12 The investment market for industrial property in Melbourne has been running hot in the last few years. Last year around $7 billion in sales occurred, spurred along by a number of major portfolio sales, notably Blackstone acquiring a large stake in the Dexus Australian Logistics Trust (focused on Melbourne and Sydney) for over $2 billion. During the first half of 2022, more than $2.3 billion of sales have transacted, indicating a normalisation of investor activity. The value of deals has been fuelled by a strong flow of funds into industrial property at a national level, with widespread reports of considerable capital assessing opportunities in industrial property in Melbourne and across the east coast. However, like Sydney, investors have become more cautious and less urgent when assessing opportunities. Notable sales of greater than $25 million in recent months include: • Monash University purchased a 3.6-hectare site at 611-625 Blackburn Road, Notting Hill for $66 million from Toyota; and • Frasers Logistics & Commercial Trust purchased a portfolio of three warehouses in Melbourne’s West for $6 million on a yield of 3.7 per cent. Rising bond rates suggests the phase of yield firming in Melbourne industrial property is drawing to a close. On our forecasts, (notwithstanding short-term volatility) 10-year bond rates will remain around current rates between now and 2024 before tapering back to a longer-term trend rate around 2.9 per cent, taking its lead from the United States. As a result, yield spreads to prime Melbourne industrial property have fallen to a sharp 20 to 30 basis points, well below the long-term average 400 basis points. We expect this will unsettle many investors, sparking a slow phase of yield softening from the end of this year. By 2025, we forecast prime yields to soften by 60 basis points, taking them back to 4.4 per cent to 4.5 per cent across the regions. Driven by the weight of funds chasing assets, average prime yields firmed considerably during 2021 to a low of 3.8 per cent in the City Fringe and 3.9 per cent in the South-East and West. During the first half of 2022, yields stabilised as investors assessed the impact of rising bond rates. Secondary yields in the South-East are assessed at 5.0 per cent, representing a firming of 110 basis points in 2021, before stabilising in the first half of 2022. The strength of yield firming underpinned strong growth in capital values in 2021, ranging from 36 per cent to 43 per cent across the regions, representing near record breaking growth. The 2022 financial year growth rates were almost as impressive at an estimated 30 per cent to 36 per cent. Average prime prices at the second quarter of 2022 reached $2,460 per square metre in the West, $2,830 per square metre in the South-East and $4,760 per square metre in the City Fringe. Secondary South-East capital value growth mirrored the above rates to reach prices close to $1,700 per square metre. The speed of the yield softening will be slowed by strong rental growth for at least part of this period. Yields on secondary properties are forecast to take their lead from prime grade assets but with a greater softening (80 basis points) to 2025. The combination of rent and yield forecasts will see a slowdown in the extraordinary rate of capital value growth. We expect strong rental growth will drive solid price gains until the 2024 financial year, before a prolonged phase of more modest growth. Average prime values are forecast to rise by 17 per cent to 18 per cent over the two years to June 2024, with slightly lower growth forecast for South-East secondary. Investment market Investment outlook Industrial Market Monitor | 2nd Half 2022
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