Beds and sheds have become the hottest investment assets in WA as occupancy issues continue to hamper the retail and office sectors.
According to research by Ray White Group, the high price of construction and a mismatch in supply and demand has seen residential built-form outperforming all other asset classes.
The industrial sector is also benefiting from limited supply and high demand, particularly as the population grows, resulting in a swift uptick in capital values and average rental rates.
Though the trend is nationwide, data compiled by Ray White shows a more obvious result in WA, with an industrial yield of 5.8 per cent and unit yields at 6.1 per cent.
“The peak industrial yield was 8.4 per cent back in 2010 and trended down to its low of 4.96 per cent in September 2022. The overlap which occurred where units overtook industrial was in mid-2021 at 5.2 per cent,” Ray White Group head of research Vanessa Rader said.
On a national level, the recent increases in rents and uptick in values saw unit capitalisation rates overtake industrial, achieving 4.6 per cent in early 2023 when industrial yields averaged 4.2 per cent.
“Residential has still a runway to go, with construction so difficult and costly coupled with increased need for housing will see continued gains in both values and rents, it’s a matter of supply and demand,” Ms Rader said.
“You can see the certainty in need and return for the residential market and why institutional buyers want to consider these assets for their portfolio and create a new sector for Australian investment as a safe and secure asset type with stability in returns as we have seen historically.”
Meanwhile, Ms Rader said the lure of office assets as a trophy investment for institutional investors had disappeared.
“Occupancy issues hamper the sector and it’s not due to a cyclical change but a structural shift by occupiers which will result in a drawn-out recovery not seen ever before. Similarly, retail has had a tough few years, with changing shopping habits impacting returns, both capital and income, deterring many investors,” she added.
Ms Rader said labour shortages were also putting pressure on businesses to provide flexibility, resulting in more work from home creeping into Perth, which would further slow a recovery of the office market.
“What is happening around the country and the world is making it difficult for the office sector and we will see that risk premium come back into yields for this asset class. Once this revaluation occurs we will see investment demand come back, as long as occupancy levels do improve.”
However, she predicted ongoing population growth would spur the need for retail, particularly food-based retail in smaller neighbourhood or subregional centres.