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Australian industrial attracts investors

May 26, 2017 / By  

The Australian commercial property investment market has matured over the past seven years, with a greater diversity of buyers and higher levels of liquidity. 2016 was the second highest year on record in real estate transaction volumes after 2015, indicating continued interest in the Australian commercial property sector.

Positive economic fundamentals have been underpinned by strong population growth for a mature economy, over 25 years of positive GDP growth and high levels of transparency – we are ranked number two in the world on our Global Real Estate Transparency Index.

We’re now observing investors being attracted to Australia’s industrial sector. While the office sector is the most commonly traded commercial real estate sector in Australia, the industrial sector stands out when we analyse the risk-adjusted returns of core commercial property sectors over the last 15 years.

Figure 1: Implied Sharpe Ratio (Risk Adjusted Returns)
Picture1_26May2017Source: IPD/MSCI (December 2016)

The historical evidence highlights the strong risk-adjusted performance of the industrial sector, but has the Australian industrial sector been re-rated?

One way to test the re-rating argument is to benchmark yield spreads between sectors. The larger and more liquid office sector is typically viewed as the benchmark sector for commercial real estate.

We explored the yield spread between the Sydney Outer Central West prime industrial yield and the Sydney CBD office market. The spread between the two markets was well over 500 basis points in 1989 and has trended lower and adjusted through several commercial property market downturns to just under 100 basis points in 2016 (Figure 2).

Downturns actually provide more insight into re-rating than upturns – it is interesting to note that after major shocks in the 1991/1992 recession and the 2008/2009 Global Financial Crisis, industrial yields have decompressed less steeply compared to that of the benchmark office sector. This can be partly attributed to increased investor knowledge of the asset class and understanding of security and quality of cash flow.

Figure 2: Sydney OCW Industrial Prime Midpoint and Sydney CBD Prime Midpoint Yields
Picture2_26May2017
Source: JLL Research

Benchmarking yields across different commercial property sectors can prove to be a useful relative value test. The narrowing yield spread between office and industrial is the first phase of the re-rating discussion.

We believe this provides evidence in the re-rating of the Australian industrial sector and the historical evidence certainly supports this view. However, in the current real estate environment, it will be important for potential investors of industrial assets not to only understand the dynamics of the sector, but thebuilding-specific factors such as design and fitout, location, accessibility and servicing, which can impact the performance of their assets.

Click here for our latest Australian Industrial Investment Review 2017.

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