37 The outlook for the industrial market in Darwin is linked to the prospects for the Northern Territory economy. On our forecasts, the Territories SFD will end this year with a solid 5 per cent before moderating to 2.0 per cent to 3.3 per cent over the next three years. The moderating outlook is tied into the outlook for mining and government defence spending. The outlook for mining investment has become more uncertain. Shifts in policy and concerns about climate change are clouding the outlook, with this headwind not expected to abate quickly. Many projects have been put on pause, and we expect investment will be significantly lower in the medium term. Nevertheless, some large-scale projects are underway and have further to run, including Santos’ $5 billion Barossa LNG project and Nolans $1 billion rare earths. Some offset will be provided by government spending, with the federal government currently undertaking several projects to expand the number of military installations in the region. Further expenditure is also planned around US Force Posture initiatives, with works on this program anticipated to run until 2026. In addition, the Darwin City Deal includes a new campus for Charles Darwin University (currently under construction) and the State Square Art Gallery & Community Hub. Over the medium term, positive economic conditions and project specific requirements linked to the projects listed above should flow through to moderate demand for industrial properties, with a lag, allowing the substantial overhang of vacancies to be slowly absorbed. Leasing outlook There was no real improvement in the state of Darwin’s industrial investment market in the first half of 2022 from 2021. Darwin’s stock of industrial space features mostly smaller properties with no major sales above $5m completed in recent times. Amongst smaller prime properties, the average yield at June 2022 was estimated at 7.0 per cent to 8.0 per cent, which was little changed on 2021 rates. Capital values for prime properties also experienced no change in the first half of 2022. The main hindrance to more transactions occurring in the Darwin industrial market is the lack of properties offered for sale that have secure longterm leases at yields attractive to potential buyers (in an environment of rising interest rates). Broadly speaking, owners of securely leased assets are choosing not to sell. Investment market There would appear to be more upside than downside for price growth in Darwin’s industrial property market over the next few years. The slow improvement in the leasing market should, in time, reduce the overhang of vacant space in the market, boosting the likelihood of rental growth. However, this process will take time. The other key influence is the yield differential of Darwin to other industrial markets across Australia. As rising cost of debt flow through on higher interest rates, investors are likely to look more favourably on higher yielding markets like Darwin. However, Darwin’s relatively small market size and remoteness will limit the pool of investors willing to invest there. Industrial Market Monitor | 2nd Half 2022
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