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Rental growth boosts outlook for asset returns

Figures released by global investment data company MSCI in December 2022 clearly demonstrate the long-term strength of asset classes over the past decade, particularly industrial and large-format retail.

The MSCI figures show the retail sector as the top-performing sector for the three months ending in December 2022, driven by the growth of the large-format retail sector.

Large-format or “bulk” retail recorded a 5.5 percent income return in the last calendar quarter of 2022, and a total return of 4.8 percent, according to the MSCI figures. That places it ahead of industrial, with 4.1 percent income return for the quarter, and a total return of 2.9 percent.

Bayleys national director commercial and industrial, Ryan Johnson says the bulk retail sector has been less impacted by widespread drops in capital growth, which is why it has nudged industrial out of the top spot in asset class performance.

“Long leases and the overall performance of large-format anchors like supermarkets and hardware stores, even through this inflationary period, have meant bulk retail hasn’t seen the same softening of capital growth as other asset classes,” Johnson says.

Over the long term, both industrial and bulk retail have proven themselves as strong performers. The MSCI figures show the industrial sector recording total annualised returns of 13.5 percent over 10 years, and 14.5 percent over five. Bulk retail has been close behind with annualised total returns of 11.5 percent over both five and 10 years.

While those returns over the last calendar year were notably lower, Johnson says key market fundamentals are likely to keep fuelling rental growth for the foreseeable future, giving commercial investors the confidence to ride out a challenging period.

“If you look at industrial, for example, it has consistently been the best-performing asset class. The 10-year MSCI figures show capital returns at 6.9 percent and income at 6.3 percent,” Johnson says.

“What that shows, is a really nice balance between capital growth and income. What is forecast now is for that income to remain strong, driven by rental growth. While totals for the sector might be flatter, as capital rates soften, that ongoing rental growth will ensure the sector delivers good returns in the short term.”

Bayleys national director industrial and logistics, Scott Campbell says strong rental growth over the past six to 12 months in the industrial sector has been driven by high occupier demand coupled with increasing construction and land costs.

“That rental growth has been a big driver of good total returns for industrial investors. That was supported for some time by compressed yields,” Campbell says.

He expects the trend for industrial rental catch-up to continue as supply tightens and demand increases further in the short to medium term.

“There has been a slowdown in speculative development of new industrial sites in recent years because of pandemic disruption and uncertainty, so we will have some catching up to do to meet demand as immigration regains momentum.”

There is also strong demand driven by an increasing flight to quality as occupiers look for cubic capacity and prime locations near arterial routes and key infrastructure, Campbell says, adding that the signs are there that industrial returns will remain strong.

Bayleys national director retail, Chris Beasleigh says that the rental growth forecast is similar in bulk retail as demand outstrips supply, and developers seek to cover construction costs.

“To make developments feasible, owners are having to set rents at a certain rate to cover higher costs of construction and land, so that is also driving good total returns.”

Similar to the industrial sector, what has changed for investors is yields, but Beasleigh says rental growth will take the sting out of market changes in the short term for bulk retail.

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