- Industrial property holds firm amidst commercial property slowdown
- Prime assets show superior capital gains
- Rising interest rates and high inflation may affect returns
Increasing interest rates have caused growth in commercial assets to stagnate, however, industrial property continues to hold its ground, according to Ray White Commercial’s Head of Research, Vanessa Rader.
Rader said that sales volumes have declined and are expected to stay subdued for the rest of the year with price adjustments beginning to materialise.
However, certain asset classes are performing better than others.
“Industrial, with its restricted supply, is keeping vacancies across the country minimal and has outperformed other key asset classes this year,” said Rader.
“Capital gains stay in the positive, whilst income returns have consistently shown positivity, providing a desirable buffer to inflation and escalating financing costs.”
Capital growth slowing
After the highs of 2021/22, Rader said that capital growth has slowed thanks to the sharp increase in interest rates.
She said industrial property in NSW, has been incredibly resilient given the restricted land availability and low vacancy rates.
Total returns for the sector were 12.7% in March 2023 according to the recent PCA/MSCI All Property Digest, with capital returns at 8.6%, having peaked at 24.7% in December 2021.
“Encouragingly, capital gains are near the 10-year average of 9.1%, in contrast to Victoria and Queensland, whose current figures of 3.7% and 3.0% respectively, fall significantly short of the longer-term averages of 6.9% and 5.4%,” said Rader.
Industrial capital returns
Perth industrial property steady
She said Industrial property in Western Australia, has shown more stability compared to other areas, despite declining returns.
“The local economy’s strength and consistent industrial demand resulted in total returns of 14.6% in March 2023, well surpassing historical averages,” she indicated.
“The robust income returns for WA reflect these strong fundamentals, with stock shortages noted at 5.9% in March 2023, the highest rate amongst all states, thereby bolstering these total returns.”
Vanessa Rader, Ray White Commercial’s Head of Research
Rader said there was a clear disparity between primary and secondary assets.
“High demand for investment and occupancy of industrial assets led to closely aligned total returns, irrespective of asset quality.”
“In the hunt for purchases, some investors are taking on higher risk in terms of quality and affordability, leading to tenants contemplating secondary assets.”
Prime assets, which generally outperform secondary, have seen superior capital gains while income returns remain consistent across both asset types, according to Rader.
She said the affordability linked to secondary assets is more appealing to tenants and investors, including owner-occupiers.
This is leading to a rise in total returns for secondary assets to 13%, just shy of the long-term 10-year average of 13.8%, whereas prime asset returns of 11.1% are considerably below the 10-year average of 14.6%.
Cap rates edging higher
Rader also said industrial capitalisation rates have held up well, although they are starting to edge higher.
“Prime industrial currently stands at 4.2% while secondary has risen to 5.0% after hitting a low of 4.4% mid last year.”
“Sydney continues to set the lowest rate of 4.1%, followed by Melbourne at 4.3%, with distribution assets keeping tight at 4.1% and warehouses escalating to 4.5% in March 2023.”
Rader said the outlook may see further compression in capital returns, while high inflationary pressures may see income returns remain stable, which will see capitalisation rates move upward accordingly.
