industrial investment market review and outlook - · pdf file04 looking backwards: the...

2014

Industrial Investment Market Review and Outlook

03 Executive summary

04 Looking backwards: the industrial investment market in 2013

10 Major transactions throughout 2013

14 Demand drivers and physical markets

20 The investment market themes in 2014

Contents

Industrial Investment Market Review and Outlook – 2014 | 3

2013 was a momentous year for industrial investment activity. Transaction activity gathered pace during the final quarter, resulting in the second highest year of industrial transactions on record (Figure 1).

2013 was also notable due to the number of new entrants to the market. We saw some reversal of the consolidation that had occurred in 2009 and 2010.

A large wave of capital is now looking to get set in the industrial sector in 2014. With a limited pipeline of approximately AUD 1.5 billion of new assets created last year, investor demand is outweighing supply. The momentum from 2013 has carried over seamlessly into 2014, and a number of transactions indicating further yield tightening have been announced. Some owners are likely to become more willing vendors and offer product to the market as pricing improves.

With such a flourish of activity to end 2013, the outlook for 2014 is very positive. Throughout the report, we consider the following investment questions:

• What drove investment demand in 2013? Where was the focus of capital? And what were the notable transactions?

• Who are the new players and will they lead or follow in 2014?• Are the physical markets supportive of tighter pricing?• Which of these investment criteria will be most important in 2014:

hunt for yield; hunt for WALE; hunt for scale; hunt for product; pur-suit of geographical re-weighting?

• What are the opportunities?

Executive summary

Figure 1: Total Industrial Transactions

Source: JLL Research

Value Number

Value of Transactions (AUD, million) Number of Transactions

0

50

100

150

200

250

300

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

4 | Industrial Investment Market Review and Outlook – 2014

VolumesThe volume of industrial transactions in 2013 was the highest since 2007 and the second highest on record. Industrial transaction volumes have increased each calendar year since bottoming in 2008. In 2013, the value of major transactions recorded was AUD 3.3 billion.

Sales transaction volume had been remarkably consistent each quarter of 2013 prior to the fourth quarter (Q1 AUD 559.9 million; Q2 AUD 597.6 million; Q3 AUD 661.6 million; Q4 AUD 1.47 billion).

The result was the second highest volume of industrial transactions in a calendar year (AUD 3.3 billion in 2013, still significantly below the AUD 4.4 billion recorded in 2007).

Average sales prices have been increasing each year since 2009, confirming the increased volume of larger format asset sales, the growing investor desire to place capital in the industrial sector and steadily rising capital values. In 2013, the average sale price was AUD 20.4 million from a total of only 161 major property transactions. This was mostly driven by large sales in Sydney (average price AUD 28.5 million) and Melbourne (average price AUD 22.0 million), though average sales prices lifted in all markets except Perth during 2013.

Volume was boosted by a number of very large transactions. The largest sales in 2013 include:

Looking backwards: the industrial investment market in 2013

Price ($m) Property name or address Purchaser Vendor

$343.0 Sydney Corporate Park, Alexandria Goodman (GAIF) Rathdrum Properties

$121.0 Somerton Logistics Centre Charter Hall Core Logistics Partnership Hunt Family

$72.85 40-88 Forrester Road, St Marys Stockland Goodman (GAIF)

$70.5 Kmart Distribution Centre, Canning Vale Charter Hall Core Plus Industrial Fund Commonwealth Bank Officers Superannuation Fund

$65.0 52-58 Lisbon Street, Fairfield Aviva Investors Blackstone Morgan Stanley

$63.5 Metcash Regional DC, Canning Vale (50%) Charter Hall Core Plus Industrial Fund Australian Unity

$62.6 Oakdale South (Site), Eastern Creek Joint Venture Industrial Property Trust (Goodman/Brickworks)

Brickworks

$55.0 Eastern Creek Quarantine Facility Mirvac Group Commonwealth Department of Agriculture



Purchaser/vendor analysisBuying was dominated by large cap AREITs and wholesale funds in 2013. Wholesale funds were the largest purchasers of industrial property in 2013, accounting for 34% of transactions by value. AREITs purchased 17%, followed by private companies & investors with 16%, developers & property companies with 12% and syndicates rounded out the major purchasers with 7% of purchases in 2013.

In contrast, there was very little concentration within the seller cohort. Only a few vendors sold multiple properties in 2013. Developers accounted for approximately 19% of transactions by value, followed by private companies & investors with almost 19%, corporates with 15% and wholesale funds at 11% rounding out the major sellers by type.

On a net basis, only wholesale funds (AUD 744 million), AREITs (AUD 305 million) and syndicates (AUD 215 million) were net purchasers of industrial property in 2013. Net sellers include private companies & investors (AUD -101 million), developers & property companies (AUD -234 million), corporates (AUD -322 million) and others* (AUD -606 million).

Figure 2: Buyer and Seller Types in 2013


10%0% 20% 30% 40% 50%

Wholesale Funds

AREITs

Private Companies & Investors

Developers

Syndicates

Corporates

Others*

Vendors Purchasers

New investors join the established players in the hunt for industrial property

Of the AUD 2.15 billion of transactions identified as ‘opportunities’ or ‘portfolio’ sales in 2013, five groups accounted for AUD 1.16 billion (54%): they were Goodman, Charter Hall, DEXUS, The GPT Group and Australian Industrial REIT (managed by Fife Capital Funds Limited).

To be sure this purchaser concentration was not only a result of large value asset purchases, we also analysed the transactions by the number of properties purchased. Looking only at those same five groups again, they accounted for 68% of all transactions >AUD 30.0 million and 49% of all transactions >AUD 20.0 million.

The top 5 purchaser groups accounting for 54% of transaction volumes in one year is eye opening. Large established AREIT and wholesale fund manager platforms are attracting solid investor support. However, this concentration is being challenged by new entrants and some older players with revised strategies looking to increase their industrial assets under management.

Prominent purchasers in 2013 include CorVal, PropertyLink, Warrington, Abacus, Altis, 360 Industrial Fund, Stockland, Aviva, Kingsmede and Growthpoint. All of these groups purchased industrial property priced at >AUD 20.0 million last year. Many of them have stated ambitions to build their scale and launch new unlisted or listed funds platforms.

The silent evidence is those groups that have been under bidders on property in 2013 and have unallocated capital waiting to be invested.

As 2014 progresses, it will be interesting to watch the hunt for industrial property unfold.

– Michael Fenton, Managing Director, New South Wales; Head of Industrial Services – Australia


Share of sales by marketFigure 3 shows Sydney accounted for the largest proportion of industrial property sales in 2013 (48%). This was the highest proportion of sales in Sydney since 2005. Melbourne was second highest (24%), followed by Brisbane (13%), Perth (12%) and Adelaide (3%).

This analysis does not account for the relative size of the investable universe across the Australian industrial markets. JLL estimates that the investable universe of the five major cities is a combined AUD 31.2 billion. Figure 4 shows an adjusted view of transaction volumes, accounting for the size of the market. The net balance is calculated by taking the share of transaction volumes less the share of the investable universe. A positive figure indicates that a market is receiving a disproportionate share of transaction activity relative to its size.

Figure 3: Industrial transactions by State - 2013


48%

24%

13%

12% 3%

NSW VIC QLD WA SA

Figure 4: Net Balance (Transactions Volumes & Investable Universe), 2013


–6–5–4–3–2–1

0123456

Sydney Melbourne Brisbane Perth Adelaide

Net Balance(%)

This has significant implications for the larger institutional investors seeking a diversified portfolio based on market weight analysis. As we will discuss later in the Investment Themes in this report, geographical diversification is becoming more important in the capital allocation criteria of some groups in 2014.

These investment volume proportions largely follow the estimated market weight (by value) of each city in JLL’s Industrial Investment Universe model. However, a clear standout is Sydney, which accounted for 48% of sales volume, but is estimated to account for only 43% of market weight (by value). Several very large sales also occurred in Perth this year, driving the proportion of sales in that market above its benchmark market share by 2.5%. Institutional investment manager Charter Hall Group funds was particularly active in the Perth market in 2013. Charter Hall entities purchased interests in three properties, totalling AUD 156.6 million, roughly 41% of the AUD 382 million of Perth transactions last year.


PricingTransaction evidence showed prime and secondary grade yields have broadly firmed in 2013 (Figure 5). Prime grade yield compression was largely limited to Melbourne and Sydney in 2013. Melbourne West had 50 basis points of compression, followed by 37.5 bps in Melbourne South East and Melbourne North. The City Fringe saw 25 bps of compression.

In Sydney, all sub-precincts had 25 bps of tightening of the prime midpoint yield, with the exception of the Outer North West, which tightened 37.5 bps.

Sub-precincts in other cities which saw yield compression were Northern Brisbane with 25 bps and Adelaide Inner West-E with 25 bps.

Figure 5: Prime Grade Yield Compression in 2013 (Midpoint of Yield Range)


–0.500%–0.375%

–0.250%–0.125%

0.000%

Melbourne West

Sydney Outer North West

Melbourne North

Melbourne South East

Sydney South

Sydney North

Sydney Inner West

Sydney Outer Central West

Sydney Outer South West

Melbourne City Fringe

Brisbane Northern

Adelaide Inner West-E

Brisbane Trade Coast

Brisbane Southern

Perth All

Adelaide Other

Secondary grade yield compression was more extensive in 2013. The most yield compression in 2013 was recorded in Sydney Outer North West and Melbourne West at 62.5 bps. The Sydney Outer Central West recorded 50 bps of tightening and a host of sub-precincts recorded 25 bps of compression (Figure 6). The exceptions were the Sydney Outer South West, Brisbane Southern, all Perth sub-precincts and almost all Adelaide precincts with the exception of the Inner West-E.

Yield tightening has previously been supported by the very wide spreads to Commonwealth Government inflation-indexed bonds. However, this asset pricing dislocation from historic benchmarks has been quickly unwinding – due to a combination of rising bond yields and decreasing industrial property yields.

Figure 6: Secondary Grade Yield Compression in 2013 (Midpoint of Yield Range)


–0.625%–0.500%

–0.375%–0.250%

–0.125%0.000%


Melbourne West

Sydney Outer Central West

Sydney South

Sydney Inner West

Melbourne City Fringe

Melbourne North

Melbourne South East

Brisbane Trade Coast

Adelaide Inner West-E

Sydney North

Brisbane Northern


Brisbane Southern

Perth All

Adelaide Other


Figure 7: Prime Grade Industrial Propertty Yield Spreads to Australian Government Inflation-Indexed Bonds


Reference: 515 bp spread

Over-valued

Under-valued (%)

3.0

4.0

6.0

8.0

5.0

7.0

Dec-07Dec-03 Dec-11Dec-09Dec-05 Dec-13Sydney (South) Melbourne (West)Sydney (Outer Central West) Brisbane (Southern) Melbourne (South East) Perth (East)

JLL Research believes fair value for prime grade industrial sits at 515 basis points over a normal risk-free rate. As can be seen in Figure 7, even full mean reversion of the indexed bond rate (to 2.85%) from current levels would leave limited further scope for prime grade industrial property yield tightening on this basis alone.


Transaction pricing ahead of the curve

JLL set research yield ranges in each market following a meeting of the Sales and Investments, Valuations and Research teams to review recent or current transaction evidence. This means that, at times, JLL research can lead or lag the market during turning points. A good example of this was in 2008 when our research yield ranges were increasing, despite a lack of transactional evidence, which ultimately proved conservative during the GFC downturn.

At that time, book values were behind the curve. Transaction liquidity eventually improved, providing enough evidence that softer yields were not outliners.

Another occurrence of this divergence is emerging now – but this time in reverse. A rush of investment grade asset transactions occurred in the final few months of 2013. This evidence showed distinctly that prime grade yields had tightened lower than our research ranges set at the end of December. Our internal view had proved to be conservative – not wanting to move ahead of sales evidence. This is despite the JLL research forecasts for prime grade yields indicating a further 25-50bps of yield tightening could be expected in this cycle.

At this stage, purchaser capital has sharpened pricing for better quality assets with core characteristics, particularly long dated lease terms to good covenants. The irrational exuberance experienced through 2006 and 2007 has not returned yet.

– Al Carpenter, Head of Industrial Valuations and Advisory - Australia

10 | Industrial Investment Market Review and Outlook - 2014

Major Transactions in 2013

Sale Price (circa) $121,000,000Sale Date Oct-13GLA (circa) 128,024 sqmSite Area / Coverage 217,300 sqmInitial Yield (passing) 5.88%Initial Yield (fully leased) 7.93%Equivalent Yield 7.70%IRR 9.19%Rate $/sqm GLA $945/sqmWALE (yrs by income) 3.22 yearsVendor Private Purchaser Charter Hall Major Tenant(s) Visy, Mazda

Sale Price (circa) $70,500,000Sale Date Oct-13GLA (circa) 79,041 sqmSite Area / Coverage 161,865 sqmInitial Yield (passing) 10.77%Initial Yield (fully leased) 10.77%Equivalent Yield 9.15%IRR 10.10%Rate $/sqm GLA $892/sqmWALE (yrs by income) 3. yearsVendor Commonwealth

Bank Officers Superannuation Corporation

Purchaser Charter Hall Major Tenant(s) Coles Myer Pty Ltd

(Kmart)

Somerton Logistics Centre, Somerton Vic

2 Bannister Road, Canning Vale WA1. 2.

Sale Price (circa) $47,640,000Sale Date Dec-13GLA (circa) 16,960 sqmSite Area / Coverage 91,690 sqmInitial Yield (passing) 8.01%Initial Yield (fully leased) 8.01%Equivalent Yield 8.01%IRR 9.61%Rate $/sqm GLA $2,480/sqmWALE (yrs by income) 20. yearsVendor Montague Cold

Storage Purchaser CorVal Major Tenant(s) Montague Cold

Storage

Sale Price (circa) $44,500,000Sale Date Sep-13GLA (circa) 41,372 sqmSite Area / Coverage 81,516 sqmInitial Yield (passing) 9.87%Initial Yield (fully leased) -Equivalent Yield 9.44%IRR 10.35%Rate $/sqm GLA $1,076/sqmWALE (yrs by income) 2.4 yearsVendor Insight Logistics

Park Pty Ltd Purchaser GPT Group Major Tenant(s) Secure Doc

Advance, CAT, WOW

7-23 Dunmore Drive, Truganina Vic

16-20 Quarry Road, Stapylton QLD5. 6.

Industrial Investment Market Review and Outlook - 2014 | 11

Sale Price (circa) $65,000,000Sale Date Nov-13GLA (circa) 59,828 sqmSite Area / Coverage 83,700 sqmInitial Yield (passing) 8.69%Initial Yield (fully leased) 8.85%Equivalent Yield 8.48%IRR 9.28%Rate $/sqm GLA $1,086/sqmWALE (yrs by income) 2.06 yearsVendor Private Purchaser Aviva Major Tenant(s) Fantastic Furniture

Sale Price (circa) $63,500,000Sale Date Feb-13GLA (circa) 105,356 sqmSite Area / Coverage 208,600 sqmInitial Yield (passing) 8.68%Initial Yield (fully leased) 8.68%Equivalent Yield 8.62%IRR 10.54%Rate $/sqm GLA $1,186/sqmWALE (yrs by income) 11.75 yearsVendor Australian Unity Purchaser Charter Hall Major Tenant(s) Metcash

52 - 88 Lisbon Street Fairfield

218 Bannister Road, Canning Vale 50%3. 4.

Sale Price (circa) $43,500,000Sale Date Sep-13GLA (circa) 33,198 sqmSite Area / Coverage 73,860 sqmInitial Yield (passing) 9.45%Initial Yield (fully leased) 9.45%Equivalent Yield 8.66%IRR 9.38%Rate $/sqm GLA $1,250/sqmWALE (yrs by income) 2.8 yearsVendor Kingsmede Purchaser GPT Major Tenant(s) Schenker

Sale Price (circa) $43,250,000Sale Date Aug-13GLA (circa) 34,922 sqmSite Area / Coverage 52,540 sqmInitial Yield (passing) 8.50%Initial Yield (fully leased) 9.28%Equivalent Yield 8.64%IRR 9.45%Rate $/sqm GLA $1,238/sqmWALE (yrs by income) 3.98 yearsVendor DEXUS Purchaser Kingsmede Major Tenant(s) Payless Shoes &

Other

Lot 200 Pine Road Yennora

10 - 16 South Street Rydalmere7. 8.

12 | Industrial Investment Market Review and Outlook - 2014

Sale Price (circa) $39,630,000Sale Date Nov-13GLA (circa) 41,372 sqmSite Area / Coverage 81,516 sqmInitial Yield (passing) 8.66%Initial Yield (fully leased) -Equivalent Yield 8.24%IRR 9.31%Rate $/sqm GLA $1,543/sqmWALE (yrs by income) 3.8 yearsVendor Undisclosed Purchaser DEXUS Major Tenant(s) Electrolux, Qbuild,

Euroglass

Sale Price (circa) $39,075,000Sale Date Nov-13GLA (circa) 100,990 sqmSite Area / Coverage 164,445 sqmInitial Yield (passing) 9.01%Initial Yield (fully leased) 9.01%Equivalent Yield 8.99%IRR 9.78%Rate $/sqm GLA $387/sqmWALE (yrs by income) 8.67 yearsVendor Cromwell Purchaser Charter Hall Major Tenant(s) AWH

1439 Lytton Road, Hemmant QLD

5-29 Frederick Road, Tottenham Vic9. 10.

Sale Price (circa) $34,250,000Sale Date Jul-13GLA (circa) 8,413 sqmSite Area / Coverage 26,734 sqmInitial Yield (passing) 7.77%Initial Yield (fully leased) -Equivalent Yield 7.71%IRR 9.53%Rate $/sqm GLA $4,071/sqmWALE (yrs by income) 13.42 yearsVendor -Purchaser Property Link Major Tenant(s) Rand Transport

Sale Price (circa) $32,750,000Sale Date Aug-13GLA (circa) 10,314 sqmSite Area / Coverage 58,628 sqmInitial Yield (passing) 8.20%Initial Yield (fully leased) 8.20%Equivalent Yield 8.20%IRR 10.50%Rate $/sqm GLA $3,175/sqmWALE (yrs by income) 20. yearsVendor EPC Pacific Pty Ltd Purchaser Cromwell Property

Group Major Tenant(s) Rand Refrigeration

60-80 Southlink Street, Parkinson QLD

Rand Refrigeration, Lot 500 Caribou Dr, Direk13. 14.

Sale Price (circa) $29,500,000Sale Date Oct-13GLA (circa) 21,298 sqmSite Area / Coverage 50,659 sqmInitial Yield (passing) 7.94%Initial Yield (fully leased) 7.94%Equivalent Yield 7.93%IRR 10.03%Rate $/sqm GLA $1,385/sqmWALE (yrs by income) 12. yearsVendor Greens Purchaser Fife Capital Major Tenant(s) Greens

Sale Price (circa) $23,200,000Sale Date Nov-13GLA (circa) 21,049 sqmSite Area / Coverage 45,020 sqmInitial Yield (passing) 8.48%Initial Yield (fully leased) 8.48%Equivalent Yield 8.03%IRR 9.35%Rate $/sqm GLA $1,102/sqmWALE (yrs by income) 11.67 yearsVendor Pellicano Purchaser Growthpoint Major Tenant(s) Fuji Xerox

29 Glendenning Road Glendenning

213-215 Robinsons Road, Ravenhall Vic17. 18.

Industrial Investment Market Review and Outlook - 2014 | 13

Sale Price (circa) $37,400,000Sale Date Mar-13GLA (circa) 15,871 sqmSite Area / Coverage 46,370 sqmInitial Yield (passing) 7.47%Initial Yield (fully leased) 7.47%Equivalent Yield 7.35%IRR 9.50%Rate $/sqm GLA $2,356/sqmWALE (yrs by income) 12.8 yearsVendor Goodman Purchaser EPF Major Tenant(s) Candida Stationary,

Aus Air Express

Sale Price (circa) $34,350,000Sale Date Jun-13GLA (circa) 43,442 sqmSite Area / Coverage 128,600 sqmInitial Yield (passing) 13.86%Initial Yield (fully leased) 13.86%Equivalent Yield 9.81%IRR 10.42%Rate $/sqm GLA $791/sqmWALE (yrs by income) 1.03 yearsVendor Maremma P/L Purchaser DEXUS Wholesale

Property Fund Major Tenant(s) Toll Jaclo & Rand

Transport

Roberts Distribution Centre Greenacre

4 Inglis Road, Ingleburn11. 12.

Sale Price (circa) $32,000,000Sale Date Feb-13GLA (circa) 24,457 sqmSite Area / Coverage 35,370 sqmInitial Yield (passing) 10.33%Initial Yield (fully leased) 10.33%Equivalent Yield 9.85%IRR 11.03%Rate $/sqm GLA $1,308/sqmWALE (yrs by income) 5.16 yearsVendor Uniting Church Purchaser Fife Capital Major Tenant(s) Symbion

Sale Price (circa) $30,250,000Sale Date Jan-13GLA (circa) 38,130 sqmSite Area / Coverage 78,460 sqmInitial Yield (passing) 10.71%Initial Yield (fully leased) 10.71%Equivalent Yield 10.71%IRR 12.09%Rate $/sqm GLA $793/sqmWALE (yrs by income) 12 yearsVendor PMP Property Purchaser Goodman Major Tenant(s) PMP Property

Symbion, 55-57 Kirby Street, Rydalmere

PMP 31-37 Heathcote Road, Moorebank15. 16.

Sale Price (circa) ConfidentialSale Date Dec-13GLA (circa) 60,310 sqmSite Area / Coverage 210,800 sqmInitial Yield (passing) < 7.00%Initial Yield (fully leased) < 7.00%Equivalent Yield < 7.00%IRR < 9.00%Rate $/sqm GLA ConfidentialWALE (yrs by income) 20. yearsVendor Murray Goulburn

Co-Operative Purchaser ISPT Major Tenant(s) Murray Goulburn

Sale Price (circa) ConfidentialSale Date Dec-13GLA (circa) 33,754 sqmSite Area / Coverage 144,420 sqmInitial Yield (passing) < 7.00%Initial Yield (fully leased) < 7.00%Equivalent Yield < 7.00%IRR > 9.00%Rate $/sqm GLA ConfidentialWALE (yrs by income) 15.35 yearsVendor Australasian Food

Group Purchaser Charter Hall Major Tenant(s) Peters

85 William Angliss Drive, Laverton North Vic

254-294 Wellington Road, Mulgrave Vic19. 20.


Demand drivers and physical markets

• New South Wales consumers are responding to lower interest rates, with stronger consumption and housing activity. However, NSW’s previously strong labour market has weakened in recent months.

• Victoria had a boom in housing construction earlier than other states, which is now unwinding and weighing on state growth, along with the impact of the previously high AUD on Victoria’s industry base.

• Queensland has suffered from a slowing resource sector and from a State Government fiscal contraction, but stronger domestic economic drivers have offset some of the impact, and state growth remains strong relative to other states. Queensland’s previously weak labour market has also improved recently.

• Western Australia, long Australia’s economic powerhouse, has slowed significantly as the resource sector consolidates. However, because it is slowing from a very high level, economic activity remains at a high level.

• South Australia is suffering from similar ills to Victoria (a high dollar and contracting housing construction), which have been exacer-bated by the state’s weaker population growth and the end of car manufacturing in Australia scheduled for 2017.

Economic environmentGlobal economic growth passed a trough in 2013 and is now slowly gaining momentum after two years of below-trend growth. The general economic environment is improving and 2014 is likely to see slightly stronger Global and Australian economic growth.

Australian economic growth remains below-trend, but there is now increasing evidence that the transition away from mining investment to domestic drivers is gaining momentum.

While not yet evident in national accounts data, more recent economic indicators suggest domestic demand is starting to respond to lower interest rates and gain some momentum. Retail turnover, housing market activity and credit growth have increased, while, importantly, consumer and business sentiment have remained robust since the Federal election in September 2013.

State economic activity has varied widely in recent years, but is now converging as the impetus of the mining investment boom recedes.


Occupier demand driversThe key drivers of industrial occupier demand growth will remain Australia’s consumption driven economy with highly concentrated urban centres. The logistics and freight sector will continue to be supported by strong population growth, rising import volumes and sustained consumption growth.

The drivers of industrial property demand are varied and broad, which means the sector is fairly cyclical and will be among the first to benefit from increased consumer spending and housing construction. The boost from the housing sector comes not only through the direct impact on demand for construction materials, but also from its indirect impact on consumption spending and general economic activity.

Undoubtedly a more significant driver of industrial property demand in Australia is the transport and storage sector. This sector saw weak growth in output of just over 1% in 2013, well below the pace of broader GDP growth. This difference reflects the weakness of the domestic economy and consumption in 2013. An improving domestic economy is expected to result in improved output for the sector, with growth forecast to increase to 2.0% in 2014 and 3.1% in 2015 (Deloitte Access Economics).

More important for industrial sector demand is the volume of imported consumption goods. This has grown by 7.7% p.a. long term (1992-2012). Goods imports are forecast by Deloitte Access Economics (December 2013) to grow 5.8% p.a. in the ten years (2014-2023), suggesting goods imports will continue to be a key driver of warehouse and logistics space demand (Figure 8).

Nevertheless, a large part of the industrial property demand over recent years has been from very large occupiers and has been counter-cyclical in nature. That is, many large retailers and logistics operators have responded to a slower sales environment by looking at improving their operational efficiency. Strategies around their property holdings have often been central to this efficiency drive. Modern automated warehousing and strategic location selection to minimise transport costs have been a key driver of this trend.

We expect this focus on operational efficiency will continue to drive demand, but we expect to see a shift in size as smaller industrial occupiers pursue such a cost management strategy. This shift in the profile of demand will increasingly be supported, in our view, by a bottom-up recovery in tenant demand as domestic economic activity gains momentum.

Figure 8: Total Goods Imports (Balance of Payments) Current Prices ($b)

Source: Deloitte Access Economics, JLL Research

$b current prices

0

100

300

500

200

400

*As at Q4/2013198

5198

9199

3199

7200

1200

5200

9201

3201

7202

1198

1

Forecast


E-commerce driving changes in logistics demand

The rapidly expanding e-commerce sector is driving a wave of demand growth in Australia, changing the way retailers choose and use real estate, from distribution centres to stores. Led by e-commerce operators and offshore retailers, international corporates will seek a domestic distribution centre network, often looking for a high degree of flexibility as they grow their operations.

Due to technological advancements, social media platforms, globalisation and the focus on cost, consumers have significantly changed how they shop, how they make purchasing decisions and what they expect from retailers. Purchasing channels including mobile devices, online and in- store are blurring. This multichannel approach is changing the way retailers choose and use real estate, from distribution centres to stores.

Retailers must make significant investments in real estate and technology that unifies their supply chain process – spending on upgrading real estate and technology is the enabler. We expect ongoing rationalisation in the retail sector in Australia in which mature retailers look closely at their existing store locations and distribution methods and online retailers grow in significance.

E-commerce retailers will utilise the following key site selection criteria:

• Location attributes allowing fast and efficient movement of goods such as the proximity to major postal mailing centres; zoning allowing 24-hour operation and multiple night time vehicle movements;

• Real estate functionality to efficiently handle large volumes of small orders; expansion requirements due to fast growing nature of online retail business; optimum building layout for e-commerce operations.

Combined with the ongoing push for efficiencies from all occupiers, we expect the rapidly growing e-commerce sector to drive a new wave of activity.

Australia has a low penetration of international retailers for a mature economy. The internationalisation of the retail sector will see more major regional and international brands enter the Australian market to grow their market share.

This trend has been evolving over the last five years. International retailers entering the Australian market will need a supply chain solution to service their clients, customers and stores. International retailers will seek a domestic distribution centre footprint or engage 3PL providers for local distribution – either solution will result in greater demand for industrial space.

– Andrew Maher, National Director, Corporate Industrial Solutions

Figure 9: Gross Take-up in Major Capital City Markets


10 year annualaverage

SQM ('000s)

0

500

1,000

2,000

3,000

1,500

2,500

*As at Q4/2013Includes take-up of traditional & high-tech space

2004

2003

2005

2006

2007

2008

2009

2010

2011

2012

2013*


Occupier activityOccupier demand has been supported by organic business growth and a low tolerance of locational obsolescence or functional obsolescence and this is resulting in more activity. Occupiers look to take advantage of infrastructure improvements made during their previous lease term, as well as changes to their customer or suppliers locations.

Gross take-up of 1.98 million sqm was recorded in 2013 (Figure 9). With take-up averaging 2.01 million sqm in the 10 years to 2012, take-up was around average last year (some upward revision to 2013 take-up is expected as new deals are announced to the market in 2014).

For the year, take-up was below average in the major east coast cities, while well above average in Perth and comfortably above average in Adelaide. Take-up in Sydney reached only 84% of its long-run average, while in Perth take-up was 70% above the average (though it should be noted that Perth take-up in 2013 was in line with the previous three years).

The Transport and Storage Industry (logistics and freight sector) accounted for 31% of take-up in 2013, supported by rising import volumes and benefitting from outsourcing to 3PLs by major retail groups. The Wholesale Trade sector accounted for 22% of take-up, followed by Manufacturing with 16% and the Retail Trade sector with 12% (Figure 10). Mining contributed to a negligible 1% of national gross take-up and only 5% of take-up in Perth in 2013.

Construction activity and new supplyThe industrial development sector at present is dominated by a small number of institutional groups with established land banks. A number of larger private developers and boutique groups are also competing for development opportunities.

One of the most notable impacts of the Global Financial Crisis has been the rapid reduction in industrial construction activity. Since 2008 new supply has been below the 10 year annual average and in 2013 was approximately 50% below the peaks of 2007 and 2008. JLL sees this as a return to more ‘normal’ market conditions. A return to the activity levels of 2007-8 is unlikely due to the confluence of factors that drove that activity prior to the GFC.

Figure 10: Gross Take-up by Industry Sector in 2013


4%

8%

12%

1% 1% 2%

3%

16% 22%

31%

Mining

Communication Services

Government Administration and Defence

Construction

Property and Business Services

Unknown or Other

Retail Trade

Manufacturing

Wholesale Trade

Transport and Storage


Figure 11: Construction Pipeline - Major Projects in Capital City Markets


10 year annualaverage

SQM ('000s)

0

500

1,000

2,000

3,000

1,500

2,500

* As at Q4/2013Includes traditional & high-tech projects

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014*

2015*

Under ConstructionCompleted Plans approved / submitted10 year annual

Completed Year to Q4/2013

(sqm)Development

Pipeline (sqm)*Pre-absorption

Rate (%)*

Sydney 413,300 390,500 91

Melbourne 326,800 423,700 61

Brisbane 231,600 299,800 81

Perth 160,700 129,000 88

Adelaide 50,900 70,000 100

Total 1,183,300 1,307,300 79

* Development pipeline includes all projects under construction in Q4/2013

Table 1: Development Pipeline* – as at Q4/2013*


Despite a sharp reduction in volume, the development market is very active at present. Figure 11 shows that approximately 1.2 million sqm of new supply was completed in 2013 nationally (major projects).

A further 1.26 million sqm is under construction and scheduled to complete in 2014, with approximately 76% of that due in the first half of the year. A further 711,000 sqm of projects currently have planning approval, heavily weighted toward the second half of 2014, suggesting that if occupier pre-commitments can be secured for those projects, construction in 2014 could exceed 2 million sqm for the first time since 2008.

The major pre-lease development market remains highly competitive in East Coast cities and an increasing number of major developers are engaged as activity again recovers. As a result of fairly tight demand and supply fundamentals, resulting in minimal vacancy in modern warehouse properties, developers have been speculatively developing generic, adaptable warehouse product.

Table 1 identifies recent construction trends by market. Melbourne remains the clear standout for speculative construction: only 61% of property under construction at the end of 2013 had known occupier commitments. Furthermore, Melbourne has overtaken Sydney as having the largest total area of new stock under construction.


Figure 12: Industrial Prime Net Face Rental Growth in 2013


–6% –4% –2% 0% 2% 4% 6% 8%

Sydney - South

Sydney - Inner WestSydney - North

Sydney - Outer North West

Sydney - Outer Central West

Melbourne - City FringeMelbourne - North

Sydney - Outer South West

Melbourne - South EastMelbourne - West

Brisbane - Trade Coast

Brisbane - NorthernPerth - East

Brisbane - Southern

Perth - NorthPerth - South

Adelaide - Inner SouthAdelaide - Inner West-E

Adelaide - North East

Adelaide - North WestAdelaide - Outer North

Tenants more demanding

Since the Global Financial Crisis (GFC), there has been a strong focus by occupiers on cost minimisation and supply chain efficiencies. Occupiers are using real estate location and specification to execute supply chain strategy, with greater demand being placed on landlords to make the case for their real estate location and building specification to the individual user.

More recently, occupiers are demanding higher incentives and shorter lease terms or staged growth options to drive flexibility in new leases. There has also been a notable increase in the time required to negotiate a new lease or lease renewal, with existing tenants engaging their landlords earlier in the renewal process.

Retention rates for institutional landlords have surged since 2007 and remain elevated. Overall the decision making process is being extended due to greater corporate uncertainty, with ‘stay put’ high on the agenda of many tenants and their existing landlords working harder to retain them.

Secondary asset owners looking to renew leases with existing tenants or secure new tenants will be required to adjust to these changing dynamics in the leasing market.

– Richard Fennell, Head of Property and Asset Management, Australia

Rental conditionsThe market fundamentals of steady demand and below average supply, as well as the ongoing renewal and infill of older industrial precinct, are supportive of low market vacancy and steady rents for existing stock. JLL expects that prime grade net face rents will broadly track inflation over the forecast period, averaging 2.0% to 3.0% per annum over the cycle.

However, prime grade existing face rents were fairly stable in 2013 outside of the most supply constrained markets, such as South Sydney (Figure 12). In most markets, a competitive pre-lease environment and healthy level of construction is limiting rental growth in existing stock. This is expected to continue in the short term. Of the markets that JLL forecasts, only South Sydney is expected to record growth in net face rents in 2014. With incentives broadly rising through 2013, effective rents have softened marginally.


The investment market themes in 2014

The industrial sector continues to offer a yield premium to the office and retail sectors; an above benchmark premium to the real bond rate; and a premium to global industrial markets. As a result, investment volume is likely to be well supported on the buy side.

Further yield compression is forecast to support valuations in the near term. Yield compression is expected to be supported by (a) the weight of capital looking for high yielding assets; (b) a continuation of the long-term re-rating of the industrial sector reflecting the changing tenant and investor profiles; (c) the spread to real bond rates; and (d) the wide yield spread between Australian and offshore industrial markets.

For capital markets, asset pricing will be interesting in 2014. Unlike other countries where property yields have followed bond yields to abnormally low levels over recent years, Australian property yields have seen much less compression. Prime yields are close to 10-year average levels (Table 2) and secondary markets in Sydney and Melbourne are still well above 10-year average levels (Table 3).

Consequently, the big question in 2014 is: will Australian property yields tighten further in the face of rising bond yields? We expect that in some cases the strong weight of local and international capital looking for a home will cause further downward pressure on yields, and if transaction activity announced to the market early in 2014 is a reliable guide, yields may compress more rapidly than presently being forecast.

We assess that five key criteria will be central to the determination of investment decisions in 2014:

1. Yield

2. WALE

3. Scale

4. Growth

5. Portfolio reweighting

The hunt for yield (a given in the sector)Industrial yields commenced a gradual downtrend late in 2012 and they remain in this trend, accelerating since mid-2013 in line with strong sales evidence.

As outlined earlier, prime grade industrial property yield spreads to the inflation-indexed Commonwealth government bond rate suggest there is limited further room for property yield compression before property could be considered priced above “fair value”.

Our expectation based on current market evidence is that asset pricing will push through this historic threshold level in the next few quarters. Does this imply that prime grade industrial property is expensive? We would argue that this historic threshold level should be set lower as the industrial sector is once again re-rated by the market – arguably justifiable because of its unique characteristics: longer average lease terms, lower management intensity, fixed rental escalations, higher entry yields, transactional liquidity, rising institutional ownership and a high calibre occupier base.


Market/PrecinctPrime Equivalent Yields

Current (%) 10-Year Average (%) Spread (bp)

Sydney South 7.50 - 8.25 7.85 2Sydney North 8.25 - 8.75 8.11 39Sydney Outer Central West

7.75 - 8.25 8.06 - 6


8.00 - 9.00 8.42 8


7.75 - 8.75 8.21 4

Sydney Inner West 7.75 - 8.50 8.09 4Melbourne West 7.50 - 8.25 8.16 - 28Melbourne South East 7.50 - 8.00 8.15 - 40Melbourne North 8.00 - 9.00 8.37 13Melbourne City Fringe 7.75 - 8.25 7.91 9Brisbane Southern 7.50 - 8.00 7.95 - 20Brisbane Trade Coast 7.50 - 8.00 7.92 - 17Brisbane Northern 7.50 - 8.00 8.10 - 35Perth East 7.75 - 8.25 7.98 2Perth South 7.75 - 8.25 7.98 2Perth North 7.75 - 8.25 7.98 2Adelaide Inner South 8.25 - 9.25 * *Adelaide Inner West-E 8.00 - 9.00 8.85 - 35Adelaide North East 8.25 - 9.50 * *Adelaide North West 8.25 - 9.50 8.90 - 3Adelaide Outer North 8.25 - 9.75 * *Adelaide Outer South 8.50 - 10.00 9.17 8* The time series for this market is less than ten years

Market/PrecinctSecondary Equivalent Yields

Current (%) 10-Year Average (%) Spread (bp)

Sydney South 9.00 - 9.75 8.81 56Sydney North 9.75 - 10.75 9.26 99Sydney Outer Central West

9.25 - 10.75 9.32 68


9.75 - 11.25 9.58 92


9.00 - 11.00 9.32 68

Sydney Inner West 9.50 - 10.50 9.10 90Melbourne West 9.50 - 10.25 9.34 53Melbourne South East 8.75 - 10.00 9.17 20Melbourne North 9.50 - 10.00 9.24 51Melbourne City Fringe 8.25 - 9.00 8.61 1Brisbane Southern 9.00 - 10.50 9.40 35Brisbane Trade Coast 8.50 - 9.75 9.15 - 3Brisbane Northern 8.75 - 10.25 9.32 18Perth East 8.25 - 8.75 8.95 - 45Perth South 8.25 - 8.75 8.95 - 45Perth North 8.25 - 8.75 8.95 - 45Adelaide Inner South 10.00 - 10.75 * *Adelaide Inner West-E 9.75 - 10.50 10.69 - 56Adelaide North East 10.00 - 11.00 * *Adelaide North West 10.00 - 11.00 * *Adelaide Outer South 10.50 - 12.00 * ** The time series for this market is less than ten years

Table 2: Industrial Markets – Prime Equivalent Yields Table 3: Industrial Markets – Secondary Equivalent Yields

Source: JLL Research Source: JLL Research


Figure 13: Industrial Funds - WALE as at June 2013

Source: Company Data

0 2 4 6 8 10 12 14Goodman Group

*Goodman Trust Australia

Stockland

Abacus Property Group

360 Industrial REIT

Dexus

GPT Group

*Goodman Australia Industrial Fund

Industria REIT

Australian Industrial REIT

Growthpoint

Mirvac Group

*Core Plus Industrial Fund

*Charter Hall DirectIndustrial Fund No.1 (DIF1)

*Core Logistics Partnership

Australand

*Charter Hall DirectIndustrial Fund No.2 (DIF2)

Years (by income)

Weighted Average Lease Expiry - June 2013 The hunt for WALEA-REITs and wholesale fund managers are focusing on enhancing their portfolio Weighted Average Lease Expiry (WALE) as a point of difference and competitive advantage. Clearly there is some impact on access to longer term funding and the cost of that debt funding due to the length of a portfolio’s WALE (Figure13).

There has been a strong shift in the focus of investor groups with lower portfolio WALE to extend or enhance this through targeted acquisitions of assets offering longer income streams. As a result, this WALE attracts greater attention as an investment decision criterion for those groups.

This will be important for corporates looking to divest assets from their balance sheets in a sale-and-leaseback process and considering optimal structured for lease tenure and rental escalation.

This also presents an opportunity for groups with longer WALE to moderately dilute WALE as a trade-off to acquire assets with higher initial yields, while still maintaining solid fundamentals due to location, specification and adaptability. Examples include specialised facilities such as regional distribution centres with lower WALE (but strategic location for the user, development extension land and sunken capital in plant and machinery).


Figure 14: Industrial Investment and Development Land Sales 2013 by Price Cohort


# of sales transacted in cohort

0

10

20

30

50

70

40

60

30 to 39.9920 to 29.9910 to 19.99< 10.0 > 40.0

Calendar year 2013 Sales $5 million. Does not include residential redevelopment site sales.

The hunt for scaleThere has been a notable increase this year in the number of investor groups with active mandates for higher value assets of > AUD 50.0 million. Given average capital values are generally between AUD 1,000 and AUD 1,200 per square metre for industrial warehouse space, assets greater than AUD 50.0 million are generally regional distribution centres for supermarket chains or facilities specialised in some other way that increases the economic rent. The increase in mandates for larger assets suggests that investors have become more comfortable with the valuation challenges these properties can present.

As Figure 14 shows, excluding residential redevelopment site sales, there were only 13 sales above AUD 40.0 million in 2013 (9 of which transacted in Q4) and only 8 sales between AUD 30.0 million and AUD 40.0 million (3 transacted in Q4).

While the number of these assets is limited, there has been an increase in the number of groups looking to acquire scale in the sector and scalable assets for their investors. This theme was evident in the fourth quarter of 2013 and is expected to continue in 2014.

There is a first mover advantage in acquiring larger stabilised assets, as they will generally be held long-term, rather than used as trading style opportunities. Investors have clearly taken notice of the scarcity value of large format investment product – 12 of the total 21 investment sales above $30 million occurred in Q4/2013.

Charter Hall funds purchased 4 of the 13 assets over AUD 40.0 million in 2013 and have recently announced contracts have been exchanged on another in Melbourne. Other large funds dominating large format asset purchases were Goodman, Stockland, Aviva, Mirvac, The GPT Group, DEXUS and CorVal.


Figure 16: Industrial Investment Universe Market Weights (by value) December 2013


43%

25%

18%

4% 9%

Sydney Melbourne Brisbane Adelaide Perth

Figure 15: Industrial Sales by Purchase Type

Sales ≥ $5 million as at February 2014


AUD (Millions)

0

500

1,000

1,500

2,500

3,500

2,000

3,000

20122011 2013

Non-CoreSub $10mPortfolioOpportunities Related

PartyOwner Occ Resi Site

Growth and product scarcity (the hunt for product)Despite rising transaction volumes each year since 2008, the current investment market still presents a scarcity challenge for investors. Depending on an investor’s mandate, access to funding and cost of funding, they will be precluded from certain types of transactions. For example, properties priced above or below a certain threshold; properties offered for sale as part of a portfolio; properties sold to related parties or into development joint venture funds; properties with short term leases or vacancy challenges; properties in non-core locations; or properties with unusual building specifications.

For investors looking to accumulate a portfolio by buying individual assets, applying the most simple criteria of assets priced above AUD 10.0 million, sold as investment style (no immediate development angle) in suburbs considered traditional industrial locations and not offered to related parties or as part of larger portfolios, less than half of all sales in the past three years can be could be considered ‘opportunities’ (Figure 15).

Applying further criteria, such as WALE, occupier type, asset type, grade, design, market weighting and allocation, results in fewer and fewer ‘opportunities’ to build a portfolio.

This is creating challenges for investors that have committed to growing their funds under management in the industrial sector, particularly by acquisitions.

A key challenge for investors in 2014 will be how they deploy capital to access product and build a portfolio, while meeting other challenges such as reweighting by geography, increasing portfolio WALE and finding higher yielding assets that remain accretive.

Reweighting portfolios a priorityReweighting of portfolios by geography will be a particular challenge for investment or development businesses originally domiciled in a single market. Figure 16 depicts JLL’s estimates of the industrial investment universe by value for each major market.

Most groups typically hold an overweight position in Melbourne or Sydney; and most groups are also underweight in Brisbane and are actively trying to remedy this through acquisitions. While most funds are also underweight in Perth, for many investors Perth is in the ‘too hard basket’.

Another question for institutional funds will be whether to try to follow a market weighting by value or by area (sqm). This is particularly relevant in assessing exposure to the Melbourne market, where average capital values can be significantly lower than in Sydney and Brisbane.

A further question will be whether to actively target stabilised properties, or reweight via increasing development pipeline in an underweight market (though this challenge is unique to investors with a development capability and focus).


OpportunitiesThere are many opportunities for investors and developers. We have highlighted a few key opportunities based on the investment market themes and challenges for 2014 outlined above.

1. Target the asset creators or become one yourself

2. Consider sale-and-leaseback options.

3. Investigate possible mispricing of risk in non-standard or specialised assets

4. Aggregate secondary assets

5. Private investors may look to sell into a strong pricing cycle

1. Development groups have been the key source of investment opportunities in the last four years. However, astute investors recognised this opportunity a few years ago and have forged development JV funds with partners such as Goodman, DEXUS and Australand. With Australand recently revising its strategy and deciding to hold more of its industrial development product on balance sheet (essentially switching from being a net seller to a net buyer), pressure will increase on investors to source product with core style characteristics from the remaining developers without an investment focus.

As a result, we expect more groups to increase their development capability and re-enter the market for development land to grow their portfolios. Recent examples include Mirvac, Stockland and The GPT Group.

2. The rationale for corporates to undertake sale-and-leaseback strategies is usually straight forward: divest a non-income producing asset from the balance sheet to free up capital that can be put to work elsewhere in the business. There are two common types of corporates that are likely to undertake sale-and-leaseback transactions: a) transport and logistics companies that moved into new precincts to develop purpose-built assets and b) manufacturers, food processors or retailers that required a higher than normal level of building specification at the time of development.

Both of these groups have a form of commonality. The properties are likely to be in some way specialised or unique to the user that built them. The difficulty for investors will be identifying these opportunities and the assets that do not offer some other form of economic value to the business operations and therefore would not be considered for sale.

The current investment environment presents an opportunity for corporates looking to free up cash from property assets. We appear to be heading toward a trough in the yield tightening cycle. The leasing market is fairly competitive. And there is an abundance of capital seeking investments with long WALE, quality covenant and scale, the attributes most common in well-structured corporate sale and leaseback programs.


Specialised assets – worth the ‘risk’

The Australian industrial market saw a number of sales of specialised facilities in 2013. Is this due to the lack of more generic investment offerings or are other factors at play?

I tend to think there are other drivers.

Before we examine these let’s determine what constitutes a specialised industrial facility?

It is a facility that has a specific use for a specific user, with little or no adaptive reuse potential. Examples of specialised facilities include data centres, cold storage and food processing facilities.

Specialised industrial facilities tend to be offered with long term leases, as they are either sale-and-leaseback offerings, or have been committed to by a tenant seeking long term security of tenure in the facility.

A unique feature of specialised facilities is that the plant and equipment is often worth many multiples of the actual building envelopes. This is one of the key attractions for investors. It is generally a good guide to the likelihood of a tenant remaining in the facility for the long term, well beyond the initial lease period of 15 or 20 years, because it would be cost prohibitive to move earlier. Tenants in generic warehouse and distribution facilities are more mobile due to the availability of comparable facilities and the relatively low cost of relocating and commissioning a new facility.

When buying a specialised industrial facility, however, basic investment principles still apply. The location should be considered prime. Ultimately the building will be obsolete, so you are better off with a prime piece of land that can be redeveloped into a higher and better use. The tenant should also operate in a sustainable, preferably growing, industry. For example, food-grade facilities are today more attractive than car manufacturing plants.

– Michael Fenton, Managing Director, New South Wales; Head of Industrial Services – Australia

3. Specialised assets have been identified as a key investment opportunity in 2014 for three reasons: firstly, specialised assets often offer the key characteristics that today’s investors are seeking; secondly, many investors who have traditionally avoided these opportunities now realise that investment ‘opportunities’ are becoming scarce; and thirdly, we believe there is often an overstatement of the risk involved in owning a specialised asset – largely because the capital sunk in the asset by the occupier and the strategic location selected by the occupier mitigate their risk.

4. Secondary assets allow investors to aggregate a larger portfolio and avoid competition for the prime grade, core assets. The investment proposition for many secondary grade assets is sound.

Some secondary grade asset re-pricing occurred in 2013. Further tightening in secondary grade yields is possible in 2014 because:

a. Average secondary grade yield spreads to prime grade assets are historically very high.

b. More investors have gone up the risk curve. Sentiment toward both value-add investing and the industrial sector as an asset class has shifted favourably.

c. The sell down of ‘non-core’ assets by institutional investors is completed. Meanwhile, private investors – while net sellers in 2013 – have not yet been convinced that the pricing metrics are optimal for disposing of assets. We expect this to change in 2014 as evidence of yield tightening builds.

Investors may accept a shorter lease expiry profile for a good building in a good location; or decide a poor building in a good location with a strong covenant and long WALE is preferable. We generally don’t expect firmer pricing for assets that are only strong on one of these criteria.

5. Private investors have been net sellers of industrial property in the last two years. We expect private owners to be enticed to sell a) by evidence of a strong pricing cycle, delivering them attractive capital returns - after taxes and fees and b) by the prospect of having to offer up-front cash or rent-free incentives to compete for tenants in a patchy occupier demand environment.


Unlisted capital set to continue targeting non-core industrial

2013 saw strong capital flows into Australian unlisted funds across all sectors. Established Australian managers enjoyed success in attracting capital from Australian and offshore institutional investors for their unlisted wholesale offerings.

Demand from unlisted wholesale investors remains unsatisfied and a number of domestic and offshore institutions indicate continued demand and capacity for investment in Australian industrial real estate. We continue to see increased evidence that institutional investors are prepared to take on additional risk with capital available for core plus and value add industrial strategies. A number of Australian superannuation funds have now awarded mandates to managers for core-plus investment across a range of sectors. For global wholesale fund investors the growing importance of the Asia Pacific region has driven more active investment in Australia as it offers a large, mature and transparent market in contrast to the opportunistic style investment available in some emerging property markets across the region.

Investor demand and the lack of core stock in Australia will likely see fund managers more active in non-core industrial. In the absence of exposure to core assets, stable income flows are key for wholesale investors. Well located modern assets with some manageable leasing risk will likely be popular targets as fund investors will accept short term challenges to secure high quality, well located assets for the longer term.

– Chris Key, Head of Corporate Finance, Australia – Kivanch Mehmet, Director - Corporate Finance, Australia


2013 INDUSTRIAL TRANSACTIONSStreet Number Street Name Suburb Sub-precinct Month Sale Price Share Vendor Purchaser

New South Wales180 Bourke Road Alexandria South Sydney Dec $343,000,000 100 Rathdrum Properties Goodman Australia Industrial Fund19-33 Kent Rd Mascot South Sydney Apr $100,000,000 100 Goodman Trust Australia (GTA) Karimbla Properties No.34 - Meriton Group 40-88 Forrester Road St Marys Outer North West Dec $72,850,000 100 Goodman Australia Industrial Fund (GAIF) Stockland52-58 Lisbon Street Fairfield Outer Central West Nov $65,000,000 100 Blackstone Morgan Stanley Aviva Investors

Eastern Creek Outer Central West Feb $62,600,000 100 Brickworks Goodman/Brickworks (Joint Venture Industrial Property Trust)60 Wallgrove Road Eastern Creek Outer Central West Dec $55,000,000 100 Department of Agriculture Mirvac Group200 Coward Street Mascot South Sydney Jun $47,000,000 100 Queensland Local Government Superannuation Board Meriton Group38 Pine Road Yennora Outer Central West Oct $43,600,000 100 Kingsmede GPT Group10-16 South St Rydalmere Inner West Aug $43,250,000 100 DEXUS Property Group Kingsmede131-151 Dunning Ave Rosebery South Sydney Dec $37,400,000 100 Undisclosed or Unknown Goodman Australia Industrial Fund4 Inglis Road Ingleburn Outer South West Jun $34,350,000 100 Maremma Pty Ltd (Toll) DEXUS Wholesale Property Fund55-57 Kirby Street Rydalmere Inner West Feb $32,000,000 100 Uniting Church Fife Capital31-37 Heathcote Rd Moorebank Outer South West Mar $30,250,000 100 PMP Print Pty Ltd Goodman Group29 Glendenning Road Glendenning Outer North West Oct $29,500,000 100 Greens General Foods Fife Capital1-11 Smeaton Road Smeaton Grange Outer South West Apr $27,500,000 100 Undisclosed or Unknown StellaLot 3 Kangaroo Avenue Eastern Creek Outer Central West Oct $25,443,000 100 Australand Kuehne + Nagel100 Bennelong Road Homebush Bay Inner West Feb $25,400,000 100 Centuria Property Fund Meriton Group 40-52 Talavera Road North Ryde North Aug $25,300,000 100 DEXUS Property Group Undisclosed or Unknown47 Swinbourne Street Botany South Sydney Mar $23,163,000 100 Macquarie Group Goodman Group554-562 Reservoir Road Greystanes Outer Central West Sep $23,000,000 100 Undisclosed or Unknown Americold350 Edgar Street Condell Park Outer South West Dec $22,800,000 100 AMP Capital Ambot Pty Ltd32 Swinbourne Street Botany South Sydney Mar $22,200,000 100 Quantum Park Botany Pty Ltd GIL Holdings (Aust) Pty Ltd74 Newton Road Wetherill Park Outer Central West Jul $22,000,000 100 Undisclosed or Unknown Fife Capital10-38 Forrester Road St Marys Outer North West Aug $21,200,000 100 Arrium Limited Charter Hall Direct Industrial Fund No. 2 (DIF2)126-134 Bourke Street Alexandria South Sydney Jun $21,196,000 100 F.Hannan Properties Pty Ltd Whistle-On-Bourke Pty Limited53 Britton St Smithfield Outer Central West Jul $20,139,610 100 Undisclosed or Unknown Altis Property Partners 28-54 Percival Rd Smithfield Outer Central West Dec $19,200,000 100 Cromwell Property Group Undisclosed or Unknown15 Cooper Street Smithfield Outer Central West Mar $19,000,000 100 Undisclosed or Unknown Crown Fork Lifts457 Waterloo Rd Chullora Inner West Jun $17,200,000 100 Colonial Direct Property Investment Fund 360 Capital Industrial Fund9 Coventry Place Mount Druitt Outer North West Nov $16,750,000 100 Australian Unity Private investor15 Huntingwood Drive Huntingwood Outer North West Jun $16,200,000 100 Woolworths Limited Charter Hall Group2-6 Basalt Road Greystanes Outer Central West Feb $15,478,000 50 DEXUS Property Group National Pension Service of Korea 154 O'Riordan St Alexandria South Sydney Jul $14,500,000 100 DEXUS Funds Management DEXUS Projects Pty Ltd.184-194 Milperra Road Revesby Outer South West Dec $13,950,000 100 196 Milperra Rd Pty Ltd Undisclosed or Unknown13 Ferndell Street Granville Inner West Apr $13,500,000 100 Arrium Limited Sentinel Property Group39 Rhodes Street Hillsdale South Sydney Aug $12,200,000 100 Undisclosed or Unknown JKN Rhodes Pty Ltd3 Distillers Place Huntingwood Outer North West Jun $11,100,000 100 LaSalle Australia Core Plus Fund Altis Property Partners111 Quarry Road Erskine Park Outer Central West Jul $10,661,700 100 CSR Ltd Murray Goulburn Co-Operative Co-Ltd8-12 Wiggs Road Riverwood South Sydney Sep $9,700,000 100 Hills Holdings Undisclosed or Unknown2 Apollo Place Lane Cove North Jun $9,200,000 100 Aspen Diversified Property Fund Denison Diversified Property Fund

Long Street Smithfield Outer Central West Sep $8,977,000 100 Transgrid Charter Hall Core Plus Industrial Fund (CPIF)10-20 McEvoy Street Waterloo South Sydney Nov $8,620,000 100 Nemkal Pty Ltd and Pondliners Pty Ltd Undisclosed or Unknown263-273 King Street Mascot South Sydney Mar $8,550,000 100 Gate Gourmet Property Pty Ltd Balaji & Family Property Pty Limited10 Solent Circuit Baulkham Hills Outer North West Jun $7,600,000 100 Print Management Holdings Pty Ltd Flexco Australia Pty Ltd73-79 Beattie Street Balmain Inner West Dec $7,400,000 100 Peter Owen Developments Ltd Undisclosed or Unknown3 Apollo Place Lane Cove North Jun $7,000,000 100 Aspen Diversified Property Fund Denison Diversified Property Fund 1 Clyde St Silverwater Inner West Jun $6,962,288 100 Graebar Properties Crei Industrial Nominees No.1 2/122 Euston Road Alexandria South Sydney Jul $6,200,000 100 Coulson Alexandria Euston Pty Ltd95-99 Reserve Rd Artarmon North Aug $6,200,000 100 Roluke Pty Ltd Health Administration Corporation25 Bessemer Street Blacktown Outer North West Sep $6,000,000 100 GW Properties Pty Ltd L & B Management Pty Ltd9 Parramatta Road Lidcombe Inner West Sep $5,900,000 100 Undisclosed or Unknown GLNS Superannuation Fund34 Williamson Road Ingleburn Outer South West Jul $5,825,000 100 Cronulla Pty Ltd Pennells Property Group Pty Limited4-14 Dickson Avenue Artarmon North Nov $5,800,000 100 George Bevan J & S Pang Pty Ltd293-295 Abercrombie Street Darlington Inner West Nov $5,400,000 100 Undisclosed or Unknown Whiteline Clothing20-24 Rodborough Road Frenchs Forest North Jul Part of a portfolio 100 GE Capital Real Estate Blackstone


2013 INDUSTRIAL TRANSACTIONSStreet Number Street Name Suburb Sub-precinct Month Sale Price Share Vendor PurchaserVictoria

Somerton Logistics Park Hume Highway & Tranport Drive Somerton North Nov $121,000,000 100 Hunt Family Charter Hall Group

Amcor Paper Mill Site Heidelberg Road Fairfield North Jun $120,000,000 100 Amcor Alpha Partners7 Dunmore Drive Truganina West Dec $47,640,000 100 Montague Cold Storage CorVal2-30 Saintly Drive Truganina West Dec $41,713,000 100 Australand Charter Hall Core Logistics Partnership (CLP)5-29 Frederick Road Tottenham City Fringe Dec $39,075,000 100 Cromwell Property Group Charter Hall Group45 Fulton Drive Derrimut West Dec $29,150,000 100 Undisclosed or Unknown PropertyLink704-744 Lorimer Street Port Melbourne City Fringe Jul $26,300,000 100 Australian Unity Centennial Property Group1408-1418 Centre Road Clayton South City Fringe Dec $25,300,000 100 Sigma Pharmaceuticals Cedar Woods9-11 Drake Boulevard Altona West Jul $24,130,000 100 Australand Growthpoint Properties Australia24 Stanley Drive Somerton North Oct $23,700,000 100 Motor Accident Commission (SA) Fife Capital169 Australis Drive Derrimut West Dec $20,950,000 100 Peter Wu Abacus Property Group69 Studley Court Derrimut West Jun $20,000,000 100 Undisclosed or Unknown 360 Capital Industrial Fund31-49 Browns Road Clayton South East May $19,550,000 100 PMP Limited Abacus Property Group19 & 20 Southern Court Keysborough South East Jul $18,760,000 100 Australand Growthpoint Properties Australia677 Springvale Road Mulgrave South East Jun $18,700,000 100 Aspen Diversified Property Fund Denison Diversified Property Fund

Atlantic Drive Keysborough South East Jul $17,349,000 100 Australand Growthpoint Properties Australia229-241 Franklin Melbourne City Fringe Nov $17,000,000 100 Jimmy Goh Chris JianLOGIS industrial park - Ego Pharmaceuticals Dandenong South East Sep $15,000,000 100 Places Victoria Ego Pharmaceuticals

18-22 Salmon Street Port Melbourne City Fringe Mar $12,143,000 100 AMP Capital Strategic119-121 William Angliss Drive Laverton North West Jun $10,500,000 100 Qanstruct Undisclosed or Unknown

Merrindale Drive Croydon South East Nov $10,250,000 100 Aspen Group Undisclosed or Unknown360-366 Settlement Road Thomastown North Aug $10,000,000 100 Wellington Capital Undisclosed or Unknown32-36 Commercial Drive Dandenong South East Aug $9,575,000 100 The Comfort Group Property Advisory Group40-48 Howleys Road Notting Hill South East Nov $9,300,000 100 Undisclosed or Unknown Undisclosed or Unknown

Lots 22-26 Vision Street Dandenong South South East Mar $8,942,973 100 Pellicano Group 50% / ISPT Development and Opportunities Funds No. 1 (DOF 1) 50% Lettieri Group

342-368 Hammond Road Dandenong South South East Apr $8,250,000 100 Castricum AAD Recycling Services297-303 Palmers Road Truganina West Mar $7,740,000 100 Australian Securities Limited Undisclosed or Unknown1-11 Remington Drive Dandenong South South East Oct $7,500,000 100 Anrose Investments Quatius Logistics86-102 Whiteside Road Clayton South East Jul $7,200,000 100 Undisclosed or Unknown Virtus Property Group12-20 Arkwright Drive Dandenong South South East Dec $6,660,000 100 Undisclosed or Unknown SRS Group120 Colemans Road Carrum Downs South East Jul $6,600,000 100 Bank of Queensland Salta Properties28-40 Vella Drive Sunshine West Apr $6,180,000 100 Australian Unity Undisclosed or Unknown16-18 Waverley Mount Waverley City Fringe Dec $5,050,000 100 Undisclosed or Unknown Undisclosed or Unknown16-18 Lionel Road Mount Waverley South East Nov $5,050,000 100 Undisclosed or Unknown Undisclosed or Unknown11 Dansu Court Hallam South East Feb $5,000,000 100 Undisclosed or Unknown U.N.I. Properties Pty Ltd

Queensland16-18 Quarry Road Stapylton Southern Oct $44,500,000 100 Insight Logistics Park Pty Ltd GPT Group1439 Lytton Road Hemmant Trade Coast Dec $39,630,000 100 Undisclosed or Unknown DEXUS Wholesale Property Fund60-80 Southlink Street Parkinson Southern Aug $34,250,000 100 Undisclosed or Unknown PropertyLink441 Nudgee Road Hendra Northern Oct $27,400,000 100 Millenium Industrial Pty Ltd DEXUS Wholesale Property Fund180 Holt Street Pinkenba Trade Coast Dec $25,375,000 100 Cromwell Property Group Charter Hall Core Plus Industrial Fund (CPIF)10 Brandl Street Eight Mile Plains Southern Apr $22,590,000 100* Peet Income Property Fund Benlee Property Trust No. 677 Logistics Place Larapinta Southern Jun $21,030,000 100 McPhee Distribution Services GICFormer Boral Quarry Darra Southern Jul $17,500,000 100 Boral Limited Charter Hall Core Logistics Partnership (CLP)45 Gosport Street Hemmant Trade Coast Jul $14,900,000 100 LaSalle Investment Management Macada Pty Ltd1 Cobalt Street Carole Park Southern May $14,475,500 100 Brookfield Multiplex James Hardie270-280 Old Gympie Road Dakabin Northern Jun $14,000,000 100 Moreton Bay Chauffer30 Peterkin Street Acacia Ridge Southern Aug $13,750,000 100 Arrium Limited Fife Capital675 Macarthur Avenue Pinkenba Trade Coast Nov $13,037,272 100 BGW Group Metalsea Pty Ltd60 Grindle Road Wacol Southern Jun $12,400,000 100 Aspen Diversified Property Fund Denison Diversified Property Fund243 Bradman Street Acacia Ridge Southern Oct $11,500,000 100 IOOF KCL Group17 Boniface Street Archerfield Southern Dec $11,000,000 100 Ginette Muller and Joanne Dunn of FTI Consulting (Australia) Undisclosed or Unknown93 Burnside Road Stapylton Southern Aug $10,000,000 100 Ferrier Hodgson Yatala Industrial Pty Ltd40 Coulson Street Wacol Southern Apr $9,000,000 100 Woolcock Investments Pty Ltd Allmet Engineering73 Industrial Avenue Wacol Southern Jul $9,000,000 100 Etleon Pty Ltd East Coast Woodshavings Pty Ltd


*Office and Warehouse Area

2013 INDUSTRIAL TRANSACTIONSStreet Number Street Name Suburb Sub-precinct Month Sale Price Share Vendor PurchaserLot 18 Schneider Road Eagle Farm Trade Coast Sep $8,946,940 100 Undisclosed or Unknown Undisclosed or Unknown16-18 Riverview Place Murarrie Trade Coast Jun $8,850,000 100 Undisclosed or Unknown DJR Super Pty Ltd87 Bancroft Road Pinkenba Trade Coast Nov $8,300,000 100 Sherrin Nominees Pty Ltd Pipeclay Lawson Ltd113 Bancroft Road Pinkenba Trade Coast Jul $7,075,000 100 Sherrin Nominees Pty Ltd Undisclosed or Unknown33 Kimberley Street Oxley Southern Oct $6,800,000 100 Zenbon Pty Ltd AEL Holdings Australia Pty Ltd133 South Pine Road Brendale Northern Feb $6,295,000 100 Mwid (Brendale) Pty Ltd Van Riet Property Developments No 3 Pty Ltd172 Evans Road Salisbury Southern Sep $6,150,000 100 Undisclosed or Unknown Undisclosed or Unknown341 Freeman Road Richlands Southern Mar $6,000,000 100 Accumulus Investment Group Freeman Partners Pty Ltd2 Gosport Street Hemmant Trade Coast Feb $5,600,000 100 Leisure Kart City Pty Ltd Industrial Installation and Maintenance231 Holt Street Pinkenba Trade Coast Dec $5,285,000 100 Wellington Capital Lukshad Pty Ltd62 Creek Street Bundamba Southern Apr $5,131,000 100 Granville Tobacco Processors Pty Ltd Independent Timber Importers7 Hi-Tech Court Eight Mile Plains Southern Apr Portfolio 100* Peet Income Property Fund Benlee Property Trust No. 669 Brandl Street Eight Mile Plains Southern Apr Portfolio 100* Peet Income Property Fund Benlee Property Trust No. 636 Brandl Street Eight Mile Plains Southern Apr Portfolio 100* Peet Income Property Fund Benlee Property Trust No. 6

Western Australia2 Bannister Road Canning Vale South Oct $70,500,000 100 Commonwealth Bank Officers Superannuation Corporation Charter Hall Core Plus Industrial Fund (CPIF)218 Bannister Road Canning Vale South Feb $63,500,000 50 Australian Unity Charter Hall Core Plus Industrial Fund (CPIF)1 Howson Way Bibra Lake South Sep $22,588,588 100 Tubemakers Charter Hall Direct Industrial Fund No. 2 (DIF2)382-410 Orrong Rd Welshpool East Feb $22,300,000 100 Erinview Holdings Pty Ltd Warrington ManagementLots 18 and 30 Clarence Beach Road Henderson South Oct $21,000,000 100 Austal Limited AME Offshore Solutions305 Spearwood Avenue Bibra Lake South Nov $12,600,000 100 Arrium Limited Undisclosed or Unknown261-273 Berkshire Road Forrestfield East Apr $11,462,260 100 KJ & MV Sims Carrooda Pty Ltd & Sansom Nominees Pty LtdLot 35 Beard Street Naval Base South May $10,300,000 100 Shinagawa Refractories Australasia Pty Ltd Tutt Bryant Group Ltd2 Murphy Street O'Connor South Apr $9,560,000 100 Dulux Holdings Pty Ltd (an AkzoNobel brand) O'Connor WA105-107 Allen Road Forrestdale South Jun $9,358,740 100 Pakwest Pty Ltd Hitachi Construction Machinery19-21 Casino Street Welshpool East Nov $8,900,000 100* Linfox Property Group FCL Numbers 1, 2 and 3 Pty Ltd Undisclosed or Unknown51 Miguel Road Bibra Lake South Feb $8,800,000 100 PMP Print Pty Ltd Undisclosed or Unknown64 Great Eastern Highway South Guildford East Nov $8,600,000 100 Dejo Nominees Pty Ltd Acure Funds Management431 Victoria Road Malaga North Feb $8,000,000 100 Pietrino Colli V10 Property Pty Ltd4 Koojan Avenue South Guildford East Nov $7,810,000 100 Emeco International Pty Ltd Pellegrini Family146 Carrington Street O'Connor South Jul $7,450,000 100 Synmar Pty Ltd Undisclosed or Unknown16 Hazelhurst Street Kewdale East Aug $7,400,000 100 Undisclosed or Unknown Undisclosed or Unknown2403 Great Northern Highway Bullsbrook North Mar $7,046,594 100 E & K Siviour Kain & Shelton Corporation Limited45 Wellard Street Bibra Lake South May $6,875,000 100 Undisclosed or Unknown Undisclosed or Unknown170 and 180 Welshpool Road Welshpool East Jan $6,675,000 100 Lifelong Investments John Hughes1 Whipple Street Balcatta North Mar $6,550,000 100 Whipple Street Properties Pty Ltd State City Investments Pty LtdLot 2 Ward Road East Rockingham South Oct $6,450,000 100 Undisclosed or Unknown Undisclosed or Unknown257-259 Berkshire Road Forrestfield East Apr $5,912,134 100 HR & SM Nepia Terra Spei Pty Ltd19 Dewar Road Bullsbrook North Mar $5,764,528 100 C & G Johnson Kain & Shelton Corporation Limited185 Welshpool Road Welshpool East Feb $5,500,000 100 Dorothea Alice Hackett Gilpin Park Pty Ltd12 Hazelhurst Street Kewdale East Aug $5,250,000 100 Undisclosed or Unknown Undisclosed or Unknown33-35 Briggs Street Welshpool East May $5,250,000 100 Michael Brocx & Brett Andrew Mounsey Undisclosed or Unknown15 Attwell Street Landsdale North Feb $5,060,000 100 WKM Holdings Pty Ltd Sita Australia Pty Ltd55 Excellence Drive Wangara North Sep $5,050,000 100 Undisclosed or Unknown Jim Kidd Sports6 & 8 Hopetoun Place Welshpool East Nov Portfolio 100* Linfox Property Group FCL Numbers 1, 2 and 3 Pty Ltd Undisclosed or Unknown

South AustraliaLot 500 Caribou Drive Direk Outer North 8 $32,750,000 100 D & R DeRuvo and Sons Cromwell Property Trust 12600 Main North Road Gepps Cross North West 3 $21,350,000 100 Bianco Steel Supplies Aretzis GroupLot 102 Grand Trunkway Gillman North West 12 $16,200,000 100 Cromwell Property Group Charter Hall Core Plus Industrial Fund (CPIF)65-85 Deeds Road North Plympton Inner West/East 8 $12,720,000 100 Metcash Ascot Capital13 Webb Street Port Adelaide North West 6 $9,425,000 100 Arrium Limited Quintessential Equity519 Cross Keys Road Cavan North West 11 $7,100,000 100 Centuria Property Fund Private investor25-31 Tappa Road Edinburgh Outer North 11 $6,500,000 100 Commercial and General Private investor

Nick CrothersDirectorStrategic ResearchResearch and Consulting - Australia+61 2 9220 8525

Michael FentonManaging Director - New South WalesHead of Industrial - Australia+61 2 9220 8000

Nick Crothers is a Director in the Strategic Research team at JLL. He has over 13 years’ experience in property industry research. Nick is responsible for the production of thought leadership papers, the industrial research agenda and strategic advice to clients of JLL.Nick holds a BA in Property Economics.

Michael has more than 22 years’ experience in the property industry. In this time he has completed some of the largest industrial transactions in Australia. In 2013 Michael won the DEXUS Agency Transaction of the year. Michael Fenton is responsible for business strategy and operations across Australia.

Authors


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COPYRIGHT © JONES LANG LASALLE 2014 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.

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