Canberra

There are close ties between demand for industrial space and the performance of the Australian Capital Territory’s economy. Home to the vast majority of the Australian Public Service, the economy is based around service delivery and public administration.

The territory was relatively immune to lockdowns through the first wave of the pandemic, charting a steady, albeit unspectacular recovery. Along the way, the territory did suffer from a temporary setback from a hard lockdown in the third quarter of 2021. Even so, the federal election provided a boost that has returned economic growth back to positive territory this year.

Net face rent ($ sqm) Incentive (%) Yield (%) Capital value ($ sqm) Canberra prime industrial market indicators Canberra $200 1.0 5.8 $3,448

Leasing market

Demand for industrial property was very strong through the first half of 2022, from both owner occupiers and tenants looking for space both greater and less than 1,000 square metres in size. Construction groups servicing major projects (including the Canberra Light Rail stages, the expansion of Canberra Hospital and a couple of major office buildings) have been the most prominent.

A number of construction companies are attempting to take extra space to store higher inventory levels to counter supply chain disruptions faced elsewhere around the country, but efforts are being hampered by low vacancy rates. Building vacancies are reportedly very low across Canberra’s four main industrial precincts, in both prime and secondary quality buildings. On the back of low vacancies, prime rents continued to rise across the precincts in Canberra over the first half of 2022, reaching an average of circa $200 per square metre. This average sits within a range across the precincts of $190 to $210 per square metre for leases on space greater than 500 square metres in size.

In line with a tight leasing market, incentives are very low in Canberra, sitting between 0-2 per cent, reflecting a 1 per cent average.

Momentum surrounding the federal election and commencement of the new Federal government’s first term in office provided a positive stimulus for the Australian Capital Territory’s economy this year. The labour market is also in good shape with a low unemployment rate supportive of consumption growth in the near term.

Continued spending on major infrastructure, health and non-residential projects mentioned above along with a number of $100m+ road upgrades will help prop up activity and support demand for warehouse space from tradespeople and building construction firms.

Additionally, the territory government is pressing ahead with their emissions reduction plan, with further funding allocated to the Big Canberra Battery project in the 2022-23 territory budget. This project will build on current works to develop a large-scale battery in Beard, with Fyshwick and Gungahlin identified as locations for Stream 2 of the Big Canberra Battery. In the long run, the territory should experience a relatively robust recovery as migration flows normalise and population growth resumes although, momentum will be dampened after the 2023 financial year by the inevitable fall back in government activity as the pandemic is controlled and related activity is unwound and the focus turns to budget repair.

Overall, we forecast solid economic growth for the 2023 financial year, before easing back through the 2024 financial year and the 2025 financial year, ultimately taking some of the momentum out of the leasing market.

Hume and, to a lesser extent, Beard are expected to see the bulk of the new demand for larger industrial property. This is because both precincts offer land for businesses to expand. Mitchell will be constrained by the shortage of available vacant buildings and Fyshwick is effectively built out and can only accommodate occupant churn or redevelopment of existing premises.

Investment market

Activity in the Canberra industrial investment market was constrained during the first half of 2022 by the lack of quality institutional grade assets offered to the market. Most of the sales activity in the first half of 2022 was focused on properties in priced below $5 million, with only a couple of sales exceeding this value. The largest recent reported sale occurred earlier this year, with a 4,300 square metres warehouse at 11 Sheppard Street in Hume selling for close to $9 million, reflecting a yield of 6 per cent.

Indicative yields on prime assets were little changed in the first half of 2022 averaging around 5.8 per cent across the precincts. However, given the lack of benchmark sales, it is hard to confirm precisely where yields sit.

In the near term, the investment market is expected to continue recent trends. Few owners appear willing to sell in a market where rents are rising. Potential buyers are also likely to push for higher yields, repricing properties lower, to compensate for higher interest rates flowing through to a higher cost of capital.

Industrial property in Canberra will continue to be traded at a discount to comparable assets in the major eastern seaboard markets due to its relatively small size, shallow occupier demand and

Supply

Canberra experienced a quiet year for new industrial property supply last year with only a handful of new developments completed. During the 2022 financial year, the largest completion was circa 6,600 square metres on Couranga Crescent in Hume.

Amongst the few projects currently underway is work on approximately 1,700 square metres of space on Dacre Street, Mitchell. Material and labour shortages are causing substantial delivery delays for the few developers who are proceeding with projects.

Annual factory and warehouse approvals data to June 2022 showed a reduction from the previous year to $27 million which is below the long-run average. The relatively low value of approvals heavily favoured warehouses over factories. Approvals data suggests new supply will be minimal in the near term, which will work to keep vacancy rates low.

We understand that circa 200,000 square metres of new industrial construction is planned within the Endeavor Industrial Park in Hume, with lots at this estate sold out to a mixture of owner occupiers and developers. However, delays in delivering the next round of supply and rising construction costs will continue to drive up rents required to make development feasible. As a result, we expect the market tightness will take some time to alleviate, which means the upswing in rents has further to run.

isolation from competition from institutional investors.

However, over the medium term, we expect the pattern of yields to follow the larger eastern seaboard, softening moderately over the next couple of years before stabilising. It remains to be seen if rental growth will be strong enough to offset likely softer yields, particularly as occupier demand starts to moderate.

Canberra demand and industrial building approvals