Industrial property stands out: Bayleys

The report, compiled by Bayleys Research, said industrial property “is a sector that is characterised by generally low volatility in key indicators such as vacancy levels, rentals, yields and returns. As such, it has strong appeal for the lower-risk, passive investor.”

The low volatility of the industrial property market is measured in a five-year rolling index correlated by the Investment Property Databank.

The index tracks the performance of 593 property investments nationwide with a total capital value of more than $12.7 billion and records the industrial property market as the least volatile of the real estate segments.

Bayleys Research national manager Gerald Rundle said the findings applied to the industrial property sector - where high occupancy levels and a growing economy and business sector would continue to make the market an attractive and stable proposition for investors.

The IPD’s latest March 2014 quarter results measure industrial volatility at 0.9%, - compared to the overall market at 1.7%, with the retail sector at 1.8%, and the office sector at 2.3%.

Rundle said the greatest volatility post-GFC was measured in 2009 with the overall market at 5% and the retail and office sectors up at 5.5%. By comparison, the industrial sector was significantly lower with volatility recorded at 3.7%.

“The Global Financial Crisis effect on the greater property market was significant - with occupancy levels across all sectors taking a significant hit,” he said.

“Tenants cut back on space as business activity stalled, and while the industrial sector was not immune, when compared to the office sector in particular, the impact was far less.”

The data shows Auckland industrial vacancy rates climbed around two percentage points as a result of the GFC and peaked at just over 8%.

“This peak was not considered to be particularly high, and the amount of vacant space in the market has quite quickly fallen with vacancy now at just below 4% - better than before the GFC,” Rundle said.

The industrial market fared far better than the office market, according to the research. The Auckland CBD recorded a jump in vacancy from sub-10% levels pre-GFC to more than 14% by the end of 2009. It too was recovering, but the rate was still sitting at just over 11%.

Wellington’s industrial market recorded a bigger impact from the GFC with vacancy levels jumping from 3% to close to 8%. But again the absolute figure at its peak was not significant, although in Wellington’s case the vacancy rate has been slower coming down and still sits at just over 7%.

Rundle said it was no surprise that investors reacted to the GFC by requiring higher initial returns and as a result the risk premium for industrial property opened up to more than 4%.

“Investors view industrial property as a generally low-risk asset. In both main and provincial centres, it has continued to be favoured by investors and is generally tightly held. When a prime asset with a good tenant does become available, it generally attracts strong interest,” he said.

“From a peak in early 2009, the heightened perception of risk has eased out of the market, and from the end of 2012, our Bayleys Research Industrial Yield index has shown investors accepting a risk premium around 3% and is expected to continue to trend down. The risk premium is not expected to fall to the pre-GFC 1% level but its recovery reflects the confidence investors continue to have in the industrial market.”