Changing risk in Australia’s industrial landscapeDecember 8, 2020 / By
Since the emergence of COVID-19, the industrial and logistics sector has been the most stableof the core commercial markets. As such, the investment market for these assets has demanded a higher level of capital allocation than historical benchmarks during the pandemic. Investment volumes for industrial and logistics assets have accounted for 29.4% in 2Q20 and 38.7% in 3Q20 of the total investment volumes – record-high shares.
Figure 1: Quarterly Investment volumes by Sector (Australia)
Source: JLL Research as at 3Q20
One of the driving forces behind the capital shift towards the industrial and logistics sector is the relatively strong risk-adjusted performance of the sector through the current cycle. Most notably, through the current economic downturn, the volatility of returns has remained relatively low and has avoided the uptick, seen in the retail and, albeit to a lesser extent, office markets.
This stability has been underpinned by two key drivers. Firstly, the sector has continued to see elevated occupier activity across most of our tracked markets – with gross take-up of 54% and 4% above the 10-year quarterly average in 2Q20 and 3Q20, respectively. Also, underlying demand and structural changes have supported rental collection for industrial assets, which managed to avoid the decline in collections seen in the retail market.
Figure 2: Historical commercial property sector volatility
(5-year rolling average)
Source: JLL Research, MSCI
The most transformative element of the risk landscape for industrial assets over the last decade has been the rapid institutionalisation of the sector. These groups have been drawn to the industrial sector by structural changes in the occupier base – which has expanded from its traditional small manufacturing and storage facilities – and the relatively low rental volatility. The expansion of institutional owners and developers into the sector has allowed for the introduction of more complex and highly bespoke developments.
There are a number of recent examples of these developments in Australia, such as the Woolworths’ 42,000 sqm temperature-controlled facility in Heathwood (Brisbane Southern), which will be developed by LOGOS. The facility is co-located and partially integrated with the supermarket’s meat supplier to reduce truck movements between the businesses. Another example is Coles’ 7,280 sqm ripening facility at Dexus’ Industrial Estate in Truganina (Melbourne West), which has been designed to include a reversible air-flow ripening technology to house and distribute fruit from northern Australia to the southern states.
Furthermore, this development has allowed industrial asset owners to move away from exposure to small, single-location businesses to more diverse networks of national or global operators. This has reduced the traditional risk of owning an industrial asset, which relied on the creditworthiness of a smaller enterprise to maintain income streams for investors.
Given the strong structural tailwinds that are present in the industrial occupier market, coupled with the ongoing tightening of land availability in quality locations, incomes and rental collection should remain relatively stable in Australia’s prime industrial market. Furthermore, prime assets with long weighted average lease expiries (WALEs) and strong lease covenants will continue to remain highly sought after by both domestic and international investors.
More on 'Logistics & Industrial' in 'Australia'
- Is “Just-in-Time” a relic of a time gone by in Australia?March 7, 2023
- A new efficiency landscape awaits Melbourne’s logisticsMay 24, 2022
- Port access drives Melbourne logisticsJanuary 3, 2022
- Perth Industrial & logistics in demandNovember 9, 2021
- How big can Australia’s logistics assets go?July 29, 2021