The South Sydney property market is rapidly changing with the rezoning of key industrial sites in and around Port Botany. Industrial property is diminishing providing a critical shortage of quality office/warehouse premises which is starting to pressure rents, incentives and affect yields.
In 2013 alone across the Sydney metropolitan area 35ha of industrial land was rezoned to other uses, of this space 18.3ha was rezoned into R3 (medium density). Botany Bay LGA accounted for a high 78.69% proportion of this metropolitan rezoned land to R3 being 14.4ha, a further 1ha was rezoned also to B2 (Local Centre) and B4 (Mixed Use) to provide shop top housing. As a result of his strong push away from industrial zoning, traditional industrial users are being priced out of the market and have limited option but to relocate to more affordable locations.
Botany was hit hard during the GFC (Global Financial Crisis); the highs in capital values achieved in early 2008 are yet to quite return, however recent reductions in yields has ensured these levels will be revisited in 2015. The limited quantity of quality industrial stock available for sale or lease has ensured that vacant industrial land in this region is the highest of all Sydney markets. The potential for alternative uses has seen a dramatic improvement in average land values more recently, with those parcels which were tipped for rezoning or subsequently rezoned achieving in some cases more ten times their pure industrial value. For industrial zoned land alone, values for smaller parcels currently average $1,163/sqm while larger parcels are slightly less at $903/sqm which still is behind the peak values achieved of $1,289/sqm and $1,017/sqm respectively. However the range in values is considerable depending on quality, access, location and amenity.
While the rental market has remained relatively constant over the last five years, there has been a significant move out to other locations which offer more affordable accommodation together with improved access and parking. This increased competition has somewhat restricted the tenant pool to those who need to be located in South Sydney due to proximity to allied businesses, access to port or airport facilities etc.
Given the low interest rate environment and the inherent limitations on industrial land in the South Sydney area the investment market has picked up over the last two to three years. Investment particularly in quality assets with good lease covenants have been highly sought after by private investors, SMSF’s as well as owner occupiers looking to shelter from on-going leasing costs during this time of affordable financing. As a result there has been a strong decline in average yields particularly across Prime assets which now range within the 6.85% to 8.00% while Secondary assets have lagged behind in the 8.25% to 9.25% band. The expectation is that yields will continue to decline throughout 2015 as demand for investment as an alternative to residential will continue in the sub $1 million bracket while larger investment grade assets which irregularly comes to market will continue to be highly sought after by both institutional investors and developers ensuring yields remain tight.