We came across an article recently that property investment journey is all about balancing cashflow with growth. We believe many investors start their property portfolio with a residential property, chasing after the maximum growth that the property is capable of achieving in the future. However, we often come across many investors who soon start to realise that they need some cash flow properties to sustain their portfolio. This is when we believe commercial properties kick in – but the real question is, what type of commercial property is worth investing in?
For the past few years with the changes in the economic environment going through COVID, there has been a significant demand in industrial properties. Although there are other types of commercial properties including Office, Retail, Mixed Tenancies etc, with the current market conditions we are in, we believe it is now the appropriate time to look into industrial properties a bit closer.
COVID-19 & Rise of E-Commerce
If we think back at pre-COVID times, almost every second warehouse was vacant as industrial investment used to carry the highest risk for investors. Many investors were afraid of its high vacancy rate as well as difficulties with re-tenanting, taking up 12 months.
However, COVID has had a massive impact on ‘e-commerce’ where more and more Australians were buying goods online, which led to supplier companies requiring more industrial / warehouse type facilities for storage and continuing their supply chain.
As a result, Real Estate Institute of Queensland (REIQ) mentions there has been an almost 80% increase in the industrial market on the 10-year average, and is jumped by 60% just in the first 6 months of the pandemic. This high demand has also driven rents upwards for industrial properties, with Colliers reporting a 21.6% increase in industrial rents within the 12 months up to late 2022.
According to several commercial platforms including The Forbes, Shopify etc, e-commerce will most likely continue to grow, where 23% of the sales is expected to be made from online purchases by 2025, which would be a 5.2% increase in just five years from pre-COVID years (17.8%).
Although these specific numbers have been gathered based on the U.S market, Australian companies are forecasting similar increases in e-commerce where $1 billion sale is expected, causing the need for an extra 70,000sqm of industrial spaces by 2025 (CBRE).
Cons of Industrial Investment
With the above information, the pros of investing in an industrial/warehouse property seems quite clear. However, like all investment types, there are definitely some cons to consider such as:
Harder to find tenant for large industrial properties and once vacant, it could take a long time to find new big tenant;
Property will need capital improvement on it from time to time and upgrade in power;
May have additional maintenance costs due to its nature and size of space; and
Property is designed for function, and may not be aesthetically pleasing.
Despite the cons, the interest in the general commercial market seems to be continual, with Australian Bureau of Statistics announcing there were 7% or 167,646 increase in number of businesses in Australia between 2021-2022. Together with this, we know that a tenanted commercial property will bring out a positive cash flow from day one if done right, and with the annual lease increases (by CPI or an agreed %), it will protect the investors from unforeseen economical changes including the rise in the interest rates.
If you are an investor looking into the commercial market at this current moment, why not consider industrial properties to add to your portfolio? It may be a worthwhile purchase that may become your next ‘set and forget’ investment.
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