Author: Paul Bungate, Director - Middle Markets & Advisory
Of the commercial property sub-categories, industrial assets have proved the most resilient in recent years.
Currently, that remains true. The globally low 1.9% vacancy rate for Australian industrial properties[1] is creating a tight rental market. In turn, this is pushing rents up and offsetting the slowly softening yields that have been caused by stubborn interest rates. Generally speaking, this combination is creating balanced market conditions in the sub-$50m industrial category.
Sydney’s sub-$50m industrial market
Sydney’s sub-$50m industrial market reflects the national trend and continues to perform relatively well, with prime yields often sitting in the low-mid 5% range. Although the market is showing signs of plateauing and some investors are being cautious, owner occupiers are still seeing value in offerings that help them escape a tight rental market.
The ongoing level of rental demand is due to a lack of new supply coming on to the market and the repurposing of existing stock. New supply continues to be limited by the lack of available land for development and the costs of construction. While there is a new industrial multi-level development coming online in Alexandria, developers are generally moving away from these projects based on their feasibility.
Compounding the issue of supply, rezoning in areas like Alexandria has seen existing industrial stock commanding higher values and then being demolished or repurposed for mixed or residential uses. For example, 20-26 Bourke Road, Alexandria sold in April 2024. The site has four adjoining industrial warehouses with a combined area of 3,307 sqm. which provides a potential developable GFA of over 13,000 sqm (STCA).
Another change is that government infrastructure investments have turned some secondary locations into prime ones. For example, the development of the new airport has led to increased volumes of listings of $5m-$10m industrial properties in the western Sydney corridor.
Leases remain key for different buyer types
Many of the drivers for owner occupier buyers remain in play, including the limited supply of industrial stock and the changed consumer behaviours that have driven the need for local distribution hubs. Reflecting this, vacant possession or assets not attached to a long-lease term are attracting premiums from this buyer pool. For example, 11 Hexam Place, Wetherill Park sold in early 2024 with vacant possession with high levels of owner occupier interest reported.
In contrast, syndicate and high net worth individuals looking to invest in the $10m-$50m bracket want national tenancies on a long WALE and a net lease. While demand in this part of the market has shown signs of easing, quality buildings that meet these requirements and that need limited ongoing capital expenditure are still attracting strong interest. For example, 65-67 Batt Street, Jamisontown sold in February 2024 with a national tenant (ASX-listed Reece Limited) in place with a new 10 year net lease to 2034 plus six further five year options to 2064.
Because of the low levels of stock, lease incentives are not a big factor in this segment of the commercial market, however they have shown signs of increasing slightly throughout Q2 2024. Where they do exist, they generally take the form of a rent-free offering attached to a long-term lease.
Looking ahead
In the Sydney sub-$50m industrial market, high demand from owner occupiers is likely to continue in the face of low supply levels. Those buyers are making financial decisions based on location security and the potential for long-term capital gains.
Syndicate and high net worth individual investors will be watching to see whether yields soften further and whether rents remain stable. In this space, much will depend on what interest rates do.
[1] https://www.propertycouncil.com.au/property-australia/australias-industrial-vacancy-rate-remains-lowest-globally
Paul Bungate
Director - Middle Markets & Advisory
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