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News release

Australia

Refrigerated logistics and distribution investments become more attractive

Australia’s 3 major supermarkets have dominated this investment class due to their ‘fresh food’ focus, but the sector has attracted new entrants who are increasing their storage capacity in major cities


​​AUSTRALIA, 12 FEBRUARY 2015 – Traditionally viewed as ‘specialised’ facilities, refrigerated logistics and distribution centres are becoming more attractive to Australian industrial property investors due to a combination of factors that make them good buying in the current market.

A new JLL report on this asset class states that the dominant nature of Australia’s major supermarket chains – Coles, Woolworths and Metcash – has meant that the large refrigerated logistics and distribution facilities were traditionally developed by these major owner occupiers.  

The report, titled, 'Keep Your cool - The Case for Refrigerated Logistics and Distribution Investment​'  says whilst the high upfront cost of establishing these facilities has been a barrier for new entrants, this sector is being re-rated due to key investment criteria that is currently appealing to investors.  This includes the focus by supermarkets on fresh food and produce, leading to demand for more refrigerated facilities for perishable items, strong food retailing consumption and the long-term and high profile tenants these facilities attract.

JLL’s Australian Head of Industrial, Michael Fenton said, “The Australian Industrial market had a record year in 2014, recording $4.4 billion of sales and surpassing the 2007 peak.  Purchasers demonstrated a strong appetite for logistics assets with core characteristics such as location, scale, modern facilities, long-dated leases and exceptional tenant covenants.

“Last year, the strong purchaser appetite for core logistics assets was confirmed by the sale of the Super Retail Group portfolio at Erskine Park in Sydney and Brendale in Brisbane and the sale of the Kmart Distribution Centre at Truganina in Melbourne.

“Selling for $153.4 million and $94.1 million respectively, these distribution centres offered scale, long WALE, quality covenants and excellent facilities in core industrial locations and achieved record pricing on yields of sub 6.5%.

“Given the weight of capital looking for a home in the industrial sector, investors are now seeing refrigerated logistics and distribution investments as a way to efficiently deploy more capital and grow the scale of their portfolios rapidly,” said Mr Fenton.

Some of the Key Investment Influences highlighted in the report include:

1. Strong fundamentals in the ‘fresh’ food sector:  The dynamics of a strongly growing, wealthy population will further support the demand for good quality fresh foods, driving the need for modern, well-located refrigerated logistics facilities. The logistics and freight sector has recorded solid growth, supported by strong population growth, rising import volumes and strong consumption growth.  

2. Barriers to entry and high quality covenants: Given the highly concentrated user market, the high upfront capital costs to develop a facility acts as a barrier to entry.  However, the attributes of long leases and solid tenant covenants in core locations are now being widely recognised and the sector has been re-priced.

3. Core characteristics such as long term leases:  Refrigerated logistics and distribution facilities leased to blue-chip supermarket or food distribution businesses are typically set with long term leases, often 15 to 20 years.  Analysis by JLL Research shows that of the 94 refrigerated logistics and distribution facilities identified in major capital cities, 27 of the largest are occupied by Coles, Woolworths or Metcash.  A further 29 are occupied by Americold or Swire Cold Storage – two of the groups responsible for major contracts to Coles and Woolworths for meat, dairy and other products.

4. Sunken investment capital by tenants may make them more ‘sticky’:  Tenants in refrigerated logistics and distribution facilities typically invest a significant amount of money into the facility in terms of things like fit out and automation.  Investors therefore may be able to factor into their pricing a lower risk of losing an existing tenant, a shorter letting up factor or lower incentive requirements – all of which can add up to an optimised price outcome for owners.

JLL’s Director of National Industrial Research, Nick Crothers said, “While Australia is often referred to as a ‘Food Bowl’ for other Asia Pacific consumers, clearly Australian consumers’ appetite for imported food products is rising.  Food and Beverages imports in Customs Value has experienced remarkable growth in recent years, increasing 8.7% pa in the 3 years to November 2014.

“As a result, sophisticated distribution centres that can accommodate both export and import produce will be highly sought after going forward.  We see this as key trend for 2015.
“The refrigerated logistics and distribution segment is estimated to account for 17.9% of warehouse industry revenue in 2014-15*, equating to an $859 million dollar industry,” said Mr Crothers.
 
*Source: IBIS 15309