Industrial property push here to stay: Charter Hall
The myriad factors that have made industrial the investment stand-out in the property sector in recent years are unlikely to abate in the foreseeable future, according to the property funds management group Charter Hall.
Charter Hall Direct CEO Steven Bennett (pictured), who oversees more than $10 billion of Australian real estate for SMSFs, high-net-worth and direct investors, says that while the group did not expect a “linear extrapolation” of the current strong demand for industrial property, it believes this market sector will remain buoyant for the medium to long term.
The vacancy rate for industrial land currently stands at 0.6 per cent, the lowest in the developed world. It has been driven by population growth, expanding e-commerce, and, post-COVID, tenants wanting to keep more stock on hand. In some instances, there has been annual rental growth exceeding 20 per cent without visibly cooling tenant demand.
On the supply side, it has failed to keep pace with demand, whether it be geographical constraints, planning restrictions, or lack of enabling infrastructure. In addition, tenants are increasing their environmental demands.
Bennett says South Sydney, which sits close to Sydney Airport and Port Botany, is a case in point. “Its proximity to the container port and airport makes it a prime location, reflected in strong rental increases. On the supply side, the situation has been compounded with several industrial properties converting to residential towers.
“What’s happening in South Sydney is a stark reminder that, for some tenants, their businesses dictate where they must locate. The Red Cross, for example, needs be close to the airport; others to the port. These tenants are very sophisticated, and they can tell you the cost of transportation down to the last cent.”
It’s often assumed that COVID has driven this keen demand for industrial property, that the pandemic turbo-charged the e-commerce revolution that underpins this seemingly insatiable appetite for industrial space. Although COVID increased demand, e-commerce was a growing trend long before the pandemic. This was recognised earlier in Europe and the US than Australia, but even here it was on the radar of property funds management groups such as Charter Hall.
Bennett says the group made a strategic move into this sector more than two decades ago, with the advent of COVID simply reinforcing our thinking. “Australia’s strong population growth will continue, and this will underpin demand for industrial property. We estimate that the population growth alone will demand about seven million square metres more industrial logistics property, and of that number four million square metres will be directly due to expanding e-commerce.”
For Charter Hall, population growth is not just an industrial property story. The fund manager forecasts Australia’s net population will grow by two million over the next five years (if correct, it will give Australia the fastest growing population in the developed world), and this will generate demand for commercial property across all sectors, including office and retail.
“What’s often forgotten is that immigration is skewed towards skilled labour, with white-collar jobs their likely destination, and this will flow into increased demand for office space. No one is pretending that COVID hasn’t changed working patterns, but we believe this is now finding a balance with employers wanting employee collaboration that can only come in an office environment. Coupled with immigration, the sector’s outlook for quality buildings is optimistic.”
There’s little debate in the industry about the premium being enjoyed by quality buildings, with increasing demand for prime assets as they come on to the market. Consequently, demand for secondary assets is falling as this stock no longer meets what the market demands, particularly as it relates to environmental issues.
Bennett says: “Tenants want low carbon usage, water efficiency, you name it, they want it. If you don’t meet the environmental standards of top-tier tenants, then you won’t even make their shortlist. It’s not just environmental issues. location, natural light, good transport infrastructure, proximity to clients, these are all factors that can enhance an office’s appeal.”
There are two factors adding to property’s investment appeal. Although few analysts are brave (foolish?) enough to suggest interest rates have peaked, there is a consensus they will fall over the medium to longer term, and that it will be broadly supportive of property – most investments have between 20 and 40 per cent debt – by dropping the required rate of return.
On the supply side, the challenges in the housing market around planning approvals, infrastructure, high buildings costs, and red tape are mirrored in the commercial sector, and Bennett does not see this changing quickly. “The industry is pushing for change, and state governments are generally aware of the need for change, especially around planning laws. But there’s no easy fix, especially as it’s often a local government issue. So, while there are moves to remove some of the bottlenecks, unfortunately it won’t happen quickly.”