Industrial property well positioned for future growth8 December 2022 / 3 min read
Investing in quality commercial property assets has always been a long game.
Irrespective of the economic climate, industrial property remains incredibly well placed and there is unlikely to be any change to it being New Zealand’s strongest performing commercial property asset class – as is has been for the past 15 years.
A number of factors inform this view, including continued growth in tenant demand, record low vacancy rates, scarcity of appropriately zoned land, the continued uplift in rental income and returns that are tracking above the already strong 15-year average.
Growth in tenant demand driving historically low vacancy rates
Vacancy rates for the Auckland region are at or near historic lows, particularly in A-grade, premium industrial properties. Colliers research shows overall vacancy remained steady at 1.8% in August 2022, including just 0.6% prime vacancies.
Demand for premium industrial properties is only increasing due to a growth surge in key sectors. In particular the significant rise in online retail over the last few years, and global supply chain issues have led to increased need for local logistics, storage, manufacturing and warehousing facilities.
Scarcity of appropriately zoned land and building constraints
There continues to be a shortage of suitably-zoned land for development across New Zealand, particularly in established industrial areas, and this is driving up land values.
In addition, Colliers research concludes that building development is rising, but there is still some way to go until it catches up to demand.
In the year to August 2022, building consents were issued for the development of nearly 1.4 million sqm of new industrial premises across New Zealand, the highest figure for an August year this century.
Activity is greatest in Auckland, where building consents for 489,610sqm of new industrial floorspace have been issued in the 12 months to August 2022, well above the 10-year average of 341,000 sqm – however this still doesn’t appear enough to lift vacancy rates.
Building costs are rising rapidly. Together with a significant skills shortage in the construction industry and supply chain constraints, this lengthens the pipeline of potential for sufficient supply, further heightening demand.
Positive signals for future outlook
The industrial sector continues to retain its investor appeal due to its strong defensive qualities and sound occupier fundamentals, including continued low vacancy levels.
Rents are increasing rapidly, and signs are emerging of above-average growth rates. Colliers forecasts average prime warehouse rents will increase by between 3-4% a year, noting this is likely to be higher for A-grade properties.
MSCI data shows the industrial sector generated a total annual return of 16.7% over the year to March 2022, well ahead of an already strong 15-year average of 11.5%.
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