Melbourne industrial market to see unprecedented infrastructure investment in 2020: HTW Industrial

Melbourne industrial market to see unprecedented infrastructure investment in 2020: HTW Industrial
Staff reporterDecember 7, 2020

Looking at 2020, the general consensus is that the Melbourne industrial market will remain strong, boosted by strong population growth and unprecedented levels of infrastructure investment, according to the February report from valuation firm Herron Todd White.

The property valuation firm also noted, the global share market is expected to remain volatile with the potential for a US-China trade war, wage growth is expected to remain stagnant, there is a risk of recession and there is uncertainty regarding Britain’s exit from the European Union.

This has led to an even greater appetite for real estate investments, with industrial leading the way when it comes to investing in commercial property. The industrial sector is considered to have the strongest pull for investors, predominantly due to the rise of e-commerce.

In the case of high value industrial assets, yields remain firm due to bidding wars, particularly as there is the guaranteed cash flow of a strong WALE.

HTW reporters said, "we have seen increased interest in industrial assets from onshore and overseas real estate investment trusts and private equity firms. Some of these started out with zero industrial assets and now have these assets making up a substantial portion of their portfolio."

Knight Frank is predicting double digit growth in 2020 on the back of the continued low interest rate environment, which further advances yield compression. Vacancy rates in Melbourne also remain at five year lows.

They said, "Melbourne industrial yields are currently sitting at 5.73%, having significantly tightened through increased investor interest and capital growth is set to rise from 6% to 6.4% in 2020."

According to Savill’s 2020 outlook report, rental rates have been increasing, currently standing at $80 to $90 per square metre. Given the sustained demand at present, this rental growth is expected to continue albeit at a diminishing rate.

Lease incentives have dropped due to the consistently steady demand for industrial space.

Some smaller strata units are selling at rates around $3,000 per square metre, which is new territory for the industrial market.

HTW valuers stated, "buyers and tenants no longer seek just a warehouse to store goods; there are many considerations that factor into their decisions. These include purchasing or leasing premises close to their prime customer bases and employees with appropriate skill sets, whilst being in a prime location in order to limit transport costs and avoid the impact of slow transit times."

"Industrial properties for first time investors are becoming harder to find, however there are still reasonably priced strata developments in which mum and dad investors can purchase a unit and benefit from a strong yield and steady income."

"Industrial properties to avoid include contaminated sites as well as secondary locations, away from major infrastructure and transport routes."

"Investing in properties with long term tenants in declining industries (for example, the printing and newspaper industries) should only be pursued with the knowledge that there is a likely chance of vacancy at the end of the lease, which leads to vacancy costs and associated refit costs to attract new long term tenants," they concluded.

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