Mark Davidson
  Registered Valuer
  Opteon Solutions

For some time now, industrial property has been the darling of the three commercial property sectors, with office and retail falling behind in preference. In the last decade, industrial yields have dropped from circa 7%–9%, down to 3.5%–4.5% with prime assets being in the low 3.00% range. Industrial rental levels have shown very strong growth in the last 12-months after a number of years of subdued increases. These factors combined have provided unheralded value gain in recent times.

Recent economic conditions providing low interest rates and an economy awash with liquidity are proving to be a boon for most asset classes, from equities to art to cryptocurrencies and, of course, real estate. So why is industrial the standout performer? Let’s take a look at some of the driving factors.

Pre-pandemic, there was some debate around the influence technology has had on the industrial property sector, with many considering the rise in demand for warehouse space a result of increased demand through the rise online shopping. Since COVID, any debate has been dismissed. During the lock downs, many businesses were forced to quickly and radically lift their online game or risk falling behind as those with more mature online offerings had a distinct edge. The curve was heading in this direction prior to the pandemic, which merely accelerated it. As demand for industrial space increased, the inverse is true for retail.

Limited land supply

Industrial land supply is scarce, with relatively few new industrial areas resulting from the Unitary Plan in 2016. Some examples include Highgate (Silverdale), Westgate, Hobsonville Point and Drury South Crossing, with stock in those developments rapidly being exhausted. In recent years, Goodman have developed some of the last remaining tracts of greenfields and in East Tamaki, forming the impressive Highbrook Business Park. A Colliers’ Industrial report states that land rates have risen 22% in the 12-months to March 2021. Even more scarce is the availability of land zoned Heavy Industry; the three main areas are Penrose/Onehunga, Wiri and East Tamaki, with only small pockets of such land in secondary locations like old Silverdale, Henderson, Rosebank Rd area, Glendene, Takanini and Papakura.

High land component

Industrial generally has a high land component to it, with the footprint of warehouses much larger than that of a shop or office building. Granted, industrial land is typically much cheaper per square metre rate basis when compared to the other two classes. One of the golden rules in property is that land appreciates and buildings depreciate so it makes sense to apply this to the industrial sector as well.

Value-add opportunity

Auckland is full of older industrial pockets such as Wairau Valley, Penrose, Onehunga and Otahuhu which were developed in the 1950s through to the 1980s, with some stock now approaching the end of its physical life. Values in these areas continue to rise, with extraordinary prices paid for properties with a relatively low standard of improvements, and often with low seismic ratings. A recent example is the auction of a very basic, 560m2, 1970s vacant warehouse in Porana Road, which sold for circa $5,000/m2. It’s easy to imagine that the purchaser is looking at a redevelopment or refurbishment in the years to come.

Low maintenance

Industrial is generally low maintenance with the improvements designed and built for functionality over form in most instances, although good quality, brand-new developments with architectural appeal are becoming commonplace. For older stock, occupants can be less particular about the standard of fitout as opposed to offices, and some retail and residential investment sectors, which need to have a relatively high standard of presentation to attract tenants. A leaky roof is the most common industrial tenant complaint.

Low management overhead

Following the previous point, the simplicity of the industrial investment requires a low management overhead, with many private owners managing their own portfolio rather than engaging a property manager. This is particularly evident in comparison to other sectors, especially residential, but also multitenanted retail or office scenarios.

Easy to understand market

Industrial is fairly simple to understand. As with office and retail, it comes down to square metre rates and yields – although the market is perhaps slightly more consistent and arguably less sensitive to influencing factors than office and retail, which has the highest variance. Those influencing factors are location, road profile, stud height, truck access, and configuration, among others. More recently, with the growing influence of technology, we are seeing low office ratios becoming highly desirable in the leasing market.

Syndications and managed funds

Since the global financial crisis, we have seen the re-emergence of property syndications which allow “Mum and Dad” investors access to larger, often high quality commercial property investments that would otherwise be unaffordable. Investments are often possible from as little as $50,000 and are purportedly relatively liquid with a mature secondary market, according to the brochures. Nonetheless, this class of product, although not new, has become increasingly popular and, in the current prolonged cycle, has provided good returns to customers. Although not exclusive to industrial properties, it is this sector proving to be the most highly sought, along with a number of managed funds that have emerged in recent years.

Residential being less appealing

In 2021 the Government announced that interest on residential mortgages will no longer be tax-deductable; a policy that will be phased in over the next four years. This will have significant cash-flow impact on residential investors, particularly those who are highly leveraged. This policy, along with a string of others such as the Bright Line Test and the Healthy Homes Act, have made residential investing less appealing, with some investors are exiting the sector and looking at commercial/ industrial as a more viable option.

In 2022 we expect industrial rents and values to continue to move forward although it is too early to determine the impact of rising interest rates on ever-decreasing yields. Market sentiment in the residential space has softened and it remains to be seen if this will flow over into other asset classes such as industrial. For the short term at least, the music looks set to keep playing.

These articles were featured in NAI Harcourts Market Leader, Issue 2 2022.