Industrial Land – The New Goldmine For The Future?

Industrial Land – The New Goldmine For The Future?

Read time: 4 minutes, 31 seconds.

2020 forced many businesses to move online. While online shopping is not a new thing, between now and 2020, the eCommerce sector experienced 5 years of growth in 12 months.

Today, online sales take up a 13% chunk of the nation’s total retail sales number. 

The trend of shopping online is not slowing down any time soon. That means we will continue to have a demand for more industrial space. According to CBRE, we are going to need more than 2 million extra square metres of industrial space over the next 5 years to support this.

That’s big news for the industrial land sector. Plus, with interest rates on loans as low as they currently are, many companies are looking to stop renting their industrial spaces. Whilst others are looking to invest in this growing industry. You can get rates like 2.5% on industrial property

 

What is industrial property?

Industrial land falls under the broader category of commercial real estate. Any land or property used only for business purposes is commercial real estate. So that would include office spaces, retail spaces, and industrial spaces.

Generally, industrial property is usually a warehouse space where large companies take care of logistics and distribution. If you are thinking of Amazon’s many distribution centres, then you’re on the right track. 

The current state of the industrial property sector

“CBRE’s Industrial Vacancy Report tracks net absorption across Australia for the very first time.” – Sass J-Baleh, Head of Industrial & Logistics Research, CBRE

The vacancy rate for industrial spaces is at an all-time low across Australia. Taking into account all the major cities, we are seeing a current vacancy rate of 2.24%.  With a vacancy rate of 1.40%, Sydney comes out with the lowest vacancy rate so far. Melbourne settles in with a 1.55% vacancy rate.

When you think of the current state of supply and demand in the industry, this all makes sense. According to CBRE, of the supply that is expected between 2021 and 2022, companies have already agreed to supply more than 60% of this total. So this means that the low vacancy rates are expected to continue at least for another 18 months. 

A lot of companies are taking advantage of the lower interest rates as demand goes up. Plus, many foreign investors are looking to Australia for industrial property. What this means is that the market is competitive so prices are being driven up. So far this year, we saw a $2.4 billion investment into Australia’s industrial property sector from abroad. At the same time last year, foreign investment into the sector capped at $1.3 billion for the same period.

In the first quarter of 2021, Sydney and Melbourne had the 2 highest industrial property values across the nation. Sydney recorded an average industrial property value of $2,750 per square metre. While Melbourne came in with the second-highest average of $1,550 per square metre.

Should you take the plunge?

While the industrial property sector is booming, we are really just getting our feet wet on the global scale. For many Asia-Pacific countries, eCommerce already accounts for 20% to 40% of their retail sales. With the boost from 2020, Australia’s eCommerce industry has just crested 13%.

The truth is, residential property alone might not give you the returns you want. In the past decade, commercial property has seen a higher return on investment than residential property. Plus, tenants for industrial property generally stay longer and are looking for longer leases. Industrial property is usually leased for anywhere between 3 and 15 years

It takes about 10 years for a commercial property to pay off itself. So if you get a longer lease term like 15 years, you will just be enjoying passive income for the next 5 years. Then, you can lease it again. Most commercial property leases also include an annual rent increase of 3% – 4%. Or the lease rate is linked to the Consumer Price Index (CPI).

So should you take the plunge? The reality is that the industrial property sector is booming right now. The demand for industrial property is high and it continues to rise. Despite the low vacancy rates, CBRE expects the sector to expand by 350,000 square metres per year for the next 4 years.

“In 20 years, I have not witnessed such vast volumes of leasing enquiry. This has not been restricted to the major East Coast markets, with South Australia and Western Australia also experiencing record leasing demand.” – Cameron Grier, Industrial and Logistics, CBRE

It might be time to have a conversation with the team at MLS Finance and review if the commercial space is for you.

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