Restructuring in the Australian industrial investment market

March 2, 2012 / By  

Over the past few years there has been significant consolidation in the Australian industrial market. At least five major domestic players, which had been active purchasers of industrial property prior to the Global Financial Crisis (GFC), have since made strategic decisions to exit the sector. This has presented opportunities for the remaining domestic participants as well as new entrants to the sector. Since emerging from the GFC one major listed fund has been taken over and a number of large portfolio transactions have occurred, though there have been relatively few individual asset purchases by Australian institutions. Instead, many of the remaining major domestic players focused on developing their existing land banks and growing their development earnings.

This rationalisation in the sector also opened a window of opportunity to foreign investors. In 2010 and 2011 two offshore investors, GIC and Aviva, each made significant investments into the Australian industrial direct property market via portfolio acquisitions and joint-venture arrangements. Prior to 2010 the Australian industrial market had become highly institutionalised and ownership on a large scale had remained almost exclusively domestic.

We expect that Australian industrial property will continue to attract offshore capital for a range of reasons. Some of the appealing features of the sector include high yields relative to the office and retail sectors (+80 basis point spread to both sectors on national average basis for prime stock), and the high quality tenants and long lease terms available for newer stock. The issue for offshore groups has been, and will continue to be, the availability of stock that meets these requirements and their ability to build portfolio scale to meet their investment targets. It should be noted that the inflow of offshore capital is not a trend limited to industrial property. Australia has been attracting foreign buyers in the office and retail investment markets since 2007. However the industrial sector has now emerged as a target for offshore investors.

The fundamentals point to a continuation of relatively strong investment returns. A low supply pipeline and healthy levels of take-up imply a positive outlook for rental growth. Yields remain elevated relative to the risk-free rate and have some capacity for further moderate compression over coming years. We are currently forecasting that prime industrial assets will outperform the other sectors over the next three years, returning an average of 13% p.a. on a national basis. If we are right, the sector will continue to attract buyers who assess investments on a total return basis. Examples are domestic wholesale funds and offshore groups, both of whom were active purchasers in 2011. We believe the industrial investment market is set to have another solid year.

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