A surge in industrial property investment has led to hot competition between buyer groups wanting a slice of one of the most profitable markets in the world.
According to the latest Colliers International report, industrial investment activity produced a $1 billion result in the first half of 2014, up from the $661 million recorded in second half of 2013.
Managing Director of Industrial at Colliers International Malcolm Tyson attributed the rise in sales to the relatively low levels of capital expenditure required for upgrades, the functional longevity of industrial facilities, and the “land rich” nature of industrial property that allows for redevelopment opportunities.
“Investors are accommodating a higher share of industrial property in their portfolios because this asset class is delivering competitive returns based on stable income streams with solid growth prospects,” said Mr Tyson.
“Over the past four years income has represented an average 86.3 per cent of industrial’s total return. This is markedly above the income return proportions for retail and office which for both is around 75 per cent.”
He added that institutions continue to dominate the market, accounting for 71.9 per cent of all purchases this year to date, although buying competition between private investors, occupiers/developers and syndicators is increasing.
Charter Hall accounted for 28 per cent of total investment by institutions, followed by Goodman at 23 per cent and GPT Group at 12 per cent, according to the report.
Chief economist for AMP Shane Oliver said while Australian institutions like Charter Hall and Goodman are buying the bulk of Australian industrial property, their clients are often overseas investors attracted to Australian returns.
“The investors in their funds might come from offshore, rather than buying a property direct, they may invest in a fund provided by an institution which then in term invests in the property and manages the property on behalf of the investor,” said Mr Oliver.
“There has been a lot of foreign interest in property.
“Californian pension funds which are operated on behalf on employees on the other side of the world see Australia as good value because the yields are relatively high compared to equivalent estates in the US where the yield could be two per cent or less.”
Mr Oliver said whilst returns were good, investors should be wary of focusing solely on “the chase for yield”.
“It’s always offered a higher yield but it’s seen as being more risky and requires more management effort,” he said.
“Investments tend to be relatively small; for example, warehouses, industrial parks and work shops as opposed to huge regional shopping centres.”
“The nature of the businesses operating out of industrial properties has changed, and as a result yields still tend to be more volatile than retail property yields, for example, which rely on the much more stable rate of Australian spending.”