The Rise and Rise of Industrial Property Value

For some time now, industrial property has been the darling of the three commercial property sectors, with office and retail falling behind in preference. In the last decade, industrial yields have dropped from circa 7-9% down to 3.5-4.5%, with prime assets in the low 3% range.

Industrial property value has risen, and industrial rental levels have shown very strong growth in the last 12 months after several years of subdued increases. These factors combined have provided unheralded value gain in recent times.

Fresh economic conditions have provided low-interest rates and an economy awash with liquidity, proving to be a boon for most asset classes, from equities to art, to cryptocurrencies and, of course, real estate.

So why is industrial the standout performer? Let’s take a look at some of the driving factors.

The Influencing Factors of Growing Industrial Property Value

Let’s break down why industrial property value is continuing to rise, even when residential property is on the downhill slope.

The Influence of Technology & Online Shopping

Pre-pandemic, there was some debate around the influence technology has had on the industrial property sector. Many consider the rise in demand for warehouse space a result of increased demand through the rise of online shopping. Since COVID-19, any debate has been dismissed. During the lockdowns, many businesses were to quickly and radically lift their online game or risk falling behind as those with more mature online offerings had a distinct edge.

The curve was heading in this direction prior to the 2020 pandemic, which merely accelerated it. As demand for industrial space increased, the inverse is true for retail.

Limited Land Supply

Industrial land supply is scarce, with relatively few new industrial areas resulting from the Unitary Plan in 2016. Some examples include Highgate (Silverdale), Westgate, Hobsonville Point, and Drury South Crossing, with a stick in those developments being rapidly exhausted.

In recent years, Goodman has developed some of the last remaining tracts of greenfields land in East Tamaki, forming the impressive Highbrook Business Park. A Colliers’ Industrial report states that land rates have risen 22% in the 12 months to March 2021.

Even more scarce is the availability of land zoned as Heavy Industry. The three main areas are Penrose/Onehunga, Wiri and East Tamaki, with only small pockets of such land in secondary locations like old Silverdale Henderson, Rosebank Rd area, Glendene, Takanini, and Papakura.

Industry has a High Land Component

The industrial sector generally has a high land component to it, with the footprint of warehouses much larger than that of a shop or office building. Granted, industrial land value is generally much lower per square metre rate basis when compared to the other two sectors.

One of the golden rules in property is that land appreciates whilst buildings depreciate, so it makes sense to apply this in the industrial sector as well.

Industrial Real Estate Offers a Value-Add Opportunity

Auckland is full of older industrial pockets such as Wairau Valley Penrose, Onehunga, and Otahuhu. Developed in the 1950s through to the 1980s, these staid business areas offer stock now approaching the end of its physical life. Values in these areas continue to rise, with extraordinary prices paid for properties with a relatively low standard of improvements, and often with low seismic ratings.

A recent example is the auction of a very basic 560m2, 1970s vacant warehouse in Porana Road, which sold for circa $5,000/m2. It’s easy to imagine the purchaser is looking to redevelop and refurbish the property in years to come

Industrial Property Saves Money with Low Maintenance

Industrial property is generally low maintenance, with the improvements designed and built for function over form in most instances. Although, good quality, brand-new developments with architectural appeal are becoming commonplace.

For older stock, occupants can be less particular about the standard of the fit-out. This is opposed to offices and some retail and residential investment sectors, which need to have a relatively high standard of presentation to attract tenants. A leaky roof is the most common industrial tenant complaint.

Management Overheads Remain Low

Following the previous point, the simplicity of the industrial investment requires a low management overhead, with many private owners managing their portfolios rather than engaging as property managers. This is particularly evident in comparison to other sectors, especially residential, but also multi-tenanted retail or office scenarios.

The Market is Easy to Understand

Industrial property and commercial real estate are fairly simple to understand. As with office and retail, it comes down to square metre rates and yields. However, the market is perhaps slightly more consistent and arguably less sensitive to influencing factors than office and retail, which have the highest variance.

Influencing factors to real estate are location, road profile, stud height, truck access, and configuration, among others. More recently, with the growing influence of technology, we are seeing low office ratios becoming highly desirable in the leasing market.

Changing Policies Mean Changing Interests in Real Estate

A lot has changed in the policy and financial market since the Global Financial Crisis and now a global pandemic. How has this shaped the growing industrial real estate business?

Syndications & Managed Funds

Since the Global Financial Crisis, we have seen the re-emergence of property syndication which allow “Mum & Dad” investors access to larger, often high-quality commercial property investments that would otherwise be unaffordable. Investments are often possible from as little as $50,000, and according to brochures, are relatively liquid, with a mature secondary market.

Nonetheless, the class of product, though not new, has become increasingly popular and, in the current prolonged cycle, has provided good returns to customers.

Although not exclusive to industrial properties, it is this sector that is proving to be the most highly sought after, along with several managed funds that have emerged in recent years.

Residential Property is Less Appealing

In 2021 the government announced that interest on residential mortgages will no longer be tax-deductible; a policy that will be phased in over the next four years. This will have a significant cash-flow impact on residential investors, particularly those who are highly leveraged.

This policy, along with a string of others such as the Bright Line Test and the Healthy Homes Act, have made the residential property market less appealing. Some investors are exiting the sector and looking at commercial/industrial real estate as a more viable option.

In 2022 we expect industrial rents and values to continue to move forward, although it is still too early to determine the impact of rising interest rates on ever-decreasing yields. Market sentiment in the residential arena has softened, and it remains to be seen if this will flow over into other asset classes such as industrial property. For the short term at least, the music looks set to keep playing.

Mark Davidson