Investment properties: Industrial sector shows simple virtues and competitive returns

By Murray Soljak

Friday 22nd February 2002

Look for the upside

"PFI's investment strategy is to seek out properties that display above-average income or capital appreciation," general manager Peter Alexander said. This means locations that are:

land-constrained - there is limited space for further growth. Mt Wellington in Auckland is a good example, particularly the Westfield business precinct.
close to important transport links. "Traffic congestion in Auckland means that getting from A to B has become a key issue for tenants."
likely to benefit from new or improving arterial routes. Mr Alexander comments: "East Tamaki became a more desirable location following the opening of Te Irirangi Drive."

ONE-YEAR RETURN TO JUNE 30, 2001

Industrial property is one of the most straightforward classes of property investment - that's why many investors choose it for their first venture beyond residential property.

It has also offered some of the best returns. Statistics from the Property Council of New Zealand show returns from industrial property were exceeded only by those of retail property.

In the 12 months to June 30, 2001, the total return (income and capital) from New Zealand industrial property was 7.91%, outperforming not only most other property classes but also bonds and shares (see Property Council graph).

More recent Property Council figures suggest industrial returns improved further during 2001 - in the half-year to September, New Zealand industrial property delivered a total return of 4.9%, with Auckland industrial providing 4.97%.

Property For Industry - the only listed property company in New Zealand which focuses solely on industrial property - surpassed both the NZSE40 and the J B Were property index, with a total return of 17.93%.

PFI general manager Peter Alexander believes PFI's shareholders enjoy the best of both worlds with an investment in industrial property and regular income through quarterly dividend distributions and by retaining liquidity through the sharemarket, with all the day-to-day management of the portfolio handled for them.

However, for investors considering going it alone in direct industrial property ownership Mr Alexander said the "simple virtues" of industrial property were the key to the performance of the sector.

Simple market dynamics

"The industrial market is very closely linked to tenant demand - the market responds quickly to vacancy, thanks to a high proportion of design/build projects and short construction times," Mr Alexander said.

Design/build properties are designed for the specific requirements of occupants, as and when required, and with tenant pre-commitment.

Combined with a short construction "lag," the risk of cyclical overbuilding is reduced. Construction periods are usually less than a year from design to completion.

This eliminates many of the fluctuations in demand and supply that are experienced by other sectors. Vacancy levels in prime industrial locations are currently lower than 5%.

Simple tenure

Industrial properties are generally single-tenant properties, with net leases where tenants pay all outgoings such as rates, maintenance and insurance. Lease terms are often longer, with nine to 15 years being common.

Simple design and construction

Industrial properties vary little, regardless of the businesses occupying them.

The needs of most users can be accommodated within a simple structure, and this flexibility increases the number of potential tenants.

Industrial properties are functional and built from durable materials.

This means low obsolescence, lower refurbishment costs and lower maintenance costs.

Simple services

Industrial properties tend to have lower levels of plant, such as lifts, escalators, air-conditioning and building management systems, resulting in lower maintenance costs and lower obsolescence for services as well as building structures.

Industrial properties also have fewer public spaces, such as foyers and lift lobbies.

Murray Soljak is Property For Industry's commmunications adviser

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