Rebecca Kent (host)
The industrial sector is open for business again. That’s the message as the sale of four Aldi distribution centres in Australia for $648 million marks the largest industrial transaction of the year.
The portfolio was acquired by a joint venture between Charter Hall and the insurance giant Allianz, with experts citing significant appetite for high quality warehouses, bolstered undoubtedly by phenomenally high supermarket spending during COVID-19 lockdowns, and the need for defensive real estate.
In this episode, Tony Iuliano, head of industrial capital markets and logistics at JLL, and Jamie Guerra, head of industrial and logistics in Australia for JLL, provide the lowdown on a sector picking right up again on this side of the crisis.
I’m Rebecca Kent, and this is JLL’s Perspectives Podcast.
Rebecca Kent
Jamie Guerra and Tony Iuliano from JLL’s industrial team. Hello, and welcome to this podcast. Thanks for joining me.
Jamie Guerra / Tony Iuliano
Thanks Bec. Good to be here
Rebecca Kent
Tony, I'll start with you. Where are we at now? Industrial has come through the global crisis really well.
Tony Iuliano
What we're seeing is significant amount of liquidity - sub $200 million - for defensive, bankable-type covenants with long lease tails. We don't see anything has changed. In fact, in some instances, we’re seeing that yields are actually getting stronger. We're about to transact a number of deals, which will kind of reset and give the market significant confidence. But, from our perspective, it's all systems go.
There's significant capital back open for business and in transaction mode. Pre COVID-19, there was estimated A$30 billion worth of capital that wanted industrial and logistics and we don't see that changing in the foreseeable future. In fact, we actually think it's going to get stronger.
Rebecca Kent
Jamie, what are some of the sectors that are really driving the demand for warehouses?
Jamie Guerra
Following on from Tony's point, the investment confidence comes from occupiers and the demand factors in terms of ability to pay rent and where expansion is coming out.
What we've seen over the past four-to-six weeks is a return to some confidence in the marketplace. Inspection levels are up and we're seeing demand flow through, particularly in those sectors that have benefited from current circumstances. The e-commerce sector has been fast-tracked. We've seen strong growth across all markets. Australian Post is one that's been actively been taking space. The grocery and non-discretionary sector has also been very strong. And I think what we're now seeing is some return to a more normalised market. But it's led to some behavioural changes and some increased demand as a result of circumstances. (The increased demand is linked to) the way shoppers are dealing with online shopping. (But it is also linked to) some of the supply chain risks and how suppliers are wanting to have greater certainty, so greater holdings of stock.
Rebecca Kent
Tony, investors, presumably are in tune to this, looking very carefully at where the demand is and what it is for. Is it the fully automated kind of warehouse? Is it cold storage?
Tony Iuliano
That's a good question. I think there are a number of different categories. So you've got the cold storage sector, which is obviously food related, which will continue going from strength to strength. In that sector there's no vacancy across the country, and demand continues to be pretty strong. You've also got the automation-type setups, where you've only got the big boys that are able to invest in those types of facilities from an infrastructure point of view, but they're always highly sought after. And then you've got your last mile, smaller infill locations, which, typically speaking, have got higher underlying land values.
But all in all, what we're seeing is pretty strong and stable capital and demand for long-weighted income that's bankable. Because debt is challenging at the moment for a number of groups. So overcoming the debt piece by having a bankable covenant in the current environment is fairly important.
What we're seeing is that there are limited opportunities out there and the demand is slowly filtering back into the system.
A stat which you'll find really interesting is that by the end of July, we'll find about A$1.8 billion worth of stabilised product trading which will basically put us on par with total volumes for 2019, which ended up at about A$4.1 billion. So that just really reinforces the activity that's going on behind the scenes and the appetite still for stabilised long-weighted income.
Rebecca Kent
Where is the appetite coming from? Give me the profile of the investor.
Tony Iuliano
The investor universe is growing exponentially. So what we're seeing is a number of Australian REITS, which already had mandates locked and loaded, they're currently acquiring. There are groups like Mirvac, Dexus and Charter Hall where capital is already in the system. You're starting to see some superannuation funds starting to play. And then sovereign wealth funds and life insurance companies from around the globe. We're actually also getting some input from the U.S. at the moment.
So, the capital is really far and wide. But what we are seeing is that these groups now are really significant groups from a global sense. And Australia is seen as one of the best destinations to invest in in the world. We are starting to see some challenges where they're seeing opportunities in parts of Europe, where yields are blowing out a little bit, which means that may become more attractive, but Australia is still probably the number one destination globally.
Jamie Guerra
I think what we've seen is it's not so much the asset issue, it's been more around the logistics of people and some of the restrictions. So as a result of that what you had is quite a lot of liquidity in the private market because private investors didn't have the same restrictions on travel. They could go and transact in their local market. We saw that activity maintained.
More recently where we've seen a comeback in confidence - and this is what Tony's talking about – is mandated money, including an offshore capital partner with a local fund. People are now having confidence to continue down that path. And I think that weight of money is what we're continuing to see as people get more comfortable with the new way of transacting and how we have to work.
Rebecca Kent
Yes, thank you. And what about the allocation towards industrial as part of a sort of more diversified portfolio?
Tony Iuliano
I can’t see the capital slowing down. From our recent experiences, particularly with the Aldi process, we went far and wide around the globe with that process, and what we identified were probably an additional 10 to 15 other groups that weren't in the market previously. So the demand will continue to grow.
In fact, I know this is kind of forward thinking, but once all this settles down with the current environment, we’re expecting that yields will actually compress in further. If you have a look at our current interest rate environment, that's going to really impact in a positive sense the competitive and yield compression that that's going to come through the system.
Jamie Guerra
Speaking to investors who have allocations to different asset classes, the one thing we're seeing is obviously retail is feeling the brunt of it. Commercial seems to be better placed, but industrial is the one that that has the most defensive characteristics. So we're seeing groups which have got allocation and balance are very much relying on their industrial portfolio to deliver returns and greater appetite to probably expose their book to more industrial.
Rebecca Kent
What about markets around Australia. Are we likely see new or expanded hubs?
Jamie Guerra
From an activity perspective, it'll continue to be on the east coast and that's both from an occupier demand and from an investor base. The smaller markets are more private in their nature and we've seen particularly some of the bigger investments around distribution centres and automation, they will occur in the key markets of Sydney and Melbourne. To a lesser degree, Brisbane.
Tony, from a capital perspective, I know what we've probably seen is there are groups prepared to look a bit broader. But with the current environment, we're probably going to see greater focus on Melbourne, Sydney and Brisbane, I expect
Tony Iuliano
I think for the capital for significant distribution centers or cold storage facilities in particular, which have embedded infrastructure, it doesn’t really matter wherever it is around the country.
There might be a slight softening of yield in Perth and Adelaide, but only marginally.
I think because of the severe shortage of opportunities out there, it doesn’t really matter too much.
Where this will impact is shorter lease expiry assets or local businesses that haven't got significant turnover attributed to them, where there might be an issue where funding comes into play, because that tenant may not be bankable.
They're challenges that come forward but they also bring opportunity. So overall, I think industrial's in pretty good shape.
Rebecca Kent
It's hard to look at some of the headlines now around warehousing and online demand without coming across automation and robots. There's a Coles and Ocado agreement now to roll out robots. GAP, I think is accelerating its automation program as well. How does this impact on what it is occupiers want out of their spaces? And how are investors responding?
Jamie Guerra
We've seen some automation up until more recent times. I guess what the current environment has fast-tracked is a reward for the investment in both supply chain and automation. Automation is quite expensive, from the scale we're talking about, but we're now seeing that return on investment being more focus.
Things like actual height of building access and configuration are all important when it comes to automation. And the announcements you're referring to with Coles and Charter Hall reflect that significant investment across those both groups in major distribution centres.
Tony Iuliano
The supply chain or demand of major corporates is now really focused on efficiencies and flight to quality. And that's how best that meets their criteria - transport routes and all those behaviours. That's really important.
The other thing to consider is, where do they locate these facilities to best enhance, in particular in the ecommerce space? How do they get to their customers within a two hour period? Because that's where it's all going. I know that while we've been in lockdown, I'm getting a knock on the door every day from a delivery van, where my children are ordering, whether it's Air Pods, or whatever it might be. So the expectation is for a very quick turnaround. I think groups use this time to actually test what they're trying to undertake in locations, and use technology to try and increase their efficiencies and output.
Jamie Guerra
I think what's going to happen is some of the last-mile delivery, and even the dark store options being talked about now are being fast-tracked with the online behaviours of consumers. So that applies to all markets, where we're seeing investors and occupiers looking for suburban locations that allow them to service their consumer base in an acceptable turnaround time. So, I think, as Tony mentioned, what we've seen with the spending patterns and what's happened is a fast-track of some of that investment.
Rebecca Kent
And just one final question. There are government economic stimulus packages, and the government's talking about fast tracking construction. Is something that the shed sector will rely on?
Jamie Guerra
I think from an industrial perspective it is very reliant on investment in infrastructure. And if you look at the roads and the ports and some of the challenges around Sydney, particularly at the moment, that's where Melbourne has got a bit of an advantage.
We talked last time in our podcast around the impact that that had on supply chain, with a relaxation of transport hours. So I think transport routes efficiencies - Tony mentioned corporations and occupiers looking for efficiencies - I think that investment is really important. And then the capital on the investment side will flow as well.
Rebecca Kent
Super. Tony Iuliano and Jamie Guerra, thank you very much. It's a great snapshot of where things are at in the industrial sector. Look forward to some great deals ahead.
Tony Iuliano
Thanks, Bec.
Jamie Guerra
Thank you
Rebecca Kent
Thank you for listening to JLL’s Perspectives Podcast.
You can read more about that Aldi deal mentioned at the beginning of this show on the trends and insights section of JLL’s website.
And for more podcasts, search JLL’s Perspectives Podcast on your favourite listening app, and if you like what you hear, please share it with a friend, or colleague.
I’m Rebecca Kent.
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