The Shed Frontier

Traditionally industrial property has held a reputation as the ugly duckling of the property market.

However, across Australia, industrial property is undergoing a transformational change and transactions are reaching record levels. We’re now in the middle of the shed frontier.

With many retailers and manufacturers bidding to maintain their competitive advantage amid disruption from eCommerce and offshore manufacturing, tenants are innovating their strategy to over-deliver on their promise and keep up with demand for quality products, same day delivery, and lower costs.

In 2017, transactions were recorded at $5.86 billion, the third largest year of annual transaction volumes above the 10-year annual average of $3.66 billion. Upward pressure on pricing has been driven by access to cheaper funds from domestic and global capital markets. Demand has been strongest from unlisted trusts, a continuing trend from previous years with many offshore fund managers expanding ownership in the Australian market. This interest represented over AUD 1.5 billion in transactions for 2017.

Given low levels of availability, nationally, a number of acquisitions were made at premium price points. Many corporates are seeking to leverage these conditions with sale-and-leaseback arrangements.

Net rents have increased in all major capitals, except Perth, where leasing demand is slow. All capitals are increasing supply with a total of 935,843 square metres under construction. The largest contributor to industrial supply is Sydney where at the end of Q1 2018, JLL reported to have nearly 600,000 square metres of industrial stock under construction. Demand for industrial space is strongest in Melbourne where activity is driven by logistics accounting for 38% of occupiers. Melbourne is also showing promising conditions for annual rent growth following strong year on year growth.

MeasureBrisbaneSydneyMelbourneAdelaidePerth
Annual rental growth1.1%0.7%3.6%1.9%-5.9%
Yield ranges6.00-6.75%5.50-6.00%5.75-6.25%7.25-8.50%6.5-7.00%
Gross take-up82,000sqm137,000sqm148,533sqm52,600sqm110,400sqm
Under construction27,900sqm598,366sqm269,324sqm13,633sqm26,650sqm

Source: JLL Market Overview Q1 2018

Consumers are driving industrial demand

It won’t come as a surprise to many that consumer buying preferences are changing. In fact, NAB reported that online retail spending totalled AUD 25 billion over the 12 months to February 2018, up 15.1%. As retailers adjust their strategies to meet consumer demand in this regard, the growth of third party logistics and transport industries has followed suit.

CBRE reported in their 2018 Asia Pacific Real Estate Market Outlook that as supply chain efficiency is key to the success of the retail sector and as such the lines between industrial and retail sectors are now blurred. E-commerce consumer expectations have increased significantly, now demanding shorter delivery timeframes and to keep up with this shifting trend, retailers are becoming more strategic with choice in location for their “dark stores” to maintain competitiveness. Early adopters who promise same day delivery are increasing the footprint for “last mile warehousing” opting to establish tenancies in population centres and CBD fringes.

The rise of dark stores and last mile warehousing

A dark store is a behemoth facility behind the success of large e-commerce retailers. Closed to the public, they are a prime example of how retailers have adapted. Last year, an article in the Sydney Morning Herald reported that Woolworths was positioned to open four new dark stores by the end of 2018 in an effort to go face-to-face with advanced Amazon’s home delivery proposition.

Last mile warehousing has also received attention of late as retailers seek to provide their customers with rapid delivery. Almost 1 in 3 retailers offer same day delivery and as such many have chosen to lease small, local warehouses rather than larger and more traditional distribution centres located in exurban areas. The strategy behind this local logistics footprint is to build greater efficiency in supply chain management. Indeed, it’s not just retailers jumping on this bandwagon, major trucking companies including Schneider National are increasing investment to develop last mile services and support growth in rapid delivery.

JLL reports that to keep up with this movement, approximately 1.57 million square metres of new floorspace will be required over the next decade. If online retail sales increase further than what’s expected, challenges will be faced in sustaining an e-commerce model in-line with the Aussie consumer’s unforgiving standards.

Industrial automation

With this rise in consumption of net lettable area by retailers also comes an increase in high-tech logistics and manufacturing. In terms of logistics, adoption of automated fulfillment solutions is imminent. However, CBRE reports that many tenants are reluctant to fully embrace automation because of its slow payback, the cost, and the short shelf life of today’s tech due to rapid advancements. Many are concerned about their ability to keep up with enhancements and are nervous about early adoption without competitors to learn from.

Indeed, automation is not a new concept. In the past, manual hoists have been replaced with forklifts and other mechanised systems. Trollies and picking trucks have been replaced by conveyors. CBRE reports that some players in manufacturing and warehousing are testing these new methods at a smaller scale to assist with sorting, picking, and packing inventory.

Automation is not a new concept. In the past, manual hoists have been replaced with forklifts. Trollies and picking trucks have been replaced by conveyors. CBRE reports that players in manufacturing and warehousing are testing these methods at a smaller scale.

There are so many reasons to love industrial property and now there’s one more. The Trilogy Industrial Property Trust (Trust) has added to its portfolio with the acquisition of an additional industrial property for its portfolio. Based in South Australia, the property will provide Investors in the Trust with added diversification in terms of tenant type, and geography. Further, South Australia is a prime market for commercial property transactions.

This article originally appeared in Issue 03 of Angle Magazine. The material on this website is intended only to provide a summary and general overview on matters of interest. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.