Pundits will eagerly await the outcome of today’s inflation results to gauge the probability of an August interest rate cut. Indeed the low rate environment has restricted the banking sector’s positive net interest margins – crunching profit projections. In the near term, moreover, as Brexit and other politically induced global volatility continues to play out; turbulence will likely also continue to materialise in the equities market. The eventuating “risk-off” sentiment will no doubt encourage migration toward the traditional safe-haven properties.
At June 2016 the average Sydney prime industrial yield was 6.66%, according to Colliers Edge Q2 results. At the same time, the Australian cash rate remained at a record low of 1.75% while the Commonwealth 10 year bond had dropped to 2.12%. As such, the prime Sydney industrial yield gap to the Commonwealth 10 year bond swelled to 454bps. This is 112bps above the long-term yield gap. Looking forward, the RBA will share the same sentiment as its global counterparts and maintain an easing bias; keeping rates at their lows and flattening bond yields. On this basis further prime industrial cap rate compression is expected.
Whatever the outcome today’s inflation result is; or whichever path the RBA elects to take, real investment returns will remain at the fore. In a world of low rates and returns, Australian industrial and logistics assets have offered a prepossessing proposition. Most recently, NSW based industrial assets have risen to outperform the alternative asset classes. In the past 12 months, NSW industrial properties provided an outstanding total return of 17.2%. In this period the MSCI equities index yielded -11.3% while the J.P. Morgan, GBI Global, Australia, Unhedged 7-10 year index returned 1.6%.
Malcom Tyson, Managing Director Industrial at Colliers International, says that demand from offshore purchasers is anticipated to increase in the near term. Firstly, in this global low rate environment the flattening long-run-yield curves will highlight the outperforming returns offered by Australian core industrial assets. Secondly, the anticipated US federal rate hike programme is looking less sanguine. As such, investors will revisit their capital deployment mandates. Finally, Australia’s comparatively strong economic; and entailed employment and retail turnover growth will assure investors. Thus, looking forward, the demand for Australia’s industrial and logistics assets will remain in vogue.