Industrial property has been white hot during the past few years, thanks to the booming e-commerce sector, improvements in automation and demand for last-mile logistics.
Global supply chain disruptions last year, especially in retail, have resulted in rising inventory requirements and greater demand for space. These trends, along with strong leasing demand, are continuing to drive growth in the sector.
“In this competitive market, sourcing the right assets is important and we look for assets in strategic locations where we can add value through development and active asset management,” Lendlease Investment Management managing director Scott Mosely says.
“We recently acquired two facilities in Altona that adjoin existing fund holdings and this creates multiple opportunities for us to expand and develop them, and add value for our investors.”
During the past few months, Lendlease has acquired around $720 million in industrial assets, including a mix of established assets and development sites.
“The outlook for the sector remains bright for the right assets in strategic locations. The leasing market is particularly strong and we continue to see strong levels of enquiry,” Mosely says.
CBRE industrial and logistics executive director Chris O’Brien agrees the continued evolution of e-commerce and high demand for warehouse space has helped drive yield compression to historically low levels, with current pricing reflecting incredibly tight vacancy levels and strong rental growth forecasts.
He says lockdowns are positively affecting prices.
“There is a direct correlation between disruption to the markets due to lockdowns and an uptick in appetite for industrial and logistics assets, which are seen as defensive,” O’Brien says.
“Conveniently, it’s also one of the easier asset classes to assess sight unseen or virtually, given many properties are single-tenanted and offer net leases.”
O’Brien says the industrial property market is yet to peak, given the continued weight of capital, occupier demand and declining vacancy rates: “We consider continued yield compression is highly likely, combined with incremental rental growth.”
Looking ahead, CBRE anticipates a continued increase in property values for the remainder of the year and beyond as a result of yield compression and continued rental growth.
Australian Unity’s head of property research Damian Diamantopoulos says Covid has emphasised the importance of exposure to resilient income-generating assets.
“Industrial property is supported by strong e-commerce sales thanks to stay-at-home orders,” he said.
“Investors want long-lease duration properties underpinned by strong corporates, big box retail and self-storage.”
Diamantopoulos says industrial property prices are being driven by improving business and consumer sentiment, Australia’s success in supporting its economy and an extremely low interest rate environment, which enhances the relative attraction of property as an asset class.
“On the whole, direct property total returns remain largely underpinned by asset-produced income.
“Industrial property is the clear exception, where returns have been strongly influenced by the weight of capital chasing these assets.
“When we look at the way industrial property has staunchly fended off the pandemic, it’s easy to see why capital growth has been significant.
“Everyone appears to be chasing established industrial properties to buy or, for those with the capability, rolling out industrial developments in abundance.
“Many institutional investors have been underweight in the sector, this helps the demand argument, with recent transactions occurring at yields of around 3.8 per cent to 4.5 per cent.”
Market rent growth remains a key question in the industrial sector and has at times proved elusive. The question is whether this time will be different.
“Leasing conditions remain strong and occupancy rates are high. Retail e-commerce tenants continue to want warehouse and logistics space, as well as pharmaceutical and other essential service tenants,” Diamantopoulos says.
“Automation and inventory build ups are also adding to this positive tailwind.”
Recent transaction evidence shows industrial properties trading at yields of circa 4 per cent—essentially tighter levels than office and retail properties.
“Listed A-REITs are valuing their industrial properties at 4.5 per cent cap rates at June 30, so it appears a tad more valuation uplift and cap rate tightening is to come, based on recent sales,” Diamantopoulos says.
While yield spreads over 10-year bonds have narrowed in the industrial sector, deals are not slowing down. Growth prospects for industrial assets are expected to outstrip office and retail during the 2022 financial year.
Asia Pacific logistics and real estate platform ESR bought Blackstone’s Milestone industrial portfolio for $3.8 billion, reflecting a cap rate of around four per cent.
The portfolio comprises 45 assets in Melbourne, Sydney, Brisbane, Adelaide and Perth and houses 100 different tenants, including Lineage Logistics, WesTrac, Toll and Woolworths.
At the time, the transaction reflected a very sharp cap rate that was assumed to have included a portfolio premium—transactions have since firmed.
AMP Capital sells a Sydney logistics facility leased to Best & Less at 1 Eucalyptus Place, Eastern Creek to Lendlease for $130 million on a yield of 3.62 per cent.
The 35,000sq m industrial property is the national distribution hub for Best & Less and was transacted at the sharpest yield for an Australian institutional grade industrial asset to date.
Lendlease’s Australian Prime Property Fund Industrial acquires a portfolio of three assets from the Mirvac Industrial Logistics Partnership for approximately $161 million, increasing the fund’s portfolio to 39 assets.
GPT acquired a Spotlight warehouse in Laverton North, Victoria from a private investor for $73 million, representing a tight yield of 3.8 per cent.
The recently refurbished 33,360sq m warehouse is fully leased to Spotlight for a five-year term, and features 31,306sq m of high-clearance space as well as 2,052 sq m of corporate offices and staff amenities.
Charter Hall acquires two industrial assets at South Guildford in Perth’s industrial precinct for $50.75 million, reflecting a 4.35 per cent yield.
Excluding 8000sq m of vacant land, the acquisition was said to reflect a yield of 4.5 per cent.
The facilities have an 8.5 year WALE and are occupied by Cleanaway and Chemist Warehouse. The acquisition includes a large component of unused land which provides development potential.
Dexus acquired the McPhee Super Core Logistics portfolio for $186 million on a yield slightly above 4 per cent. The four properties comprise more than 70,000sq m of industrial space on an average lease expiry of 6.7 years.
The portfolio includes a warehouse occupied by Australia Post at Truganina in Melbourne’s west with room for expansion, with three more logistics facilities at Berrinba in Queensland. Other major tenants in the portfolio include McPhee Transport, TLS and Rinnai.
GPT acquired Ascot Capital’s 28-asset portfolio for around $825 million, representing a yield of around 4.4 per cent across the portfolio, according to media reports.
The yield on the industrial portion of the portfolio was said to be around 4 per cent. The portfolio has 24 logistics assets and four offices.
Lendlease, in a 50-50 joint venture partnership with an investment vehicle sponsored by Morgan Stanley Real Estate Investing, acquired a portfolio of eight industrial assets from a private logistics group.
The assets comprises five leased industrial facilities, each with 15-year WALEs, and three development sites, with a developed value of around $430 million.
Centuria Industrial REIT acquired a portfolio of eight industrial properties across Sydney, Melbourne, Brisbane and Perth for $351 million on a blended initial yield of 4.1 per cent.
The centrepiece property is a $200.2-million super-prime distribution centre in Fairfield NSW.