With the investment spotlight focussed on a substantial drop in the residential property market (up to 20 per cent in some areas), you may be tempted to think the glory days of property investment are well and truly over. Well, we think differently… While the masses are beset with ‘doom and gloom’ stories, we like to strike. And for those looking for a more cash flow focused investment, in what is still a very high demand market, we explore the alternatives.
If you shift the spotlight to another segment in the commercial space, you will be presented with an entirely different story where demand is actually increasing.
Let’s talk about light industrial.
What is Light Industrial?
As the name suggests, Light Industrial is a term that refers to commercial spaces on in the outer suburbs, albeit not the type of heavy machinery industrial parks that you may initially think. These sites have a diverse range of tenants, are easy to access, have strong visibility and plenty of parking which is one of the biggest challenges with most businesses on the city fringes and suburbs. Owing to these highly sought after features, Light Industrial is attracting businesses such as children’s play arenas, veterinary clinics, allied health practices, gyms, CrossFit and PT studios and even financial services like accountants and mortgage brokers.
Additionally, demand for distribution and storage centres is increasing. This is hardly a surprise considering we are spending more online with e-commerce gains up close to 40 per cent year on year but still only accounting for 5 per cent of the total retail consumption market. As online consumerism grows in line with USA and UK trends (now at 10 and 12 per cent respectively) the demand for accessible space for dispatch centres will also increase.
The urbanisation effect
As the urban radius continues to spread from the centres of our eastern seaboard capitals, the boundary between residential and industrial areas is rapidly shrinking. As more land is needed for residential development, commercial and industrial sites become highly desirable options.
The urbanisation effect on light industrial sites is two-fold:
Residential shifts go hand in hand with construction booms and huge investment in transport infrastructure is making travel time shorter. Cities are becoming more accessible to outer suburb residents, freeways are expanding, light rail lines are being reinstalled much to the amazement of Sydneysiders, tunnels are being built for Melburnians; all of which improve the access of industrial sites and the ease of tenants doing business in them.
Financial considerations and what you need to know
Strong yields on a property are always helpful in a low growth climate particularly when consumer sentiment is modest, the banks have tightened up and as a result buyers are apprehensive. In this ‘low growth’ environment cash flow is more important than ever. Highly negative geared assets that eat into your disposable income may weigh you down. However, most light industrial properties will generate a 6 to 7 per cent yield, slightly lower in Sydney and often higher in Brisbane. Even so, the major banks will want more capital up front and will often only lend 70 per cent of their assessed value of the site.
So where does this leave you?
Light industrial assets require independent valuation and are complex to price. Land value, building structure and the strength of lease (including quality of tenant) all have an impact on value.
Not all industrial sites suit everyone but if it sounds like something that suits your investment mix, ensure there is diversity in the range of tenants, good access to the site, visibility and, most importantly, close to main arterials. This is critical for any trades, services, health or distribution centres.
And, as always, seek professional advice from an advisor before making any investment decisions.