Backed by the growth of institutional investment, the rise of logistics as an institutional grade sector, and the evolution of certain industrial sectors, the performance of Australian industrial property in the last decade has been climbing.
While not the same investment it was back in 2009, today’s industrial market is hot property.
Sydney industrial values have risen 36.2 per cent in the year to June 2019. And in what’s been labelled the ‘best time in history’, some east coast owner-occupiers are being prompted to cash in on their long-held assets and upgrade their operations with automation and new technology.
It’s a sign of the times in an eCommerce and logistics-fuelled industrial market.
To show how and why industrial property has emerged as a mainstream asset class for investors with a diversified portfolio, I’ll break down its performance across Australia in the last decade.
Since 2009, prime industrial land values have experienced a steady, upward trend across the country. But the major increases have only been seen in the last few years, particularly in two key state markets.
Average land values in Melbourne’s prime sub markets have increased between 34 per cent and 60 per cent in the last decade. Landlords today can expect between $300 per sqm and $450 per sqm for sites on prime parcels of land.
But these notable increases only kicked off in 2015, after land values had spent several years hovering around $200 per sqm to $250 per sqm.
Sydney land values have only recently defied gravity, too.
In June 2016, land values in its key prime market, South Sydney, surpassed industrial market rival Melbourne, with average values rising from $1,150 per sqm to its current $1,900 per sqm.
In the decade prior, South Sydney industrial land averaged approx. $600 per sqm, alongside other Sydney prime markets North Shore and Central West. Both precincts have since seen land values almost double to approx. $1,100 per sqm as at June 2019.
In line with growing demand, industrial land was late to blossom in the last decade. Today, east coast landlords are admiring industrial assets in full bloom.
Each state has their own story about industrial prime net face rents in the last ten years.
Average prime grade industrial rents have been soft in Sydney, increasing an average 1 per cent per year since 2009.
But certain Sydney sub markets have outperformed the market in recent years, brought on by growing demand for new industrial facilities, with Central West and Outer South West recording 10.2 per cent and 16.7 per cent growth in the three years to June 2019.
Net face rents in Melbourne’s prime precincts have followed suit, barely increasing between $70 per sqm and $80 per sqm in the seven years to June 2016. Since then, prime net face rents have risen an average of 3 per cent year-on-year, on the back of less available industrial zoned land.
Out in the west, prime Perth industrial rents have plummeted since its last resources boom in 2012 left a nasty hangover for most industrial sectors.
But it looks like the decline has flattened, with prime rents hitting the floor between $80 per sqm and $90 per sqm in the past 12 months (from around $120 per sqm in 2012). The good news is owed to early signs of mining investment, business sentiment and offshore interest returning to the west.
With Adelaide’s record infrastructure spending and increased activity from defence, food and technology sectors in the last decade, prime net face rents across all precincts have been showing signs of improvement. An average incremental rise of circa 7 per cent in the year to June 2019 is in line with both business confidence from solid economic activity and investor confidence after the 2019 federal election.
Looking at income returns for the nation’s industrial property markets over the last decade, the inverse relationship between values and yields remains ironclad.
While all capital cities saw land values bolster, prime yields have been compressing across the country since 2009.
Sydney has watched prime average yields dip from between 8 per cent and 8.5 per cent in 2009, to as low as 5 per cent and 6 per cent a decade later.
2016 saw some stabilization of yields in Melbourne’s industrial market, driven by investors chasing yield in a low-interest rate environment. But ultimately its prime market yields have rested between 5.9 per cent and 6.1 per cent for prime buildings as at June 2019 (from 8.5 per cent and 8.8 per cent in June 2009).
Perth’s South precinct is currently producing the nation’s highest income returns, between 7 per cent and 8.5 per cent. The key sub market only experienced incremental compression since its 8.8 per cent yields in 2009. But with increased appeal and bolstering capital values out west, yields could tighten a whole lot more in the coming years.
The increased demand of prime grade industrial assets since 2009 (and particularly since 2016, as we keep seeing) is the result of a few key drivers.
Industrial property is now less about manufacturing – which has predominantly moved offshore – and more about logistics. That’s because eCommerce is a rapidly expanding sector down under.
The retail sectors’ major challenge has become the industrial sectors’ major benefit, as logistics centres and transport companies cater to the growing demand of online consumers (these sectors account for 60 per cent of Australia’s total industrial floorspace take-up as at June 2019). Australia’s huge population spread means more distribution outlets are needed to service a growing number of online shoppers.
Infrastructure and mining have both played an exceptional part in buoying (and sometimes bludgeoning) industrial property values and rents.
While WA’s industrial worth plummeted after its last resources boom ended, the east coast shined. NSW and VIC economies benefited greatly from the federal government’s asset recycling program, being allocated around $3 billion as a reward for selling public assets in mid-2016.
Another driver is investment. Today’s typical investor of industrial property looks very different to what one did in 2009.
JLL records the greatest share of industrial sales in Australia since 2012 (above $5 million; by sales volume) belonging to institutional investors. Back in 2009, institutions made up only 9 per cent of all sales volumes. Attracted by stable yields and long WALE assets, they now partake in around 50 per cent of all sales in the country.
Offshore investors have continued to participate more in industrial property acquisitions on Australian soil. The circa 5 per cent share of offshore investment sales in 2009 is now eclipsed by an approximate 28 per cent share in 2018-19. This is in part why Industrial property has delivered total net returns in excess of 8.5% compounding p.a. over the past 10 years and being one of the best performing property sectors in that time frame.
As both international and domestic gear their strategies toward greater exposure in the industrial property market, we could expect asset demand to continue into the next decade.
But of course, investors should be reminded that past performance never guarantees future returns. The pattern of the last ten years might not be repeated, as a new decade sees new changes and challenges.
For the best advice on commercial property investment in Australia, get in touch with Heath Bedford at Performance Property Advisory on (03) 8539 0300 or firstname.lastname@example.org.