Income yields for better quality Auckland industrial properties are holding firm at record low levels — but it's unlikely they'll tighten much further, says Bayleys Research.
Bayleys Research manager Ian Little has tracked median income yields achieved on Auckland industrial property for many years.
He says present low level industrial yields reject ongoing demand for property assets in a low interest rate environment, conditions which have prevailed since the GFC.
Little is used to seeing yields soften (go higher) in weak markets, when tenancy risk is higher and investors seek higher income returns to compensate for that. Conversely, they firm (reduce) in buoyant markets as we see now, with interest rates low.
"After being as high as nine per cent in the weak post-GFC market of 2009/10, in the first quarter of 2016 the median yield index dipped below 6 per cent for the first time in late 2016," he says. "It now sits at 5.4 per cent, and while competition for a limited supply of industrial investment product has driven yields to historic lows, returns have continued to provide a premium over risk free alternatives.
"The risk premium over the returns generated by New Zealand 10-year government bonds has been holding at about two per cent to 2.5 per cent since the early 1990s."
Bayleys North Shore industrial manager Matt Mimmack says he generally sees good quality Shore industrial investment properties selling at yields of 4.5-6 per cent.
He says larger, higher value offerings have traditionally sold at higher yields than smaller properties.
"But that's not always the case now due to the very small supply of bigger offerings being presented for sale."
A recent example was Mimmack and fellow Bayleys North Shore industrial manager Laurie Burt's, selling at auction 9 Tawa Drive.
This property went for $5.38m at a yield of 4.55 per cent.
The 1458sq m industrial building on a 2457sq m corner site was constructed in 1994 for present tenant Xylem Water Solutions. The company renewed for four years in April, with one further four-year right of renewal remaining on its current lease.
"It was the first time the property was offered for sale since being built," says Mimmack. "Due to the strength of both the location and tenant, it was one of the best Shore investments we've sold in recent times. And that was reflected in the strong interest in the property with over 100 inquiries and 12 bidders at the auction."
Earlier this year Mimmack sold a similarly-sized property — a 1301 sq m warehouse, showroom and office building on a 1729sq m site at 60 Apollo Dr — for $5.1m at a 4.47 per cent yield.
The longstanding tenant, Wallace Cotton, exercised a final four-year right of renewal in October 2017.
Bayleys Auckland Central & West industrial manager Sunil Bhana, says it's a similar story south of the harbour bridge.
"Sub 5 per cent yields are also being achieved on some high quality, strongly located larger offerings."
Bhana and colleagues James Hill and Mike Houlker recently sold a 1780 sq m industrial building on a 2834sq m site (with 28 car parks) at 24 Vestey Drive, Mt Wellington for $5.15m at a 4.85 per cent yield. Jazz Print, in occupation since 1996, has taken a new six-year lease from settlement.
"Looking ahead, it is likely that industrial yields are close to their cyclical low," says Ian Little. "This means most future capital growth will come from rental increases."