Industrial property offers strongest returns of commercial property classes: Morgan Stanley

Industrial assets offers the potential for far better returns than risk-free government bonds, according to investment bank Morgan Stanley’s latest Australian property report.

As the chart below shows, while capitalisation rates (yields) are well off their mid-1990s peaks, industrial assets offer an average return of 8.3% compared with a yield of 3.05% for 10-year government bonds.

“Yield is the name of the game,” says Morgan Stanley in its latest report authored by analysts Lou Pirenc, Todd McFarlane and John Meredith.

“In a typical environment where demand fundamentals in property are weakening, we would normally expect a softening in asset prices.

“As the graph shows, however, industrial, office and retail all offer attractive spreads to the risk-free rate and increasingly to the marginal cost of debt for many REITs.

“Whereas assets in recent years were primarily sought by sovereign wealth funds and selected domestic unlisted funds, we are now seeing buyer demand from listed REITs, unlisted funds, sovereign wealth and pension funds, and offshore corporates/investors," says Morgan Stanley