$30 billion of capital looking to deploy into Australian industrial sector

AUSTRALIA 15 February 2020– JLL is predicting another year of continued strong growth for Australia’s industrial investment market after identifying $30 billion of capital wanting to deploy into industrial and logistics assets.

JLL’s annual report, Australian Industrial Investment Review & Outlook 2020, found that the Asia Pacific (APAC) region is attracting more capital in a global context, driven by GDP and population growth.  Australia represented 11% of the cross-border transactions in the APAC region in 2019, ranking fourth behind China, Japan, and South Korea.

JLL’s Head of Capital Markets, Industrial and Logistics Tony Iuliano said the key for 2020 will be how investors unlock prime industrial assets, as demand continues to outweigh availability of quality stock.

“We estimate $30 billion of capital is looking to be deployed into the industrial and logistics landscape in Australia.

“This has been derived by many different mandates, including development, speculative construction, and investing with managers who have the skill set and expertise to continually ad value coupled with capabilities in growing the platform year on year.

“We are seeing a significant amount of capital playing in the development space to increase their exposure and footprint as stabilised product remains difficult to obtain. Furthermore we expect corporate sale and leaseback to be a significant driver in 2020 which will help corporates reinvest their capital back into their operating streams.

“Investors and developers will be forced to be creative to help unlock opportunities.

“The opportunity to unlock/partner with certain groups will be a trend moving forward as investment volumes continue to remain low.   We will also see an increase in corporate activity to help unlock lazy balance sheets which will, in turn, create investment opportunities on a sale and leaseback, such as the recent sale of Arnott’s and Viridian Glass,” said Mr Iuliano.

Industrial investable universe in Australia:

JLL estimates for the industrial investable universe show that the market continues to grow each year.  The current capital stock by value is estimated at $88.2 billion, or 55.2 million sqm of gross lettable area (GLA).  This is estimated to reach $114 billion in value by 2024.

Mr Iuliano said, “Sydney is expected to remain the largest market by capital value of stock and physical stock by GLA, prompting investors to continue a high weighting to Sydney.  However, Melbourne’s share of physical stock in 2019 was only just behind Sydney, with Melbourne at 28% versus Sydney at 29%.”

The attractiveness of Australia:

JLL’s Director of Industrial Research Sass J-Baleh said, “Demand for industrial assets in Australia continues to rise, underpinned by stable long-term factors, with vacancy across the Eastern seaboard states relatively low at 3.8%.”

“The Asia Pacific market is growing and, in turn, attracting capital to the region with Australia being a beneficiary. The Australian market offers a liquid, stable and strong return performance trend, low interest rates, a weakening dollar, and robust growth mainly supported by infrastructure expenditure and population growth.

“Domestic population growth as well as global demand influences - particularly within the Asia-Pacific region – will further drive the sector in the short, medium and long term.

“Industrial property has emerged as a mature, institutional grade investment sector, and plays a vital role in a diversified investment portfolio,” said Ms J-Baleh.

The drivers of industrial demand:

Ms J-Baleh said, “A depreciating Australian dollar is attracting investment sale activity as well as trade activity. The imports of goods have been steadily on the rise; however, Australia has been exporting more and in a trade surplus since 2016. 

“Australia is in a prime position to take advantage of changing demographics within the world’s emerging markets. The Asia Pacific region’s evolving economic and demographic factors include; leading global economic growth, rapid urbanisation, and a growing middle-class population. These factors combined will positively influence the demand for Australia’s exports, particularly within Australia’s food sector.

“Online retail sale is consistently on the rise, growing on average AUD 2 billion a year, and has now reached a record AUD 30 billion.”

“It is the growth of the non-discretionary retail sector that will ultimately be the long-term driver of growth for industrial, with online retail expansion playing a supporting role in occupier demand.”

“Consumer staples is a significant and stable long-term driver of the industrial sector, also a major driver of Australia’s GDP – representing around 15% of national exports. The high consumption of consumer staple goods impacts transport distribution, warehousing and logistics, cold storage space, high-tech innovation and development (particularly for food and pharmaceutical products), as well as manufacturing facilities,” Ms J-Baleh said.

The year in review 2019:

• 2019 Investment volumes:  Over 2019, JLL recorded approximately 4 billion in industrial investment sales (for transactions $10 million and over). Whilst this is 10% above the 10-year annual average, over $1 billion in sales occurred over the last month of the year, as several major portfolios came to market in late Q3 and Q4.
• Multiple capital sources competed for assets in 2019 with strong activity from domestic and offshore groups.  Continuing historical trends, the level of investment activity was concentrated toward Australia’s East Coast – representing around 86% per cent (or AUD 3.5 billion) of total national sales.
• An increase in acquisitions by major institutions, particularly Real Estate Investment Trusts (REITs) and Insurance groups. REITs continue to dominate net acquisitions, accounting for 43% of acquisitions and only 30% of disposals.
• Offshore buyers maintained a notable share of total investment sales: Offshore capital sources remained active participants in the Australian industrial and logistics sector, acquiring AUD 0.9 billion in 2019. Offshore capital was sourced mainly from Hong Kong, USA, Singapore, Germany and Switzerland. 

Mr Iuliano said, “Over 2019, institutions remained the biggest buyer group, representing over 80% of total transactions.  The top three buyers (Charter Hall, Lineage Logistics and Centuria) accounted for 45% of total national sale activity.

“These three buyers were involved in a range of substantial transactions – including the Viridian Glass manufacturing facility in Victoria for $100 million, the sale of Arnott’s facility in Huntingwood, NSW for $400 million and their QLD and SA sites for $236 million, as well as the Emergent Cold Storage portfolio (five assets – QLD, WA and SA) for $345 million.

“REITs were active in 2019, particularly in comparison to traditional private owners of industrial assets and corporate groups, the latter of which were net disposers of industrial assets this year. 

“The Australian industrial market is in a process of adjustment to a lower yield and return expectations relative to historic benchmarks.  However, when you benchmark Australia relative to global industrial markets, Sydney and Melbourne remain attractively priced relative to several gateway cities,” said Mr Iuliano.