The flight to small industrial

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We are seeing unprecedented prices being paid for smaller industrial and commercial properties in the Bay of Plenty at the moment, especially in my own forte of industrial at Tauriko and Mount Maunganui.

It’s not difficult to understand why. We are seeing the impact of the flight of investors out of the residential sector and into smaller commercial and industrial units where they can enjoy more attractive yields.

The trend has also included investors strategically landbanking by securing strategic sites. And there is a shortage of quality industrial stock, which is putting upward pressure on pricing.

Without a doubt, smaller residential investors are reacting to recent regulatory changes and government policymaking, which have made it much less attractive for them to be in the rental residential market.

Yes, there is a potential capital gain for residential investors over the longer term. But in today’s market, they may only be getting a three to four percent annual yield on residential.

And out of those returns, the residential landlord is paying for all the costs, maintenance and other outgoings.

By contrast, in industrial/commercial, the tenant typically pays for the outgoings, and the landlord may be looking at typical yields of five to six percent.

And that is excluding any potential capital gain.

So we are seeing good numbers of investors both contemplating and actioning on selling their properties to reinvest in industrial or commercial properties.

We are seeing strong inquiries for smaller industrial properties and units, especially in Mount Maunganui and Tauriko.

In my five years or so specialising in this sector, I’ve found it can be subject to quite dramatic changes.

For example, we may see a new development come on stream with 14 or 15 brand new units, which might saturate the market for a while.

But currently, there is only limited availability in the market. I’ve been heavily involved in working with developers in properties ranging from 50 sqm to 300 sqm and I try to recommend to my developers where the demand is at any one time and where and how it is likely to develop.

This part of the sector is definitely emerging as an attractive investment for residential investors wanting to dip their toe in industrial.

Basically, if you have a choice between investing $600,000 in a residential and getting three or four percent, or in a small industrial and getting five or six percent, its won’t be surprising if this trend is maintained over the next year or so.

This trend may see more housing freeing up for first-time home buyers.

But there are certainly some concerns about the longer-term impact of this on the residential rental market.

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