Factors to consider in industrial property investment

Commercial,IndustrialTuesday 8 September 2015
Property-Blog

Industrial property has the potential to deliver higher yields than either commercial office or retail property investment, and also has the capacity for positive capital growth.

According to Property Observer, in the 20 years to 2014, average annual income returns for industrial investments were 9%, while being 7.4% and 7.3% for retail and commercial property respectively. Capital growth was also positive at 2.3% per annum.

However, with the potential for higher returns comes a higher level of potential risk, so it’s important when investing in industrial property to be fully cognisant of the market.

Drivers of positive investment returns

One of the main factors contributing to positive returns in some large industrial properties is that of retail spending – internet sales in particular. For example, an online retail company might require a large and efficient facility for warehousing and wide distribution of its products.

Industrial property leases are at times longer than for offices or retail, with ten-year leases not being unusual. This factor can provide a higher degree of stability for investors than might be the case with other property types.

Benefits and risks of industrial investments

Benefits:

As well as longer leases and potentially higher yields, some of the other benefits include:

  • – Annual increases in rent in line with the CPI are frequently the norm
  • – Tenants usually pay most of the outgoings
  • – Depending on the industry/application, building maintenance can be lower than for retail, office or residential properties. That being said, good building management is just as important for industrial properties as it is for any other type of investment property


Risks:

  • – Vacancy rates can be higher – especially in the case of purpose-built properties
  • – Financing the purchase can come with higher interest rates and greater demand for equity/capital outlay
  • – A property can become obsolete if purpose-built, or due to changes in technology or regulatory requirements

What to consider in an industrial property investment

When considering investing, you should look for a property that will attract good tenants and that has longevity – that is one that will be unlikely to become obsolete and vacant in the near future. Some tips on what to look for in an industrial warehouse for example include:

  • – Preferably a new, modern facility – one that is not going to become outdated quickly. In this case it’s also important to look at future trends with regard to business, technology, and planning and development in the region.
  • – Plenty of space – for example good height clearance (above 10m), space for machinery, equipment, vehicles (such as forklifts), large hardstand areas, and wide doorways
  • – Good location and accessibility – preferably on or close to a main road, and with plenty of access for trucks as required
  • – Modern offices – if these come with the property they should provide a comfortable space and facilities for staff
  • – Adequate car parking areas – for use by large vehicles as well as employees, visitors, customers and suppliers
  • – Good tenants – be sure to check out their financial capacity to pay and any past tenancy histories

Investing wisely can enable you to build up a property portfolio over time, thereby increasing your potential for even greater returns. Make sure you undertake plenty of research and seek assistance from professional property consultants, such as the team from Burgess Rawson, especially if you are new to the industrial property investment game.

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