Article

Sydney land values: hot; pre-lease rents: not

May 24, 2018 / By

Industrial land values in Sydney’s Outer Central West have grown rapidly over the last five years, whilst pre-lease rents have remained comparatively stable. Values for 1-hectare parcels of land since early 2013 have doubled, from an average of AUD 282 (USD 212) psm p.a. to an average of AUD 567 (USD 426) psm p.a. in 1Q18. Meanwhile, pre-lease rents in the precinct recorded marginal growth over the same period, averaging AUD 120 psm p.a.

Why has this divergence occurred?

Shortage of developable land

The increase in land values can be partly attributed to the diminishing availability of industrial land in Sydney. The re‑zoning of industrial land in inner-city locations for residential and commercial redevelopment has displaced tenants from these locations, pushing industrial demand further west. The inadequate supply of industrial land in the Outer Central West has supported record growth of land values in the precinct. We estimate there are four years of serviced and zoned industrial land remaining across the Sydney industrial market. Thus, we believe land values are expected to demonstrate steady growth over the medium-term.

Strong competition between developers

Supply is strong in the Outer Central West, with 212,200 sqm under construction and due to complete by the end of 2018. Approximately 70% of this space is already pre‑committed, whilst the remaining 63,300 sqm under construction is being developed speculatively.

Competition amongst landlords to secure a pre‑commitment is strong, keeping pre‑lease rents stable. Stronger levels of demand have supported the rise in speculative development activity. Above 155,100 sqm of vacant floor space is currently under construction in Sydney. This will be delivered across the Outer Central West (41%), Outer South West (38%) and Inner West (22%).

Figure 1: Sydney Outer Central West pre-lease rent & land values, 1999 to 2017 (1 hectare)

Source: JLL Research

Will higher land values flow through to pre-lease rents?

Post global financial crisis, industrial activity saw a strong correlation between the growth rates of land values and pre‑lease rents. Over 2010-2015, the average annual growth was 2.2% for land values in the Outer Central West, whilst pre‑lease rents recorded average annual growth of 2.1% in the precinct over the same period. Since then, the positive relationship between land values and pre-lease rents has bifurcated.

Land value growth from the past few years is expected to progressively materialise into pre-lease rental growth in the medium-term. Demand is expected to outweigh supply as the current construction levels in the Outer Central West will moderate in the coming years. Concurrently, robust demand for industrial space from traditional logistics users and increasing activity from e‑commerce tenants is expected to rise. Therefore, this imbalance between the demand and supply of industrial space, combined with rising land values, will culminate into cost‑push inflation, and thus growth in pre-lease rents.

Rental growth in existing assets has been strong over the past year, with average annual rental growth reaching 5.3% in 4Q17 – the highest growth rate since 4Q11. Consequently, the prime existing to pre-lease rental differential has narrowed to margins below historical averages. We believe this will support the growth of pre-lease rents moving forward.

Medium-term outlook:
Land values: still hot; pre-lease rents: warming.

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