_Investors increasing exposure to Sydney’s industrial sector

The industrial property sector is becoming one of the most sought-after asset classes, according to our Sydney Industrial Market Overview February 2020.

Industrial property transaction volumes in Sydney hit $2.17 billion in 2019, up from up from $1.7 billion in 2018 and $1.28 billion in 2017. While leasing take-up volumes have also increased significantly, with 2019 leasing take up volumes reached almost 1.1 million square metres – a 20% increase on 2018 levels. 

Buoyed by ongoing demand from logistics and retail trade sectors, industrial development also continues to reach record levels, with a decade high of circa 677,000 sqm delivered in 2019, which is expected to be eclipsed by the end of 2020.

The level of activity relative to the previous three years is trending above average, indicating that as a sector industrial property has solid fundamentals that are benefiting by growth in e-commerce and the ongoing evolution of the supply chain. 

The popularity of the sector can also be reflected in the wave of fresh capital both REITs and privates are seeking to deploy. The majority of institutions have been upfront about new allocation targets in industrial property, which appears to be driving much of the recent activity in both the acquisition of existing assets and of land suitable for industrial development.

Many of these same REITs are reporting occupancy levels in the high 90% range, with above-average take-up levels and a reduction in vacancy rates, which is continuing to fuel competition and yield compression. This is subsequently driving the asset value growth we have seen in recent times. 

Lower interest rates are expected to continue to drive demand for industrial logistics assets going forward, particularly those with strong lease covenants, potentially buoying investment volumes in 2020.  

While the spate of capital raisings by REITs in the second half of 2019 also points to strong investor appetite for industrial property long-term and potentially further prime yield compression. 

We are also expecting developer confidence to continue throughout 2020, with over 790,000 sqm of new supply anticipated to be delivered by the end of the year. The boost in development will assist in closing the cap in demand for logistics occupiers trying to keep up with the growing e-commerce trade.