Land V’s Rent

With land prices having doubled in the past 5 years and making up roughly 40% of development costs it’s very difficult to see how rents can’t rise sharply as the market plays catchup post 2020 Covid settings.

In the West of Melbourne in the Industrial heartland of Laverton, Derrimut, Truganina and Ravenhall during 2017 and 2018 there were noises from agents around the land market setting new heights of $200/m2.

In fact the land pricing out West has always lagged the more traditional industrial areas of the South East and the North but for no good reason. (Well apart from the perceived endless supply -more on that myth maybe in a future post).

However turn to 2020 and the aforementioned $200/m2 is just a distant opportunity past and $300/m2 is now more the norm.

So, onto the headline Land V’s Rent.

Industrial real estate decisions are often made on a group of factors but at the moment none is more compelling than the following.

If we follow the bouncing ball then …….. Land content is lets say 50% of the site coverage so for a 2000m2 building we need a 4000m2 block (some planning allows up to 60% but lets stick at 50% for the sake of the non mathematicians). Therefore using the above and assuming $1000/m2 for a good looking building and $600/m2 for land ($300/m2 by 2).Then production cost is approximately $1650/m2 at todays rates.

So in getting to the point …….at $1650 production cost and rent at $75/m2 it doesn’t stack up.

Or got means developers are producing stock and are happy to accept a 4.54% yield.I think not!

So the conclusion, rents have to rise in the West and rise in line with other major Victorian and Australian comparable markets.

The opportunity, Buy well located new buildings leased under our target rate of $90/m2 and renegotiate at the first market review. The sooner the better in our option!