by Jason Huljich

When the Chairman of the US Federal Reserve, Ben Bernanke, surprised markets last week by announcing his intention to continue quantitative easing (QE) until the US economy picks up further, property markets received a boost. Investors had feared that a quicker than expected tapering of QE would push bond yields and therefore property yields up, and that if economic growth slowed as the cash tap was turned off, rental growth would very likely suffer, and with it property valuations.

Ultimately, however, for the moment anyway, the continuation of QE and low interest rates should make property investment more attractive than ever, but with so much on offer, where should investors be looking to invest?

I recently outlined the differences between commercial and residential real estate, and today it is the turn of industrial property, and a quick overview on how it stacks up when compared with commercial property. Is there a clear winner?

Over the past twelve months, Premium and A grade commercial property has offered investors yields in the order of 6.25-7.00%. B grade has been closer to 8.00%-8.50%, and regional properties between 9-10%.  The marked difference in yield between regional and other assets can be explained by the fact that regional properties are generally considered to be riskier assets. When markets are weak or under pressure, regional assets are more heavily discounted than centrally located assets.  In addition, the smaller buyer pool for regional properties means that both the time frame to sell, as well as the price, can be negatively affected.

Premium and strong A grade commercial property, on the other hand, has been in high demand from both overseas and local institutional investors. This has pushed valuations up, and from Centuria’s point of view, finding properties at prices that make good investment sense has been difficult.  With price tags in the $200-$800 million vicinity and strong competition for quality assets from both onshore institutions and offshore buyers, yields have been tight, and paying too much can be a very expensive mistake for us and our investors.

On the other hand, lower A grade and high B grade assets in the $50-$100 million range have, in our opinion, offer better potential upside. We have concentrated on identifying instances of mispricing.  Where we see quality property which we believe is mispriced, our aim is to buy well and add value for investors through active property management initiatives. 

When it comes to Institutional grade industrial properties, on the other hand, yields have been in the order of 7.25-7.5%, and more secondary style industrial assets have yields of between 8% and up to 9%.

There are a number of reasons that explain the differences in yields on commercial and industrial properties.

Industrial properties tend to have fewer tenants. This can be both a blessing and a curse. One good tenant can be much easier and less time consuming to manage than many smaller tenants.  However, your risk is also concentrated, in that if your one good tenant doesn’t re-sign at the end of their lease and you are left with an empty building, that’s not a great outcome either.

But what about that old catch-cry, location, location, location? The bottom line is that the fundamental truth of the saying applies equally to commercial and industrial property. There are just slightly different things to consider. When it comes to commercial property, at Centuria we favour eastern seaboard CBD or fringe CBD locations, but will also look at the best properties in more ‘secondary’ or suburban locations.

When it comes to industrial property, access to road and rail links are very important, and also the city in which the property is located. Sydney has no room to expand and no land to expand into, so industrial property rents tend to be more expensive than those in say, Melbourne, where access to land is less constrained.

Ultimately, both commercial and industrial property have much to offer the astute investor. However, as with all investment decisions, investors should always understand their objectives and investment horizon. And if you are investing via a syndicate structure, like an unlisted property trust, the quality of the manager you choose is also of paramount importance.  So do your homework, look carefully at your investment objectives, and the right industrial or commercial property is sure to perform.