Seeking the Perfect Industrial Property Investment

With many potential benefits, industrial property could be the right investment for you. But not all industrial property is the same from an investment perspective. Here are a few factors to look at when considering investing in industrial property.

Location

When all the investment criteria are considered, Melbourne is probably the best location for industrial property in Australia. Some of the reasons for this are:

• Melbourne is the country’s second biggest city behind Sydney.
• Industrially, Western Australia and Queensland have traditionally been boom/bust states where fortunes are made and lost depending on all important timing.
• The Sydney industrial property is prime but expensive.
• In Victoria, Melbourne has the lowest industrial rentals in Australia, the lowest land prices, and the best value investment properties.
• When companies are looking at their industrial property cost and where to locate their facility, it is not surprising they often choose Melbourne due to its cost effectiveness.
• Melbourne has effective truck routes and well developed transport systems.
• Over 40% of Australia’s container shipping comes through Melbourne ports.

In summarising his outlook on Melbourne industrial property, Atholl Williams, Director of Rutherfords Real Estate, says, “Melbourne is probably the safest place to own an industrial investment, which we liken to a sleeping giant. It is more immune from the boom-bust cycle than other states and shows a steady predictable return compared to other states in general.”

Flexibility

Some industrial facilities are highly specialised and are purpose built for a particular type of tenant or owner occupier. Often these types of facilities are high cost but have substantial depreciation benefits. Rentals in specialised properties reflect the cost and the risk of developing these types of facilities. If the tenant was to exit the lease, however, it is sometimes difficult to find another tenant. In many cases, this results in rental adjustment back to market rates for a similar sized generic facility. As a general rule, it’s best to avoid these types of facilities as the risks are high. A generic office warehouse or factory suiting many types of tenants or owner occupiers would be a less risky investment in most cases.

Demand

The three major growth areas in Melbourne are the Laverton region, the Dandenong region and the Campbellfield region. Most of the new larger industrial developments are located in these general areas. Industrial properties closer to the Melbourne CBD are always in high demand, and some investors have gained the benefits of rezoning to multi-storey apartment developments.

Guarantees

Obviously, the better the security offered under a lease commitment, the better for an investor. Over many years, the trend has been for landlords to agree to a bank guarantee, as this is basically a guarantee that can be simply cashed in if there is a default or if a tenant fails to meet their obligations under the lease.

Industry conditions in the market

Lease demand is relatively weak due to interest rates being so low that, in some cases, rent is double interest. A growing trend is for tenants to want to own their own building.

Many factors come into play when looking for the ideal investment. However, competition to place money and obtain a better than bank yield is fierce, with few landlords wanting to sell prime investments.

When interest rates were high, it used to be considered normal that an investor would look for a 2% higher return in buying industrial property than they could get from depositing money in a bank. Currently, this difference sits at around 4% on average.

For this reason, yield compression is considered likely, resulting in higher prices being achieved.