VIC and NSW industrial property investment is in vogue. Here’s why more investors will flock to the east coast industrial property markets in 2020.
Investors are jumping up and down about east coast industrial property. But why?
Well, there’s a lot to be said for online retail’s impact on industrial property market. The eastern seaboard, particularly NSW and VIC, has a lot of surface area to cover between its growing population. More logistics and distribution centres are needed to service online shoppers.
And commercial property investors want what they can’t have. East coast industrial property is short in supply, with many new players vying to partake. Meanwhile, those with hands on established assets are holding on tight to the few quality assets available.
Let’s take a closer look at industrial property demand before exposing the reasons why it’s so popular.
Investment and leasing demand stronger than usual
From REITs to unlisted property trusts, investors are picking up whatever Prime industrial stock they can find in Sydney and Melbourne.
Transport and logistics assets are the industrial sector’s golden child. A by-product of a good-looking eCommerce sector, they accounted for 57 per cent share of take-up on new industrial supply between 2017 and 2019.
Offshore investors are unsurprisingly partaking in east coast Industrial property. With bond yields flatlining across the globe, international investors are looking for alternative yield sources and finding it in Australian commercial property investment.
Interestingly though, overseas investor appetites are increasing even though Industrial property yields are tightening.
Developers are getting in on the east coast industrial property action, too.
VIC Industrial development approvals have more than doubled in 10 years, from about $1 billion in August 2009 to over $2 billion in August 2019. Tenant demand and pre-commitments are to be thanked for the increase in new development.
(Keep in mind these are just approvals – these don’t help investors looking to invest today.)
And on the tenant front, total east coast vacancy is sitting far below the long-term average, driven by Third Party Logistics (3PL) providers, online retailers and distributors.
In Melbourne, absorption rates have climbed 23 per cent higher than the 12 months prior to September 2019. Many projects yet to be completed are already leased.
So, what’s to thank for east coast industrial property demand?
Scarcity + Building costs = East coast Industrial property demand
Developers’ wallets are wearing thin from the exorbitant costs to build new facilities.
Automation and new technology for the industrial sector means more technical parts and equipment are needed.
Semi- and fully-automated solutions can cost between $10 million to $25 million (and up). So, many landlords and developers opt to merely upgrade their existing facilities or shy away from the automation movement all together.
The result is less new stock for investors to play with. The problem is, more tenants are looking for new premises. Almost 50 per cent of leasing volumes transacted in the 12 months to September 2019 were pre-commitments. Industrial tenants don’t just need larger space, but better technology to match their need for automation and technology services.
We’re seeing investors buy industrial assets, but we’re also seeing investors hold them.
“Core markets across the eastern seaboard are expected to remain tightly held, with continued supply constraints in the traditional markets creating expansionary demand for new industrial product beyond the existing core areas.” – Knight Frank Research
Demand in industrial assets is outstripping supply, so why wouldn’t investors hold on to their sought-after investment?
What’s the result of limited supply?
Supply constraints are forcing demand outward, into secondary precincts in Melbourne and Sydney. This is especially the case for areas where development is rampant, including Melbourne’s West and South East precincts, and Sydney’s South West and Outer West.
With little institutional grade assets on the market, prices are driven higher while yields are continuing to compress.
Sydney’s West precinct – its main market – saw yields compress 75bp to 4.88 per cent. Meanwhile, capital values rose 20.8 per cent year-on-year and land values appreciated 7.4 per cent year-on-year.
What rental income should investors expect?
Investors might be more attracted to the capital gains found in east coast industrial investment. Little income growth is currently being seen between Melbourne and Sydney industrial assets, as rental growth remains colourless over the next two to three years.
Those wanting the best deal on yields and rental income will need to know where to look. Or who to invest with.
For more information on how to invest alongside professionals in an exclusive commercial property syndicate, contact Properties & Pathways today.