A specialist wealth manager has raised concerns over the ability of investors, including SMSF trustees, to properly price the risk of industrial property as they chase yield in the current low interest rate environment.
“What we’ve been seeing is, because the cash rate has been so low, a lot of SMSF and private mum and dad investors have been looking for better income returns elsewhere and have been chasing the assets such as service stations and childcare centres with single tenants and long leases valued at under $5 million,” Stronghold Investment Services fund manager Tim Dunsdon told smstrusteenews.
“As a result, what we’re seeing at our end is not necessarily a mispricing of risk, but not an appropriate pricing of risk for some of those assets.
“This is because people are just seeing the cash dividends generated by these assets, or cash return, and paying big prices for them.”
According to Dunsdon, SMSF members and self-directed investors can easily fall into this trap as they are generally more familiar with the retail property market and do not understand the unique and different characteristics of the industrial real estate sector.
“These assets are a different kettle of fish and there is a lot of difference between an A-grade, blue-chip-type asset near the city, with good fundamentals and a good tenant in place that can be leased to a lot of other operators, versus a regional or fringe asset where if the operator [moves out] the investors are not left with much,” he noted.
With regard to the performance of the industrial property sector, the wealth manager acknowledged the COVID-19 pandemic has seen it strengthen.
“Within the first six months [of] COVID hitting, market feedback was that Woolworths had leased five of its really old industrial sheds to convert them into dark stores,” Dunsdon revealed.
“Then there were further supply chain impacts as well with a lot of organisations looking to onshore their manufacturing or their processing capabilities and now obviously they need more space to house their increased inventory.”
All of these circumstances combined was of benefit to the sector, he said.''