It's been a difficult few weeks in south east Queensland and northern NSW as communities battle against rising flood waters impacting the livelihoods of residents, businesses and property owners. While some come to grips with this unexpected reality, there are many, notably in the SEQ corridor, which remember the impacts of the Brisbane floods of 2011 and are now faced with the prospects of rebuilding again.

For the commercial property markets, we are in a different environment at the moment compared to the 2011 period. Over the last 18 months we have seen significant increases in demand to purchase assets, notably across the industrial asset class.  Industrial land values have climbed to new highs, vacancies are at an all time low, and investment yields break new benchmarks falling to their lowest rates ever on record. 

Fuelling this strong demand has been the weight of funds available to be invested, low interest rates, cash rich buyers, and burgeoning second tier lenders in the market actively competing for business. We have seen more first time buyers make their foray into commercial real estate over the last 12 months than ever before, and industrial and its wide range of price points and high occupancy has made this an attractive investment choice. While these smaller buyers may be in the sub $1.5 million price range, we continue to see much activity by private investors, family offices, private syndicates up to $50 million while larger groups such as REITS, funds, developers and offshore buyers continue to aggressively compete in the upper price ranges.

How will industrial assets be impacted, and what lessons have we learned from 2011?  

During the time of the 2011 Brisbane floods, the demand for quality stock was not aligned to what it is today.  Higher vacancies saw tenants able to relocate quickly, while assets sat in the clean up phase for a prolonged period.  We saw yields during this time rise by as much as 2 per cent for flood affected properties, rents drop more than 15 per cent as incentives skyrocket all resulting in a significant compression in capital values. Furthermore, owners were hit by rising insurance premiums further pressuring their bottomline. The effects of the flood continued to be felt for three to four years later, with those assets still attracting discounts to secure a tenant or when sold with LVR’s representative of their increased risk.

Fast forward to 2022 and for many buyers, perceptions have changed. The lack of quality stock in the marketplace and the insatiable demand to purchase has seen some turn a blind eye to the floodwaters. Many prospective buyers continue to request access to view assets despite the knee high flood waters, with some eager buyers requesting to be advised when waters were down to “gumboot height” so they could inspect a property. 

Tenants however will feel the pinch during this time. With few vacancies in some SEQ markets, landlords have been more selective in their tenant selection and those needing urgent accommodation options will be faced with rental increases and non-existent incentives. 

While the market may power through, there is no doubt owners will be faced, yet again, with clean up costs and rising premiums.  With a shortage of trades and growing development costs this could be an expensive exercise.  For developers and many owner-occupier builders this was already being felt - new developments had slowed and, while demand to occupy is high, the high cost to develop will likely set new benchmarks for tenants growing rents.  

While banks and financial institutions have been amenable of late, the prospect of interest rate rises and the real threat of natural disaster more often than predicted could see greater difficulty in securing funds which should filter through to the yield achievable.  While some discount is anticipated it is unlikely that the current low rates will grow as they did in 2011 particularly if FOMO continues with some buying groups.  A more considered approach will be needed by purchasers and banks to ensure that the increased risk is appropriately factored into values but with rents unlikely to reduce considerably this may be a difficult task.