Industrial property's ‘spectacular' run coming to end: analysts
Industrial property been on an unprecedented run for the last seven years.

Industrial property's ‘spectacular' run coming to end: analysts

The latest valuations of logistics properties owned by ASX-listed heavyweight Centuria Industrial REIT (CIP) may signal the industrial property market is close to its peak, as rising interest rates and bond yields start to take their toll on the high-flying sector, industry analysts say.

The $4.1 billion trust, which calls itself “Australia’s largest domestic pure play industrial REIT”, registered an increase in values of just 1.3 per cent ($48 million) over the first six months of this year, and no change in its weight average capitalisation rate – or yield – of 4.19 per cent following independent valuations of almost two-thirds of its portfolio.

This marked a sharp downturn from the 9.6 per cent ($281 million) valuation gain recorded in the six months to last December, alongside a 33 basis point tightening in the cap rate. It registered an 11 per cent valuation gain and 42 basis points tightening over the same six-month period in the previous year.

Like many other industrial property landlords, the trust recorded spectacular valuation gains in the past few years as institutional investors reweighted their portfolios to gain exposure to the booming sector, where demand for warehouse space has been driven by the acceleration of e-commerce.

This demand has driven down average super prime industrial yields from more than 7 per cent in 2015 to 4.5 per cent at the end of last year, with many transactions in the past 12 months being struck on yields below 4 per cent.

While industrial landlords are set to benefit from rising rental income driven by record low vacancy rates on the eastern seaboard – CIP fund manager Jesse Curtis said on Tuesday that “positive leasing activity and rental growth would support valuations” – they will not be able to count on big valuation gains to bolster their balance sheets.

Some may even record property values falls as cap rates rise, a point highlighted by David Libling, chief executive at industrial property specialist Pipeclay Lawson, which expects yields to rise a further 150 basis points.

Matt Webb, a director of industrial at valuation firm m3property, said he was not surprised at the latest update from CIP given transaction activity had slowed down and deal metrics were being re-assessed.

“Industrial property been on an almost unprecedented run for the last seven years, but yields are now at record lows and interest rates are rising,” Mr Webb said.

“With a 10-year government bond yield at 3.4 per cent, it’s hard to justify buying an industrial property at 3.5 per cent.

“I am hearing stories that analysts cannot stack up numbers [on industrial deals] that they could stack up six months ago.”