Manufacturing drives industrial demand in Perth

Increasing activity in mining, construction and IT is helping put Perth back on the investor map

December 16, 2019

Manufacturing companies are expanding in Perth at a rate not seen since 2015 in one of the strongest signs of recovery since the collapse of the resources boom.

The sector has accounted for 17 percent of all industrial leasing in 2019 so far, a huge leap from the six percent seen in 2018, according to JLL’s Western Australia’s Manufacturing Sector report.

Meanwhile, the 84,900 square metres of total industrial space leased in the past quarter is the highest in any other three-month period since the second quarter of 2015.

A surge in feeder sectors including mining, construction and IT, is driving the manufacturing boom, with AU$140 billion worth of public and private sector mining infrastructure still to come over the next five years.

Growth forecasts will result in increased requirements for industrial space, says Nick Goodridge, Head of Industrial – Western Australia, JLL.

“Just as Western Australia’s economy has rebounded, the manufacturing sector is following suit. As a result, future rental growth can be expected in this sector,” says Goodridge.

In addition to the strong take up of space in Perth’s industrial sector, rental  rates in the core markets stabilised over the past 18 months, according to JLL data.

In the East precinct, which makes up the bulk of leasing volumes, yields have tightened by 63 basis points over the past two years alone.

Robust growth

WA’s economic performance is attributable to Australia’s export market, which is currently being turbocharged by a weak Australian Dollar, says Ronak Bhimjiani, Strategic Research – Western Australia, JLL.

“The weaker Aussie, which is forecast to remain low against the US Dollar (71 cents on average) over the next three-to-five years, is improving the international competitiveness of WA exports,” he says.

Known as the engine room of the Australian economy, Western Australia accounts for nearly 32 per cent of the country’s total trade. The State’s exports alone account for 48 per cent of Australia’s total exports, according to the West Australian government.

Work to be done

While AU$30 billion of capital is looking to invest in industrial real estate globally, Perth’s recent performance and outlook is likely to put the city back on the investor map.

However, a shortage of quality assets remains a challenge for investors.

Most of Perth’s prime industrial assets are tightly held by private investors, predominantly due to high divestment costs and capital gains. This has also been a contributor to yield compression in the market.

Recent transactions include Investec’s purchase of a warehouse in Welshpool (East precinct) from Charter Hall Prime Industrial Fund for AU$26.5 million. The asset transacted with an initial yield of 6.6 percent and a weighted average lease expiry of 8.7 years.

Development activity has been limited since 2016, though early planning approvals indicate improvement is on the horizon. The largest project in the pipeline, Toll Group’s new freight logistics facility in Hazelmere, in Perth’s east, will add 21,680 square metres of new industrial space to the eastern industrial markets.