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News release

Re-rating of Australian Industrial Property by offshore funds continuing due to relatively high yields on offer relative to other asset classes

Jones Lang LaSalle Report examines key market themes midway through 2012


AUSTRALIA, 6 JUNE 2012–The re-rating of the industrial investment sector by offshore funds that has been underway is expected to see likely new entrants into the market this year. 

A new research report by Jones Lang LaSalle, entitled ‘Industrial Investment Review’ examines the key themes for 2011 that are now being played out in 2012.
 
The report says RREEF, CIMB Group and Pramerica have an established track record in Australia having purchased office assets in Sydney and Melbourne.
 
All three groups are looking to direct funds towards industrial assets in 2012.
 
Telopea, Mapletree and Blackstone are large groups with established capital sources and capital partners that are actively seeking opportunities to enter the Australian industrial market and would be looking to make their presence felt with acquisitions of high quality assets and large scale.
 
Australian Head of Industrial at Jones Lang LaSalle, Michael Fenton said the Australian industrial sector is being re-rated by offshore funds due to attractive returns.
 
“Between 1994 and 2011, the industrial sector delivered higher returns with lower volatility than office markets.  In fact, over this 18 year period Australian industrial property has offered risk adjusted returns only just surpassed by major retail property categories.
 
“While good quality major retail assets now typically offer yields between 5.25% and 8.50%, prime grade industrial assets in the major east coast cities currently range from 7.50% to 9.50%.  This offers investors a higher upfront income return, boosting their total return, before rental growth or capital growth potential is considered,” said Mr Fenton.
 
Australia has accounted for 7.9% of the cross border capital flows in the industrial sector between 2008 and 2011.
 
A number of large industrial portfolios have been acquired by offshore funds and domestic groups, enabling them to build scale within the sector. GIC Real Estate has a joint venture arrangement in place with Australand that will see it acquire more assets as they are developed and stabilised, while Aviva has acquired from Mirvac two large distribution centres in western Sydney.
 
The Industrial Investment Review says that midway through 2012, the outlook for the Australian industrial market remains a gradual upswing in industrial market indicators including market rents and values, with modest improvement in activity such as construction, occupier take-up and investment volumes.  This ‘base case’ allows for a continuation (without deterioration) in the recent global and domestic economic trends.
 
The Report says trends for 2012 include:
• Fairly steady investment volumes, driven by ongoing consolidation of funds and steady competition from domestic and offshore groups;
• Further portfolios and/or parts of portfolios offered to the market;
• The incidence of very large sales to hold up, but not increase by much;
• Supply and demand to remain fairly balanced, with constrained new supply continuing to support growth in existing market rents.
 
Director, National Industrial Research, Nick Crothers said, “In 2011, there was a big shift in the domestic investor landscape.  A number of funds were seeking to exit their industrial holdings, others trying to build scale, and a corporate takeover was underway in the AREIT space. 
 
“The Goodman led consortium including CCPIB, CIC and APG were successful in absorbing the ASX-listed ING Industrial Fund, now known as the Goodman Australia Trust.
 
“This consolidation and rationalisation was not always so apparent during 2011, but it did result in a steady flow of assets of all types onto the market.  This process is presently ongoing, with the AMP managed PIF fund winding up, Stockland still likely to sell down a fair amount of industrial product, the MacarthurCook portfolio being actively marketed in 2012, Brookfield to sell down some major assets and BlackRock selling an industrial portfolio as part of a larger portfolio offering that is being marketed in 2012, with approximately 75% office assets included.
 
“Due to the buyer landscape, we are expecting greater competition for assets to be evident in the market place for the rest of this year. 
 
“In the main, the major sellers in 2012 will remain property developers and property companies, corporates and listed/unlisted domestic funds.

 

“Private investors and private investment companies remain the most prolific purchasers of industrial assets above AUD 5.0 million on a volume basis.  However, wholesale funds, boutique funds and offshore funds are grabbing a large share of the pie, through the purchase of mega assets and portfolio deals. The major purchasers in 2012 will remain property developers and property companies, corporates and listed/unlisted domestic funds,” said Mr Crothers.