Centuria’s Ross Lees on tightening warehouse yields in Australia

Australian industrial and logistics real estate yields are set to compress further, with an ever-growing crowd of investors fuelling competition for assets, says Centuria Industrial REIT’s Ross Lees.

“We’re seeing so much more demand for these assets and the pricing getting to levels we haven’t seen before,” Lees, fund manager of the A$1.2bn (US$850m) warehouse trust, told APAC Real Estate.

Online shopping has energised the industrial and logistics real estate markets, as e-commerce players and traditional retailers seek out the best locations to service home deliveries and supply chains.

Ross Lees (image: Centuria)

A rush to capture rental growth in hot property markets like Sydney and Melbourne drove down super prime yields by 23 basis points nationally to an average of 6% in 2018, according to advisor CBRE.

“Yields will continue to tighten for the industrial class, driven primarily by the growing field of investors competing for a smaller bucket of assets,” Lees said.

New stock

Bringing on new stock has its challenges despite the increasing demand for well-positioned warehouse stock around Australia’s major cities.

The growth in e-commerce is projected to stimulate occupier demand for an additional 350,000 sq.m. of new industrial and logistics space each year in Australia until 2022, predicts CBRE.

Yet the supply of available land in coveted industrial locations has become scarce due to strong land take-up and demand from competing uses like residential.

The robust supply-demand conditions have pushed up land values, with 1.6-hectare plot land values rising by 6.3% on average across Australia in 2018, and up a staggering 21.9% in Melbourne.

The investment side is also changing, says Lees, with more investors zeroing in on Australia and less new stock coming to market.

“Ten years ago, there were a lot of private developers in the space and they would sell into the market, but now all the developers are putting them into their own funds,” the fund manager said.

Lees has also seen the field of investors grow, with dozens of groups, including local and international REITs, private equity and fund managers, looking at warehouses at the moment.

Fewer options

The impact of dwindling appears to be rippling throughout the sector.

“Everybody has been used to having options in the market,” said Lees.

“We’ve always known there to be the opportunity for someone to develop the next block and it’s actually becoming more limited to do that.

“I don’t know necessarily know if the occupiers have realised that yet, and even some of the developers haven’t realised that with how they’ll chase the deal.”

The fund manager pointed to Sydney, where the city may not be able to grow much further due to national parks to the north and south, coastline to the east and the Blue Mountains to the west.

“This year, we’ve probably seen 20% rental growth in some parts of Sydney,” he said. “In my career, that’s never happened.”

Rental growth will continue in Sydney and parts of Melbourne, driven primarily by the cost of land, he said.

Centuria Industrial REIT owns 41 industrial assets located around the country, and is listed on the Australian stock exchange.

In December last year, the REIT bought two warehouse properties in Brisbane and Perth for a combined A$54.4m, as it targeted locations capital city airports.

The REIT is managed by Centuria Capital Group, an ASX-listed investment manager with A$5.6bn of assets under management.

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