5 The Sydney industrial property investment market held firm in terms of sales value over the year to September 2022, at over $4 billion, but indicators suggested a slowing in activity during Q4 2022. It is clear that rising interest (long bond) rates last year caused investors some pause. Even so, recent surveys point to industrial property investments remaining popular, but investors are being more selective, targeting opportunities that can capture rising market rents to offset the effect of softening yields. Furthermore, Sydney industrial property still seems to be viewed favourably by foreign investors, with a notable proportion of sales over the last year attributable to this buyer cohort. Major recent sales included; • Gateway Capital/Invesco buying 12 Frederick Street, St Leonards for $118 million; • Pittwater Industrial paid $95m for a portfolio of three Sydney industrial properties on a yield of 3.2%; and • Nash Cap bought the Rosehill Business Park for around $118 million. Overall, Sydney prime yields were firm at an average of 3.6% to 3.9% as at June 2022. While South and Central West secondary yields ranged from 4.2% to 4.3% at that time. However, these tight yields came under pressure to rise during the second half of 2022, as higher bond rates ratcheted up investor’s cost of debt. By December 2022, prime yields softened by 40basis points to an average 4.0% to 4.3% with South and Central West secondary yields at 4.6% to 4.7%. The strength of rental growth last year more than offset yield softening, driving solid to strong capital value growth of 6% to 23% across the regions, albeit well down on the exceptional growth of 2021. Secondary capital value growth in the Central West and South was also strong last year at 10% and 16% respectively. Investment market Since 2020, 10-year bond rates have increased by circa 250 basis points, narrowing the spread to prime Sydney industrial property yields to well below the long run average. On our forecasts, prime yields in the benchmark Outer West will soften by a further 60 basis points this year, for a total increase of 100 basis points. Our forecasts reflect our 10-year bond rate projections hovering at or above the current rate (3.4%) over the next two years. However, strong rental growth will limit how much yields often. investor preference for prime assets will see secondary South/Central West yields soften by 130 basis points by the end of 2023. The combination of rent and yield forecasts will see a slowdown in the extraordinary rate of capital value growth. Prime values in the Southern, Northern, Central Western and Outer Western regions are forecast to rise by 6% to 12% over the two and a half years to June 2025. Secondary prices in the Southern and Central Western regions are forecast to rise by just circa 3% over the same period. Investment outlook 185 George Downes Drive, Central Mangrove NSW 2250 Industrial Market Monitor | 1st Half 2023
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