Industrial yields to fall further, development set to soar in 2022
Industrial property sector momentum shows no sign of slowing with agent Knight Frank forecasting record development levels through 2022 and further contraction in prime yields on asset sales.
But Knight Frank believes that prime Australian industrial real estate will still offer better returns than other major global markets such Hong Kong, where yields are now below 3 per cent.
Work is almost finished on Amazon Australia’s robotics fulfilment centre in Kemps Creeks, Sydney, which will be ready in early 2022.
Over the past year, Katy Dean, head of industrial research at Knight Frank, said there has been a dramatic tightening of yields.
Leading the charge down is Melbourne, where yields have tightened by 125 basis points to 3.5 per cent.
Close behind, Sydney industrial yields have compressed 100 basis points and are now at 3.75 per cent.
Yields have also been contracting in the other major capital city markets.
At the end of the third quarter, Brisbane yields were 4.2 per cent, significantly sharper than Perth and Adelaide, both at 4.75 per cent.
“The amount of capital targeting the sector remains significant, particularly for land constrained markets where strong demand from occupiers has led to record take-up rates and an acceleration in rental growth,” Ms Dean said.
“Further yield compression is anticipated in 2022.”
That is, everywhere except Melbourne, where a massive development pipeline will match demand and keep pricing relatively steady after a spectacular 2021.
Knight Frank predicted that next year, average Sydney prime yields will further tighten by 25 basis points and join its southern counterpart at 3.5 per cent.
The biggest movers will be Perth and Adelaide, cities where investors looking for better income returns are increasingly turning, with yields contracting by a further 50 basis points to 4.25 per cent.
Yields in Brisbane are projected to reach 4 per cent, Knight Frank said.
Ms Dean said competition for land is intensifying, “flowing into future supply plans, with the forecast development pipeline in 2022 set to reach a new historical high, with circa 2.6 million square metres planned, pending commitments and approvals”.
Once again Melbourne heads the pack, followed by Sydney and Brisbane.
“Record volumes of investment capital continue to flow into the industrial sector with investors pushing up prices through acquisition and development activity,” Ms Dean said.
“This demand has created powerful tailwinds resulting in further contraction of vacant space and the return of rental growth rates of 1-2 per cent in most markets.
“We expect to see further strong rental growth in this sector throughout 2022, underpinned by low vacancy, supply constraints, the continued expansion of e-commerce and intensifying competition for space.”
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