After 2 years of largely trading below 2 per cent, the Australian 10-year bond yield has increased this year. What does this mean for industrial property? Marty Green, Westpac Banking Group’s national general manager for property, shares his insights.
Westpac Banking Group is involved in industrial markets right across Australia. The Group’s latest property report, The Outlook for Industrial and Logistics Commercial Real Estate, unpacks some of the key trends and their implications. Among these is rising bond yields.
Australian long-term bond yields – or interest returns – have been depressed following the Covid-19 pandemic and the large amounts of stimulus unleashed by the Reserve Bank of Australia (RBA).
But the RBA scrapped its yield-curve control program in late 2021 and its bond-buying program for bond maturities of five to 10 years in February, Westpac’s report notes.
Bond yields in 2020 hit a bottom in January, lifting noticeably higher in late 2020 as the Australian economic recovery gathered momentum. Setbacks due to the Delta and Omicron waves did result in some temporary pull backs in yields.
After 2 years of largely trading below 2 per cent, the Australian 10-year bond yield has climbed steadily, trading at 3.09 per cent as of 20 April 2022.
What does this mean for property?
The gap between property returns and government bond yields is called the ‘risk premium’. This is essentially the excess yield that can be realised by investing in commercial property when compared with the ‘risk-free rate’ of investing in a government bond. As bond yields increase, the risk premium narrows.
The industrial sector has outperformed commercial office and retail since the pandemic commenced. Last year, tenant take-up of industrial property was 80 per cent higher than its 10-year average, Westpac’s report notes.
As investor competition for logistics and industrial assets has intensified, prices have risen significantly on the eastern seaboard, and yields have compressed.
Industrial transactions, both domestic and offshore, totalled $16.3 billion in 2021, according to data from Cushman & Wakefield. In comparison, around $5 billion was transacted in both 2018 and 2019.
In the first quarter of 2022, every major industrial market in Sydney, Melbourne and Brisbane posted average prime logistics yields of below 5 per cent – a new record according to LJ Hooker Commercial data reported in the Australian Financial Review in March.
“The significant demand, both locally and globally, which is looking for a home and historic low interest rates mean industrial property yields are likely to continue to compress or at least stabilise. Rents are now showing strong signs of finding new materially higher levels in the major growth corridors,” Green observes.
Westpac notes the invasion of Ukraine in late February led to a spike in demand for safe-haven assets, such as government bonds, and spurred a further lift in commodity prices. Green says the situation in Ukraine is “highly uncertain and fluid”. There are some concerns a prolonged and broader conflict could hurt world growth and place upward pressure on inflation.
Nevertheless, Westpac’s core view remains one of strong economic growth in 2022. “We expect the RBA to start raising the cash rate in June 2022 to tame inflationary pressures,” Green says.
“We anticipate the Australian 10-year bond yield will remain around 3 per cent over part of this year, but there is likely to be volatility with the geopolitical tensions.”
Against this background, industrial property will remain appealing to investors. Demand is expected to remain high with limited new land supply and the gap between industrial property yields and 10-year bond yields will continue to be attractive, noting expected growth in rents, Green concludes.
Download Westpac’s latest report, The Outlook for Industrial and Logistics Commercial Real Estate, to gain more data-led insights into demand drivers and their implications for industrial property.
Westpac is the principal partner of the Property Council’s National Mentoring Program.