Speculative development is once again a feature of the Melbourne industrial landscape as savvy developers seek to capitalise on stronger market fundamentals.

Speakers at today's annual CB Richard Ellis Market Outlook breakfast in Melbourne highlighted a range of positive drivers which had encouraged increased development - and investment - in the industrial sector after the biggest market shakeout in 20 years.

CBRE's Victorian Director of Industrial & Logistic Services, Walter Occhiuto said Australand had been leading the pack on the development front after completing three speculative projects in Melbourne's West. The group is also poised to commence a circa 27,000 square metre project in Melbourne's South-East.

"In the West, two of these projects have been leased and we understand there is good interest on the third from user groups coming to the market and not necessarily giving themselves the appropriate lead in time to source a pre-lease," Mr Occhiuto said.

"We think there are very good opportunities for speculative development, particularly given the demand from major retailers who are currently driving strong levels of pre-lease activity."

Container throughput continues to be one the key market drivers, with 2010 having been a record year for the Port of Melbourne.

CBRE Executive Director, Global Research and Consulting, Kevin Stanley said the strength in port trade has helped stabilise industrial rents and build demand for industrial property, which would inevitably lead to some rental growth during 2011.

Mr Stanley told attendees at today's breakfast that industrial yields had stabilised over the past 12 months and were now starting to compress following the "first really major shakeout in industrial capital values in 20 years."

"We think industrial yields will probably compress by around 40 basis points per annum - which is a very conservative estimate and one which is likely to spark some debate," Mr Stanley said.

"The question will be whether the market comes in and buys stock more aggressively and pushes values up faster that what a traditional compression cycle would suggest."

Certainly the industrial sector was actively traded in 2010 fuelled by a number of major portfolio sales.

Mr Stanley said the past year had also been marked by the introduction of foreign buyers who perceived that the quality of certain Australian industrial assets was now close to that of prime office assets in regard to offering blue chip covenants and long term leases.

However, a shortage of stock could stymie industrial buyers this year according to CBRE Senior Director, Industrial Investments, Graham Hemingway who pointed to the fact that $450 million of last year's industrial transactions had been accounted for in just two major portfolio transactions.

Notwithstanding that, Mr Hemingway said some assets were likely to come to the market as a result of M&A activity in the REIT sector and some potential sale and leaseback activity in the corporate sector.

As a sign of the current pent up demand for quality industrial stock- particularly in the sub $30 million sector - Mr Hemingway pointed to last year's sale of a Bunnings Warehouse at Port Melbourne which had had traded for circa $24 million on a yield of 6.7%. The sale attracted in excess of 100 enquiries and 20 Expressions of Interest.

"When we have prime properties come to the market place there is a great amount of money looking to buy," Mr Hemingway said.

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