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APIL Market Commentary – Industrial

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Despite a slow June quarter across the Australian property market, the industrial market has weathered the effects of COVID-19 better than other commercial property sectors with post-COVID transactions maintaining pre-COVID rates. APIL’s industrial properties are located in Perth, Adelaide and Brisbane, with all three cities being less Covid impacted than Melbourne and Sydney.

JLL research for Q2 2020 indicates leasing activity across Australia recorded a sharp uptick despite broader economic headwinds. Demand was weighted to the Sydney and Melbourne markets, and was driven by accelerating adoption of eCommerce within retail trade and food logistics. The national trend for occupier demand in the last 12 months was led by retail trade (39%), followed by the transport, postal and warehousing sector (31%), and manufacturing (22%) sector.

The past quarter saw strong purchasing demand for properties with a long WALE and strong leasing covenants. These properties are highly attractive as they are considered to be able to weather the Covid 19 pandemic relatively unscathed. Yields for the industrial properties are expected to hold, if not compress further, especially for larger scale and “super-core” properties.

Industrial activity is expected to improve as the economy emerges from the pandemic. However, demand is expected to be mixed over the near term. Some industrial sub-sectors, particularly those related to the non-discretionary retail sector, will be more resilient during the COVID-19 pandemic than others.

In Perth, the largest take-up of industrial space in the state over the quarter was by Australia Post (Transport, Postal & Logistics), who signed a short-term lease for 6,500 sqm building in Welshpool to handle the increased movement of goods from online retail shopping resulting from the COVID-19 lockdown measures. This trend is consistent across the country with Amazon, Woolworths, Coles and DHL expanding their industrial presence across the east coast of Australia.

The mining sector has also benefitted during the pandemic. It is one of Australia’s most resilient (and critical) industries. The commodity market is very strong at the moment, with demand for iron ore, gold, and other minerals at a one-year high.

The closure of international borders has also highlighted weaknesses in the supply chains of many industries that Australia relies on, in particular agriculture. Federal Agriculture Minister David Littleproud said even though agriculture delivered just 2 per cent of GDP, the industry would be crucial in helping the nation rebound after this crisis. He said, “Growing the industry is going to be so important to helping our nation repair. It’s the bedrock of our nation’s economy and our nation’s security.” Littleproud has mentioned that there are opportunities for “new jobs in innovation and science” to boost livestock and crop yields with new farming techniques and technology. The Government’s focus on agriculture may also lead to increased food manufacturing jobs which would further boost the industrial market.

Nationally, JLL research expects future rental growth to remain broadly stable. This is off the back of strong occupier activity recorded year-to-date. However, there is potential for this demand to be offset by a large, impending pipeline supply delivery, and the ongoing economic impacts from the COVID-19 pandemic. Over the medium-term, JLL predicts the average annual growth rate over 2021 – 2025 for national prime average weighted net face rent to be 2.4% per annum. This largely leans into the idea that industrial properties will hold up through to the other side of this pandemic.

It is still not clear what the exact long-term effects of the COVID-19 pandemic will be on the Australian Industrial market. However, based on the data provided, industrial and logistics property is proving to be the most resilient of the commercial markets so far, driven by structural changes in consumer behaviour. As a consequence, APIL’s focus continues to be further acquisitions in the industrial sector to complete the $100M APIL Industrial Fund currently being offered to investors.

 

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