Lockdowns, E-commerce Fuel Warehouse Shortage

While malls, offices and hotels have suffered in the face of strict social distancing practices, industrial property looks set to be one of the few winners to emerge from the coronavirus pandemic.

According to a worldwide survey by investment bank UBS, demand for space from top e-commerce and logistics companies is outstripping the supply provided by major listed developers.

UBS said companies that managed to secure space were also dramatically boosting the automation inside warehouses, which in turn meant they were taking longer leases in top locations.

Australian respondents now expect warehouse space needs across the country to increase by 7.5 per cent during the next two years with the potential incremental demand for industrial space growing to one million square metres.

E-commerce users expect penetration for grocery to reach 10 per cent and ex-grocery 17 per cent, doubling the 10-year average for take-up from retailers.

“Industrial, while a consensus long position for real estate, is a bright spot as a key beneficiary of the shift to e-commerce as supply chains adapt and logistics operators adjust to changing consumer behaviour,” UBS analyst Grant McCasker said.

“Demand for space is accelerating, but is likely to be matched with increased supply while demand from capital for logistics is likely to see cap rate compression despite a lack of rental growth.”

UBS said over the medium term, a significant amount of new supply would likely be needed in the recently-approved Mamre Road precinct.

The 850-hectare precinct, one of 12 key precincts in the Western Sydney Aerotropolis, was one of 24 projects included in the second tranche of “shovel-ready” projects identified by the NSW government to support the state’s economic rebound post-Covid.

Related: Goodman Deal Sees Amazon Expand Into Queensland

Institutional landowners in this precinct already include Altis Property Partners, Fife Capital, Frasers Property, ESR, GPT, Mirvac and Stockland, accounting for 35 per cent, or 290 hectares, of rezoned land.

“Assuming 40 per cent site coverage, 3.4 million square metres of GLA, and at a 5 per cap rate and market rents, this could lead to $8b of logistics properties over the next three to five years,” McCasker said.

“With expectations of further cap rate compression, developers will likely be aggressive on rents in order to attract tenants.

“This will limit rent growth in outer west Sydney.”

For context, over the past five years, the logistics supply in Sydney has totalled 3.2 million square metres, or 630,000 square metres per year.

Looking ahead, UBS said major logistics transactions across 2021 will focus on QUB’s sell-down of Moorebank and GMG selling 50 per cent interests in Coles and Amazon facilities—which include the most advanced warehouse facilities on a long WALE of 20 years.

GMG is currently developing 50 per cent of these assets on balance sheet and will likely dispose of the 50 per cent stake to existing or new partnerships to de-risk development earnings.

JLL Industrial head of capital markets Tony Iuliano said investor demand for modern logistics assets has remained firm with multiple capital sources seeking to enter Australia or increase their exposure.

“One of the challenges for investors wanting exposure to the Australian industrial & logistics sector is size of the investable universe,” Iuliano said.

“We estimate the investable universe is approximately $90 billion and most investors in the sector are looking to build a portfolio of between $1.0 billion and $1.5 billion.”

In June, Amazon agreed a 20-year lease with ASX-listed groups Goodman and Brickworks to open the country’s first robotic fulfilment centre at the joint venture’s Oakdale West industrial estate in Western Sydney.

The fully-automated, four-level warehouse is a sizeable 200,000sq m—about the size of Taronga Park Zoo—and will house up to 11 million items distributed by 2000-odd robots.

E-commerce fulfilment company eStore Logistics has also partnered with supply chain and industrial property consultants TM Insight on sourcing and developing more than 100,000sq m of warehouse space.