Perth

140 Stirling Highway, North Fremantle WA 6159

Higher commodity prices have supported the WA economy and boosted government revenue and corporate profits. Moreover, the increase in mining revenues contributed to a very strong pickup in machinery & equipment investment as miners look to maximise current capacity.

Our near term outlook is for momentum to remain strong in the WA economy, underpinned by smaller-than-usual migration flows out of the state and robust resources investment.

Net face rent ($ sqm) Incentive (%) Yield (%) Capital value ($ sqm) Perth prime industrial market indicators Perth Eastern $120 2.5 5.0 $2,400

Leasing demand in Perth maintained strong momentum through the first half of 2022 and was particularly strong the in the South, all fuelled by the relatively robust growth in the Western Australian economy. Leasing volumes during the 2022 financial year were significantly higher than in the 2021 financial year and above or well above the long run average.

The demand for industrial space in Perth is coming from a broad range of occupiers, most notably transport and logistics, manufacturers, companies servicing the mining sector as well as retailers servicing consumption growth (Marley Spoon’s commitment to a new 14,000 square metres warehouse at Jandakot is a prime example).

We understand that many businesses want to occupy more space in Perth to store additional stock to combat supply chain disruptions, as well as to cater for growth, but are unable to do so due to very low vacancies across all the North, East and South regions. Vacancy rates across the Perth metropolitan area have dropped to less than 1 per cent by June 2022, with the strength of demand outstripping low completions.

Reflecting the rapid tightening in the market this year, average prime stated rents rose rapidly across the regions during the first half of 2022. In the benchmark East, average net stated prime rents increased by 25 per cent over the 2022 financial year to $120 per square metre.

Leasing incentives fell at a rapid pace during the 2022 financial year as the swift recovery in the leasing market flowed through. At June 2022, prime incentives in the benchmark East were 0 to 5 per cent, at an average 2.5 per cent. We understand that some institutional owners are offering incentives up to 10 per cent for new builds but are pushing face rents higher than the market average. Overall, effective rents rose appreciably through the 2022 financial year.

35 Furnace Road, Welshpool WA 6106

Over the next two years, we expect the Western Australian economy to perform well relative to the national economy, underpinned by a solid pipeline of (particularly resource-related) investment. We forecast an upswing in engineering construction in Western Australia, from $21 billion in the 2022 financial year to $26 billion by June 2024.

The recent strength in commodity prices have provided a boost to the Western Australian economy. The process of budget repair is coming through faster than expected which, combined with funding for the Perth City deal, is set to see public investment pick up. Major infrastructure projects including the staged Metronet (already under construction) will also provide further support.

The strength of the Western Australian economy will continue to encourage businesses to invest in additional capacity over time, boosting demand for industrial property. We also expect transport and logistics operators in Perth to partake in the broader supply chain efficiency drive underway Australia-wide to cater to structural changes in consumer spending, most notably the continued growth of online retail and firming up local supply chain capacity to service local consumer demands.

We forecast industrial demand to be broadly positive through the 2023 financial year before easing a little to still robust growth in the 2024 and 2025 financial years. The strength of demand for industrial property should help keep vacancies contained. In response, we expect further rises in industrial property rents to flow through.

Investment market

After rising to volumes well above average in 2021, activity in the Perth industrial property investment market has slowed through 2022. Although, the value of deals has held up due to some large transactions. Recent major sales include:

• Charter Hall recently acquired the partially developed 72-hectare Roe Highway Logistics

Park for a reported $300 million;

• Charter Hall bought 919 Abernethy Road, High

Wycombe for around $26 million on a 4.7 per cent yield;

• Centuria bought a 4,900 square metres industrial property at 431 Victoria Road, Malaga for almost $11 million, reflecting a yield of 5.0 per cent;

• Centuria also acquired 204-208 Bannister Road,

Canningvale for just over $10 million, with plans to redevelop the 2.5 ha site; and • Redhill Partners buying a 14,300 square metres industrial property at 15 Beach Street, Kwinana

Beach on a sale and leaseback from AusGroup for around $16 million.

Investor interest remains strong in Perth, particularly for offerings that present the potential to reset passing rents at higher market rents. Even so, prospective investors are reassessing property values to reflect the flow through from higher interest rates. However, like other markets, there is a lack of sales evidence to confirm any downward price revision or softening in yields.

At the second quarter of 2022 prime industrial yields in the benchmark East sat an average 5.0 per cent, unchanged from six months earlier. Prime average yields in the South and North sat close to levels in the East. Average yields for secondary properties typically sat around 100 basis points above prime yields.

We expect yields for Perth industrial properties will start to soften from around the end of 2022, and the rising cost of debt via higher bond rates flows through. However, much of this impact should be offset by the strength of rental growth over the near term. The higher yields in Perth relative to those in the eastern seaboard will continue to provide an incentive for purchasers to invest in the region. The combination of softening yields countered by rising rents points to some positive capital value growth prospects over the medium term.

1 Railway Parade, Bibra Lake WA 6163

The quantum of industrial property completions across the Perth industrial market during 2021 was below long-run averages, with circa 100,000 square metres finished, or about the same as 2020.

Rapid escalations in construction costs in recent times (due to labour and materials shortages) and land value gains, mean rents required for development feasibilities have shot up.

Based on projects under construction, industrial completions are slowly increasing across Perth, but remain below average, with just over 100,000 square metres due for completion this year. The largest projects recently completed, under construction or at site works include:

• A 25,000 square metres distribution centre, precommitted to Australia Post at 112 Pilbara Road,

Welshpool;

• A 20,000 square metres warehouse at 111-121

McDonell Street, Welshpool, committed to an undisclosed tenant;

• A 18,000 square metres warehouse on Centurion

Place, Jandakot Airport;

• A 14,000 square metres warehouse on Sparton

Street, Jandakot Airport, pre-committed to

Marley Spoon; But so have market rents, pushed higher by extremely low vacancy rates.

As a result, some developers are pushing ahead with speculative projects to capture demand from tenants who cannot wait from pre-lease space to be delivered.

• Two warehouses for a combined 16,500 square metres at the Roe Highway Logistics Park,

Kenwick; and

• A circa 6,400 square metres warehouse under construction at Lodge Drive East, Rockingham.

The latest warehouse and factory approvals data to June 2022 shows that activity is picking up, with the combined value reaching $420 million, but this is still well below previous peak levels. However, the recent uplift is taking time to flow through to commencements. Furthermore, labour and material shortages are likely to lead to some delays in the construction of new industrial properties. Though, we understand that project delays for developments that are underway are not as severe as in other parts of the country.

Supply outlook

Perth demand and industrial building approvals