Aussie Logistics Investment to Accelerate as Shed Demand Remains Strong: MTD TV

As Australia’s logistics property sector continues to normalise following a pandemic-driven surge, investment in Aussie sheds will pick up this year as population growth, increasing e-commerce penetration and tight supply continue to drive demand for warehouse space, senior executives from ESR, DWS, Hale Capital Partners and MSCI Real Assets told Mingtiandi’s 2024 APAC Logistics Forum on Thursday. Watch the full recording>>

While rental growth has moderated after average prime net face rents of Australian industrial and logistics properties grew over 50 percent over the last three years, according to Colliers, vacancy has remained in the low single-digits in most markets, with the undersupply of logistics space continuing to support positive rental reversion, according to Simon Sayers, general manager of development for Victoria at ESR Australia.

“I do think we’re at a turning point in the market now, and normalisation is certainly coming back to the market,” said Sayers. He added that, “When you’re talking about vacancies between 1 percent and 2 percent across most markets, when you look at the prime vacancy levels in most markets being sub 1 percent, maybe around half a percent, that’s not a lot of supply. So that is definitely driving rent growth.”

The Australia-focused panel, which was sponsored by Yardi, also included George Anastasiou, head of Australia real estate for DWS; Nick Bradley, founder and joint managing director of Hale Capital Partners; and Ben Chow, head of Asia real estate research for MSCI Real Assets. The speakers also highlighted cold storage and ESG initiatives such as electric vehicle charging systems as appealing to an increasingly sophisticated cohort of tenants, as the market matures.

Strong Demand, Low Supply

With Australia’s population having increased by 2.5 percent in 2023 – the country’s sharpest uptick in 20 years – Frankfurt-based investment manager DWS has identified Aussie sheds as one of its top sectors for investment in Asia Pacific as well as globally, with Anastasiou expecting vacancy to remain in the low single digits as the country’s burgeoning population drives demand for online shopping.

“Australia has one of the highest population growth metrics for the developed world, and we’re coming off a very low vacancy of about 1.1 percent across the market and sub 1 percent in Sydney,” said Anastasiou. “So with this population growth and the penetration of e-commerce, we’re expecting a demand for about 9 million square metres of logistics space in the next four years…we think it’s going to be an undersupplied market, and those vacancies will remain in the low single digits, resulting in really strong rental growth.”

Tight supply and strong rental growth have shielded Aussie sheds from material declines in capital values despite an increase in cap rates, according to MSCI’s Chow, who expects the sector’s strong fundamentals to draw in institutional investors this year following a dearth of dealmaking since Australia began raising interest rates in 2022.

Logistics transaction volume in Australia reverted to roughly pre-pandemic average in 2023 with $1.6 billion worth of trades, compared to a $6.2 billion wave of investment in 2021 and $2.6 billion in 2022, according to MSCI.

“We are coming to a period of normalisation, and it’s good that the landing is a soft one, not really a hard one,” said Chow. “In terms of transactions, we are already starting to see institutional investors coming back into the space, particularly in the second quarter. 2024 started off on a brighter note and I do expect that to continue for the rest of this year…we see a mix of players that have been quiet over the past 2 to 3 years coming back, including global fund managers that had paused on dealmaking as well as some new players.”

The view was echoed by Anastasiou, who anticipates an upswing in transaction activity in the second half of the year as cap rates moderate, presenting an attractive entry point for investors who have been waiting to deploy capital into the sector.

Future Proofing

The panelists pointed to cold storage facilities as a source of future growth, as Australia’s growing online food retail, food export and pharmaceutical sectors drive up demand for cold chain logistics, with properties owned by ESR and DWS seeing near zero vacancy.

“From our perspective, (cold store) has a huge amount of growth potential,” said Bradley, whose firm specialises in industrial property investment and development in Australian infill markets. “With this sector sitting in a sub 1 percent vacancy at the moment…we see it’s got quite a long runway to go. I don’t think we’ll be in a similar situation to, say, South Korea or places like that where there’s quite a lot of vacancy in the cold store. I think we’re still way behind more developed nations when it comes to cold storage and how much we’ve got to develop to even get close to that.

In addition to cold chain, Anastasiou pointed to the importance of “future proofing” properties to secure rental growth, with initiatives like providing electric vehicle charging capabilities generating significant cost savings for occupiers while boosting asset values.

With logistics facilities serving as natural charging stops for electric delivery vehicles, Anastasiou cited ESG-compliant properties in Europe as a replicable model in Australia, with occupiers seeing transport cost savings of as much as 25 percent from electrification, leading to increased demand and higher rents.

“One thing we are focusing on is making sure the infrastructure is in place for those assets to perform in the future,” said Anastasiou. “I think you’ll see this divergence between the ESG, future-proofed assets and the secondary assets that are 20, 30 years old and are very expensive to implement some of the strategies we’re seeing overseas. So I think ultimately, that will result in a higher rent and more demand for your space. We will see this trend develop in Australia, as we’re seeing globally, and ultimately that will benefit the portfolios that are ready for this change.”