Includes industrial units, warehouses, workshops etc with ancilliary offices, but also vacant industrial land.
Our valuation reports identify both market sales transactions and leases to arrive at a value.
The Industrial property market following sharp declines in both yields and values in late 2008 and through 2009 has now appeared to have stabilized but with a mixed outcome. Industrial properties at the lower value end of the markets, have been less affected, as credit continued to flow for these transactions. However the larger industrial sites market previously controlled by the Listed Property Trust sector companies (LPT’s) effectively collapsed with no or few buyers, difficulties in obtaining finance with uncertainties of final developed values. However in
Sydney recently the first LPT large industrial site sale took place, being the first major transaction for 18 months. As the ASX has strengthened throughout 2009, then this has stabilized many LPT’s who are obviously in a position to now consider future projects with much more certainty than they were 12 months ago. We expect to see consolidation within the LPT sector in 2010, as their current market values are probably better than direct acquisitions, but we also expect to see many more industrial transactions throughout 2010 as confidence returns.
The chart below highlights the possible cause of Industrial yields being out of line with investment yields for several years. Traditionally Industrial Yields have been measured against Australian 10 Year Bonds to provide indications of risk premium spread. However since 2005 until 2009 the 90 Day cash rate had been higher than the 10 Year Bonds, and has in effect substituted itself as the risk free rate. Unfortunately the market has not embraced this scenario and continued to derive the risk free rate from 10 Year Bonds, which resulted in additional tightening in Industrial Yields over the 4 year period, when realistically they should have been declining. This scenario continued until January 2009 where once again the 10 Year Bond rate became higher than 90 Day Bills and currently involves a very high spread.
Previous problems with the larger industrial land market involved competition from the Listed Property Trusts competing for the higher quality Industrial Assets, and clearly there was an oversupply of demand which increased land values and strengthened yields. For developers, investors and owner occupiers, there was also an abundance of cheap credit available to fuel the market further. These issues have since unwound throughout 2009 and we expect the LPT sector to be more cautious with future acquisitions, but also credit growth to be maintained within stricter gearing ratios than they were in the past. Therefore we expect future prospects to be slow but sustainable.
Industrial Yields
Industrial yields have increased generally to around 8% to 9% for many prime assets with secondary assets being around 9% to 10%. There has been little activity in the larger industrial land market, with LPT’s preferring to buy shares in rival companies, rather than direct land acquisitions and so yields have been difficult to derive. However the secondary industrial assets for smaller sites have involved increased yields which underpin the primary yields at present. The current strength of the Australian Dollar has also reduced imports and this has also impacted on the demand for industrial land and warehousing, but we expect this to improve in 2010.
Small Sites - Owner Occupiers / Small Developers
This market is currently the strongest with credit for smaller transactions being freely available. Owner occupiers and small developers are actively acquiring industrial sites and land of smaller sizes as land values have fallen and forced sales provide good opportunities for cashed up buyers. In certain markets the strong demand for smaller assets has maintained values within those areas.
Medium Sites - Owner Occupiers / Larger Developers / Investors
The medium sized industrial assets are also selling but in most States for lower levels than in the past, as cashed up purchasers seek out the best bargains. Investors are looking to obtain the best value for their funds and are able to negotiate the best deals, which continue to come to market as banks review on-going valuations and create an ever increasing mortgagee in possession sales and liquidation of assets sales. Many “toxic” assets only come to market when there is a realistic chance of obtaining the outstanding loan involved, and so as the market consolidates then there could be additional opportunities of sales, which are currently held in limbo by the banks.
Large Sites - Listed Property Trust Sector
The market for large industrial assets was previously dominated by the Listed Property Trust companies. The ASX LPT index was down 60% for 2008 but has stabilised throughout 2009 and ending the year marginally negative. It took a while for sales to drop off and for schemes to be shelved, but most of the restructuring has already taken place and the LPT’s are now much more stable than they were 12 months ago. Most of the stronger investors and developers have tended to acquire smaller sites, to achieve quicker turnarounds and minimise capital outgoings and have not participated within the larger market. The lack of transactions has caused much uncertainty in terms of where values currently lie and estimates are derived from secondary sales. Where large transactions have taken place they tend to be well below previous levels and indicate a sharp downturn, but it remains to be seen whether this trend will continue.
The LPT’s have also looked to pay off debts where sales have occurred, or to acquire shares of rival companies, which is likely to produce better value, than direct acquisitions. We would expect consolidation within the LPT sector to be a priority for several LPT’s in 2010, and this would minimise individual asset value transactions from becoming available to the market which would perhaps stabilize the market.
Infrastructure
The federal Government have committed Billions of dollars to road, rail and port infrastructure schemes which should benefit numerous areas with follow on development opportunities. The State governments have a mixed approach with some committing to existing and future schemes, but others withdrawing schemes due to lack of funds.
