Charles’ tip for investors is to focus on properties with leases of less than four years, which are being overlooked by institutional investors.
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Industrial offers high returns for investors
It might not be as sexy as a penthouse overlooking Darling Harbour or have as much cachet as a ski lodge on Mt Hotham, but an industrial warehouse could provide returns that blow the others away, according to experts.
Not only are industrial rents expected to rise, but according to Joshua Charles, regional director of industrial services and logistics at CB Richard Ellis, the industrial market stands out because it is still very cheap relative to other commercial asset classes and to residential.
He recommends industrial investment because properties tend to come with a large chunk of land, and they are generally easier to manage and maintain than other types of real estate.
Charles concedes industrial assets are often riskier than other tenancies because landlords are usually reliant on income from just one tenant, whereas other commercial properties usually have multiple tenants with leases starting and ending at different times.
But Michael Fenton, national head of industrial at Jones Lang LaSalle, says the increased risk profile is offset by generally higher yields and a lower capital expenditure requirement.
Demand for warehouse space growing
Fenton says tenant demand for industrial space is increasing every month, both in terms of enquiries and new leasing deals being struck. There is also increased interest from owner-occupiers, though this is generally confined to the “smaller end of the market” and to strata space. Both buyers and investors are finding it tough to get their hands on a property, as almost no new industrial property has been built in the past three years.
Managing director of industrial at Colliers Malcom Tyson is upbeat about the sector’s future, saying prices have “reset” and are now “reasonably good value”, meaning it’s a good time to get into the market.
Tyson says investors should look for properties close to rail, road and port infrastructure.
Charles’ tip for investors is to focus on properties with leases of less than four years, which are being overlooked by institutional investors. As the market tightens, Charles says landlords will be able to get a better deal out tenants when they look to renew in one to two years’ time.
The east coast market – specifically Brisbane, west and south Sydney and most of Melbourne – is proving attractive to overseas investors. Charles says there is significant interest from Asian investors and some from European ones.
According to Colliers International Marketing Research Forecast Report, Sydney’s outer-west market has the cheapest prime grade rentals – between $100 and $110 per square metre annually, with yields of between 8 and 8.5%.
Melbourne’s least expensive prime grade market is in the northern suburbs, with rents between $130 and $160 and yields up to 8.25%.
Fenton tips more portfolio sales and high-end property offerings in 2011, with domestic institutions returning to the industrial market alongside overseas interest.
New entrants to the space include the large A-REITs, fund managers who are now focused on industrial property as a core investment sector, mid-level managers and offshore groups
Recent reports on the sector sit well with these predictions.
NAB’s March 2011 quarter industrial market outlook (released in May) predicts the industrial property sector is due for an upswing in the next two years.
Nationwide, industrial property rents are tipped to rise by 3% over the next two years, and the national vacancy rate is tipped to fall from 5.8% to 4.4%. Under-supply is expected to be a feature of all state industrial property markets over the next three to five years.
Colliers’ Industrial Research and Forecast Report (also released in May) is equally upbeat, reporting that industrial market performance improved during first half in 2011 “as it moved through post GFC headwinds to have a more positive outlook than it had six months ago”.
Western Australia – leading the way
The NAB forecast for WA’s industrial sector is extremely healthy as the state continues to benefit from the resources boom. Over the next two years, the state is forecast to have the strongest rental growth (5%), capital growth (4%) and the lowest vacancy rates due to a lack of new construction and limited supply in the existing market.
NSW/ACT – playing the long game
Rent rises are expected to be strong in this market over the next two years, rising by 3.1 per cent as it emerges as the best-performing market by 2013. NAB also predicts capital values to increase by 1.3% during this time frame. The market is predicted to be the most undersupplied in Australia over the next three to five years.
Victoria/Tasmania – strong and steady
Victoria and Tasmania are currently the “stand-out” performers in the industrial property sector, driven by demand from major retailers and strengthening port trade. Over the next two years, capital values are expected to rise by 4%.
Queensland – getting better all the time
Though currently performing poorly, Queensland’s industrial market is tipped for modest improvement over the next two years, though at a slower rate than NSW/ACT’s. Over the next two years, NAB predicts capital values will rise by 1.8% and rents by 1.7%. The floods have tempered ongoing recovery in the Brisbane market, though it is still expected to improve due to increased tenant demand and limited new supply.
South Australia – if you build it they will come
Currently the sentiment in South Australia is cautious, but planned infrastructure projects such as South Road Superway are expected to boost the local economy and drive up demand for industrial property. An expanding defence sector, mining exploration, population growth, access and transport are predicted to assist growth over 2011, according Savills’ January 2011 outlook report.