Australian investors reweigh portfolios towards industrial property

The share of industrial sales doubled from 18% to 36%. 

Australia’s economic recovery is now well underway with strong GDP growth recorded over the last two quarters of 2020, after falling into a recession in June. According to Savills, the rebound has been supported by better than expected health outcomes and expansion of monetary and fiscal policy. 

Despite the national economy shrinking by 1.1% over the course of the year, the second half saw two quarters of more than 3% growth for the first time in history (3.4% and 3.1% respectively). 

Here’s more from Savills:

The Reserve Bank of Australia has cited that they are forecasting that GDP will return to pre-pandemic levels by the middle of this year, which is a result of quicker than anticipated removal of restrictions and social distancing measures throughout the states. The rapid economic turnaround has translated into improvements in business confidence and consumer sentiment with increased consumer spending evident. Household spending increasing by 4.3% in the December quarter, with the savings ratio falling drastically to 12% (from 19% in September). Albeit this figure is still double the preCOVID rate, which is largely a result of government stimulus payments as well as the inability to travel overseas. 

After reaching a peak of 7.5% in July last year, Australia’s unemployment rate has continued to decline (apart from a small spike in October, largely a result of lockdown measures in Victoria) with the latest seasonally adjusted figure falling to 5.8% in February. The Federal Government’s JobKeeper stimulus package came to an end in March and it is likely that we will see the unemployment rate plateau or increase over the coming months as a direct result. Treasury forecasts that without the AU$130 billion JobKeeper payment, the unemployment rate may have peaked at 15% in 2020. 

In the 12 months to March 2021, Savills tracked AU$24.92 billion of sales (AU$5m+) across office, retail and industrial asset classes, down 37% 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 doubling from 18% in the previous 12 months to 36%. 

Latest Morgan Stanley Capital International data (December 2020) demonstrates the impacts the pandemic has had on retail and office property. Capital returns for both sectors fell into negative territory, with annual growth for retail at -13.7% and -0.2% for office. This was the first time since the Global Financial Crisis that office capital growth has contracted. 

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. Capital returns for industrial property were recorded at a three year high of 7.9%, making a total return of 13.9% for the sector.