MHD PROPERTY FOCUS
INDUSTRIAL & LOGISTICS PRICING OUTLOOK
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In this month’s column, Colliers provides MHD with an in-depth analysis of the pricing of industrial real estate assets.
round the globe, several key economic thematics have emerged that have the potential to impact the pricing of real estate assets. Australia’s industrial and logistics sector is not immune to these risks as inflationary pressure and a higher interest rate environment have the potential to impact asset pricing and investment decisions going forward. Over the past quarter, the industrial yield compression cycle has slowed; however, the good news for the sector is that income growth is at its highest level in decades, supporting asset pricing and will drive asset performance over the next five years.
INFLATIONARY PRESSURE IS UNDERPINNING RISES IN INTEREST RATES AND BORROWING COST Headline inflation has increased sharply over the past six months, reaching 5.1 per cent year on year to March 2022 – the fastest pace of annual inflation since the introduction of the GST in 2000. Supply chain disruptions have been a critical cog in this upward movement, and given these disruptions are expected to persist for at least the next 12 months given the backlog at
Real 10-year Bonds vs. National Prime Industrial Yield key ports, further pressure on inflation is expected and could exceed 7.0 per cent by Q3 2022. Off the back of this, interest rates which provide a crucial backdrop to real estate pricing have begun to increase, and the view is that they will reach 1.5 per cent or higher by Christmas. Borrowing costs were already heading north before the Reserve Bank of Australia’s (RBA) recent decision and commercial loan rates now range between 2.5 per cent and 4.5 per cent, while the weighted average cost of debt for the REIT sector measured 3.1 per cent in December 2021. Given the outlook for further rate rises,
commercial loan rates are expected to follow a similar path. Nominal bond yields have also shifted higher off the back of higher rate expectations from the RBA with the 10-year Government bond yield more than tripling from the low point of 0.82 per cent in October 2020 to its current ~3.5 per cent. Notwithstanding this, the real risk-free rate (Government bonds adjusted for inflation) remains low at close to 0.0 per cent, and while the spread to industrial yields is lower than historical averages, industrial and logistics assets have been re-priced given the strong macro tailwinds recorded in recent years and historical averages are no longer relevant. Nonetheless, the rise in bond yields and interest rates will undoubtedly limit further yield compression within the sector.
WHAT DOES THIS MEAN FOR INDUSTRIAL AND LOGISTICS YIELDS?
Headline Inflation by Country 46 | MHD JUNE 2022
Concerns surrounding rising interest rates are causing investors to assess their underwriting, particularly for core investments in the $100 million or above price bracket due to the higher
