11 The Melbourne industrial property investment market slowed over the year to September 2022, with the value of sales falling a reported 40% to around $3 billion, but this was from a very high base. It is clear that rising interest (long bond) rates last year have caused investors to pause. Even so, recent surveys point to industrial property investments remaining popular, but investors are being more selective, targeting opportunities that can capture rising market rents to offset the effect of softening yields. Furthermore, Melbourne industrial property still seems to be viewed favourably by foreign investors, with a notable proportion of sales over the last year attributable to this buyer cohort. Major recent sales included: Major recent sales included; • Frasers Group purchasing three new warehouses on Magnesium Place Truganina for $61 million, on a yield of 3.7%; • Frasers also paid $41 million for a 21,000 sqm building at 2-24 Douglas Street, Port Melbourne; • Charter Hall paid $84 million for a 28,000 sqm building in Mulgrave with development potential on a passing yield of 3.1%. Overall, we assess Melbourne prime yields remained firm at an average of 3.8% to 4.0% across the South-East, North, West and City Fringe at June 2022, and 5.0% for South-East secondary. We surmise that yields for Melbourne industrial properties came under pressure to rise during the second half of 2022, as higher bond rates ratchet up investor’s cost of debt. However, there is little evidence to date to confirm the shift. At December 2022, prime yields averaged 4.15% to 4.25% across the regions, with South East secondary around 5.3%, reflecting a softening of 40 basis points. The combination of rising rents and softening yields still underpinned robust capital value gains for calendar 2022, averaging 10% to 13% across the regions and 9% for South East secondary. However, the pace of growth was significantly slower than through the 2022 financial year. Over the last two years, 10-year bond rates have increased by 250 basis points, narrowing the spread to prime Melbourne industrial property yields to well below the long run average. On our forecasts, prime yields in the benchmark SouthEast will soften by 60 basis points by the end of this year, for a total softening of 100 basis points. Our forecasts reflect our expectations that 10-year bond rate will hover at or above the current rate (3.4%) until the end of 2024. The rise in bond rates over recent years suggest that Melbourne industrial property yields should soften more, however, we believe that strong rental growth will limit how much yields often. By the end of 2023, we forecast average prime yields will rise to 4.8% to 4.9% across the regions, before stabilising. Yields on secondary properties are forecast to take their lead from prime for timing/direction, but with a greater softening (130 basis points) over the next 12 months. The combination of rent and yield forecasts will see a further slowdown in the extraordinary rate of capital value growth over recent years. Prime values in the South-East, West and City Fringe are forecast to rise by 13% to 20% over the two and a half years to June 2025. Secondary prices in the South-East are forecast to rise by 11% over the same period. Investment market Investment outlook Industrial Market Monitor | 1st Half 2023
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