"Economics 101" set to boost industrial real estate

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While continued capital growth seems like a possibility for residential real estate in Sydney and other markets across Australia, one real estate professional believes another sector of the market is set to become increasingly popular with investors.

Barry Cawthorn, managing director Bawdens Industrial, believes an increased desire among investors to improve their cash flow situation combined with scepticism about how much heat is left in the residential market is set to give the industrial real estate sector a boost.

“People are coming back and revisiting industrial real estate now. They’re looking for somewhere to invest but they’re concerned about the volatility in the share market and they don’t want to look at residential property right now so they’re thinking about moving some money into the industrial market,” Cawthorn said

“We’re finding a lot of people right now are saying capital growth is great, but I can’t eat that now and I need to improve my income,” he said.

While the term industrial real estate may have investors thinking large scale factories or warehouses, Cawthorn said those switching to the sector are likely to come in at the smaller and more affordable end of things.

“Sydney investors are realising that a small industrial strata unit can be purchased for half the capital outlay compared to a home,” he said.

“We know that a 5.5% net yield on a property under $400,000 is about what you can expect in the industrial market in Sydney currently. You can add capital growth of 5% - 8% a year to that and then you’re seeing your total returns are over 10% per year.

“At the lower end you’re not going to get returns of 15% a year, but you will get 10%. For somebody who may only $400,000 to spend that’s attractive because you’re not going to get anything like that from the residential market at the moment.”

Sydney's residential yields currently sit at 3.1% for houses and 4% for units, with growth unlikely in the near furture

With the economy currently growing at a sluggish rate Cawthorn said it’s understandable that some may be sceptical of the viability of the industrial sector now, but he said a situation of “economics 101” is helping to strengthen the market.

“What we’ve seen in the last seven or eight years in Australia since the GFC is that the GDP isn’t going up at all, it’s just going sideways. The outcome of that usually in the industrial sector is that the demand for new space stops.

“But since the GFC there’s been no real construction for the small to medium industrial market, that’s building that are less than 3,000 square metres.

“Because nobody’s built any, there’s a real lack of supply at the moment and because of that we’re starting to really see rent increase as well as capital growth increase, it’s just economics 101.”
 

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