Industrial Investors Keep the Market Outlook Positive

Industrial Investors Keep the Market Outlook Positive

Recent research from the Jones Lang LaSalle Industrial team has found that the New Zealand industrial market is now fast becoming the top performing sector within the property market and is and is helping to steer the overall sector towards a recovery.

The driving force behind this performance is due to strong demand for stock across Auckland with investor sentiment running ahead of tenant demand.

Sam Smith, Director of Industrial Sales and Leasing at Jones Lang LaSalle, says, “Investors are attracted to the sector because industrial property has historically displayed a low level of volatility combined with strong fundamentals, especially in prime stock.

“We continue to see strong demand in the sector; however, this is matched with very low levels of supply which is pushing up pricing. In particular we have seen a firming of average yields for prime stock of 62.5 basis points in the 12 months to December 2012. At the top end of the range we would expect this trend to continue with a firming of over 100 basis points over the 18 months to mid-year 2013.”

The last 12 months saw the Jones Lang LaSalle capital value series for prime industrial in Auckland increase some 7.7% giving a total return for the year of 15.9%. This outpaced the performance of secondary stock, which saw no appreciable yield compression over the same period.

Justin Kean, Director of Research and Capital Markets continues, “The industrial sector provides a good bite size for a lot of medium sized investors, high net worth and family offices. These buyers are often looking for single tenant, uncomplicated assets, which industrial stock can typically provide. These investors are currently very active and are encouraged to seek yield when risk free rates are so low.”

Despite investors turning to the sector and increasing levels of enquiry, there have not been any significant gains in rentals. There has been very little movement in the Jones Lang LaSalle series for prime industrial rents over the last 12-18 months. There are however several positive signals coming out of the sector, indicating that demand pressure will pick up resulting in likely rental upside over the medium term.

Stats NZ recently reported GDP growth of 1.5% for December 2012 quarter equating to 3.0% for 2012. This indicates that the economy is now growing at the fastest pace since before the Global Financial Crisis - economic growth has traditionally led rental growth in the industrial sectors. In addition, the NZIER Quarterly Survey of Business Opinion shows that manufactures and construction businesses have strong positive outlooks. A net 74% of manufactures expected output to increase through Q4 2012 compared to 50% in Q4 2011. For the construction industry the figure was 79%.

Mr Smith concludes, “There is now also a significant rental gap between prime and secondary rents – a difference of 27.3%. This is the highest it has ever been and indicates that any future pick up in secondary rentals will likely outpace growth in prime – in percentage terms.

“Looking ahead we expect to see investment performance continue its strong growth with rental growth likely to catch up in the next one to two years.”

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