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Beds and sheds are the new prime assets

Industrial property continues to be the in-demand asset class for institutional investors, however, residential is quickly picking up steam.

According to Ray White Group Head of Research, Vanessa Rader, industrial is the new ‘prime asset’, as demand for office and retail has waned in recent years.

“The industrial sector and its limited supply and high demand, particularly as population grows, saw a swift uptick in capital values and average rental rates,” Ms Rader said.

“High demand for institutional grade industrial assets resulted in significant tightening in investment yields from eight-plus per cent 10 years ago to circa four per cent during 2022.”

She said the strong gains in rents over the past five years were instrumental in improving capital values and changing the investment perception of industrial as a prime asset class. 

“While demand has not dissipated, and limited new supply is keeping occupancy elevated, investment yields have turned a corner in 2023 and 2024 rising inline with increased bond rates and re-rating of the risk profile of these assets,” Ms Rader said.

“Despite capitalisation rates increasing, the demand and supply profile for industrial is anticipated to keep rates tight, particularly given limited industrial land availability and planning constraints during a time when population and consumption levels are tipped to increase.”

Ms Rader said despite institutions not typically owning residential property, there was growing interest.

“With the strong growth in median house prices across the country as well as sizable ongoing rental growth due to the lack of supply and increased population, institutional investors have turned to residential as a suitable, lower risk investment opportunity,” she said.

“While Australia has no track record regarding these assets, build to rent has grown in popularity over the past few years with land tax exemptions, improved planning and tax concessions for offshore investors/developers. 

“Piquing interest of investors has been the long-term stable returns of residential assets in Australia and robust capital value increases across the country.”

Ms Rader said that given the huge increase in population leading to homes becoming more unaffordable, it was likely to lead to more people being forced to rent.

“The recent increases in rents and uptick in values saw unit capitalisation rates overtake industrial achieving 4.6 per cent in early 2023 when industrial yields averaged 4.2 per cent,” she said.

“Industrial yields since this time have increased due to a reduction in capital values, while residential yields have increased off the back of strong income gains during a time of robust capital growth, yet remaining within the long-term band of between 3.6 per cent and 5.2 per cent seen during the last 20 years,” she said.

“These long-term, secure trends in income growth across the residential market, coupled with strong capital gains are now in full view of institutional investors.”

She said the significant reduction in industrial yields over the last five years does make many industrial assets unfeasible for institutional investors, leading them to look elsewhere.

“Despite this, industrial assets do have similar fundamentals to residential –  including constrained land, limited supply, and increasing demand – therefore the outlook for growth is greater than many other commercial alternatives,” she said.

“Institutional investors will continue to seek out strong returning industrial assets which factor in risk appropriately, however, demand will continue to turn a corner for a new era of residential property. making beds and sheds the most sought after assets for years to come across Australia.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.