Industrial remains the leading performing commercial asset class

The commercial property market has taken a hit in 2023 after a difficult late-2022 period. Growing interest rates and uncertainty surrounding their movement, together with high inflation causing investors to be more considered in their property decision making, while some buyers have completely retreated from the marketplace.

There is no doubt that sales volumes have reduced and are expected to remain subdued for the remainder of the year with price corrections starting to be realised, albeit some asset classes performing better than others. Industrial and its limited supply, keeping vacancies low across the country, has performed ahead of other major asset classes this year. Capital returns remain in positive territory while income returns have been consistently positive, providing an attractive hedge to inflation and increased financing costs.

Coming off the highs of 2021/22, capital returns have fallen away inline with interest rates’ upward momentum across each state. NSW has been the most resilient region for industrial given its heavily constrained land supply and low vacancy Total returns have been recorded at 12.7 per cent in March 2023 according to the latest PCA/MSCI All Property Digest, of which capital returns sit at 8.6 per cent after peaking at 24.7 per cent in December 2021. Encouragingly capital returns sit close to the 10 year average of 9.1 per cent, in contrast to Victoria and Queensland whose current results of 3.7 per cent and 3.0 per cent, and are well below the longer term averages of 6.9 per cent and 5.4 per cent respectively.

For Western Australia, despite the falls in returns, this state has shown greater stability compared to other regions. The strength of the local economy and underlying industrial demand kept total returns at 14.6 per cent in March 2023, well ahead of historical averages. The strong income returns for WA are highlighting these strong fundamentals, with stock shortages recording 5.9 per cent in March 2023, the highest rate of all states, propping up these total returns.

More recently there has been some divide between primary and secondary assets which have been tracking closely since the onset of COVID-19. The high demand for investment and occupancy of industrial assets resulted in total returns being closely aligned regardless of asset quality. The quest to purchase is seeing some investors move up the risk curve in regard to quality and affordability, seeing tenants considering secondary assets.