Capital city industrial investors are drawn to the regions by increasing capital values and rents

14 September 2022

Regional industrial capital values grew to an average of 22.2% within the prime market across FY 2021-22, which was outperformed by the Gold Coast (26.4%), Newcastle (25.5%) and Toowoomba (24.2%) where the capital city average of 23.6% was beaten.

Capital city industrial investors are being drawn to growing regional markets, moving up the risk curve, with prime yields across East Coast regional centres compressing to 5.4% by June 2022, while prime yields in capital cities still average around 4.0%.

Favourable conditions such as yield compression and boosted capital values, are supported by an average prime rent increase of 9.6% across East Coast regional centres for FY 2021-22, indicating the newfound status of the regional industrial market, given historical rent trajectory, according to Luke Crawford, Director, Research, Colliers.

“While most of the spotlight has been on the record performance of capital city industrial markets, many regional markets around the country have outperformed their respective capital cities, led by higher levels of population growth and shifting business preferences.” Mr Crawford said.

“Regional industrial markets are also well placed to weather interest rate headwinds and buffer rising fund costs, given the higher yield spread than capital city markets.”

The growth of regional industrial markets will continue to be driven by elevated demand and low vacancy, with available supply across the assessed markets dropping to around 110,000 square metres by June 2022 (for buildings over 3,000 square metres), from around 260,000 square metres in June 2021. There are even no leasing options available above 3,000 square metres in the Ballarat and Sunshine Coast markets.

With limited new supply on the horizon, particularly for buildings of 3,000 square metres and above, Colliers forecasts rental growth of 7.5-10.0% over the next 12 months.

Occupiers are being directed to the pre-lease market or are buying land themselves and building their own warehouse, according to Daniel Coburn, Director of Industrial, Colliers Gold Coast.

“With strong underlying fundamentals, the momentum from 2021 has continued into 2022, supported by population growth, the continued growth of e-commerce and the movement of businesses from Brisbane.” Mr Coburn said.

Newcastle is seeing a race to execute leases for the first time, ensuring rents continue to climb, according to Trent Robertson, National Director of Industrial, Colliers Newcastle.

“Infrastructure investment and buoyant local economic conditions have continued to support industrial demand across the Newcastle and Hunter Region, however, a lack of stock for lease and sale is restricting enquires and mandates being met.” Mr Robertson said.

Toowoomba’s growing industrial market is also set to benefit from planned infrastructure, including the proposed 12,000 square metre assembly plant at Toowoomba’s Wellcamp Airport by Boeing, according to Dan Dwan, Managing Director, Colliers Toowoomba.

“The Toowoomba industrial market has been a standout performer in the region in recent years and this is set to continue given recent investment.” Mr Dwan said.

For regional markets along the East Coast of Australia, the infrastructure pipeline exceeds $90 billion, including the $10 billion Inland Rail project, which will reshape the demand drivers for industrial land.

“The new Inland Rail will challenge the status quo of the industrial market on the Australian East Coast, expanding and connecting the supply chains across Melbourne and Brisbane to international and other domestic markets.” Mr Crawford said. “As it stands in mid-2022, fundamentals for the industrial sector remain solid, supported by a record level of infrastructure investment, supply chain volatility which has forced occupiers to hold more stock locally and elevated levels of online retail expenditure.”