As the intense heat we’ve witnessed in recent years has come out of the industrial market, land values across Australia’s Eastern Seaboard have broadly stabilised, following consecutive periods of extraordinary growth.

In some areas, however, we have seen a continuation of the growth phenomenon as the large focus and appetite for land has been ongoing.

In the current market there is variability in land pricing based on several considerations. While we have median or average rates to guide us it’s important to remember that each market and property is unique, so it’s not possible to apply a blanket rate to every parcel of land. Each site must be individually assessed to determine where it sits, and ultimately, the market will make that determination.

Discussions around land values now undoubtedly encompass a wide range of factors, including interest rates and construction costs relating to the availability of materials and labour. 

Core development factors such as floor space ratios (FSR) and height limits play an important role in the valuation of land, as do the standard aspects such as proximity to infrastructure.

Understandably many owners are trying to calculate where their land value is now, particularly if they’re bringing an asset to the market. The main factor at play is demand, and where the demand for each property is coming from.

Demand will underpin values moving forward

With an ongoing shortage of industrial land in the market, as land is tightly held amid strong underlying demand, land values are expected to remain largely stable for the foreseeable future across the board.

For individual properties, the value of industrial land will largely be determined by which buyers the property appeals to. Positioning the marketability of the asset to a competing buyer pool is generally the most effective approach to maximise value.

In Sydney there are three main current buyer types in the market driving demand – investors (both institutional and private), industrial occupiers and data centres.

The latter is a subset of occupiers but is classed in its own category at the moment due to their substantial and particular requirements. Each buyer type has their own list of what they want when it comes to buying land, including in terms of location, features and size.

Data centres are looking for proximity to power, first and foremost, with proximity to water a secondary priority. This buyer type is also particular on location – they generally want to be within the cluster of data centres situated within Western Sydney, predominantly in Eastern Creek, while other hubs include Macquarie Park and South Sydney.

Since data centres are often multi-level occupiers, they look for land where they can build up into the air space, with the right height and FSR, as opposed to just wanting to build a single-level facility.

Costs associated with development are less of an issue for data centres when it comes to purchasing as they see their huge developments – which generally cost hundreds of millions of dollars - as a long-term play, and so the land component, to them, is very elastic.

Institutional owners are looking for infrastructure, particularly having road and rail networks close by, but they aren’t necessarily looking for a particular location. If the land is suitable for an industrial development that will appeal to the larger and more sector-dominant tenancy clientele, then it will be an attractive proposition. Institutions will be looking for the larger land sized parcels of five hectares-plus.

While conditions for these owners have become slightly trickier, with construction and delivery delays, ultimately there is strong demand for the prime industrial facilities that institutional owners build, generally with the most cutting-edge technology to deliver the ultimate efficiency for users. And this occupier demand means there is capital wanting to buy land to provide for major tenants.

Occupiers often look for existing buildings that they can refurbish or redevelop, but those that are looking for land are generally looking for parcels that are smaller in size, around one to three hectares. Their requirements are to find a parcel of land close to where their staff and customers are, and rarely do they move very far from their current location. Many offer short-term leasebacks (usually two years) so as to buy themselves time to relocate whilst also taking advantage of strong current market conditions.

Due to the high rents we have seen in the industrial market, occupier demand at this level is strong, with these buyers wanting to acquire their own premises to have more control over cashflow. Many, however, are selling to obtain access to the equity and signing long-term leases in newly-built facilities.

By Angus Klem, Knight Frank Partner, Head of Industrial Investments and Head of North Sydney