There is no doubt that industrial has been a prized investment type over the past few years. Growing population continued to spur on the need for logistics and warehousing facilities, while limited new stock additions have seen most markets keep vacancies minimal and rental growth positive. Specialised industrial assets such as self-storage facilities and cold storage have been popular; and over the past few years we have seen a mix of buyers converge on these various industrial assets due to their high occupancy, growing rent and range of prices, suitable for first time investors and owner occupiers through to offshore and domestic funds, and REITs.
As the cost of finance increases the spotlight has been put on the industrial asset class, yields, and what this means for land and capital values. With construction prices remaining elevated, new rental assets coming to the market will dictate a higher economic rent as owner occupiers continue to scurry to secure a piece of industrial property sheltering from uncertainty in rental prices. With land supply limited in many markets and the demand for space unlikely to dissipate, what will that mean for the industrial asset class and the appetite for buyers to continue to invest?
The latest data from MSCI shows the strong reductions in returns for industrial. While income returns have kept in a positive direction, capital returns have fallen considerably, with Brisbane and Melbourne showing the greatest correction, followed by Sydney. As a result we have seen both Melbourne and Brisbane total returns falling into negative territory representing -2.3 per cent and -2.2 per cent respectively. While Sydney is heading downwards, some markets are performing better than others, with Sydney’s north capital returns at -3.5 per cent, while Sydney’s south, central west and outer west hover around zero percent. The rest of Australia has been propped up by Perth industrial which continues to yield more positive results, albeit falling inline with the national trend.
This reduction in values aligned with the change in yields, despite the underlying demand to occupy space. The mismatch between financing levels and these capitalisation rates resulted in a required uplift despite fundamentals still in check for this asset class. Other industrial assets such as cold storage and self-storage assets continue to buck the trend with their limited supply, keeping investment yields tight and interest elevated, with offshore buyers as well as domestic funds vying for a piece of this part of the market.
With national average yields for industrial assets moving upwards to average 5.1 per cent after the lows of 4.1 per cent during 2022, does this signal now is the time to invest in industrial property? A correction of 100 basis points is a far cry from the increase in cash rate of 425 basis points over the same period, however, some markets and specific asset types and qualities have more than others. Brisbane’s average is sitting at 5.4 per cent after bottoming at 4.4 percent, similar to Melbourne at 5.1 per cent from 4 per cent. Sydney has not been immune to this as yields approach 5 per cent, well ahead of the sub 4s achieved during the pandemic period.
So have yields reached their peak? With the expectation of rate cuts coming the first half of this year, confidence has returned to the investment market. Industrial and its underlying supply issues, together with high occupancy, is compelling for many investors especially when considering other asset types. Poor office occupancy is impacting returns, retail and its changing face, not to mention the alternatives and their uncertain track record, may result in investors circling back to industrial this year. Industrial was the major investment type in 2023 after historic office domination, a trend we expected to continue in 2024.
