Modest Improvement in Brisbane’s Industrial Property Market

There has been a modest growth of about 10% in the number of industrial sales and leases since the middle of calendar year 2009, the nadir of the market. In other words, there was neither a “W” nor a “V”, but rather a more flatted “U” in the turn around.

For buyers who were cashed up and with their existing investments not under financial pressure, the market has been favourable. These buyers have been able to “bottom feed”, and with bank support, were able to obtain good deals which will provide excellent growth into the future.

The supply of properties for these fortunate purchasers was provided by over-extended owners who at the time of loan rollovers found their banks less willing then three years earlier to provide new loans. At rollover they foundthemselves 10 to 20% down in their valuations with the banks insisting on loan to value ratios around 60% instead of the heady 75 to 80% previously. Additionally, banks are insisting on interest rate covers of at least 1.5 times, instead of 1.25 times the income from the property. Thus these property owners are faced with the bleak prospect of either providing additional security or selling part or whole of their portfolio. It is expected this situation will continue for at  least another year as the financial institutions proportionately reduce their loan portfolio in commercial property.

More specifically,the reluctance of banks to extend credit for commercial, particularly industrial, propertydevelopment and investment purposes will continue to hinder growth in the market as developers are unable to bring new stock onto the market. On the other hand, the lack of new supply will eventually drive rental and property prices higher.

Land sales are few and this situation will prevail until bank policy changes. Although construction costs have declined, the long approval process, lower rentals related to affordability and less demand have depressed prices up to 25%  depending on location and size.

Leasing has also seen a variable year. While there has been an increase in activity, this has been in shorter termleases…a situation that may reflect the lack of confidence in their businesses and the economy going forward or anexpectation of better deals later. Meanwhile, the leasing market remains challenging. Discretionary decisions are being delayed. Although the stock of vacant buildings is steady, the lack of demand ensures it is a tenant’s market.  Availability depends on location style and size. Larger buildings still take longer to lease. Incentives such as rent free periods, fitouts and  favourable review clauses are being negotiated from cashneedy landlords. However, this situation will come to an end when confidence returns to the market, and the lack of new stock will quickly drive prices upward.

Overall projections
Property markets run in cycles and while the current one has lifted off the bottom, it is not too late to get involved. Opportunities are there and will continue to be there during 2010 for those who can afford to buy or lease.Owner/occupiers were prevalent during 2009 and early 2010, but this will change as interest rates continue to rise. Sales activity has been greatest under the $3m mark and it is over this price tag where the best buying will occur in 2010 and 2011 across the market. If you are able, purchase as early as possible before demand increases and forces prices higher.  Prospective tenants may also take advantage of lower rentals and negotiate concessions such as rent free and other incentives with rental review clauses to safeguard against future inflation. On the other hand landlordsneed to be flexible and structure leases to receive earlier than usual market reviews and to ensure annual reviewsinclude uncapped CPI.

Phil Ainsworth, April 2010