Locating the sweet spot

This 11,000m2 warehouse and office property in Sydney's western suburbs brings in $A1.27m a year in rent with a fixed annual increase of 3%. It was bought for $A14.7m in May 2009, with a lease signed till December 2017.

Relevant offers

A SHORTAGE OF good quality industrial properties for sale in this country is encouraging well-heeled investors to look for opportunities across the Tasman, reversing the capital flows of the last few years.

Although there is plenty of industrial property for sale in this country, there is a lack of properties in what Jones Lang LaSalle's investment property director Nick Hargreaves refers to as "the sweet spot" for wealthier private investors and large family trusts – well designed and located properties with good leases in the $5m to $20m price range.

To fill the void, Jones Lang LaSalle (JLL) has been promoting Australian industrial properties to New Zealand buyers, and although the flow of investors across the Tasman has so far been a trickle rather than a flood, it has been a steady one.

Hargreaves' Australian counterpart, JLL's Sydney-based industrial investment director John Macree, said the industrial property markets in both countries had much in common. Both countries imported most of their manufactured goods, which meant their industrial markets were dominated by the logistics industry, with companies achieving economies of scale by moving to increasingly larger premises.

But unlike Auckland and Wellington, Australia's main industrial hubs of Melbourne, Sydney and Brisbane dve plenty of land available for new developments and until recently, this was mainly the preserve of institutional investors undertaking preleased design-and-build projects.

Institutional investors' stranglehold on the market had left few opportunities for private investors to take a slice of the action, but the international financial crisis had meant most institutions were no longer in a position to fund new projects and many had been forced to sell properties to shore up their balance sheets, opening the door for private investors and syndicators.

Of the 23 significant industrial property transactions completed in New South Wales in the last year, all of the vendors were institutions or corporate owners, while 16 of the buyers were private investors and three were syndicates.

Macree said when private investors first started moving into the market, most were looking for a "Perfect 10" property – priced at about $10m, with a 10-year lease providing a 10% return. Most had to settle for less. Yields on the 23 NSW sales ranged from 5.26% to 10.06% while most leases had five to 10 years to run.

Macree said yields on new buildings with 10-year leases would probably be in the 8.25 to 8.75% range.

Fairly typical of the larger sales was an 11,000m2 warehouse and office, on a 1.94ha site in Sydney's western suburbs, which was sold by Australand Property to a private investor for $A14.7m in May, providing a yield of 8.62%.

The property was purpose-built in 2007 for sitting tenant Aristocrat Technologies, an ASX-listed manufacturer of gaming machines. The lease runs until December 2017, with two rights of renewal of five years each. Rental income was $A1.27m a year, with annual increases fixed at 3% a year, reviewed to market on renewal.

Among the smaller sales was a 7573m2 property at Silverwater in Sydney's west, sold by supermarket operator Coles to a private investor in September for $A4.9m. The lease had 9.75 years to run and the price produced a yield of 8.77%.

Macree said most investors from New Zealand were building their portfolios and chasing capital growth rather than income, although they were cautious. Most would add a new property about every six years rather than every six months.

"Most buyers are negatively geared. They are not looking for cash flow to take back to New Zealand, they are looking to build an asset base that will grow. So, in simple terms, they are happy if they can get an asset that will wash its face," he said. Generally they would raise the finance in Australia and the banks there were quite comfortable dealing with New Zealand investors, he said.

But tighter lending criteria meant loan-to-valuation ratios had fallen to 50-60% compared with 70-80% a couple of years ago. Buyers could often negotiate non-recourse loans, he said.

On both sides of the Tasman, industrial property has survived the slump in much better shape than the office sector.

Macree said the Australian office market was heavily exposed to the financial services industry and had been hammered by the financial crisis.

But demand for industrial space had been underpinned by consumer spending, which had stood up relatively well.

On top of that, the lack of new industrial developments coming on to the market had kept a lid on vacancy rates and that had supported rents.

The short-term outlook was for consumer spending to pick up, which could increase demand for space. So the expectation was for rents to rise, Macree said.

However, the current situation would not last indefinitely.

Macree said the major institutions were now indicating that their recapitalisation plans were complete and this was reducing the pressure on them to sell assets.

This had resulted in several properties being taken off the market recently.

"If you believe what they are telling us, they are out of the woods and will start developing again shortly," he said.

And that should start to free up the supply of new space.

- © Fairfax NZ News