Australian industrial property is fast becoming the sector of choice for investors.
The Savills Q4 2018 National Industrial Quarter Time report shows the yield compression cycle remains a reality, as competition to acquire the limited assets that were put up for sale drove yields further down in the second half of last year.
The report highlights transactional activity in industrial assets rebounding in 2018, after muted activity in 2017, with about $4.42 billion of industrial assets exchanging hands across the country. Almost 50 percent of that value was brokered in NSW.
Growing ecommerce market
The east coast of Australia was at the forefront of investors’ minds, as the growing ecommerce market buoyed demand for warehousing facilities from lessees’ in the national logistics and wholesale industries.
National leasing volumes remained largely in line with long-term averages, underpinned by tenant demand for warehouses in prime industrial precincts.
With the rise of online retailing in Australia, we will continue to see this trend continue.
Given the relative infancy of the ecommerce industry in Australia, it is clear that we are likely to see aggressive growth in the short to medium term but it is important to consider which areas will be affected by growth in online retailing.
Australia’s unique geographical spread
Australia is different from other countries due to our geographical uniqueness. Given the distances between the major cities and the major regional centres, those areas that have good connectivity and populations large enough to support demand for online goods will remain in high demand for the foreseeable future.
To put it into perspective, approximately 65 percent of Australia’s population reside in the country’s major cities, compared to 20 percent in the UK.
This means that demand for industrial assets will be most prolific in the cities that are supported by complementary infrastructure and transport options.
The report shows that sales and leasing activity supported these trends in 2018, with Sydney and Melbourne’s industrial markets outperforming on all metrics.
Even within these cities, it was the precincts that had proximity to major arterial roads, transport hubs and ongoing infrastructure activity to support growing populations that performed the strongest.
A focus on Sydney and Melbourne
2018’s industrial story was still in favour of Sydney and Melbourne, with the key industrial precincts in each state experiencing falling yields.
On average, prime grade market yields fell 75 basis points in Sydney’s western industrial precinct, bringing the year-end average figure to 5.50 percent.
Average prime grade yields in South Sydney were the lowest nationally at 5.25 percent, after compressing nearly 65 basis point in 2018.
In Melbourne, yields fell furthest in the city’s eastern and city-fringe precincts, where average prime market yields compressed just under 40 basis points.
Demand for industrial assets was likely to remain strong in 2019, supported by the falling Australian dollar and significant amount of capital available for investment.
The spread between yields in the industrial sector and the underlying cash rate remain attractive in a global context, in spite of an ongoing yield compression cycle domestically.
The quantum of funds available, not just in Australia but globally, is staggering, as superannuation and pension funds remain key investors across all property sectors.
The report also reveals that land values across Sydney and Melbourne recorded notable growth in 2018, with increases of nearly 50 percent in some precincts.
Average land values for serviced and benched sites between 3,000sq m and 5,000sq m in the South Sydney and western precincts increased by 42.9 percent and 34.9 percent respectively, while average land values in Melbourne’s western and eastern precincts rose 49.4 percent and 46.7 percent respectively during the same period.