Industrial property could be an effective way to hedge against Australia’s highest rate of inflation in decades, according to an expert.
Ray White Commercial Head of Research,
Vanessa Rader, said commercial property and in particular industrial assets
appear to be well positioned in the current high inflation environment.
“Commercial property has often been perceived as a good hedge against inflation, however, the current inflation rate of 6.1 per cent will be a test for some landlords, in particular assets which have recorded increased vacancies as these will be challenging,” Ms Rader said.
“Asset classes such as industrial, with high occupancy and growth in demand notably from the freight, transport, and warehousing sectors are likely to weather the storm given they have enjoyed strong levels of rental appreciation which can, to some extent, counteract these rising rates.
“Many of these increased costs are heavily passed on to the consumer with the freight and transport industry also recording a strong uptick in costs due to rising fuel, wages and accommodation expenses.
“Road freight is now up 8.3 per cent over
the last year while postal and courier services have grown 8.1 per cent over
the same period.”
Ms Rader said tourism assets have had a difficult two-year period with border closures, lockdowns, and reduced occupancy limits. However, an increase in domestic and international travel has seen the service industry raise prices.
“Plagued by rising wages, accommodation costs have grown by 16 per cent over the last year, while growing food prices, labour shortages, and supply chain issues have seen cafes, restaurants and takeaway food increase by 6 per cent.
According to Ms Rader, it will be difficult for office landlords to raise rents in the current environment.
“As office vacancies are up across most of the country and WFH now expected by a high percentage of the population, we are seeing tenants reducing their office footprints or only leasing adequate space, allowing WFH to cater for any growth,” she said.
“As a result, sublease space continues to climb and incentives will remain a key strategy to fill space.
“While rental appreciation is unlikely in the short term, there are opportunities for landlords to be more flexible or innovative in their lease terms and conditions to maximise future escalations.
“However, low yields which were on offer over the last couple of years appear unsustainable given the changing spread to bond rate.”
Ms Rader said there are some areas in the retail space that have been able to raise prices.
“Convenience and food retailing have been the segments showing the most increase in turnover, followed by services; hairdressing and dry cleaning being key industries which have seen price rises up 4.6 per cent and 8.6 per cent respectively,” she said.
“With retail vacancies high, there is little sign of rental growth on the horizon.
“There have been a growing number of property owners repurpose their assets (STCA) to allow a broader range of uses such as growth sectors of childcare, medical and even co-working to potentially increase their assets earning potential to hedge against this high inflationary environment.”