Demand for industrial property remains at record high levels with institutional investors, however, residential assets are also quietly gaining steam. According to Ray White, industrial property has quickly become the new “prime asset”, as demand for office and retail has fallen in recent years.

Ray White said the industrial sector is currently experiencing limited supply and high demand—particularly as the population grows—leading to values rising. “High demand for institutional-grade industrial assets resulted in significant tightening in investment yields from eight-plus per cent 10 years ago to circa four per cent during 2022,” Ray White said.

They said the strong gains in rents over the past five years were critical in boosting valuations and enhancing the asset class’s perception as a prime asset. “While demand has not dissipated, and limited new supply is keeping occupancy elevated, investment yields have turned a corner in 2023 and 2024 rising in line with increased bond rates and re-rating of the risk profile of these assets,” they said.

“Despite capitalisation rates increasing, the demand and supply profile for industrial is anticipated to keep rates tight, particularly given limited industrial land availability and planning constraints during a time when population and consumption levels are tipped to increase.”

Ray White said the recent increases in rents and values saw unit capitalisation rates overtake industrial, achieving 4.6 per cent in early 2023 when industrial yields averaged 4.2 per cent.

“Industrial yields since this time have increased due to a reduction in capital values, while residential yields have increased off the back of strong income gains during a time of robust capital growth, yet remaining within the long-term band of between 3.6 per cent and 5.2 per cent seen during the last 20 years,” they said.

“These long-term, secure trends in income growth across the residential market, coupled with strong capital gains are now in full view of institutional investors.” Ray White said the reduction in industrial yields over the last five years does make some industrial assets unfeasible.

“Despite this, industrial assets do have similar fundamentals to residential—including constrained land, limited supply, and increasing demand—therefore the outlook for growth is greater than many other commercial alternatives,” they said.

“Institutional investors will continue to seek out strong returning industrial assets which factor in risk appropriately, however, demand will continue to turn a corner for a new era of residential property. making beds and sheds the most sought-after assets for years to come across Australia.”