The industrial investment class has now caught up to the more traditional office and retail asset classes as an asset class sort after by private and institutional investors. Prime industrial investments are now being purchased on comparable yields to traditional prime office and retail investments. This revolution is being driven by a lack of supply of quality industrial properties, and a strong demand from investors based on potential growth opportunities for industrial assets in Sydney.
Lack of supply of quality industrial properties
Strong owner occupier demand;
The current low interest rate environment is encouraging owner occupiers to purchase their premises rather than rent. The knock on effect from this strong demand is that vendors are seeing the strong prices paid by owner occupiers and are expecting the same from their own properties even though they may have a long term lease in place. As a result the yield expectation on long term investments has fallen.
There is a strong reluctance from most industrial vendors at the moment to sell their property, typically for the following three reasons: 1) They may be receiving a passing yield of 8% to 9% and to buy back into the market they would only be achieving 5% to 6%; 2) If they sell they will incur the costs of selling a property, mostly capital gains tax; 3) If they purchase a new property they will incur purchase costs, mostly stamp duty.
Traditional industrial zoned land in Sydney in particular the South Sydney market have over recent times been rezoned to higher and better uses, which has resulted in a loss of industrial properties. This loss of properties has resulted in an increase of tenants and owner occupiers having to find alternatives premises in other industrial areas in Sydney.
Potential growth opportunities
There is a lot of new infrastructure projects either underway or planned for Greater Sydney. The ones that most benefit the industrial markets are in West and South West Sydney with the planned construction of the Badgerys Creek Airport precinct (estimated cost of $5.3 billion, and completion in 2026), and the surrounding road infrastructure projects (estimated costs of $3.6 million, and completion in 2020). These road projects will improve the connection between the outer west Sydney sub industrial markets and the Inner and Middle ring industrial areas.
Land values increase;
Industry experts have reported that industrial land values across the Sydney industrial markets have recorded positive annual growth over the past few years, and have entered double digit growth since March 2014. More recently since the end of 2015 the annual growth rates have been in the high 20 per cent range.
E commerce revolution;
The industrial market which has historically been an unsophisticated supply chain sector is growing more complex as the market adjusts to cater for the increase in companies using industrial property as a platform for online retailing. Below are some facts that support this growth in E commerce and the systems that need to be implemented to support this continued growth.
- The share of online retail trade to total retail sales has nearly doubled in the last 5 years.
- 74% of the total industrial area leased in Sydney in 2017 was to retail, transport, postal & warehousing and wholesale traders who are related to the increased demand from online retail operators looking to expand their distribution capacities.
- Over half of the Sydney Metropolitan population currently live within Sydney’s Inner and Middle ring areas (approximately 20km from the CBD). This creates a greater need for facitlities to be positioned close to highly populated areas to effectively achieve what has been labelled as the ‘last half hour delivery’. To achieve these delivery time frames the traditional large regional distribution centres may be replaced with smaller distribution centres within close proximity to highly populated areas.
- The traditional B2B (Business to Business) sector which has been served by “pallet in and pallet out” systems is undergoing a major change to B2C (Business to Customer).
High bay and multi-level warehousing;
We are now facing the viability of the traditional single storey industrial facility having to be expanded to a high bay facility or a multi-level facility. This is being driven by many factors including; the lack of industrial land currently available, the increasing price of industrial land, and the need for an industrial presence close to highly populated areas. Below are some facts relating to this new revolution.
- A traditional warehouse in Australia is single storey with a roof height of typically 8m to 10m, with a maximum height governed by fire regulations of 13.7m for a single roof mounted fire system.
- A high bay warehouse lifts roof heights to 40m+ which can only be achieved by eliminating forklift-type equipment and replacing this with cranes. Typical high bay warehouses are tall rectangular buildings with cranes running along the long axis and these cranes can carry multiple pallets at a time and store these up to three deep in racks using telescopic forks.
- High bay warehouses are economical in areas where land is scarce, and also for temperature controlled facilities.
- The additional costs can be overcome by; the need for less land, reduced labour costs, and faster sorting and stacking.
- Multi-level warehousing is popular in land locked cities like Hong Kong and Singapore with some facilities as high as 30 storeys. These facilities are accessed by ramps and cargo lifts.
Market leaders are predicting that the use of artificial intelligence in the industrial sector will accelerate over the next five to ten years not only with the use of robotics but with data collection and its intergration with transport logistics.