Warehouse yields hit record low

Warehouse yields hit record low

29 August 2019

Investors flooding the logistics sector with capital have driven yields for super prime warehouses to a record low of 5.76 per cent in the June quarter, reports the AFR..

Over the June quarter, yields tightened across all capital city markets apart from Melbourne where they were flat at 5 per cent.

Citing a recent CBRE report, the AFR notes that tightening of returns on investment grade assets is being driven by rising capital values with land values also surging on the East Coast.

In Sydney, super prime yields compressed by 10 basis points over the June quarter to 4.75 per cent “driven by strong demand from institutional and offshore investors looking to increase portfolio allocation to industrial and logistics assets”.

Leading the pack was South Sydney, one of the most supply-constrained markets nationally, where yields have compressed to 4.5 per cent, in line with returns being generated for A-grade office towers in Sydney and Melbourne.

The overall vacancy rate for industrial property along the eastern seaboard has fallen to 2.3 per cent by the end of the second quarter, led by a squeeze in Melbourne particularly,

In terms of transactions, CBRE recorded $1.2 billion worth of deals, up 23 per cent on the prior quarter, but 32.7 per cent lower than the same quarter last year.

“Limited availability of assets available for sale was the primary reason for the softer transactions volumes,” said CBRE in its report.

The largest transaction over the June quarter was the sale of a 50 per cent share of the Coles cold storage facility in Parkinson, Queensland for $134.2 million on a yield of 5.75 per cent to global investment manager DWS.

“This reflects continued investor appetite for high quality assets with a strong lease covenant – a trend expected to continue in the second half of 2019 as investors look to increase their allocation towards industrial and logistics assets,” said CBRE capital markets director Chris O’Brien.

“The fact that a cold storage facility was the largest transaction further highlights the continued demand and appetite for the food sector within Australia,” Mr O’Brien said.

Supermarket chains are also vying for inner-city warehouse space to cater for the growth of online food deliveries, both in dry goods and perishables, says The Sydney Morning Herald.

All the major landlords have large development pipelines with an emphasis on high density areas of Melbourne and Sydney, but finding the land is the hard part and is putting pressure on land prices and rents.

Globally, location to cities and consumers is the most important consideration for warehouse space users, over ports and proximity to suppliers, and Australia is no different.

“For landlords, we see location together with increases in automation as the key drivers of rent growth over the medium term,” UBS analysts Grant McCasker and James Druce said.

Ross Lees, fund manager for Centuria Industrial REIT, agrees that location is vital to gain competitive advantage in the sector.

Mr Lees says there are five market movements that matter for industrial property landlords: (1) the current era of infrastructure investment, and ongoing economic growth; (2) location, (3) e-commerce, (4) logistics, (5) and manufacturing.

“Investment in infrastructure is good news for the economy and for commercial real estate markets,” Mr Lees said.

“If demand for same-day delivery is on the rise, then the need to be close to consumers is rising also. There’s no point offering same day delivery when your stock is located 100 kilometres from the customer’s home. Smaller, more centrally located properties are where you want to be,” Mr Lees said.