Commercial Real Estate Market Update Spring 2019
TM Insight is a leading provider of advice and expertise on the commercial real estate sector. Nathan Bingham is TM Insight’s Director – Commercial Real Estate. Here he shares a snapshot of current trends in the commercial real estate sector.
The rise and rise of institutional investors
Industrial property is no longer is the best kept secret in commercial real estate. Over the past five years, institutional investors have sat up and taken notice of industrial property, investing at an unprecedented rate. In 2018, 49% of all industrial property sales were to institutional investors. This is more than five times the 2009 level, when 9% of all industrial property sales were to institutional investors.
Australia is now among the top five countries in the world for institutional investment in industrial property (as a proportion of GDP, indexed against the US). Factors which have driven this shift include:
Over the past few years, institutional investors have developed a more nuanced understanding of the industrial property market. This specialised capability enables them to make better-informed decisions and model more accurate expectations of returns.
Foreign investment in industrial property
Foreign institutional investors have shifted their focus to the Australian commercial real estate market, in particular the industrial property segment, due to the transparency of the market, and stringent regulatory environment which helps ensure the quality of the commercial real estate stock.
Analysts are finding that the fundamentals of the Australian commercial real estate, and in particular, industrial property sector are strong, so returns are forecast to remain good in the coming years. Drivers of this strength include Australia’s rapid population growth (third highest among the world’s developed economies), ongoing investment in supporting logistics infrastructure (such as ports and roads) and continued growth of the logistics market, particularly driven by ecommerce and grocery industries.
The Australian online retail sector is experiencing record growth. Figures from the Australian Bureau of Statistics show that in 2018, 5.3% of all retail sales took place online, which equates to growth of 33% year-on-year. This dramatic growth is driving up demand for commercial real estate and industrial property, along with supporting industries including transport, logistics, warehousing and supply chain management.
Customer service is a key differentiator in ecommerce, with many retailers promising same-day delivery, next-day delivery, or low-cost delivery in order to attract customers. Consequently, there is increasing demand for commercial real estate and logistics services that facilitate fast delivery. This translates to fierce competition for commercial real estate which offers close proximity to the end user or access to efficient transport options. Transport costs generally exceed rental costs, so businesses are often better off spending more on industrial property in close proximity to their customers, than renting further away and paying for transportation. In Sydney, this is demonstrated by a strong correlation between commercial real estate rental costs and proximity to the Sydney CBD. (Industrial property that is within 15km of the Sydney CBD typically rents for $250 per sqm, while industrial property that lies 45km from the Sydney CBD typically rents for $90 per sqm.) Melbourne exhibits a similar trend, although the greatest demand is for commercial real estate in middle-ring locations (approximately 20km from the Melbourne CBD). Not surprisingly, less densely populated cities such as Adelaide and Perth, offer greater potential for timely delivery, so the demand for commercial real estate is more modest.
Australian industrial property in a global context
A number of global factors are driving up demand for commercial real estate and industrial property in Australia.
The populations of many of our major trading partners are becoming more urban. This urbanisation drives demand for manufactured food products, which is increasingly being met by trade. This is particularly applicable in the case of Australia’s trading relationship with China, where Australian exports have increased in value almost 7-fold since 2008.
This has significant flow-on effects for Australia’s commercial real estate sector, with manufacturing (predominantly driven by the sub-industry Food Product Manufacturing) contributing to 25% of commercial real estate take-up over the past five years. The rapid growth in trade not only increases the commercial real estate footprint of the manufacturing industry, it also has a multiplier effect on the wider logistics, supply chain management industry, driving a need for increased production facilities, cold storage and specialised food logistics capabilities.
Favourable trading conditions
The low AUD naturally means Australian exports are more competitive in the global market, which is driving robust demand. In addition, US wine and Chinese meats have both recently been subjected to tariffs, which has worked in favour of Australian wine and meat exports. These favourable trading conditions are reflected in the upward trend in freight volume (measured in Twenty-foot Equivalent Units, or TEUs). Freight volume is a good predictor of demand for commercial real estate and industrial property, along with related industries including transport, logistics and warehousing.
The rise of institutional investors, combined with a boom in ecommerce and robust international trade all result in fierce competition for prime commercial real estate. If your business is being challenged by this aggressive climate, TM Insight may be able to help. We help with strategic planning and operational management of commercial real estate and logistics. If you’d like to know how we can help you, get in touch today.