6 minute read
Darwin
The Northern Territory economy (as measured by State Final Demand – SFD) started this year in a positive manner after a long period of lacklustre growth following the winding down of the massive $37 Ichthys LNG project.
The territory has navigated the impacts of the pandemic waves well, with relatively mild impacts compared to most other states. This year, public demand has made a sizeable contribution to growth in the territory, more than offsetting other drags.
Net face rent ($ sqm) Incentive (%) Yield (%) Capital value ($ sqm) Darwin prime industrial market indicators Darwin $110 12.5 7.5 $1,467
Leasing market
The economic improvement is yet to flow through to demand for larger industrial property, particularly buildings greater than 1,000 square metres. Indeed, there are a limited number of occupants (as owner-occupiers or tenants) actively looking for industrial property space in Darwin. Amongst those who are, small scale trades businesses are the most prominent and some transport groups, with a focus on servicing the local population more generally.
There is no shortage of vacant properties for occupants to choose from, with options available above and below 1,000 square metres. However, the bulk of options are tilted towards lower quality properties with relatively few prime buildings vacant. There was no change in prime industrial rents over the six months to June 2022, although a shortage of market evidence means that indicators are estimates only. Average prime industrial face rents averaged around $110 per square metre.
There has also been no change in net rents for secondary buildings, averaging around $80 per square metre as owners with vacant buildings look to attract tenants. Leasing incentives also remained stable the first half of 2022, within a range of 10 per cent to 15 per cent, varying depending on the length of the lease.
The outlook for the industrial market in Darwin is linked to the prospects for the Northern Territory economy. On our forecasts, the Territories SFD will end this year with a solid 5 per cent before moderating to 2.0 per cent to 3.3 per cent over the next three years.
The moderating outlook is tied into the outlook for mining and government defence spending. The outlook for mining investment has become more uncertain. Shifts in policy and concerns about climate change are clouding the outlook, with this headwind not expected to abate quickly. Many projects have been put on pause, and we expect investment will be significantly lower in the medium term. Nevertheless, some large-scale projects are underway and have further to run, including Santos’ $5 billion Barossa LNG project and Nolans $1 billion rare earths. Some offset will be provided by government spending, with the federal government currently undertaking several projects to expand the number of military installations in the region. Further expenditure is also planned around US Force Posture initiatives, with works on this program anticipated to run until 2026. In addition, the Darwin City Deal includes a new campus for Charles Darwin University (currently under construction) and the State Square Art Gallery & Community Hub.
Over the medium term, positive economic conditions and project specific requirements linked to the projects listed above should flow through to moderate demand for industrial properties, with a lag, allowing the substantial overhang of vacancies to be slowly absorbed.
Investment market
There was no real improvement in the state of Darwin’s industrial investment market in the first half of 2022 from 2021. Darwin’s stock of industrial space features mostly smaller properties with no major sales above $5m completed in recent times.
Amongst smaller prime properties, the average yield at June 2022 was estimated at 7.0 per cent to 8.0 per cent, which was little changed on 2021 rates. Capital values for prime properties also experienced no change in the first half of 2022. The main hindrance to more transactions occurring in the Darwin industrial market is the lack of properties offered for sale that have secure longterm leases at yields attractive to potential buyers (in an environment of rising interest rates). Broadly speaking, owners of securely leased assets are choosing not to sell. There would appear to be more upside than downside for price growth in Darwin’s industrial property market over the next few years. The slow improvement in the leasing market should, in time, reduce the overhang of vacant space in the market, boosting the likelihood of rental growth. However, this process will take time.
The other key influence is the yield differential of Darwin to other industrial markets across Australia. As rising cost of debt flow through on higher interest rates, investors are likely to look more favourably on higher yielding markets like Darwin. However, Darwin’s relatively small market size and remoteness will limit the pool of investors willing to invest there.
Supply
There is very little by way of new industrial property supply that is either under construction or recently completed in Darwin. Over the 18 months to June 2022, we only know of a handful of industrial buildings that were completed, including circa 1,450 square metres at 29 McCarthy Close, Wishart and around 1,750 square metres at 32 Dawson Street, East Arm. Approximately 1,900 square metres is currently under construction on Raphael Road in Winnelie.
The most recent ABS data release indicates the value of industrial approvals lifted in the 2022 financial year to $27 million, with this result predominantly made up of warehouse approvals. There are no major pre-lease or design and construct requirements currently active in Darwin that will underpin new supply. The largest requirement is for hard stand linked to an LNG project. As a result, the near-term outlook for new supply looks minimal.
If and when demand improves on positive economic growth, there is a plentiful supply of land to accommodate it. In particular, there is ample available land to build on in Berrimah, Tivendale, East Arm and Wishart.
Darwin demand and industrial building approvals
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