The Brickworks Limited (ASX: BKW) share price went nowhere over the last six months.
Brickworks owns a significant portfolio of investment assets, including a 26.1% stake in Washington H Soul Pattinson Ltd (ASX: SOL) and property development ventures, partnering with Goodman Group (ASX: GMG).
During the same period, its business partner Goodman Group saw its share price gain nearly 50%.
In this article, I will explore recent developments in Australia's industrial property market, with a focus on Sydney, and what they mean for Brickworks shares.
Australia's industrial property vacancy is the lowest level globally
Last week, CBRE Group released its property market review report for the six months ending 30 June 2024. In this report, the property group emphasised that although there was an increase in the nation's industrial property vacancy, it remains among the lowest globally. According to CBRE:
The national vacancy rate has increased to 1.9% for H1 2024, with upward movement recorded for most major markets across Australia. This rate is still the lowest level globally.
Despite the rise in space availability, we still do not expect to see the national average vacancy rate to surpass 4% in 2024.
Super prime grade stock is still being readily absorbed in the market at strong rental levels, and we do not anticipate demand for good quality assets in core locations to fall.
The vacancy rate in Sydney, where Brickworks is developing its land holdings with Goodman Group, rose from 0.5% six months ago to 2% in 1H CY24.
While it was disappointing to see the upward movement, the CBRE report highlights that this is still below the equilibrium rate of 4% and pre-pandemic level of above 5%.
As the shortage in the industrial property market continues, the current pre-commitment rate for the new supply is strong at 75%.
What does it mean for Brickworks shares?
The high pre-commitment rate for industrial properties is one of many reasons Bell Potter remains positive on Brickworks shares. The analysts at the broker said:
Despite some recent normalisation in market rent growth and vacancies, near-term supply in BKW's precincts continues to remain heavily pre-committed.
BKW has recently secured DA approval for Oakdale East 2 (250k sqm GLA) and last month announced Amazon (58k sqm GLA) as its anchor tenant, providing the group with strong optionality and, in our view, an effective 12 to 18 month lead on most incoming local supply.
Brickworks appears undervalued compared to the company's own estimation of its net asset value (NAV). In its May 2024 trading update, the company estimated its NAV at around $5.6 billion or $36.68 per share. This is far above its share price of $26.84 today.
In the same update in May, the company highlighted its current rent is well below the market. This indicates there's room for further income growth from its property ventures as rental terms come into effect. Management said:
Theses structural trends, along with land supply issues, have driven up rent for prime industrial property in western Sydney by 55% in the past two years. We estimate that the current passing rent within the Industrial JV Trust of $147/m2 is now 35% below average market rent of $225/m2.
The Brickworks share price is flat today at $26.84.
