Industrial & office properties continue to offer investors solid returns

Industrial & office properties continue to offer investors solid returns

January 2020

For self-managed super fund (SMSF) trustees, industrial property has been the flavour of the property market for the past few years – and there’s every likelihood that this state of affairs is not going to end any time soon.

In 2018, this asset class outperformed the retail and office sectors, notching an index return of 14.8 per cent compared with 13.6 per cent for office space and 5.8 per cent for retail. Industrial sites mightn’t look all that attractive at times – but the returns don’t. 

The prime reason for this outperformance is not hard to discern. Quite simply, that old economic maxim is at work: demand outstripping supply. And that demand is forecast to keep growing.

As a report by the listed property group Charter Hall highlights, leasing volumes across Australia’s industrial market have been above longer-term averages since 2015.

Over this period, national leasing volumes have averaged 2.6 million square metres a year – above the 10-year average of 2.2 million square metres a year – but supply hasn’t increased to the same degree with new industrial completions averaging 1.5 million square metres a year. This shortfall is most pronounced in Sydney and Melbourne.

There are several factors coalescing on the supply and demand sides of the equation that is underpinning the stellar investment performance of industrial property. Taking supply first, there is limited industrial land available with significant stock being rezoned for alternate uses such as residential and mixed-use.

Compounding the supply issue has been Australia’s stringent planning laws, limiting the provision of readily available development land. The fallout from the Financial Services Royal Commission also is playing a role; lending for industrial property projects has tightened, pushing the more speculative projects off the drawing boards. At the very time the market would be receptive to having more projects in the pipeline, it’s simply not happening.

On the demand side, there are macro and micro factors at play. A growing population and economic growth (Australia is just shy of three decades of continuous growth) underpin demand for industrial property, but without doubt the biggest influence has been the rise of online retailing and the demand this creating for what is now quaintly called “e-fulfillment centres”.

Although Australians have been slower to adapt to online shopping than other countries (notably the UK and US), they are increasingly reaching for the laptop or iPad than the car keys when they want to shop. In 2010, Australians were spending $6.7 billion online; by 2018 it had more than trebled to $21.7 billion.

In percentage terms, it equates to a rise from 2.6 per cent to 6.9 per cent of the national retail spend, a figure expected to reach 9.2% by 2024 as the large global online retailers grow their footprint in our market by offering consumers and producers greater access to their products. According to Charter Hall, it translates into Australia needing an estimated 1.67 million square metres of industrial floorspace over the next five years to service this growth.

While online shopping is the elephant in the industrial office space, niche manufacturing based around high-tech industries and the export of certain pharmaceutical, food and agricultural products is also helping generate demand for industrial land.

On the micro front, Australia’s leasing structures for industrial land also contribute to investment appeal, with contract terms typically longer compared with their overseas counterparts. They range from five to 15 years (or even longer for quality tenants), meaning the investor is shielded, in part, from the business cycle.

It’s little wonder SMSF investors are increasingly looking at industrial property (like commercial property, there are listed and unlisted investment vehicles) because they see the sound returns being generated, both in terms of income and capital gains.

With a growing consensus among leading economists that Australia has entered a “lower-for-longer” interest rate environment, the appeal of industrial property arguably can only be enhanced. For the well-informed SMSF investor, supported by sound advice, industrial property can comprise a significant part of a well-diversified portfolio.

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