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Industrial property – the diamond of real estate

Industrial property  the diamond of real estate 1536 x 1040 px

The current run on the Australian industrial and logistics sector continues unabated and similar to the current mandated lockdown in most parts of the country; many are asking when will it stop? However, unlike being in lockdown, it's a great time to be an industrial and logistics property owner, with a sharp rise recorded in values over the first half of 2021. The sector continues to beat expectations, and the performance spread over the retail and office sectors is at record highs.

The sector's strong performance continues to be underpinned by e-commerce, and in turn, investors are re-weighting their portfolio's into industrial. This additional weight of capital has been the key driver behind the acceleration of yield compression in 2021, which occurred when many were expecting yields to stabilise. The recent A-REIT reporting season underscored the sector's strong performance as yields continued to fall and high occupancy and rental collection rates were recorded. 

From a demand perspective, appetite for industrial and logistics assets has risen significantly off the back of the strong occupier market and favourable structural tailwinds. In H1 2021, approximately $8 billion in transactions had occurred (>$10 million) and compares to $5.5 billion for the entire 2020 calendar year. Since June 2021, the level of investment has further accelerated as a result of recent portfolio transactions. Portfolio transactions represented 65% of investment volumes in H1 2021, up from 28% in 2020.

The recent reporting season showed that the weighted average capitalisation rate (WACR) of the major A-REITs industrial assets firmed by 49 basis points (bps) over the six months to June 2021 and 75 bps over the past year. As a result, as of June 2021, the WACR of the A-REITs industrial assets measured 4.61%, down from 5.35% in June 2020. 

While this level of compression is significant, particularly compared to other sectors in the current environment, recent benchmark industrial and logistics sales imply there remains scope for further compression in the second half of 2021. These transactions include:

  • The McPhee Logistics Portfolio, which Dexus recently purchased on a yield of slightly above 4%;
  • 5-17 Leslie Road, Laverton North which Mapletree acquired on a 4.30% yield; and
  • The Mirvac and Morgan Stanley portfolio, which Lendlease acquired on a 4.00% yield.

Based on recent transactions and our view on where yields currently sit within the sector, the upside to A-REIT industrial and logistics valuations is in the order of 10-15%.

Australian REIT Industrial Cap Rate Analysis

Chart 1

Colliers Research Q2 2021 data shows that the rate of yield compression has been strong in all capital cities, albeit most pronounced within the Adelaide (-72 bps) and Brisbane (-68 bps) markets. In some respects, this represents a catch-up period to the Sydney and Melbourne markets, which saw significant growth levels of compression in Q1 2021.

As a result of the large re-rating and pricing shift within the sector over the past six months, for the first time on record, industrial and logistics yields are now lower than CBD office yields. Historically, a discount of 100 basis points or more was applied to industrial and logistics assets when compared to the CBD office and Regional retail assets. However, the favourable macro drivers supporting heightened occupier demand levels have re-balanced the yield pendulum, with sharper yields recorded for industrial assets. Nationally, the average prime industrial yield measures 4.54% and compares to prime CBD office yields of 5.13% and regional retail centre yields of 5.53%.

Australian Commercial Property Yields by Asset Class

Chart 2 

From an occupancy perspective, the vacancy rate among the A-REITs with industrial assets sat at 2.7% in June 2021, compared to 3.3% in December 2020. This vacancy level is below the broader national average of 3.5% for the same period and highlights the lack of leasing options at the institutional end of the market.

National Industrial Vacancy Rate

Chart 3

Where to from here?

Recent sales evidence has provided significant upside to industrial and logistics values for H2 2021. In our view, yield compression is expected to continue for the remainder of 2021 before stabilising in early 2022. By this point, average prime yields are expected to sit closer to 3.5% in Sydney and Melbourne while Brisbane will be closer to 4.0%. For Adelaide and Perth, sub 5.0% yields are expected to become more prevalent. Similarly, with a pick-up in rental growth expected due to heightened tenant demand and the low level of leasing options, capital values are expected to grow substantially in H2 2021.

Prime yields at a national level are now sitting 236 basis points below the 10-year average and 256 basis points below the last market peak in early 2008. Comparing against the 10-year Government bond yield, forecasts indicate this will sit at ~1.8% by Q4 2021, providing a spread between the low end of the prime yield range of 170 basis points. While this spread has narrowed significantly, it remains well above the 79-basis point spread recorded before the GFC in early 2008. In addition, with interest rates expected to stay at 0.1% until late 2022 or 2023, the spread to the low end of the prime yield range is at a healthy level at 340 basis points. 

Related Experts

Luke Crawford

Director | Research


Luke has 10 years’ experience in property research and real estate advisory, providing strategic advice and research to private, government and listed groups. Luke currently heads up the national industrial and logistics research function at Colliers, where he provides high quality research on the trends impacting the sector to both internal business lines and clients.

Luke has provided tailored and strategic industrial and logistics research to groups including Charter Hall, Mapletree, ESR, Ascendas, Centennial and ARA.

Prior to joining Colliers International, Luke has held roles within the Real Estate Advisory Services (REAS) division at KPMG and the Research and Consultancy team at Knight Frank.

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Gavin Bishop

Managing Director | Industrial


Gavin is the Managing Director of Industrial & Head of Industrial Capital Markets Australia at Colliers, where he has been specialising in industrial property for 21+ years. Based in the Sydney CBD Head Office, Gavin manages a highly successful team of over 120 staff across every state & territory nationally in key industrial and logistics precincts.

Gavin specialises in the national industrial capital markets and has excellent relationships across a broad spectrum of institutional, international and private investors. Over Gavin’s time with Colliers, he has completed hundreds of deals in industrial property, settling over $14 billion in his career to date, and leasing over 400,000sqm. Gavin enjoys a 75% market share of industrial capital markets share in NSW.

Gavin has worked extensively in the sale of industrial portfolios of up to 30 assets in one portfolio. Gavin and his team have sold 24/34 of all industrial portfolios in Australia over the last five years, including the AMP Portfolio ($105m), J.P. Morgan Portfolio ($250m), Altis Portfolio ($342.5m), Qantas Portfolio ($802m) and GIC/Australand Portfolio ($1.073b).

Some major distribution centre sales that Gavin and his team have been involved in over the last two years include, the Calibre, Eastern Creek ($130.1 million), 1 Eucalyptus Place, Eastern Creek ($90.5 million), 3 Roberts Road, Eastern Creek ($253 millions) and 6-20 Clunies Ross Street, Greystanes ($76.6 million)

Gavin has focused on building deep relationships with his clients, providing the latest in-depth information about logistics markets across Australia, which in line with his extensive track record, has seen Gavin achieve record-breaking results for his clients.

Gavin is a long-standing member of the Colliers team, having joined in 2000 as a graduate valuer. Gavin commenced with Colliers as part of their Scholarship Program and he was fortunate to work across multiple service lines and locations across Sydney, before settling in the Industrial team in Sydney South in 2001. Over the last 20 years, Gavin has progressed through the industrial business including managing the Sydney South and Sydney South West offices, before moving into the NSW State Product Director for Industrial in 2010.

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