Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 495

The future remains bright for industrial property

High levels of inflation and rising interest rates have shifted the investor landscape. Many investors have pursued cashflow growth and its contribution to investment outperformance. Commercial real estate is often considered to be a defensive asset class given the contractual cashflows offered through periods of uncertainty. These contracts typically have fixed rental increases or other rental features linked to inflation/CPI rates.

Growth in demand for Industrial & Logistics (I&L) assets has been unprecedented over recent years and the sector has adapted to changes in technology and consumer behaviour. Yet the construction of new I&L assets has been insufficient to meet tenant demand. New supply has been inhibited by a lack of zoned I&L development land and supporting infrastructure. This imbalance between demand and supply has translated to record rental growth (+22% pa), significant increases in land value and ultra-low vacancies (<1%).

Rental growth across the Australian Industrial sector reached the highest level on record
Figure 1: Prime Annual I&L Rental Growth (%)

Source: JLL Research, Charter Hall Research. At 4Q22.

The imbalance between I&L supply and demand has reduced vacancies to the lowest level on record
Figure 2: I&L Vacancy Rates, by Market (%)

Source: CBRE, Charter Hall Research. At 2H22.

Shortage in development stock manifesting in significant growth in industrial land values
Figure 3: I&L Land Value Growth (Compound Annual Growth Rate) (%)

Source: CBRE, Charter Hall Research. At 2H22.

A sector adapting to fundamental shifts in demand

Demand should continue to remain strong driving further rental growth, due to the following:

The ongoing rise in online retailing: The growth in online retailing has been an impetus for growth the I&L sector. More goods are transported directly from I&L assets to the consumer. Like retailing of the past, success is fundamentally predicated by cost, range of product, stock availability, and time to consumer. As such, retailers have been competing for I&L assets with:

- proximity to consumers;
- greater storage capacity; and
- the ability to move goods faster.

Advancements in technology and the longer-term shifts in consumer behaviour is driving a sustained growth in digital retailing. Online sales continued to increase over the year, reaching $53 billion equating to 13.3% of total retail sales. Total volumes are ~75% above pre-COVID levels. Total online retailing volumes are forecast to grow by 123%* over the next five years – requiring significantly greater capacity across the I&L market.

A shift in supply chain strategies: The pandemic has increased occupier focus on supply chain resilience. Supply chain strategies shifted to higher levels of holding inventory and greater stock security. With the risk of escalating geo-political tensions, strategies will continue to support stock security and supply chain resilience.

A growing focus on Environmental, Social and Governance (ESG): Institutions and consumers have increased scrutiny about where and how goods are sourced. Additionally, frameworks are being developed to measure the emissions across supply chains.

With higher costs of transportation and a focus on reducing emissions, there will be increased demand for well-located assets with high sustainability credentials.

The rising feasibility of automation: Online retailing will rely on stocking a wider variety of goods, moving them faster and reducing operating costs. Given specific sets of requirements, advanced automated systems can usually only be installed in higher quality assets. High upfront investment costs and increased scrutiny on emissions will influence the feasibility of asset locations – thereby increasing the value placed on location.

Restrictive conditions on new construction: The challenges to the construction of new I&L assets are expected to persist over the medium term. The rise in construction costs, ongoing shortages in labour, and supply chain disruptions have increased the costs of developments. These issues are further compounded by the rise in interest rates.

A combination of these factors and the ongoing rebound in Australian population growth will continue to generate demand for the sector. But the performance of portfolios will be distinguished by asset quality and active management. The deficit of modern assets with high sustainability credentials will drive income and value growth for well-curated portfolios.

Good quality managers will continually review their portfolios and seek to divest older buildings and properties at risk of obsolescence as they may erode future value growth. Over the near-term, the quality of the tenant is crucial. The higher interest rate environment will exert pressure on certain firms, particularly those across low-margin industries.

We’re also approaching a period where there may be market price declines, possibly providing further buying opportunities. As such, it is essential that managers have the capital structure and strategies in place to outperform, whilst having the capacity to acquire quality opportunities at attractive pricing.

 

Sasanka Liyanage is Head of Research and Steven Bennett is Direct CEO at Charter Hall Group<, a sponsor of Firstlinks. This article is for general information purposes only and does not consider the circumstances of any person, and investors should take professional investment advice before acting.

For more articles and papers from Charter Hall, please click here.

 

RELATED ARTICLES

Unique factors drive Industrial and Logistics property demand

Population density trends and what they mean for housing

How AI will transform the real estate sector

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Property

Coalition's super for housing plan is better than it looks

Housing affordability is shaping up as a major topic as we head toward the next federal election. The Coalition's proposal to allow home buyers to dip into their superannuation has merit, though misses one key feature.

Planning

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Retirement

More people want to delay retirement and continue working

A new survey suggests that most people aged 50 or over don't intend to stop work completely when they reach retirement age. And a significant proportion of those who delay retirement do so for non-financial reasons.

  • ASFA
  • 13 November 2024
Economy

US debt, the weak AUD and the role of super funds

The more the US needs capital and funding, the higher its currency goes. For Australia, this has become a significant problem as the US draws our capital to sustain its growth, putting pressure on our economy and the Aussie dollar.

Investment strategies

America eats the world

As the S&P 500 rips to new highs, the US now accounts for a staggering two-thirds of the world equity index. This looks at how America came to dwarf other markets, and what could change to slow or halt its momentum.

Gold

What's next for gold?

Despite a recent pullback, gold has been one of the best performing assets this year. What are the key factors behind the rise and what's needed for the bull market in the yellow metal to continue?

Taxation

Consulting on the side? Don't fall into these tax traps

Consultants must be aware of the risks of Personal Service Income rules applying to their income. Especially if they want to split their income or work through a company.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.