Decline in vacancy for Australia's industrial property sector

SYDNEY: A slight overall decline in national vacancy has been recorded for investment grade industrial property in Australia, according to the Savills Industrial Stock Survey (SISS).

Set as a new bi-annual benchmarking tool for the performance of the national industrial sector in Australia, the inaugural survey in September 2008 recorded a national vacancy rate of 3.2%. The latest survey, based on data as at March 31 2009, shows a small decline in national vacancy to 2.8%.
The SISS tracked ownership of 887 investment grade properties in the prime, secondary, high tech and development site segments of Australia's key capital industrial markets, comprising 16 million sq m of built gross lettable area (GLA).
The survey focuses purely on properties owned for the purpose of investment returns, omitting the owner-occupier market to provide an accurate analysis of the market for investment grade industrial assets.

"Australia's economic climate has changed markedly over the last year and the industrial property market has not been immune. However, the flexibility of the industrial market to changing conditions is evidenced in the findings of the report.

While results vary from state to state, we recorded a slight overall decline in national vacancy for investment grade industrial," said Savills NSW research analyst Claire Cupitt, also the report's author.
Over the period from September 2008 to March 2009 - vacancy has increased in New South Wales from 3.5% to 3.9%. However, for Victoria and Queensland, vacancies decreased from 2.5% to 1.9% and 4.1% to 3.0% respectively, while vacancy for South Australia (only a couple of leases effected the small market in this case) decreased from 6.5% to 1.6%. In Western Australia, vacancy remained at 0%, reflecting the lack of stock in the Perth industrial market.

Cupitt added, "The increase in vacant stock in New South Wales relates to a number of vacancies, mainly in secondary stock, in Sydney's west. We expect the vacancy rate in Sydney's west to tighten over the next reporting period due to stagnant development, with tenant demand absorbing the remaining space.
"The overall decline in vacancy in the other main states relates to the quick supply side in response to the lack of development funds in the market and the decline in economic conditions. Existing tenant demand has taken up remaining vacancy in the markets," she said.
"We expect the general slowing in economic conditions and restrictions to investment finance to lead to a further increase in tenant retention with occupiers opting to lease for shorter time periods rather than owner occupy. Moreover, some business expansion plans may be shelved and tenants may opt to renew or extend their current leases in order to retain flexibility," said the research analyst.

The study, which also surveyed over 126 million sq m of industrial land, showed that Real Estate Investment Trusts (REIT) and government sectors dominate land ownership, with strong prevalence of government land ownership in Queensland and Western Australia, reflecting the commitment of these State Governments to industrial development around their port precincts.
While Queensland and Western Australia held the majority of industrial land surveyed, New South Wales is the state holding the lion's share of investment grade GLA, with 7.1 million sq m over 348 properties, while the Victorian industrial property market recorded 5.1 million sq m of GLA on 221 properties. Savills attributes this to the influx of REIT activity in Sydney's industrial property market over the last few years.
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