Industrial strength to remain
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When Damian Collins bought into Westbridge Funds Management in 2015, industrial property was considered a poor cousin of the retail and office sectors.
At the time, industrial assets were producing yields of close to 8 per cent, compared with about 7 per cent for retail and 7.5 per cent for office, research from JLL, Colliers and Knight Frank Australia shows.
As low yields reflect higher capital growth potential, this showed a lack of confidence in the sector. But Mr Collins, like many of his peers, took the view the market would improve.
“For many decades, industrial was the least appealing asset,” the Westbridge Funds Management managing director told Business News.
“Retail was always the most popular, then office, then industrial. And then it really made a switch.” In 2018, a growing number of investors became drawn to industrial property as demand began to outweigh supply.
COVID-19 accelerated the sector’s growth, as a rapid rise in e-commerce led to an explosion in demand for warehouse and logistics space.
In 2021 and 2022, industrial yields in Perth dropped to historic lows of under 5 per cent, while office and retail were about 6.5 per cent and 6.4 per cent, respectively.
Meanwhile, growth in rental values means industrial property has held its value.
While investor demand has softened slightly following successive interest rate rises, the sector is still seen as the standout by industry experts.
Tenants are jostling for industrial space, which has pushed vacancy rates in Perth’s industrial property to record lows and placed upwards pressure on rents.
Vacancy rates have contracted to as low as 0.2 per cent for Perth’s prime industrial property, with a CBRE report showing Perth’s industrial vacancy rate at 0.5 per cent.
This was significantly lower than the national average of 0.8 per cent, which is the lowest industrial vacancy rate in the world.
New research from Western Australian real estate group Cygnet West shows a 16.8 per cent lift in industrial rents in the 12 months to September 2022, to an average $106 per square metre.
Cygnet West industrial agency director Greg O'Meara said reports of up to $180/sqm for high-specification warehousing showed rents had reached a ceiling.
Cygnet West’s research also showed that 240,000sqm of new supply was added to Perth’s industrial market in 2022, compared with 123,805sqm in 2021 and an expected 385,142sqm this year.
Moves by major institutional players including Dexus at Jandakot – where 20,000sqm of warehouse space has just been built for Amazon and a further 50,000sqm is under construction – form part of this supply.
Perth property fund Lester Group bought a four-hectare industrial site on Prinsep Road in Jandakot in December, on which it plans to develop up to 16,000sqm of warehouse space.
Mr O'Meara, who brokered the Lester Group deal, said demand would continue to outweigh supply in the near term despite the growing pipeline of industrial developments.
“If the buildings that are in the pipeline came on instantly, supply might exceed demand, but it will be a graduated increase in supply, and there’s no sense in my mind that demand is easing off,” he said.
“Any leasing opportunity is being taken up in short order, and the demand is across the board: warehouses and logistics, tradespeople and other owner-operators, suppliers and service providers in the resources sector.”
Market activity
The Westbridge purchase of 64 Great Eastern Highway in South Guildford for $16 million from Acure Funds Management in December was part of $40 million in industrial sales across three deals brokered by JLL.
Fund manager Realside Ovest bought a two-hectare infill site at 17-21 Fargo Way for $9.5 million from Burswood-based Lyssos Investments late last year.
Additionally, MRS Property bought 198 Bannister Road in Canning Vale for $14.7 million, through its investment arm Harmony Property Investments.
At the time, JLL’s Ross Palframan said the deals reflected the continued appetite and depth of buyers from a wide range of local and interstate investors in the WA market.
Westbridge bought 3 and 5 Marchesi Street in Kewdale from Manassen Foods Australia for $8.1 million, and 1A Forge Street in Welshpool from a Summit Homes entity for $9.6 million late last year.
The off-market transactions brought the total value of its industrial portfolio to $315.6 million and reflected the group’s investment of more than $33 million in the sector in the final quarter of 2022.
Industrial property comprises 57 per cent of the West Perth-based property fund’s $557.8 million portfolio, with retail making up 33 per cent and office and healthcare accounting for the remaining 10 per cent.
As Mr Collins explained, his aim from day one was to expand Westbridge’s industrial presence.
“I bought the majority share of the Westbridge business seven and a half years ago …[when]… they only had about $90 million in assets,” he said.
“I wanted to take a strong focus on industrial property, and certainly thought with the transition to e-commerce that was taking place globally … that industrial was going to be a major focus.”
Mr Collins said he was confident the sector would remain strong for the next couple of years but expected other areas, such as the office market, would start to rebound.
“I am quite confident in the industrial market … but like all market cycles it will come to an end, supply will catch up with demand and we’ll have a downturn,” he said.
“We made the decision, six or seven years ago, that we’d sit on the sidelines with office and not buy too much of it.
“Office will have its time in the sun again, but it’s still got a bit to go before it really starts to improve significantly; I still think it’s a 2025 story for the office market.
“The industrial market has still got some legs, but it’s not going to run forever.”
He said WA’s abundance of minerals, including those used to power renewable energy, contributed to the popularity of industrial property.
East coast
Speaking at a recent Australian Property Institute conference, Realmark Commercial director of commercial industrial sales and leasing, Wayne Chorley, said he had observed a trend towards more east coast investment in Perth.
“These big instos [institutional investors] and mum and dad investors and self-managed super funds from over east see value in Perth, they see it as being undervalued,” he said.
“We look at $140/sqm and go ‘geez, that’s expensive’, they look at $140/ sqm and say ‘that’s cheap’.”
Mr Chorley also pointed to the rise in institutional ownership, with recent moves by big players including Centuria, Dexus and Charter Hall.
“We’re going to see a shift in the market,” he said.
“That institutional ownership will increase, and they will become the dominant player in the Perth market, and it will behave differently.
“We will see a lot more large-scale transactions in the Perth market than we have ever seen before.”
Rethink Investing acquisitions manager Rob Martin, who acts on behalf of commercial property buyers on the east coast, said he had brokered an increasing volume of sales in Perth in recent months.
“We are seeing a big shift. We were predominantly buying a lot in south-east Queensland and still are … but we are seeing a lot more people buy in Perth,” he said.
“It presents an attractive return for investors, you’re looking at six per cent net yields, and it’s got a very tight rental market.”
The firm brokered $78 million of industrial transactions in Perth in 2022, compared with $48 million in 2021 and $21 million in 2020.
Mr Martin said the strong level of tenant demand was reflected in recent sales campaigns, where assets were marketed as vacant and then quickly bought by tenants.
He said this occurred with a recent listing of 21 Adrian Street in Welshpool, which was filled within two weeks of the vendor announcing it had a vacancy.
Agency moves
Recent moves by real estate groups to bolster their industrial teams has also shown the continued appetite for the sector.
Industry sources say JLL’s industrial team has been poached by rival firm Cushman & Wakefield, with about six staff expected to make the shift.
Neither firm would comment to Business News on the move.
Colliers has grown its industrial team from one to four since it formed a new agency early last year, after Colliers International WA rebranded to Cygnet West.
Colliers industrial director Sam Hammond, who was brought into the company in August from Knight Frank, said market activity was unusually busy for this time of year.
“It’s been a very quick and strong start to the calendar year; we’ve been pleasantly surprised,” he said. “
General activity and enquiries have been as strong as I’ve seen it … and we’re expecting demand to continue, because we’re getting a build-up of tenants actively looking for space.”