LMW Link Gold Coast Industrial - September 2016

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Gold Coast Industrial Indicators

Indicator Q2 2016 Forecast Q4 2016

Average Prime Grade Net Face Rent ($/m2) $120 $120

Average Secondary Grade Net Face Rent ($/m2) $90 $90

Average Prime Grade Initial Yield 7.50% 7.50%

Average Secondary Grade Initial Yield 9.00% 9.00%

LMW Link Gold Coast Industrial - September 2016

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Local Market Overview

Local market conditions appear to have stagnated during 2016 with recent sales of warehouse facilities showing generally stable values. Arundel however, appears to be an exception to this trend, showing recent price increases for new freestanding and strata titled warehouses. The rental market remains competitive with net rates having stabilised. Most leasing activity stems from users looking to upgrade to better facilities at little additional cost. Whilst incentives of up to 15% are being offered for leases in secondary buildings, 2016 has seen a tendency towards more tenants becoming owner occupiers. Low interest rates will continue to drive owner occupier demand over the short term; the impact of this on the rental market however, remains to be seen.

Owner occupiers tend to be the main driving force behind industrial sales below $2 million. There is strong interest by investors for large modern, near new buildings with long-term leases (5 – 7 year initial term) to national tenants, however there is a shortage of this product in the market.

Properties priced under $500,000 dominated sales activity throughout 2015/16. The strength of the sub $500,000 market is mostly attributable to sales of strata titled units which represented the greatest share of all industrial transactions over the past 12 months. Again, this sector is largely driven by owner occupiers.

Supply

The majority of current and future supply continues to be largely dominated by the Yatala Enterprise Area (YEA) with our research indicating approximately 70% of development planned and under construction occurring in this precinct. The 127ha Empire Industrial Estate is the largest industrial project on the Gold Coast and one of the largest in Queensland. The estate, to be rolled out over the next decade, will ultimately comprise about 250 buildings. When complete the estate will accommodate 550,000 m2 of buildings in 10 staged lots. There are currently 113 lots in the 10 stage master plan which will be rolled out over the next 10 years. The Caterpillar Logistics centre and Cope Sensitive Freight are anchor tenants, with Caterpillar already operating from an $80 million 60,000m2 warehouse on a 20ha site and Cope, Australia’s largest independent specialist sensitive-freight carrier, also now operating a new 3.8ha distribution centre. Construction is underway on Stage four within the industrial hub which comprises 32 lots ranging between 2,200m2 and 10,000m2. The lots are selling for an average price of $300/m2, with around 16 reportedly under contract (as at time of writing).

The more established estates such as ‘Access Business Park’, ‘Motorway Business Park’ and ‘Centra Park Yatala’ have only a limited number of infill sites available. Our research also shows there is particularly low supply of larger serviceable industrial lots above 1.5 hectares. Several englobo parcels are in varying stages of planning and expected to be released from 2017 onwards. Some of these are highlighted below:

Stanmore Road, Elderslie Road and Darlington Drive Precinct Sandy Creek Road, Pearson Road and Darlington Drive Precinct Quarry Road, Quinns Hill Road and Stapylton Jacobs Well Road Precinct Burnside Road Precinct

Supply of new industrial accommodation on the Central and Southern Gold Coast precincts has been limited with most new construction contained within Stage 2 of ‘Enterprise Industrial Park’ in Molendinar (circa 9,000m2). Building areas range in size from 1,200m2 to 14,000m2 with 10m to 11.5m internal height clearance and overhead crane provisions available if required. Rental rates within the estate start at $120/m2 and are reportedly receiving strong interest. A recently completed 24-unit strata tilted development in Sinclair Street, Arundel has received strong take-up with one unit remaining for sale (at time of writing). Prices range from $2,100/m2 to $2,350/m2 of GLA. Sizes typically range from 105m2 to 400m2 (approx). A new 22-unit development currently under construction in 14 Technology Drive, Arundel has around nine pre commitments off the plan (as at time of writing) with one sale achieving $2,500/m2 of GLA. Settlement is expected around November-16.

The ‘Arundel Industrial Estate’ located on Harrington Street is offering fully serviced industrial lots sized from 1,800m2 to 1.4 hectares.

In the planning stages is a new 27-lot industrial estate fronting the Pacific Motorway at Reedy Creek which will form part of the existing BP service centre. Most of the lots range in size from 2,410m2 to 5,800m2. The development is currently before Council. Prices are unknown at this stage.

We are also aware of a 42-lot industrial subdivision at 58-64 Kristin’s Lane, Upper Coomera currently before Council. Lots are expected to range from about 1,200m2 to 2,200m2. Prices are unknown at this stage.

LMW Link Gold Coast Industrial - September 2016

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Land Activity

The market for serviced industrial land is improving however is still cautious. There remains an absence of smaller developers which is reflective of general business confidence and consumer sentiment conditions as well as caution from the banking sector, particularly on development sites across all asset classes, not just industrial. Well located infill sites are generally receiving most interest and those with a healthy holding income are particularly attractive.

The YEA has been the largest recipient of land sales over the past 12 months which is not surprising given this area contains the largest supply of industrial sites on the Gold Coast. This area in recent years has also provided the catalyst for new construction activity encouraged by the implementation of the ‘Construction Kickstart’ programme. Land values are slightly cheaper than other parts of the Gold Coast (typically ranging from $250/m2 - $300/m2 for sites sized 2,000m2 – 5,000m2), however are starting to catch up with land prices in the central precincts. As land values are still below those achieved in Brisbane, the YEA remains attractive in a market which is showing signs of improvement.

Land in Central Gold Coast precincts is very scarce and potential buyers are starting to find it tough to find a block to develop. To get into the market, buyers and developers are now searching for an existing structure to demolish, or wait for a parcel of land to become available.

Given the continued scarcity of vacant serviced lots, values have seen an uplift over the past 12 months and are typically achieving $285/m2-$430/m2 for lots sized 2,000m2 – 5,000m2. The table below outlines the typical rate range achieved per square metre for industrial land across the Gold Coast.

Land Size (m2) Average Rate ($/m2)

2,000-5,000 $285 - $430

10,000 – 50,000 $120 - $200

75,000 + $20 - $100

Whilst land values are still quite away from the levels achieved at the park of the market (2007) there is a definite upward momentum in demand occurring. Demand is likely to be supported in the short to medium term by a low cash rate environment, a tightening in yields for prime grade warehousing (with long WALEs) and the overall scarcity of serviceable sites.

Leasing Activity & Rents

At present, leasing activity is modest and industrial rents remain stable. Most leasing activity stems from users looking to upgrade to better facilities at little additional cost. Attractive rentals and incentives are driving this activity as opposed to actual ‘growth’ in industrial demand.

Beneficiaries of this current activity are typically smaller tenancies sized under 250m2 as well as larger leases sized in excess of 2,000m2.

Prime stock enquiry remains reasonably strong and competitive due to limited supply additions. However, the majority of available space is predominately secondary grade which continues to sit on the market for extended periods. Some landlords are willing to provide considerable rental discounts and shorter lease terms for longstanding vacant premises and many have taken the initiative to refurbish their properties in order to compete with prime stock. We anticipate secondary grade rents are likely to remain low over the short term.

Rental rates for freestanding warehouses vary depending on age and condition of the premise. Older buildings are typically achieving net rates between $60/m2 and $100/m2. Modern facilities on the other hand are generally achieving net rates from $110/m2.

Net rental rates for strata units have stagnated at $100/m2 to $125/m2 over the past few years. Gross rates have increased slightly in line with the rising cost of outgoings. Gross rents are generally between $140/m2 to $160/m2.

Burleigh Heads and West Burleigh continue to record stronger leasing activity than other locales within the Southern precinct. The showroom precincts in particular continue to attract significant leasing interest from local and national operators and are showing low vacancy rates.

LMW Link Gold Coast Industrial - September 2016

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42% of all sales 2015-2016

Central Gold Coast

74%of all sales 2015 - 2016

Strata Titled Units*

*built stock only

61% of all sales 2015-2016

under$500,000

0

10

20

30

40

50

60

70

80

90

Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 (to date)

Gold Coast Industrial Sales by Price PointQ1-2015 - Q3-2016 (to date)

< $500k $500k-$1m $1m-$3m $3m-$5m $5m+

Source: Corelogic RPData, LMW Research 2016

Investment Market

Data sourced from RPData Corelogic confirm properties priced under $500,000 dominated sales activity throughout 2015/16, representing approximately 61% of the total market activity. The strength of the sub $500,000 market is mostly attributable to sales of strata titled warehouses which represented the greatest share of all industrial transactions over this period. The strata titled market is still dominated by owner occupiers and SMSF’s as the current business environment is ideal for businesses to purchase their own properties as opposed to leasing them. Strata units selling vacant possession to owner occupiers are showing analysed market yields between 5.0% and 6.5% (approx). The Southern and Central industrial precincts are home to the largest proportion of strata titled units. Burleigh Heads has been the greatest recipient of transactions below 500m2 - generally within the affordable $200,000 to $450,000 range. Rates are typically between $1,600/m2 to $2,000/m2 with variance reflecting standard of accommodation, level of exposure, size and location. Brand new strata units in Arundel and Molendinar are achieving rates between $1,900/m2 to $2,500/m2.

The Central Gold Coast industrial precinct recorded the greatest percentage of sales representing circa 42% of the total market. Notable sales in this precinct included the $6.1 million purchase of a large telecommunications facility leased to Vodafone at 15 Telford Place, Arundel; a large development site (17,844 m2) located in ‘Gaven Central’ Industrial Park having excellent exposure to the Pacific Highway purchased for $14.871 million; and a large site at 26 Production Ave, Molendinar selling with vacant possession for $6.45 million.

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The Southern corridor represented circa 34% of total sales during 2015/16 followed by the Yatala Enterprise Area (YEA) recording 23%. The Northern corridor (Oxenford, Coomera & Upper Coomera) recorded the lowest volume of all sales illustrating the precincts propensity for lower priced assets and its relatively small market.

New warehouse buildings are typically achieving rates in the order of $1,400/m2 and $1,600/m2 depending on size location, and added fixtures such as gantry cranes. Older buildings are typically achieving between $1,000/m2 and $1,300/ m2. These values have not increased much on the previous few years.

There is strong interest by investors with $5m+ to invest for large modern, near new buildings with long-term leases (5 – 7 year initial term) to national tenants. They are prepared to accept yields of 8.0% or so, however there is a shortage of this product in the market.

Modest rents and higher outgoings have resulted in prime yields falling under 8.0%.

A Selection of Warehouse Transactions 2015/16

Address Sale Price Date Lettable Area (m2)

$/m2 Initial Yield

12 Junction Rd, Burleigh Heads $2,500,000 Aug-16 1,431 1,747 7.50%

24 Harrington St, Arundel $2,000,000 Aug-16 1.089 1,836 VP

14 Mercantile Ct, Molendinar $1,275,000 Jun-16 832 1,532 VP

105-107 Dover Dr, Burleigh Heads $950,000 May-16 639 1,487 8.42%

76 Quinns Hill Rd East, Stapylton $23,000,000 Jun-16 13,799 1,667 7.00%

6-10 Octal St, Yatala $3,850,000 Apr-16 2,107 1,827 VP

2-4 Union Ct, Yatala $2,720,000 Apr-16 1,471 1,849 VP

26 Production Ave $6,450,000 Mar-16 6,696 963 VP

14 Access Ave, Yatala $3,400,000 Mar-16 1,950 1,744 7.68%

26-30 Access Ave, Yatala $4,400,000 Feb-16 3,056 1,440 7.17%

41 Alex Fisher Dr, Burleigh Heads $1,390,000 Feb-16 780 1,782 7.14%

15 Telford Pl, Arundel $6,100,000 Feb-16 2,038 2,993 7.05%

VP = Sold with Vacant Possession Source: CoreLogic RPData 2016; various agents & LMW Research

Outlook

Looking forward we anticipate the investment market to continue to improve, albeit slowly, throughout the remainder of 2016. Whilst the cash rate remains stable and or falls further and the long term bond rate remains at historically low levels (currently sitting at 1.97% at Sept-2016) the trend for quality prime and secondary grade assets should continue in the short term. Tightening is anticipated to also be led by the strong weight of offshore money attracted to Australian yields on offer.

As rental rates remain modest we anticipate owner occupiers and individual super funds to remain active for lower priced assets. The demand by business to relocate to modern warehousing facilities may see rental levels for secondary grade stock fall further. This may trigger landlords to refurbish, divest and or look for a change of use of their facilities. The market is still dominated by owner occupiers and a stronger push coming from private investors would be needed to keep the Gold Coast market moving forward, otherwise a level of stagnancy may ensue.

Construction in public projects, infrastructure, residential property and tourist related projects are set to intensify over the next three years which should bode well for the industrial sector.

LMW Link Gold Coast Industrial - September 2016

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For further information please contact the Gold Coast office.

LMW Ground Floor, 26 Marine Parade Southport QLD 4215 T: (07) 5634 7100 F: 1300 727 684 E: goldcoast@lmw.com.au

No part of this research report or any reference to it may be included in any other document or reproduced or published in any way without written approval of the form and context in which it is to appear.

No liability is accepted for any loss or damage (including consequential or economic loss) suffered as a consequence of fluctuations in the property market subsequent to the date of survey. The opinion noted herein is relevant as at the date of survey only and no warranty can be given to the accuracy of the onion at any point following the date of survey.

The research report is current as at 2016 only. The opinions noted herein may change significantly and unexpectedly over a relatively short period including as a result of general market movements or factors specific to the survey area and property classes, the opinions expressed in this research report are that of the researcher and is authorised by LMW. Liability limited by a scheme approved under Professional Standards Legislation.