Why demand for Australian industrial property is set to continue
Several factors have come together to create a perfect storm of soaring demand for industrial property across many parts of the world.
Australia is no exception, as investors who have traditionally relied on residential property and the share market to drive their investment portfolios and retirement strategies are increasingly turning to the potential of higher yields from industrial real estate.
The national industrial vacancy rate has fallen to a historic low of 2.24 per cent, says a new report from CBRE, reaching just 1.4 per cent in Sydney and 1.54 per cent in Melbourne.
“In 20 years, I have not witnessed such vast volumes of leasing enquiry,” says Cameron Grier, CBRE’s regional director of Industrial & Logistics.
This has not been restricted to the major east coast markets, he added, with South Australia and Western Australia also experiencing record demand.
Trilogy Funds Managing Director, Philip Ryan, said the industrial sector was supported by strong underlying fundamentals of robust demand and modest supply.
“With Australia’s historically low interest rates, there is strong appetite for investments in the industrial property sector right now due to its potential for competitive yields with long-term capital growth prospects,’’ he said.
“Demand for industrial property in Australia should continue to rise – particularly as institutional investors gear their strategies toward greater exposure in the industrial sector and build their investment portfolios.”
Industrial space was already in high demand in many advanced economies before the COVID-19 pandemic, but the accelerated growth of e-commerce and restructuring of supply chains that has occurred since its emergence have caused a further sharp spike in requirements for warehousing and logistics space.
At the same time, investors seeking competitive returns, companies looking to take advantage of the low-rate environment to acquire their own industrial premises rather than renting, and government driven infrastructure developments are driving up demand across regional locations.
Upward momentum in prices locally is also being buoyed by strong foreign demand for Australian commercial property. In the first quarter of 2021, $2.4 billion flowed into the sector from abroad, and in April a portfolio of 45 Australian industrial assets sold for almost $4 billion to Asian investors.
Property experts don’t see demand changing soon. CBRE forecasts that an additional 2,500,000 sqm of industrial space will be required in Australia over the next five years to support the growth of online shopping alone.
“E-commerce last year experienced five years of growth in just 12 months and now accounts for around 13% of all retail sales in Australia,’’ notes CBRE’s Industrial and Logistics Vacancy Report H1 2021.
“But Australia still has a long runway for growth in this area to catch other APAC countries that range between 20% and 40%. This coupled with the fundamental rethink of how occupiers deal with inventory levels has set up 2021 as a great year for owners of industrial and logistics property.’’
Low vacancies are translating into strong capital appreciation, with industrial land prices in west Melbourne for example more than doubling over the past four years.
Industrial space is a specialised segment of the commercial real estate market. It is typically tenanted by large companies with particular needs including proximity to major transport links, good access for large vehicles and significant roof and gantry heights.
These firms make excellent tenants as they are generally willing to sign long lease agreements with fixed rental increases, giving investors more stability than a typical residential lease.
And they are often signed up on net leases, meaning tenants bear costs such as insurance and maintenance that would normally be paid by the owner.
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