Posted on Feb 29, 2012
Looks like they will remain fields for some time.
Whether discussing Brownfields or Greenfields developments at present, the answer is about the same - it doesn't pay. And it won't for some time.
In assessing the viability of building - and that includes clearing existing older buildings,or building on virgin industrial land - we just cannot make the numbers stack up at present.It's not the price of land that is the obstacle. Far from it, there are some great deals on land available currently.
What prevents the numbers working is that when the costs of land (even at current good prices), and construction costs and red tape costs are added up, they add up to an answer which demands a rental far in excess of market reality. If you then lease at today's rentals it obviously does not work as an investment.
So what is out of whack? Obviously not the cost of land. In most cases that is not a problem. The land price in any event does not make up a disproportionate amount of the total.
So, are rents too low? or building costs too high?
We know that building costs are very high by international standards, and have not fallen during the GFC. So perhaps they are. Rents are set by the free market, and largely influenced by supply and demand.And we all know how efficient that is. And industrial rents are largely where they were 25 years ago.
So the conclusion can only be that until we see a combination of higher rents and/or lower building costs, then it won't make economic sense to start building again. Accordingly holders of existing stock should see the value of that stock increase as demand rises. Or so says the free market theory.
In the meantime - or until someone can teach us a way to use a spreadsheet that produces a different result - we won't contemplate getting involved in any building projects.It just does not make economic sense. Feedback, criticism and proof we don't know what we are talking about is always welcome.