Investors flock to Aussie industrial real estate
Investors and managers are increasing their allocations to Australia’s logistics sector, despite further increases in prices this year.
Global investors deployed $8.6 billion to the sector in the first half of this year, compared with $4.9 billion in the first half of 2020 and $4.7 billion in the first half of 2019, according to Real Capital Analytics.
“Institutional investment appetite continues to favour this sector due to high quality covenants in institutional-grade assets and confidence in the ability to collect income,” said Sass J-Baleh, head of industrial and logistics research Australia for CBRE in Sydney.
Alek Misev, portfolio manager for property at Australian superannuation fund Aware Super in Sydney, told AsianInvestor that despite high prices, tenant demand remained high and there were still plenty of opportunities.
“There is definitely a risk that prices can go too high in industrial. [But] we still see a lot of local opportunities because we are very close to the market. It’s always easier when you are close to the action,” Misev said.
Troy Rieck, CIO of another Australian superannuation fund, LGIAsuper, told AsianInvestor that in the last year, the fund had increased its allocation via the Charter Hall Prime Industrial Fund (CPIF), although he declined to say by how much. “But like all rising assets, you never feel like you own enough. The hottest demand in Australian real estate is in industrial – money is just flying into logistics solutions.”
In April, American alternative investment management company Blackstone sold an industrial portfolio for A$3.8 billion to Hong Kong logistics real estate group ESR as well as Singaporean sovereign wealth fund GIC, in Australia’s largest ever logistics and general property portfolio deal.
“Industrial has significantly outperformed office and retail. The discount rates being paid for industrial sites suggest other long duration assets are due for a catch-up at some point. We already own some of those – including specialist allocation to medical centres,” said Rieck.
However, increased investor interest has been pushing down yields. In April, the yield for super prime Australian logistics assets fell below that for prime CBD offices for the first time on record, and in June was 0.25% lower, at 4.5%, according to CBRE.
Joseph Lee, co-chief executive and president of Seoul-based real estate specialist Igis Asset Management, told AsianInvestor that the fund was looking at expanding its Australian allocations, currently comprising offices, into logistics.
“We are looking [at] club deals, typically between A$100m and A$200m, driven by investment opportunity,” he said, adding that while the fund had not yet bid on any deals, it hoped to complete its first transaction by next year. “Australia has been a good defensive market in terms of Covid. The property market has started to recover and has good fundamentals.”
Louise Kavanagh, Asia-Pacific CIO and managing director of UK firm Nuveen Real Estate, told AsianInvestor that she was targeting selected locations on the east coast of Australia.
“We are interested in the logistics space across cities where either domestic demand, or international trade, or technology and e-commerce penetration is strong,” she said, adding that the fund’s other targets were South Korea, Japan, the Greater Bay area in China, and Singapore.
She said investors had to do careful due diligence to avoid overpaying for logistics assets. “At this point of the cycle in the logistics sector, it is important for investors to underwrite assumptions cautiously [and] be even more selective of location and target tenants,” she said, emphasising the role of buying assets where tenants still have long leases to serve, to mitigate downside risks.
Mary Power, principal consultant and head of property at Jana Investment Advisors in Melbourne, pointed to a shortage of opportunities and high prices. “Everyone would like to be in logistics but it’s not easy, with the Blackstone portfolio that has re-rated the sector,” she said.
BUY & BUILD
Misev said that in Australia, Aware Super is following a “develop-to-core” model for all its logistics deals – buying land and building assets on it, to own and manage for the long-term or to sell – rather than buying existing buildings, in order to pursue higher yields.
Misev said the funds had focused much of its recent buying in the western part of Sydney, with a number of purchases on the back of actual and proposed government investments in local infrastructure. “If you’re going to build a big shed for Amazon, [you] need road and train connections,” he said.
He pointed to the broad appeal of the country’s real estate sector, adding that the fund’s domestic allocations were similar to a year ago. “[Australia] is a good defensive play. The borders are closed but the economy is functioning. It is part of the pan-Asia strategy in property and it has transparent markets,” he said.