2021 was the hottest year on record for Australia’s industrial property market. What has 2022 brought? And what can we expect as the year’s end is in sight?
Make no mistake, 2021 was the industrial market’s biggest year in decades and will remain the sector’s monolith era for many more to come. Industrial and logistics assets were a rare commodity, and even the real estate titans (institutional investors like Charter Hall) dipped into the sector with sub-$10 million purchases on tight yields – something we rarely see in the commercial property market.
So, considering 2021’s huge year, investors shouldn’t be surprised headlines say Australia’s industrial market has come off the boil.
Analysts began telling us the industrial market was at its peak (or closing in on it) back in July 2022. It came as valuations of ASX-listed heavyweight Centuria Industrial REIT registered an increase in values of just 1.3 per cent ($48 million) over the six months to 30 June 2022, without a change in its 4.19 per cent yield. It was compared to the 9.6-per cent ($281 million) valuation increase recorded in the six months prior.
Valuation growth pains and bolstering yields… What did this signal? That the market was turning the tap on the big-time capital gains seen in 2021.
Throw in consecutive interest rate rises – 2.25 per cent’s worth of rises since May 2022 – and increasing bond rates, and the industrial market’s wild west of shoot-from-the-hip acquisitions, two-day due diligence periods, institutional buyer frenzies and those with a petulant fear of missing out appears to have come to a close.
The combination of peak market and escalating interest rates has made prospective industrial market buyers reconsider their appetite. There’s been a knee-jerk reaction to these headwinds, meaning less buyers are out there hunting for the first industrial asset they see. But it doesn’t mean the market has gone stale.
Again, we’re talking about the industry coming off the boil after record-breaking capital appreciations. It just means buyers are taking a far more considered approach before contracting their first (or fiftieth) industrial asset.
So, where to from here?
Well, it depends… Are you a buyer? Seller?
Sellers are doing one of two things: Holding on to their stock and earning solid yields for themselves or their investors. Or looking for buyers who’re wise enough to see the earnings potential of a high-quality industrial premises, despite the capital values likely having hit its peak. Such buyers are far rarer than they were in 2021, for reasons we’ve explored.
2022 doesn’t signal a significant slow down in the industrial market, but it does indicate buyers are doing far more homework than they were in 2021 to ensure they buy well. Just as any commercial property investor should – at any stage of the market cycle.
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