A liquid asset is one that can be sold swiftly with minimal loss of value. Therefore, a liquid market is one that always has ready and willing buyers and sellers. That is, liquidity can be characterised by a high level of trading activity, often referred to as market depth. The lower the liquidity risk of an asset, the lower the expected return on the asset or the higher it is priced. It is safer to invest in liquid assets than illiquid assets as it is easier to get your money out of the investment.

There is a perception that industrial property is a less liquid asset class than office or retail property. This perception has been created because the average annual transaction volume in the industrial sector is a lot lower than both office and retail. So, how liquid is an investment in the Australian industrial property sector?

One way we can measure liquidity is by using a simple stock turnover analysis. That is, the total value of major sales as a proportion of the estimated total value of capital.

In 2012 Jones Lang LaSalle recorded AUD 2.40 billion in major industrial asset sales. Our measure of the value of capital stock in the major monitored* city industrial markets in 2012 was AUD 29.13 billion. This equates to stock turnover of 8.25%.

While the vast majority of industrial sales in 2012 were in Sydney (37.7%), and Melbourne also accounted for a large share of transaction volumes (18.8%), these two markets had the lowest turnover ratios in 2012 (7.2% and 6.8% respectively).

Sales volumes in Brisbane were very strong in 2012, accounting for 23.7% of total sales. As a result, Brisbane recorded a turnover ratio of 10.1%. Sales in Perth were also solid in 2012 at 12.9% of national sales, resulting in a turnover ratio of 10.3%. Adelaide accounted for 6.8% of sales, well above its market share of capital stock, and therefore had a high stock turnover ratio of 12.5%.

How does the industrial sector compare to the much larger CBD office sector?

In 2012 we recorded AUD 7.43 billion of major office sales in the combined CBD markets. Our measure of the value of capital stock in CBD office markets in 2012 was AUD 114.64 billion. Turnover of stock in 2012 equated to 6.5%.

What does it all mean? Investors in commercial property should consider the liquidity characteristics of the property sector and individual market or city they are considering investing in. The industrial property sector in 2012 was slightly more liquid than the CBD office markets combined (when using stock turnover to measure liquidity).

It is clear from the high level of transactions in 2012 that there is very good depth in the investment market for vendors of industrial property. The high entry yields on offer in the sector relative to other property classes and positive rental growth outlook will continue to attract strong investor interest in 2013.

* Jones Lang LaSalle Research monitors metropolitan industrial markets in Sydney, Melbourne, Brisbane, Adelaide and Perth.

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