Industrial property tipped to cool

Colliers industrial director Kellie Tattersall said with the performance of warehouses outstripping that of other property classes, landlords had dictated terms such as demolition clauses to maximise a site’s development potential.

With asset values high and yields falling, the market is becoming divided as to its ability to appreciate further.


“However we are starting to see a different picture and a shift which favours tenants,” she said.

Patchy economic conditions contributed to vacancy rates in Sydney’s central west climbing by 0.5 per cent over the last six months, to 2.2 per cent.

Incentives paid to new tenants also rose commensurately, from 8-10 per cent of the value of the rent to 12-15 per cent.

In its national quarterly industrial update, agent Savills also questions the ‘stronger for longer’ assumptions that have underpinned the sector’s stellar performance.

“With asset values high and yields falling, the market is becoming divided as to its ability to appreciate further,” the firm says.

“The asset class remains a capital growth story. However the lack of income growth via rental growth is beginning to stabilise yields. Savills expects the growth in valuations to slow down in the short term.”

Savills reports a further 50 basis points of capitalisation rate compression over the last 12 months in the in the Sydney, Melbourne and Brisbane industrial markets.

Cap rates (in effect yields) in Sydney’s west declined by 75 basis points to 4.9 per cent. In the same period, capital values grew 20.7 per cent to an average $2626 per square metre, with land values rising 7.4 per cent to $725 sq m.

In Melbourne’s west, yields declined 50 basis points to 5.63 per cent, while capital values rose 3.6 per cent to $1450 sq m and land values gained 10.7 per cent to $338 sq m.


In Brisbane yields also declined 50 basis points, to 5.88 per cent, while capital values gained a more modest 1.4 per cent to $1750 sq m.

Savills says that with rents rising only 2-3 per cent across the board, asset values were being driven more by population “densification” and the resilient ecommerce and logistics theme.

“Traditionally, industrial asset values reflected the health of the economy,” the firm says. “However in the last ten years demand for logistics has driven the asset class to fulfil business-to-business distribution and the growing ecommerce industry.”

According to Colliers’ Ms Tattersall, buyers are still factoring in further yield compression of an average 25 basis points. In Sydney, average yields are at 5.38 per cent, with a widening gap between primary and secondary assets.

“Many believe the industrial real estate has peaked and the tide has turned,” she said. “However there is still a lot of optimism and misplaced funds in the sector that should keep capital values steady.

“Having said that, I believe buyers will be forced to take higher risks and lower their yield expectations to secure an industrial asset.”

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