Industrial property favoured as ‘low risk asset’

1:21 PM Tuesday October 7, 2014 Colin Taylor

Industrial property has strong appeal for lower risk, passive investors.

Industrial property has been identified as the steadiest performer in the commercial real estate market in a report compiled by Bayleys Research.

“Industrial property is a sector that is characterised by generally low volatility in key indicators such as vacancy levels, rentals, yields and returns. As such, it has strong appeal for the lower risk, passive investor,” the report says.

The low volatility of the industrial property market is measured in a five-year rolling index correlated by the Investment Property Databank (IPD). The index tracks the performance of 593 property investments nationwide with a total capital value of more than $12.7 billion and consistently records the industrial property market as “the least volatile” of the real estate segments.

Gerald Rundle, national manager of Bayleys Research, says the findings certainly apply to the industrial property sector where high occupancy levels and a growing economy and business sector will continue to make the market an attractive and stable proposition for investors.

The IPD’s March 2014 quarter results measured industrial volatility at 0.9 per cent, compared to the overall market at 1.7 per cent. The retail sector was at 1.8 per cent, and the office sector at 2.3 per cent.

Rundle says the greatest volatility post global financial crisis (GFC) was measured in 2009 with the overall market at five per cent and the retail and office sectors up at 5.5 per cent. By comparison, the industrial sector was significantly lower with volatility recorded at 3.7 per cent.

“The Global Financial Crisis effect on the greater property market was significant with occupancy levels across all sectors taking a significant hit,” he says.

“Tenants cut back on space as business activity stalled, and while the industrial sector was not immune, when compared to the office sector in particular, the impact was far less.

Bayleys Research data shows Auckland industrial vacancy rates climbed around two percentage points as a result of the GFC and peaked at just over eight per cent.

“This peak was not considered to be particularly high, and the amount of vacant space in the market has quite quickly fallen with vacancy now at just below four per cent - better than before the GFC,” Rundle says.

The industrial market fared far better than the office market, according to the research. Auckland CBD recorded a jump in vacancy from sub-10 per cent levels pre-GFC to more than 14 per cent by the end of 2009. It too was recovering, but the rate was still sitting at just over 11 per cent.

Commercial Property - Gerald Rundle, Bayleys - cropped.jpg

Gerald Rundle 

Wellington’s industrial market recorded a bigger impact from the GFC with vacancy levels jumping from just on three per cent to close to eight per cent. But again the absolute figure at its peak was not significant, although in Wellington’s case the vacancy rate has been slower coming down and still sits at just over seven per cent.

Rundle says it is no surprise that investors reacted to the GFC by requiring higher initial returns and, as a result, the risk premium for industrial property opened up to over four per cent.

“Investors view industrial property as a generally low risk asset. In both main and provincial centres, it has continued to be favoured by investors and is generally tightly held. When a prime asset with a good tenant does becomes available, it generally attracts strong interest,” he says.

“From a peak in early 2009, the heightened perception of risk has eased out of the market, and from the end of 2012, our Bayleys Research Industrial Yield index has shown investors accepting a risk premium around three per cent which is expected to continue to trend down.

 “The risk premium is not expected to fall to the pre-GFC one per cent level but its recovery reflects the confidence investors continue to have in the industrial market.”