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Industrial Real Estate can be broadly defined as those properties which accommodate industrial activities including production, manufacturing, assembly, warehousing, research, storage and distribution of goods.
There are specific areas zoned in cities designated to industrial real estate, which controls where these spaces can be constructed and operate. This is to make sure that the site’s activity does not disrupt businesses or residences that might have otherwise been placed nearby – in effect cordoning off industrial activity from residential and commercial offices.
The location of industrial property is highly influential on the success metrics of a business located there due to its impact on overheads, production and distribution. With the increasing influence of e-commerce and change in customer expectations, such as same day delivery, it is becoming even more important for logistics users to strategically locate their hubs closer to more densely populated areas.
According to a recent report from JLL, the demand for Industrial property has increased off the back of growth in e-commerce, food logistics and infrastructure investments. The Australian economy has proven resilient and is well placed to benefit from strong GDP growth into 2021. This is expected to further benefit the industrial real estate sector.
Evidence of this can be seen in the prices for industrial space, which risen this year, pushing down yields. JLL estimate that there is $45 billion of capital looking to be invested in the industrial real estate sector, with only $4.5 billion of transactions recorded over 20201. These favorable supply and demand dynamics has increased competition for well located, high quality assets and further driving down investment yields. Average investment yields on Prime Sydney assets were 4.35% as at Q1 2021 with Melbourne (4.5%) and Brisbane (4.75%) also seeing yield compression1.
Additionally, land in desirable, centralised locations for industrial real estate development is becoming scarce. This in turn puts pressure on supply chain efficiencies. Given that half of supply chain costs come from transport, and only 5% from occupancy costs, finding a location which will minimise those costs is key – this means a location with good access to suppliers and customers is key.
All these factors are expected to provide a continued strong tailwind to the industrial real estate sector.
1. Industrial & Logistics & Logistics Investment Review & Outlook 2021, JLL, March 2021
If you want to ride the wave of industrial property investing, there are a couple of different options available to you as an investor:
|Purchase a direct whole industrial property. This can be cost prohibitive to individual investors given the high value of assets.|
|Property fund managers offer the ability to buy a “share” in an asset in the form of an industrial property fund – this usually has a minimum investment amount.|
|Listed entities where you buy and sell securities/shares in a trust on the ASX (such as ASX:CIP).|
Buying a direct property as a sole investor obviously would carry more risk due to the high cost of exposure to the individual property.
By investing via an unlisted property fund or in a listed REIT, you are placing your trust in the property fund manager and responsible entity. Property funds managers are regulated by ASIC and you should always make sure they have longevity and a strong track record.
There are a number of larger economic and social themes which are creating significant change in industrial markets generally, with a flow-on effect to the type of industrial property most likely to be in demand.
eCommerce has changed traditional retailing forever – warehouses are the new source of goods, and the effect has been felt in traditional bricks and mortar retailing space – which has declined in line with increasing demand for industrial space in which to store, pack and ship packages. The most recent e-commerce industry report published by Australia Post notes the increased online spend over 2020, a trend which was accelerated by Covid-19. According to this report $50.5 billion, or 16.3% of total retail spend was done online. Despite this strong growth in online spend, comparisons with more established global e-commerce markets such as China (30%) and the UK and US (~19%) indicate that there is still plenty of room for growth1.
There is evidence that this increased online retail activity is directly benefiting Industrial property with the latest Industrial market update by Colliers noting that 44% leasing demand over 2020 coming from occupiers in the retail trade space2.
The need for faster, more efficient delivery of packages has led to increased tenant demand for metropolitan industrial sites. This has continued to position industrial as a highly desired investible asset class. In the largest industrial real estate deal in Australia – and a clear indication that well-placed industrial assets are hugely sought after by institutional capital – logistics real estate investor ESR paid AUD$3.8 billion for an Australian portfolio of industrial assets in a logistical play designed to “meet the growing e-commerce demand”.
At the same time, demand for large industrial distribution centres, as the first sorting point, particularly for imported goods, is also on the rise.
The final driver of changes to the industrial real estate market is the renaissance of manufacturing in Australia. Clean manufacturing is on the rise in Australia, as a result of the so-called ‘fourth industrial revolution’, or the use of transformative technologies to connect the physical world with the digital world.
Trends such as the use of advanced automation and robotics, machine-to-machine and human-to-machine communication as well as artificial intelligence and machine learning are helping Australian manufacturers control two of their longstanding challenges – high labour costs and distance to markets.
Real-time access to production information, logistics and monitoring means better connectivity between customers and supply chains, as well as greater flexibility to produce differentiated products and services on a small scale.
According to a report by global management consultancy Bain & Company, automation powered by the rise of artificial intelligence, will be a key driver of change3.
What is particularly interesting is the prediction that the small Australian market is likely to be a real beneficiary of the effects of automation – because automation and de-scaling of production means that small markets can compete in a way they never could before. Some areas of manufacturing, which previously relied on scale, are opening up to competitors able to use technology to overcome size limitations.
1 “Inside Australian Online Shopping; eCommerce Industry Report”; Australia Post, March 2021
2 “Research & Forecast Report – Industrial First Half 2021”, Colliers
3 “The Collision of Demographics, Automation and Inequality”; Bain & Company, February 2018
There are broadly five kinds of industrial real estate:
1. Distribution Centres
Specialised hubs that deals with the storage and shipping of goods.
2. Cold Storage Facilities
Temperature controlled, refrigerated facilities for food or other perishable supplies.
3. Transport Logistics
Where all activities relating to transport, logistics and the distribution of goods are carried out.
Facilities where the primary purpose is the manufacture or processing of goods or materials.
5. Data Centres
Centralised facilities that house an organisation’s computing operations and equipment for the purposes of storing, processing and disseminating data and applications. Often known as cloud storage.
It’s always critical to do your research if you are choosing to invest in industrial property – or any type of property for that matter. Remember the golden rule when it comes to property of ‘Location, location, location’.
Different states and cities will have different levels of activity and infrastructure spending which may or may not support the sector. Additionally, macro-economic trends can also impact on your investment’s short and long term returns.
The current larger economic and social themes include the eCommerce boom, the renewed logistics sector focus and the rise of the manufacturing sector in Australia, which are all impacting on the need for centrally located industrial properties.
All of these factors should be taken into consideration when deciding where to invest in industrial real estate.
Take the example of NSW in the current market cycle, where the current infrastructure programs are likely to create a stronger positive for some parts of the industrial property market over others – much more so than in previous cycles. These spending programs are taking place within the geographical borders of Sydney – which means that not only will there be no access to new land, but land is being removed from the market – increasing pressure on prices and rents.
If you have always wanted to invest in commercial real estate but weren’t sure how to get started, then this resource should help you to understand the commercial property market so you can make more informed investment decisions.