Savills : Land values in Melbourne’s east, south-east industrial precincts skyrocket

The average price of small industrial land parcels in Melbourne's south-eastern and eastern industrial precincts has risen by up to 40 percent and 37 percent respectively in the 12 months to March 2018, according to Savills Research.

The agency's latest researchfinds the scarcity of ready-to-go development sites and a general strong demand are the biggest drivers of buyer competition.

Savills Associate Director for Research & Consultancy, Monica Mondkar, said additional rises were anticipated, as site availability was not expected to improve significantly in the near term, while demand had been rising steadily.

'We expect supply to be further constrained as an increasing amount of industrial land gets consumed, at the same time being rezoned for residential and commercial purposes driven by rising population and housing demand,' she said.

The 2016 Census revealed greater Melbourne's population had increased from 3.33 million to 4.48 million, a rise of 25.6 percent from 2001 to 2016.

Ms Mondkar said this rapid population growth had been putting pressure on the availability of land, with Melbourne's Urban Development Program revealing that from 2000-01 to 2016-17, a total of 2,221 hectares of industrial land was rezoned for other use, including residential at 28 percent, commercial and transport each at 26 percent, and mixed-use at 13 percent.

Melbourne's Urban Development Program also showed a net 279 hectares of industrial-zoned land was consumed in 2016-17, 20 percent more than the decade-long average.

Of this amount, 76 percent was consumed within the State Significant Industrial Precincts (SSIP) - West SSIP, North SSIP and South East SSIP. Shortage of industrial zoned land in the south-eastern region resulted in consumption of only 74 hectares, down from 128 hectares consumed in the South SSIP 12 months ago.

'New industrial stock above 5,000sq m in size in Melbourne has been above its long-term average since 2013, utilising a substantial amount of industrially zoned land,' Ms Mondkar said.

'An estimated supply of 513,000sq m of industrial space is scheduled for completion by the end of 2018, with 20 percent of this forecast supply yet to commence construction.

'A vast majority of the stock under construction is coming online from pre-leasing or as purpose-built space for tenants and owner-occupiers.'

Strong development activity with limited serviced-site options and low interest rates have driven a surge in land values, especially in some key pockets of Melbourne's east and south-east regions.

Savills Director for Industrial & Business Services, Kosta Filinis, said the increases in land values were greatest for parcels sized between 3,000sq m and 5,000sq m, in estates within close proximity of key road infrastructure. Land parcels sized between one and five hectares saw an increase of about 4.0 percent in the same period.

According to Mr. Filinis, the most dramatic rise in the past year has been the 40 percent increase in land values for the south-east industrial precinct.

'Land that was selling in March 2017 for $275 per square metre is now averaging at about $385 per sqm, driven by strong development activity,' he said.

'The enthusiasm for industrial property is reflected at every level of the market.

'Stage one of the six-hectare Interlink Business Park in Keysborough sold out within 12 weeks of release early last year, while similar lots in the precinct, if available, would fetch up to $475 per square metre, setting a new benchmark for industrial land in the south-east.'

Mr Filinis went on to say that demand for serviced land in Dandenong and Keysborough was outstripping supply, in turn putting upward pressure on prices.

'The boom in construction activity reflects a growing recognition by developers that occupier demand will be sustained in the near term, despite higher land and building costs,' he said.

'A scarcity of serviced land stock and the area's proximity to freeways and major arterials, such as EastLink and the Dandenong bypass, has successfully attracted occupiers from Knoxfield, Scoresby and Bayswater.'

Mr Filinis said that land at the smaller end of the scale, currently averaging $450 per square metre in Melbourne's eastern industrial region, had seen a significant increase in demand, rising 37 percent from 12 months ago.

'The eastern precinct is facing a rapidly dwindling land supply, with most competition from residential developments,' he said.

'Industrial developers, particularly of strata units, and owner-occupiers wanting to put their foot on an eastern allotment could pay up to $475 per square metre should an opportunity be presented in the fast-diminishing land supply market.

'With the delivery of key subdivisions a little way off, we are likely to see that upward pressure on values remain in the medium term, especially with the strong push from occupiers wanting to get into the market.'

Ms Mondkar said the South SSIP had the greatest shortage of vacant land supply and the second-highest rate of consumption among all the SSIPs.

'Unlike other state-significant industrial precincts, there is no proposed industrial land being added in the near future, and the Department of Environment, Land, Water and Planning has revealed that land supply in this precinct will become constrained in the mid-2020s,' she said.

Ms Mondkar said the mooted North East Link Project, which would connect industrial operators in the east and south-east to the Melbourne Airport in the north without going through the city, would further augment the strong demand for land in Melbourne's east and south-east regions, as Australia's key industrial markets.