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YIELDS for industrial property investments will stabilise and remain at current levels for the next four to six years if the risk-free rate remains low, according to the Australian Property Institute (Vic) and Savills Property Market Update 2015.
API (Vic) Industrial Spokesperson and Savills National Head of Research Tony Crabb painted a positive picture for the sector on all fronts with investment expected to remain robust and stronger demand from occupiers would lead to the vacancy rate falling and potentially rents to grow.
Crabb said Australia’s booming population and displacement of industrial businesses from traditional locations will set up industrial markets for long-term high demand.
“Over the next decade, Australia’s population is going to grow by millions more people, and with that so does the demand for housing, food, and the things we consume and goods we use.
“Technology is also having quite a profound impact. Just-in-time retailing and better logistics, better knowledge of how goods are distributed and demanded means industrial property has to adapt,” he said.
“We’d expect that demand for more logistics, more storage space and more places for manufacturing will continue to grow.
“The manufacturing we’re talking about here is not just putting widgets together. It’s more to do with food processing, food production and housing,” he added.
Crabb said that whilst rents do not typically change by large amounts and had been essentially stable around the country for a number of years, there had been substantial cap rate compression.
According to Savills research, Perth prime industrial yields as at September 2015 are estimated to range between 7.25% and 8.50% in the north, and between 7.25% and 8.75% in the south, representing a 50 basis firming over the period. Similar Sydney witnessed a tightening of 62 basis points in the western precinct. Prime yields typically ranged between 6.50% and 7.25%. Recent sales transactions at sub 6.00% are likely to place further pressure on average industrial yields over the next 12 months.
Brisbane prime industrial yields ranged between 7.00% and 7.75% in the southside / northside and between 6.75% and 7.50% in the Trade Coast. Adelaide prime yields are estimated to range between 8.25% and 9.00% in the north west, and between 8.50% and 9.50% in the north. Melbourne prime yields were in the range of 6.50% to 7.75%.
“Where cap rates were sitting at around 9 or 10% six or seven years ago, they’re now trading into the sixes and sevens.
“That means a lot people are starting to get nervous because that’s where cap rates were prior to the previous correction in 2005/06. What’s different this time around is that the risk-free rate has changed. Whereas we were looking at a 7% risk-free rate then, we’re now looking at 2%, so the margin over the risk-free rate is still very healthy 4 and 5%.
“Should risk-free rate remain low for a considerable period of time, yields could sit at around current levels for four, five or six years, all other things being equal,”
Crabb said demand in the industrial property investment market will be quite robust in the coming years, as industrial business are displaced from traditional inner city industrial precincts to middle-ring and now outer-ring suburbs.
He added that this would very much a positive for ongoing industrial investment, as well as for the opportunity to convert industrial land to residential use.
“Over the next decade we would expect that also to start influencing industrial land values in the middle-ring suburbs, such as Parramatta in Sydney or Glen Waverley, Notting Hill and Mulgrave in Melbourne.
“Those are the areas we would expect to see considerable investment returns, and then continue pushing that demand further for industrial floorspace to the outer suburbs,”
Crabb said the size of industrial property was also growing due to population and consumer demand increases.
“This makes for a very dynamic sector. We’ve seen in recent years the sector continuing to develop, grow and build more property, but demand and investor appetite have changed and grown also.
“We saw that most recently with the transaction of the GIC portfolio, which was bought by Ascendas out of Singapore.
“It was one of the largest industrial portfolios ever offered to the market, and whilst most domestic buyers were looking at around $900 million to $950 million as a purchase price, the portfolio of course ended up trading for well over $1 billion.
“This was a sizeable premium paid for the scale of portfolio, and that level of appetite doesn’t appear to be going away. Of course, that doesn’t necessarily translate into individual properties because the premium was paid for being able to purchase a rare $1 billion-sized land offering. So that now leads to a number of portfolios being brought to the market.” Crabb concluded.
Australian Property Journal
