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Why industrial property markets are up when the economy is down

3 December, 2019
Categories: Commercial, Industrial, Investments

Industrial property values once reflected the health of the economy. But things change. Here’s why industrial values are headed upward, while the economy is flatlining.

A lot of us long-term property investors know that a good-looking industrial property market can mean the economy is performing well.

A busy industrial property market could indicate infrastructure activity is up, perhaps as a result of a booming population, which might also indicate employment growth. Or perhaps the resources sector is booming and yellow goods providers are flat out serving mining companies’ needs.

These days it’s slightly different. The nation’s economy is relatively flat (growing 1.9 per cent in 2018-19), population growth grew only 1.6 per cent in the year to 31 March 2019, employment growth is not substantial across the country, and the bond market – an indicator of economic conditions – is producing record low yields.

Meanwhile, industrial property values around Australia are either sitting pretty or trending that way. Melbourne and Sydney have boasted record values in some precincts, while Brisbane and Perth industrial property markets appear to be making a comeback.

So, why are industrial values still defying gravity in light of a grounded Australian economy?

It’s not all about manufacturing

Once upon a time, Australia manufactured most of (or at least a lot of) its own goods. Vehicles, clothing and even heavy equipment were produced here before cheap outsourcing was discovered in our Pacific neighbours.

The truth is, Australia is no longer a manufacturing hub. So, with economic indicators, like consumer spending, at a low, it doesn’t necessarily mean the industrial property sector should be down, too.

Meanwhile, new non-manufacturing industrial property sectors are arising and causing a wave of investment to boost property values.

Data centres are now a thing and, speaking of digital, e-commerce is having a positive impact on many industrial property types. For example, cold storage warehouses are being favoured by both domestic and international businesses, brought on by an increase in online grocery sales.

But the mother of all non-manufacturing property types, buoyant in demand these days, is logistics centres.

Need for logistics

red and white truck driving out of a logistics centre in the Brisbane industrial property market

With the nation’s growing population, logistics are a major driver of industrial property demand in Australia.

In an age of increasing online sales, Australia’s huge population densification has called for more logistics and transport facilities to service it.

These nodes are popping up in both cities and regional areas, with lofty tenant demand causing investors to clamber for the little prime space available.

Investor demand in the industrial property market is high for logistics centres. Their relevance will only increase as more consumers turn to online shopping and our population becomes more widespread.

Another driver of logistics property values is the limited supply of institutional grade assets. Many landlords of existing stock are holding their investment tightly, because there are limited other investment opportunities available. The lack of stock inflates both property demand and value.

Lacklustre bond yields

Australian government bonds are producing less than exciting yields. Those chasing “smart money” in bond investments aren’t seeing the rewards they’re used to. For example, 10 yr Bond Rates have been plummeting since 2013, giving investors a reason to look elsewhere.

Sources tell us that industrial property markets are where many are eyeing off, even though yield compression is emerging across most states.

So, while the nation’s economy has seen better days, Australia’s industrial property markets are seeing some of their best. We expect this trend to continue, particularly in WA and QLD markets which are waking up from years in a slumber.

For more information on industrial property investment in Australia, contact Properties & Pathways today.

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