High rental returns driving residential investors to industrial property: Barry Cawthorn

High rental returns driving residential investors to industrial property: Barry Cawthorn
High rental returns driving residential investors to industrial property: Barry Cawthorn

GUEST OBSERVER

High rental returns in a low interest rate environment are driving residential investors to the industrial property market in Sydney.

Based on current market conditions, rental increases of between 35 to 45 per cent are expected over the next three to five years and possibly more due to an under supply of industrial property in Sydney.  

The low interest rate environment is creating perfect conditions to invest in industrial property. The owners of residential property and developers with land banks, who have made strong returns in recent years are cashing in and now moving into industrial property to capitalise on higher returns. The cost of money domestically is falling and driving price growth.

Astute investors are realising you can’t eat capital growth. To build long term wealth through property, cash flow is king which is what is delivered through industrial property. We are witnessing a shift towards investors purchasing industrial property in their self-managed super funds to generate an income for life.

Sydney investors are realising that a small industrial strata unit can be purchased for half the capital outlay compared to a home. There are significant advantages associated with investing in industrial real estate when compared to residential. These include the security bond is usually bigger (three months), leases are longer – typically three to five years,  less capital outlay is required for smaller units and rental yields are generally higher. 

According to the latest statistics from the Property Council/IPD Australia All Property Index, the average annual return of industrial property was 15 per cent in the year to end 31 March.

Property shares returned 9.2 percent, bonds recorded 1.6 percent and balanced share portfolios went backwards by 11.3 percent. The average rent income yield was 6.6 percent, plus 7 percent capital growth, which is the best since 2008.

In a Sydney based example, a private investor purchased a 746 sq m property (total area) in the Seven Hills Industrial Precinct in October, 2010 for $1.117 million. Today the property is worth $1.49 million which is an increase of 33 percent in value since the purchase price. The net rental cash flow from the tenant on the existing lease is $82,399 returning 7.37 percent with total returns exceeding 10 percent per annum.

Sydney’s industrial property market is currently experiencing a major under supply. I don’t expect the market will suffer any significant rental downturn due to supply constraints. With price increases continuing, Sydney offers the potential for very good industrial rental and price return growth well into the future. However the window of opportunity to secure the best returns will be gone after 2017 due to supply constraints today.

Barry Cawthorn is managing director, Bawdens Industrial and can be contacted here.

Tags: 
Property market Rental Returns

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