Luke Crawford, Head of Research and Gavin Bishop, Head of Capital Markets, Industrial | Australia at Colliers highlight the key themes in the market in 2020.
Against a backdrop of changing economic conditions, Australian industrial and logistics assets remain well sought after with $5.49 billion trading in 2020 (>$10 million), up 11.5 per cent from 2019. In a year when volumes for other commercial sectors have fallen sharply, 28.5 per cent of investment volumes in 2020 (across office, retail and industrial) stemmed from the industrial and logistics sector, well above the 15.4 per cent recorded in 2019.
The strong level of investment recorded for the year has come off the back of robust fundamentals within the sector including e-commerce growth, food logistics and infrastructure investment. In tandem with a deeper pool of capital as new entrants into the market emerge, the sector has been brought to the forefront in 2020 and has outperformed all other mainstream real estate asset classes.
Despite the significant depth of capital and an increase in investment volumes in 2020, the market was constrained by fewer assets being brought to market with a 26.9 per cent fall in the number of assets sold in 2020 when compared to 2019. Sales volumes by number were at their lowest level since 2012.
Beyond the macro themes, investment allocations to the sector have risen significantly with several major institutions seeking to reweight their portfolios and gain further exposure to the industrial and logistics sector. This led to several significant capital raisings in 2020, many of which were oversubscribed and included Charter Hall (CPIF) raising $2.6 billion since April 2020 in two separate raisings.
The following points highlight the key themes in the market in 2020.
- Flight to Quality – Shifting market dynamics has forced groups to reassess risk and chase security and as a result, prime assets have been highly sought after.
- Purchaser Profile – Domestic institutions were the largest buyer group in 2020, accounting for 78.0 per cent of investment volumes for the year. Offshore investors remained active in 2020, however, their share of total investment volumes has fallen from 28.9 per cent in 2019 to 10.0 per cent in 2020. The lower proportion is the result of travel restrictions and an increased participation in the market via a local manager.
- Sale and Leaseback Transactions – Given increased pressure on balance sheets, many industrial businesses are reassessing their capital needs to support their long-term growth. For this reason and coupled with the strength of the industrial and logistics investment market, sale and leaseback transactions have been an integral factor within the investment market in 2020. Sale and leaseback transactions represented almost 50.0 per cent of investment volumes in 2020 with just over $2.6 billion trading via this arrangement.
- Cold Storage & Food Logistics – With investors chasing strong non-discretionary covenants, almost $2.0 billion traded from food backed tenants in 2020 with an average deal size of $90.6 million. Of this amount, 65.0 per cent or $1.29 billion traded from supermarkets with ALDI capturing the bulk of this following their divestment of six distribution centres across two tranches. Cold storage asset acquisitions totalled $694 million in 2020 across 10 transactions.
- Portfolio Acquisitions – Given fewer assets were brought to market in 2020 and the difficulty in obtaining core and core plus assets on their own, portfolio transactions remain highly sought after. Industrial and logistics portfolio transactions in 2020 amounted to $1.54 billion, down from the $1.8 billion recorded in 2019. Major transactions for the year included the first and second tranche ALDI Portfolio for $648 million and $281.5 million respectively and the Sigma portfolio for $172 million.
- Yields – Despite challenging economic conditions, yields for industrial and logistics assets continued to compress throughout 2020. The tightening of yields in 2020 has been underpinned by the significant weight of capital seeking to be placed within the sector with groups having to be aggressive in order to secure assets. On average, 41 basis points of compression has been recorded nationally in the prime market over the year compared to 20 basis points in the secondary market. The outperformance of the prime market is the result of the flight to quality thematic as groups place a premium on prime assets backed by a strong covenant.
2021 is shaping up as a year of growth and opportunity for the industrial and logistics market, buoyed by strong fundamentals within the sector which will continue unabated over the coming year. We estimate there to be $26 billion in capital looking to be placed in the market and broadly spread between offshore and domestic institutions as well as private investors. Given that just $5.49 billion transacted in 2020, it highlights the significant mismatch between supply and demand. This depth of capital will continue to drive further yield compression in the sector in 2021, albeit concentrated in prime assets as investors chase security.