values in industrial property in south west sydney link property’s $18m sale at kurnell
As businesses get pushed further into the corridors of Sydney to make room for residential, how is the industrial property market faring? The MP Report speaks with Matthew Herrett, from Link Property Services – leading specialists in Sydney industrial, commercial and mixed-use real estate, about their recent $18m industrial transaction in Kurnell in Sydney’s south, and where value can be achieved in the South West industrial markets.
MP: Given your ‘patch’ is Alexandria and Silverwater, what are you seeing in terms of businesses moving out of the city fringe?:
MH: There is a continued shift in use from industrial to residential in areas closer to the city, such as Alexandria. As industrial use competes with higher and better uses in these lcoations, naturally price begins to rise, squeezing the industrial users out.. Improved road infrastructure such as the M5 motorway widening and M4 east extension are enabling businesses to decentralise along the motorway corridors such as the M5 with improving access to the city and major arterial networks critical for their business.
In addition, we have witnessed over the last decade businesses based around Alexandria/Mascot/Botany have drifted down to Taren Point or Caringbah because it was cheaper and perhaps closer to where the business owners lived. But now these areas are all but fully developed and consequently very expensive. As a result business is in need of a well priced alternative, and companies are looking at emerging markets such as Kurnell. It’s always had a stigma of being isolated and far away, but that’s changing as a result of the push (lack of alternative options due to competing land uses) and pull (low entry cost) factors.
MP: What are you seeing as the primary driver for Kurnell as a location?:
MH: It’s value driven. Kurnell is increasingly being chosen as a location for small to medium enterprise, with land costs less than half the price of nearby Taren Point and Caringbah and only six and a half kilometres down the same road.
The sense of isolation too is beginning to wane.There has been a number of significant developments along Captain Cook Drive such as the Sharks redevelopment,Greenhills Beach and the Shearwater Landing development. It’s all primarily residential development however it brings life to the suburb and with it accompanying amenity for business and residents.
MP: You had a large sale in Kurnell recently; can we talk more about this?:
MH: It’s been over ten years in the making. The property located at 238 Captain Cook Drive Kurnell is an obsolete manufacturing facility, last occupied by a multinational pharmaceuticals company but essentially vacant for over 20 years. It’s a significant property measuring in excess of 17 hectares with a number of challenges such as flora and fauna impacts as well as substantial demolition of largely asbestos improvements.
MP: Sounds like a very interesting project – why did it take so long to sell?:
MH: We were appointed by theReceiver and Manager 11 years ago and had a couple of false starts. Just before the GFC hit we had a buyer in due diligence who then withdrew, and for a few years after that depth of demand remained thin for a large tract of land in a seemingly secondary location. The lending environment for that sort of asset was also not conducive to facilitating redevelopment at that point in time.
In 2011 we recommended a leasing campaign to cover holding costs. Since then we’ve had tenants such as John Holland(desalination plant), scaffolding groups and builders. This has generated rental around $300,000 per year for our client, enough to defray holding costs. In 2013 as the market started to recover we began a new sales campaign. We successfully negotiated an option to a developer for two years, who planned to undertake a substantial industrial land sub division.
During exchange and settlement of contracts we on-sold the property to an owner-occupier, Dicker Data Limited, an IT hardware distributor who currently reside next door.
The two sale transactions simultaneously settled on 13 May, with the on sale completing for $18 million (plus GST). The new owners are currently masterplanning the development of the property in to a new head office and distribution facility, a move that has seen us now offer to market their existing 16,000sqm distribution centre in Kurnell as a sale and leaseback opportunity.
MP: You describe Kurnell as an ‘emerging market’. What kind of investors might be interested in this opportunity?:
MH: Unlisted funds and private investors who play in the $5-30 million range, also owner-occupiers looking to capitalise on the low interest rate environment. Some institutions may not consider Kurnell because it’s not a defendable acquisition, geographically speaking. For private investors prepared to understand the dynamics of that market and who look for value, it presents a terrific opportunity to create a super return over a purchasers cost of capital.
Post the Dicker Data leaseback (7 years) the potential of the surrounding marketplace creates an opportunity to re-configure the existing improvements to offer a quality and functional industrial estate catering to small andmedium sized businesses.
Such product would entice users with its lower entry cost compared to adjoining Taren Point and Caringbah. Whilst prices in Kurnell may never be the same as these locations, it is safe to say they wont stay forever at the huge discount they are at today.
MP: Because of the high costs in Sydney are you seeing businesses look offshore for warehouse or distribution facilities?:
MH: I am aware of businesses investigating offshore facilities in Asia, enabling them to use excess capacity offshore as a means to warehouse and transport Asian manufactured goods direct to the end user in Australia, negating the need for a substantial warehouse presence locally.
For companies considering such a change, it represents a significant structural shift in the supply chain habits of a business and as such may take time to manifest itself more fully in our local marketplace.
MP: Aside from Kurnell, are there other areas in Sydney where you are seeing good value for industrial property?:
MH: Ingleburn represents good buying. It sits on the south side of the M7 and M5 interchange, with Moorebank to the east and Prestons to the north. While Moorebank and Prestons will attract land prices between $450 and $550 psm, Ingleburn remains at a 20-25% discount.
Looking further afield at Smeaton Grange, prices have really grown in the past year, almost surpassing Ingleburn and Minto. In my opinion not only has the M5 motorway widening improved access, but the substantial residential development and growth in population base in the immediate precinct has made Smeaton Grange an attractive industrial location.
MP: So in your view, rather than residential squeezing industrial out it can actually entice?:
MH: Certainly residential has displaced and decentralised industrial activity in traditional city fringe locations. But by the same token new residential land releases coupled with improved infrastructure makes nearby employment zones and industrial precincts ripe for growth.
MP: Are you seeing any other trends?
MH: We’re seeing a lot more demand from owner-occupiers on the back of the sustained low interest rate environment. There are a lot of healthy companies looking to buy into this market but can’t because there is a lack of stock. Now is the point in the cycle for owners considering selling to capitalise on the massive imbalance between supply and demand. Whilst buyers have the purchasing power the lack of stock will continue to drive prices up.
The knock-on effect of business unable to find new accommodation due to a lack of supply is you may find an increase in short-term leasing deals as companies look to hold over.
By most accounts vacancies rates across Western Sydney remain at around 1pc, meaning incentive levels are coming under pressure, and rents may begin to grow over the next 6-12 months.
contact: matthew herrett, partner
02 8753 7383
0457 383 383
Posted: 21 June 2016