Why industrial stacks up
The industrial property sector’s strong fundamentals are likely to provide a buffer against market changes as New Zealand recovers from the economic disruption of the Covid-19 lockdown.
New research from Colliers International shows that while there could be some disruption in the short term due to the impacts of the virus, the industrial asset class generally performs well in periods of uncertainty and market upheaval.
Ian Little, Colliers' newly appointed associate director of research, says: “Globally, many investors favour the defensive characteristics and positive aspects supporting the industrial sector, and New Zealand is no different.
“The heart of the industrial sector is goods-producing industries such as manufacturing and construction, which accounted for around one-fifth of New Zealand’s $300 billion economy in 2019, according to Statistics New Zealand.
“This is bolstered by other services such as transport, warehousing and postal services – industries that were already in growth before Covid-19. These services have received a significant boost in recent months as people shift to online and ‘click and collect’ services more than ever before.
“Additional depth comes from the rising public infrastructure spend on major road, rail and other ‘shovel ready’ projects, amounting to $15 billion or around four per cent of GDP.
“Auckland has just over half of the national projects by dollar value. It is likely that more projects and government support will be announced to drive New Zealand’s recovery and boost the sector further.”
Little says the industrial sector has been heavily in favour of landlords for an extended period with an extremely low vacancy rate, a modest supply pipeline and limited access to land for development activity.
Colliers’ latest Auckland industrial vacancy survey undertaken in February 2020 showed the overall vacancy rate was 1.4 per cent with just 171,000sq m of vacant space fragmented across the region.
A tight leasing market and limited supply response pushed prime vacancy to under 1 per cent or just
30,000sq m. Finding secondary space has also been a challenge in recent times.
While development activity has taken place, there is only around
300,000sq m of industrial space under construction, representing around 3 per cent of total supply. This has not been enough to satisfy demand and is much lower than in previous cycles.
Greg Goldfinch, industrial national director at Colliers, says all of these factors underpin the industrial sector’s strength.
“Combined, these strong property fundamentals provide a significant buffer for the sector against changes in market demand that will likely eventuate in the second half of 2020.”
Goldfinch says it is still too early to tell the full extent of the increase in space availability, but there is likely to be a rise over the next six to 12 months.
“Historic market performance indicates that it is likely to appear in smaller secondary premises and fragmented across the region. Prime stock
will remain in very short supply.”
Goldfinch says the buoyant economy and a shortage of available space has led to a decade of rental growth in Auckland’s industrial sector.
Prime warehouse rents now regularly push above $135/sq m, while average secondary warehouse rents are at some $115/sq m.
“While there is likely to be less rental growth in the industrial sector over the next year or so, the buffer provided by strong underlying fundamentals will help stabilise rental rates over the short-term.
“Incentives are likely to rise but are coming off a very low base.”
Accordin to Goldfinch, industrial’s strong underlying fundamentals are likely to remain attractive to local and offshore investors, as well as owneroccupiers.
He says: “Sale prices have been rising strongly and supply has been limited. However, changes in market conditions may provide increased purchasing opportunities in 2020, particularly for the secondary market where there’s more risk for those with the appetite in return for a higher return.
“This would typically be for properties with less certain cashflows, lower income growth rates and the potential for extended vacancy during the current period of uncertainty.
“Conversely, there is likely to be strong enquiry and a lot of competition for high-quality premises with strong tenant covenants providing certainty in business performance and cashflows.
“We expect very solid pricing to continue for prime industrial investment offerings especially given the continued low interest rates environment.
“There is currently a lack of transactional evidence to provide a firm indication of post-lockdown values, however this will change in the near future as many deals that have been on hold during lockdown are set to complete in the coming weeks and new campaigns launch.”