Industrial property has been the most in-demand real estate sector globally for the past two years, and the combination of domestic and international demand for properties in Australia has seen sustained growth in asset values and rents.
The report looks into the factors driving returns from industrial real estate in Australia, and explains why the outlook for the sector is increasingly positive. Prime industrial rents in Sydney are predicted to increase by 7.8 per cent to 12.5 per cent over the next three years, while yields are likely to tighten by 15 basis points to 25 basis points and values likely to increase by 10.5 per cent to 15.2 per cent.
Why? There are economic and social forces at play providing significant tailwinds for industrial property. With infrastructure spend peaking next year – and a strong link between infrastructure spend, the economy and industrial property – infrastructure investment will make a significant difference to demand for industrial assets.
The current infrastructure program is different from the last major spend, on the M7, which opened up new land and allowed for new cheap industrial property to be built cheaply in the newly serviced areas – creating a net negative for industrial property. The current spend, conversely, is happening inside the band – on transport in particular. The consequences for industrial property are likely to be very different. Not only is no new land being “opened up” but industrial space is being taken out of the market to allow for the light rail – reducing supply and pushing up prices. This is already happening according to the latest figures – despite our weaker economy.
E-commerce’s role in industrial property’s positive fundamentals has also been apparent for some time as it has fueled increased demand: e-commerce has changed retailing, and still has some way to go – penetration in Australia is far below than that of the US and the UK – 5.6 per cent in Australia compared with 11 per cent in the US and 22 per cent in the UK. For every square metre lost in brick and mortar retailing, 3 square metres of warehousing is required. But it is also one of several drivers that have created a global focus on logistics and the importance of supply chain management as a competitive advantage, as well as boosting “clean” manufacturing
Customers’ demand for fast delivery, so-called “last mile logistics” has been identified as a key differentiator, and means that warehouses located too far from consumers are less in demand than smaller warehouses closer in.
Meanwhile, clean manufacturing is on the rise – automation, robotics and AI are helping Australian manufacturers control two of their longstanding challenges, high labour costs, the need for scale in a small market and distance to market.
In all, Australian industrial property is on the precipice of strong growth.
Ross Lees is Centuria’s recently appointed head of funds management.
