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Q1-17 - Industrial Markets Wrap Up
April 4, 2017
Industrial Markets Wrap Up - Q1, 2017
Industrial markets in Q1, 2016 reflected a lower level of activity due to the absence of the larger portfolio and one off deals that have been evident in the last two quarters of 2016.
Industrial property transactions in Q1, 2017 dropped a modest 5% in volume to $457 million compared to Q1, 2016 at $480 million with a fairly "normal" mix in number and prices achieved.
NSW accounted for half of the value of transactions with Victoria taking a third.
Only one asset traded above $100M, the LOGOS acquisition of the Woolworths Distribution Centre at Minchinbury, NSW for $161 million.
Through the most part of 2016, industrial property yields were stable, averaging approximately 7.0%. The 1st Quarter 2017, shows a marked sharpening to 6.5% however there are only a few transactions revealing their passing yield and those that did enjoyed long term leases to high quality covenants, worthy of a sharper yield, so I regard this quarter's average yield as an anomaly.
An alternative indicated a value for industrial assets is the value per square metre of NLA. After strong increases in value of the sold assets through mid 2016, the nature of the assets sales in Q1, 2016 revealed a lower average of approx $2,000/sqm.
So What has changed ?
Clearly things have changed over the past quarter. The new US government has begun to have an influence on the global market. Ten year Aussie Bonds yields rose 40Bps shortly after the election and continued to climb to a high of 2.98%, and now settled to 2.72%. The prospects of higher US interest rates has elevated as has the prospects of higher local interest rates to counteract what may become a strengthen Australian economy and a falling Aussie dollar. As these factors play out, there also remains the prospect of foreign capital returning offshore to chase better returns.
On the flip slide, a strengthening Australian economy will continue to support employment growth and occupier demand.
Asset pricing under these scenarios is challenging and most sophisticated investors will err on the side of caution, particularly with respect to any assessment of a terminal yield and rental growth.
What Next ?
Australia continues to be a favoured destination for global capital. For long term investors who are able to properly price an asset, and stick to their fundamental beliefs, there remains a valid reason to participate in the market.
The quality assets with long term lease covenants will continue to find capital from investors at prices of 6.0% - 6.5%, however lower quality assets will find fewer buyers and see average yields moving back above 7.5%.
Propel is a property based advice, research and economics group providing support to institutional investors. We provide assessment on direct investment and development transactions, listed real estate, and investment strategy.
We are part of Capital Management Australia, a boutique funds management business.