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Industrial property in demand as e-commerce booms

Demand for industrial office space is strong at the moment, but keep an eye on office property too, say Pendal property investment managers Pete Davidson and Julia Forrest

  • Industrial real estate in high demand.
  • Office market set for an oversupply.
  • Supply-demand equation out of sync

AS THE dramatic shift to online shopping continues, the rule of thumb in the property world is that for every metre you take out of retail space, you need to put three into warehousing space.

That’s because forklifts need room to operate and much more space is needed for packaging.

It’s one of the reasons demand for industrial office space is so strong. Yet many large investment funds are underweight industrial office space.

There’s a conundrum in the office property market as well.  Why are so many office buildings being built when people are working from home?

To investors outside the sector, office and industrial property can be harder to understand than residential and retail property.

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“Demand for industrial real estate is particularly strong,” says Peter Davidson, head of listed property at Pendal.

“We all know there’s a trend to online retailing. You need much more space — and Aussie retailers have got a long way to go in terms of online fulfillment.

“The rule of thumb is that rent growth accelerates when you get above 10 to 12 per cent of retail spend being online — and that’s where we are now,” Davidson says.

“Also, you have this trend to more manufacturing in Australia. We used to talk about just-in-time inventory, but now there is demand for just-in-case inventory. Supply chains are getting longer,” Davidson says.

Strong demand for industrial property

These trends mean demand for industrial property is strong.

Yet institutional investors remain underweight industrial property.

Why?

“It’s the size of the assets,” says Pendal portfolio manager Julia Forrest. “You might pay a billion dollars for an office building in a CBD whereas industrial tends to be much smaller transaction sizes.

“While the perception of the asset class has changed over the past 15 years, it started from a very low base.

“Investors have always been overweight retail malls and office. It’s been quite difficult to become overweight industrial,” she says. That’s why the pace of transactions has lifted.”

Office property is a very cyclical asset and it’s very tradeable, with investors able to buy and sell shares in real estate investment trusts on share markets.

“The key issue in office is typically excess supply. If you suddenly get a lot of cranes in the sky you can get too much supply and that’s a problem,” Davidson says.

“But now there’s this structural issue where lots of people are working from home. There are segments of the office market, such as call centres, which will always be done at home. They won’t go back to the office.”

“On the plus side of the ledger, when people do go back to work, each person will probably require a larger space because of social distancing.”

Many workers want a return to the office

“Frankly, I think there will be a sense of relief for many people that want to get back into the office environment,” Davidson says. “At the moment many of us aren’t sure if it’s work from home, or sleep at work.

“So office in this situation is where more supply is coming, and there’s this structural element where people will be working from home.”

The dynamic of having more supply coming, even as people are working from home, is unusual, Forrest says. But it’s happening because bond yields are so low.

“You’ve got this supply pipeline which impacts rents. But asset values are still intact, developers are happy to develop. In other cycles you have asset values more tied to the rental outlook,” Forrest says.

“It could result in a reasonable oversupply which ultimately does affect rents and the returns of the asset class.”


About Pete Davidson, Julia Forrest and Pendal Property Securities Fund

Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.

Pete Davidson is Pendal’s Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here


This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at September 2, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
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