Window closing on industrial divestment
The investor flight from bonds, and other assets, to industrial property has continued despite negligible rental growth, LJ Hooker Commercial’s recently released Industrial Market Monitor shows.
While industrial sales, in the 12 months to July, dropped 19% year-on-year (from $5.8 billion to $4.7bn) the scarcity of listings has been the responsible for the result, not the sector’s popularity.
Indeed, the Monitor found the industrial sector provided double digit returns for most of the last seven years.
However, with LJ Hooker Commercial noting bond rates were at ‘unsustainably low’ levels, the window of opportunity for owners and landlords planning to divest was closing quickly.
In Sydney, major industrial hubs recorded a 30 basis point contraction over the past 12 months, with yields now well below the pre-GFC peaks.
LJ Hooker’s Head of Commercial Mathew Tiller said a broad spectrum of purchasers had been keen to take up the limited opportunities that come to market in the last 12 months.
“Compared to five years ago, the level of off-market activity LJ Hooker Commercial is undertaking has soared,” said Mr Tiller. “It’s a tightly-held sector and the under-supply has been accentuated by the demand we’re fielding from all corners; developers, investors and owner-occupants.
The Monitor noted many developers were activating cheap industrial land which was a ‘hang over’ of the GFC. Developers have been able to absorb rising construction costs – while also offering increased incentives – because firming yields had underpinned capital growth.
“But with yields traditionally following rising bond rates, developers have a limited period to afford such attractive deals,” said Mr Tiller. “If landholders, landlords and owner-occupants have intentions of divesting, they have the next 12 to 24 months to make their move as we believe it’s unsustainable for bond rates to remain this low for so long. Once bond rates rise, we may see a softening in investor demand.”
In Sydney, the Monitor estimated net absorption of approximately 675,000sqm over the past 12 months. In the city’s south, prime rents have increased five percent to $170psm, while secondary rents increased nine per cent on the back of residential conversions.
The Monitor found there would be demand for industrial use around Smeaton Grange and Gregory Hills to facilitate residential growth through the State Government’s South-West Priority Growth Area plan.
In Melbourne, rents have remained steady despite vacancy rates rising, with landlords opting to maintain stated rents by supporting incentives – the cost of which has been offset by firming yields and rising property values.
Melbourne’s leasing outlook is unclear, with public infrastructure such as the Metro Rail and ancillary works offset by a slowdown in residential construction.
In Brisbane, industrial leasing picked up over the first half of 2017, but the Monitor warned that a clear-cut recovery was not yet signalled.
Businesses supporting Queensland’s population growth had taken up new leases including building materials firms Beaulieu Carpets and National Tiles; food services including Asahi Beverages, Coca-Cola Amatil and Hilton Foods; while Woolworths and Bidvest took on new distribution facilities.