Australian industrial property’s capital returns hit 5-year high of 9%

The industrial markets have been robust over the last 12 months.

Australia’s economic recovery is now well underway with strong GDP growth in the March 2021 quarter, up 1.1% YoY and exceeding pre pandemic levels, after falling into a recession in June of 2020. 

According to Savills, Australia has secured a safe haven status for investment as the only G7 national which has recorded GDP growth relative to pre-pandemic GDP which is attracting further demand from off shore capital. This is a result of a quicker than anticipated removal of restrictions and social distancing measures throughout the states and territories. 

Here’s more from Savills:

The rapid economic turnaround has translated into improvements in business confidence and consumer sentiment with increased consumer spending evident. Household consumption increased by just over 1% in the March quarter, with the savings ratio falling to 11.6% (from 22% at the peak of the pandemic) which is largely a result of government stimulus payments as well as an inability to travel overseas. 

In the 12 months to June 2021, Savills tracked AU$28.7 billion of sales (AU$5m+) across the office, retail and industrial asset classes, down 13% on the previous 12 months. Over the last 12 months it is clear that investors have looked to reweight portfolios towards industrial property, with the share of industrial sales increasing from 20% in the previous 12 months to 32%. Capital returns for both retail and office sectors are now in negative territory. This was the first time since the Global Financial Crisis that office capital growth has contracted. With a significant spread between property yields and 10-year bonds, and the cost of debt at historically low levels, an argument is presented for cap rate compression for core, defensively positioned assets. 

On a more positive note, income returns for all sectors were only just below the three-year average. Industrial property continues to go from strength to strength as demand for the sector increases, placing downward pressure on yields and driving values higher. Overall, the conditions within the industrial markets have remained strong over the last 12 months. Demand continues to be driven by the transport, postal warehousing, and wholesale retail sectors making industrial and logistics an attractive class for investors. Capital returns for industrial property were recorded at a five year high of 9.0%, generating a total return of 14.9% for the sector.