Looking at the quarterly sales volumes for Industrial property above 2,000sqm floor space, you can see a big decline. I looked at larger and smaller assets as well and they show the same trend. If I exclude sales from 2020 (pre-covid) then it is still down on trend ($250M instead of $500M for the Qtr.).
There is a lot of talk about the effect of our transition to ecommerce and you can see it in the sales surge which by 2021 was in full swing (particularly with REITS). Another telling point is the decline in new Industrial supply. You cannot sell what you do not have and compared to Melbourne and Brisbane, Sydney has a trickle of new Industrial supply coming through. The rezoning of the Badgerys Creek area will be interesting for many reasons, including how much Industrial land will be developed and hit the market in the years ahead.
On the demand side, inflation has risen and interest rates off the back of it. Banks are applying more scrutiny to debt servicing, so there isn’t as much Investor money looking for a home when money costs more. Rents are rocketing so the prospect of Owner Occupiers selling to lease back to Investors is less attractive as its typically cheaper to own. Investors getting big rent increases are less likely to sell, as who doesn’t like extra cash when your interest bill is going up? Vacancy rates are so low that the risk of losing a tenant or not finding a new one is highly unlikely so like the residential market, Industrial rents are rising.
None of this means that Industrial values are dropping in Sydney. Rents can be rising faster than prices and cap rates will be expanding (which cap rates have done of late in some areas). We are just used to the opposite happening for the last 10 years where values were climbing faster than rents, so cap rates were contracting. Even though bottom feeders looking for a little blood are back out in the market, prime Industrial sites are still selling well; there are just not many of them, and sales volumes are therefore down.
For more information contact Costi Cohen’s industrial specialist Richard Matthews.
Source: MSCI Real Capital Analytics online report Sydney Industrial property over 2,000sqm
