Australian Warehouses in Short Supply

The usually staid market for Australian warehouses is heating up as investors chase a limited supply of properties for returns that are beating offices and malls.

Stockland, the nation’s biggest diversified real estate investment trust, plans to double its holdings of industrial properties within five years. Goodman Group (GMG), the world’s second-biggest warehouse developer, raised A$1 billion ($950 million) for its Australian industrial property fund in the 12 months ended in June. Australian REITs plan to invest more than A$3 billion in the asset class over the next five years.

Australian REITs, with more financial flexibility after cutting debt and seeing their share prices rise 46 percent over the past two years, are looking at warehouses to bolster earnings as a decline in white-collar jobs weighs on office demand and retail sales growth slows. Some may come up short as prime buildings available for purchase are constrained, according to broker Jones Lang LaSalle Inc.

“There’s a significant number of buyers in the market chasing a limited amount of product,” said Michael Fenton, Sydney-based head of industrial property at Jones Lang LaSalle, who forecasts yields on warehouses could shrink by about 0.25 percent point within a year as prices rise. “A lot of the REITs will struggle to meet the upper end of their projected targets for acquisitions over the next year or two. I don’t think they’ll overpay, but they’ll be operating at the upper end of the pricing range.”

Photographer: Carla Gottgens/Bloomberg

Rectangular boxes, a trademark of Stockland, form a viewing area onto their residential sales hub in Craigieburn, an outer northern suburb of Melbourne. The company plans to raise warehouses to as much as 15 percent of assets from about 7 percent over the next five years, with a goal of holding as much as A$1.5 billion of the properties. Close

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Photographer: Carla Gottgens/Bloomberg

Rectangular boxes, a trademark of Stockland, form a viewing area onto their residential sales hub in Craigieburn, an outer northern suburb of Melbourne. The company plans to raise warehouses to as much as 15 percent of assets from about 7 percent over the next five years, with a goal of holding as much as A$1.5 billion of the properties.

‘Most Competitive’

Industrial properties delivered rental returns of 8.6 percent in the year through June, compared with 7 percent for retail and 7.3 percent for offices, according to the Property Council/IPD Australia All Property Index. The value of A-grade industrial properties rose 4.9 percent as of June 30 from a year earlier, according to CBRE Group Inc.

Sydney-based Stockland (SGP), which earlier said it was looking to sell industrial real estate, reversed that strategy in May under new managing director Mark Steinert. The company plans to raise warehouses to as much as 15 percent of assets from about 7 percent over the next five years, with a goal of holding as much as A$1.5 billion of the properties.

“We acknowledge that industrial is now the most competitive part of the market,” said Steinert. “We’ll be very disciplined in our process.”

Stockland shares rose 1.8 percent to A$3.97 at the close of trading in Sydney, extending gains this year to 12.5 percent, compared with a 6.7 percent increase in the S&P/ASX 200 A-REIT Index in 2013. The A-REIT Index has gained 47 percent from a low in August 2011, compared with a 27 percent advance by the S&P/ASX 200 Index, a benchmark for Australian equities.

Industrial Land

REIT purchases of industrial properties valued at more than A$5 million jumped to A$111 million in the three months to Sept. 30 from A$42 million two years earlier and A$71 million a year ago, data from broker CBRE show.

As REITs compete for modern warehouses, those that already own industrial land that can be developed will fare better than those looking to buy existing properties, Simon Hemphill, Australian research director at broker Savills Plc, said in an interview in Sydney.

Goodman has A$3 billion of land that could be developed into buildings with a value of A$10 billion, Chief Executive Officer Greg Goodman said in a telephone interview.

Online Sales

“There’s more emphasis on modern warehousing, efficient warehousing, putting a number of operations together or creating a hub for their activities to get cost efficiencies,” Goodman said. “The growth in e-commerce is also continuing at a very, very strong rate.”

Online retail sales rose 10 percent in August from a year earlier, data from National Australia Bank Ltd. showed, while total retail sales rose only 2.3 percent in the same period, according to the Bureau of Statistics.

Much of the goods purchased online are from overseas, helping drive a 5.3 percent rise in imports in August from a year earlier, according to the bureau data.

Goodman has no plans to sell any of its industrial assets even though it has received unsolicited offers, as it expects values to rise, Greg Goodman said. The company’s shares rose 0.2 percent to A$4.95 and have gained 14 percent this year.

New REIT

With a limited supply of willing sellers, only A$1.37 billion of industrial properties, including land, changed hands across Australia as of Sept. 30, compared with A$3.5 billion in 2012, and A$4.3 billion in 2011, according to broker Colliers International Plc.

Many owners have refinanced debt following the financial crisis, leased up their warehouses and are reluctant to sell, Savills’s Hemphill said.

Signaling strong investor interest in industrial properties, Fife Capital of Sydney is seeking A$129 million through an initial public offering for an Australian industrial REIT that will hold seven properties in Sydney and one in Melbourne, all fully leased.

Fife’s fully underwritten IPO contrasts with attempted listings of property trusts with office or shopping center assets that failed to attract enough interest this year, including Centuria Property Trust, which had one Sydney office building, and Pacific Retail REIT.

Failed Takeover

Fife’s REIT, which will start trading Oct. 23, had an annualized yield of 8.25 percent for the eight months to June 30 and offers 8.5 percent for the six months to Dec. 31, 2014, it said.

The REIT is a “very good offering,” said Peter Davidson, Sydney-based head of property securities at BT Investment Management, who has an overweight rating on Goodman and Dexus Property Group, Australia’s second-biggest industrial landlord. “People are spending on the net or in malls, but the product still has to come through warehouses.”

GPT Group (GPT), which expects to meet its industrial property target of 15 percent of assets by developing land it already owns, may still seek acquisitions for its new unlisted fund, Chief Executive Officer Michael Cameron said.

The Sydney-based company failed this year in its attempt to acquire Australand Property Group’s (ALZ) commercial property division, which itself planned to boost warehouses to 70 percent of properties in five years from 50 percent now.

Supply Shortage

GPT recorded comparable income growth of 3.2 percent in its industrial property division in the six months to June 30. That beat an increase of 1.5 percent in its retail unit and a 0.7 percent decline in its office business, the company said in August. GPT shares were 1.4 percent higher at A$3.69, and have risen 0.3 percent this year while Australand shares were up 1.4 percent to A$3.64, extending this year’s gains to 7.1 percent.

Office vacancies jumped to 10.1 percent as of July 1 from 8.4 percent six months earlier, as tenant demand for space fell to the lowest level in four years, data from the Property Council of Australia showed. At neighborhood shopping malls -- defined by the council as local centers with one supermarket and about 35 specialty stores -- vacancy rates jumped to 5.8 percent in June, from 4.6 percent in March, according to a survey of 100 malls managed by Jones Lang LaSalle.

While industrial properties can typically be built within a year, compared with about three years for offices, a lack of available land in areas with access to infrastructure including roads, rail and ports will keep a lid on supply, said Hemphill at Savills.

Dexus (DXS), Australia’s second-largest listed warehouse developer, generates higher rents and longer leases at a 44-hectare (109-acre) state-of-the-art development 26 kilometers (16 miles) west of Sydney’s center, than at its other developments, said Mark Cuddy, head of industrial property at Sydney-based Dexus.

‘Sticky’ Tenants

The average size of a property at that development is 16,206 square meters (174,440 square feet), compared with 2,428 square meters at an older industrial estate, and the average lease term is 10.5 years compared with 4.1 years across all its industrial properties as of June 30, according to Dexus.

“The location, both near large employment pools and near major infrastructure, the amount of investment tenants make into their fitouts, all add to the stickiness of the tenants,” Cuddy said. “That makes these precincts higher-return investments.”

The company, which completed its exit from U.S. property in April, has said it aims to have about 20 percent of all assets in industrial spaces. Dexus shares rose 0.5 percent to A$1.065, extending gains this year to 4.9 percent.

“Industrial property is the sector with the least headwinds and probably the strongest tailwinds,” said Tony Sherlock, Sydney-based head of property research at Morningstar Australasia Pty. “You’re going to see some quite respectable asset value growth over the next one to two years” of as much as 4 percent, he said.

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

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