Industrial property in favour as investors turn defensive
Industrial property has become the darling of the real estate market in the wake of COVID-19, with local and overseas investors circling Adelaide as it emerges from the crisis.
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Investors are continuing to turn to the industrial property market as the COVID-19 crisis lingers, with defensive assets in favour as the crisis weighs on the economy.
ASX-listed property fund manager Primewest has confirmed a $22m deal to acquire the Border Express logistics and distribution centre in Salisbury South, while expressions of interest in Rand Transport’s cold storage and logistics facility in Direk close on Wednesday.
Pent up demand for leased industrial property is expected to deliver a price tag close to $60m for the 11,113sq m building, which sits on 5.86ha of land on Caribou Drive.
JLL head of industrial & logistics Jamie Guerra said the property, being offloaded by Cromwell Property Group, had already attracted interest from a range of buyer groups.
“We’ve seen strong interest from groups across the spectrum - onshore funds, syndicates, privates and offshore,” he said.
“What we’ve seen is industrial continue to attract capital - investors are really comfortable with the asset class, especially food-based industrial.
“Adelaide industrial is probably two to three years behind commercial in terms of yield compression, so not only is industrial strong, but Adelaide is still extremely good value because we haven’t had the capital flows and yield compression.”
Mr Guerra said industrial property offered investors security at a time of economic uncertainty caused by COVID-19.
“It really goes to the foundation of real estate,” he said.
“Industrial is typically underpinned by land and they tend to be simpler buildings - there’s not a lot of complexity around things like air-conditioning or lifts, and the incentives are reasonably light compared to offices.
“We’ve seen incentives in CBD offices pushing back up to 35 per cent whereas in industrial they’ve been maintained at around 10 per cent.
“The (industrial) leases tend to be long-term and typically to corporates. When the market tightens there’s a tendency to go back to simplicity.”
Rand Transport has 15 years to run on its current lease at Direk, paying about $3.6m annually in rent.
While investor appetite for leased industrial assets heightens, a lack of stock is holding back transaction activity in South Australia.
According to research from JLL to be released later this week, there were no $5m-plus industrial transactions reported in the three months to June, while $57.9m worth of industrial property changed hands in the first quarter of the year.
That compares to an annual total of $419.1m worth of sales last year - the highest annual figure for more than 30 years.
Mr Guerra said the challenge was finding institutional grade property to satisfy the demand from investors.
“The depth of buyers is strong and Adelaide is very much on the radar but it’s really around a lack of opportunity,” he said.
“Particularly in our (Adelaide) market there are a lot of privately owned assets and the thought is if I sell what do I do with my money?
“It’s been tightly held in Adelaide for some years but last year we had quite a number of deals and if prices sharpen we’ve seen private investors are willing to sell.”
In the longer term Mr Guerra expects occupier demand for industrial property to increase in response to a shift in consumer behaviour prompted by COVID-19.
“The growth in e-commerce caused by the downturn is likely to be a fundamental change in how we consume goods moving forward,” he said.
“And so if you look at e-commerce and the continued growth in the supermarket sector, but also the thoughts around supply chain risk, I think there’ll be a requirement for bigger stock levels which means more footprint.”
Expressions of interest in the Rand Transport property close at 4pm on Wednesday.