project continues with preparations for the final stage – the 10.5 km Torrens to Darlington Project – underway. This section, which provides a bypass to twenty-one intersections, is set to further enhance transport links. Construction is likely to be delivered in stages, with final completion expected in 2030. As companies relocate to take advantage of road improvements – particularly in the logistics sector – they will leave behind secondary space in the more established and centrally located areas. In some cases, sites may be lost to industrial use, being withdrawn for residential redevelopment, but in other cases premises left behind could add to vacancies.

As with other locations, we expect upgrader demand in Adelaide to continue over time as business move to newer, more efficient premises, incorporating technological advancements.

In addition, private sector spending is occurring in the energy and the transport and logistics industries. Solar and battery storage investment is being undertaken to ensure the state’s energy supply remains stable. Increases in online spending have driven demand for additional (largely prime) warehouses for fulfilment centre conversions, not a trend unique to Adelaide.

Investor interest in the industrial property sector is strong in Adelaide, as it is across the nation. Transaction activity is strong across the board. As anticipated, 2021 reached even higher heights than the peak in 2019, with approximately $750 million transacting across the year.

Momentum has continued into 2022, with around $150 million selling across the first half of the year, limited only by tightly held assets. Transactions across all price cohorts remain buoyant, supported by expectations of strong rental growth despite a changing interest rate environment.

Yields continue to firm, but at a slower pace than the last few years in the face of higher bond rates and interest rates amidst strong inflationary pressure. However, ongoing investor interest, solid occupier demand and low vacancies have seen Adelaide’s average prime industrial yield tighten by a further 15 basis points through the first half of 2022 to settle just below 5 per cent, with some transactions even reporting yields of below 4 per cent. Recent notable sales include:

• Fife Capital’s $121 million purchase of the 45,000 square metres Treasury Wine Estates warehouse and distribution facility from AM Alpha, a year after AM Alpha paid $98 million for the asset;

• MA Financial sold 5 Talisman Avenue in Edwardstown, with a WALE of 6.6 years, for $20 million on a yield of 4.6 per cent;

• Centuria acquired a distribution facility and office warehouses at 27-30 Sharp Court in

Cavan with a WALE of 5.3 years from MRS

Property for just over $23 million, reflecting a yield of 4.2 per cent; and

• ICAM paid $12 million for IKEA’s South Australian distribution centre on Transport Avenue in Netley.

Investment outlook

We believe a slow phase of yield softening will commence around the end of this year, spreading across the markets, including Adelaide. On our forecasts (notwithstanding short-term volatility) 10-year bond rates will remain around current rates over the next 12 to 18 months before tapering back to a longer-term trend rate, taking its lead from the United States.

This will ultimately push up investors’ cost of capital, forcing many to adjust their required return on investment. We think the narrow yield spread on Adelaide industrial properties will unsettle many investors, sparking a slow phase of yield softening from the end of 2022. However, as with other markets, we are yet to see clear evidence in Adelaide of an asset repricing. Strong near term rental growth is likely to offset much of the near-term yield softening which means capital values are not expected to suffer a significant setback.

The investor profile in Adelaide is unlikely to change in the near term. AREITs and other institutional investors are likely candidates if a large, newly developed asset with a long lease in place comes onto the market, while the smaller end of the market will remain dominated by private investors and owner-occupiers.

Following a record-breaking 2020 for new completions, 2021 was more muted at an estimated 115,000 square metres across Adelaide. New supply is expected to remain around similar levels in 2022, with around 110,000 square metres likely to be completed, with another 68,000 square metres proposed. Close to 50,000 square metres was complete in the first half of the year.

The majority of projects finished so far this year were relatively small in scale, such as a 7,700 square metres design and construction warehouse for Joyce Foam Products in Edinburgh North and a new 15,000 square metres fertiliser dispatch facility for Wengfu Australia in Port Adelaide.

The Outer North remains a focus for supply, responsible for around half of the completions last year, and is expected to continue this share of new supply in 2022. However, as with elsewhere, the speed at which new construction can be delivered is likely to be slowed by material and labour shortages.

Supply outlook

The value of approvals for factory and warehouse construction has risen well above the lows of 2020, with $410 million approved over the 2022 financial year. Consequently, we expect this to flow into completions in the near term. Warehouses dominate total approvals, contributing roughly 75 per cent, with the Adelaide West region accounting for the vast majority.

Major projects due for completion over the next 12 months, include the Osborne North future submarine construction yard, alongside the 10,000 square metres La Casa Del Formaggio cheese production facility in Edinburgh Parks and the 9,000 square metres Mainfreight freight facility in Regency Park.

Traditionally, most of the development pipeline floorspace represents pre-committed facilities or those purpose-built for an owner-occupier, with little speculative space. That appears likely to continue. Over the medium term, there are numerous major industrial sites available to cater to future demand, but opportunities are limited in the most in-demand precincts. Construction is underway at CEP Energy’s large-scale storage battery at the former Holden site in Elizabeth, now Lionsgate Business Park. In addition, there are another 220 hectares of the 400-hectare former multi-function polis site (although some may be set aside for residential construction).

Adelaide also has lost industrial land to other uses, as noted earlier, with several sites rezoned to residential or mixed-use development following the closure of industrial plants. More of this can be expected, especially in inner areas with higher land values as occupiers upgrade to sites serviced by the new transport infrastructure.