The fight to own properties housing Australia's industrial and logistics sector is set to intensify this year as the assets available for sale dwindle just as institutional investors look to expand their ownership.
With just two transactions Blackstone became the fifth largest industrial property owner in Australia last year and other groups such as Mapletree, Cache and Ascendas all aggressively joined in the buying in 2016. Even AMP surprised many pundits with its $250 million purchase of an industrial property portfolio from JP Morgan.
With limited property portfolios expected to hit the market this year and buyers still out in force, many expect that if the industrial property buyers want to grow they will have to focus on acquiring land for developing their own product, identifying corporate companies for potential sale and leaseback programs or look at takeovers of property funds.
"Never before has demand for Australian industrial investment property been so great, yet supply so limited," the managing director of leading national industrial advisory One Commercial, Joshua Charles, said.
He expects all three areas will be exploited as investors battle to increase their property funds under management.
"Over the past decade groups such as Goodman, Dexus and Frasers [formerly Australand] have led the industrial development charge, with much of that end product spun off for sale shortly after. Recently, though, we have seen groups not normally associated with industrial development buying their own large parcels in order to create product to develop and hold."
True value
Mr Charles also expects more sale and leasebacks if only corporates could understand the true value of their assets.
"If more corporations new the true value of their industrial property holdings in today's market we would definitely be seeing increased sale and leaseback activity," he said. "Many businesses keep their property at conservative levels on their books and ultimately management takes these numbers as gospel."
The reality of the property's value is often very surprising to non-property businesses, specifically what an REIT would be prepared to pay for their sites based on five and 10-year leasebacks in today's market.
Charter Hall group executive for industrial Paul Ford said the availability of high-quality industrial assets coming for sale had diminished and that was making buying assets more competitive.
"I do think the level of competition is likely to be sustained at least for the first six months because of the appetite from overseas investors and because there are fewer assets coming to market," Mr Ford said.
"We are also probably seeing the quality of assets coming to market diminish."
Charter Hall has been one of the more active participants in the industrial property market driven by the conversion of existing client relationships.
"We have had a very strong run in sale and leasebacks and that's because we have a large number of existing, trusted customers and there is a strong correlation between good relationships and new deals."
Growing trend
Colliers International's managing director for industrial Mal Tyson, who negotiated Charter Hall's recent $65.9 million industrial property deal, said sale and leasebacks were a growing trend and would continue into 2017.
"It makes sense for the corporate, in many cases, they unlock and release the capital that is tied up on the balance sheet, and reinvest in their business to achieve a higher return," he said.
"Colliers have acted for companies from a range of industrial industries over the past 24 months, who have sold the property and entered into long-term leases, realising some $750 million of investment dollars."
The ownership of the investment-grade industrial stock is still the least concentrated of the major asset classes of office, retail and industrial. Colliers estimates about 30 per cent of investment-grade industrial is owned by the top eight players.
Among them are AMP and DEXUS.
DEXUS Property Group's head of industrial Mark Cuddy said that while development and sale and leasebacks were still active spaces there were fewer opportunities in the listed industrial funds management space than there were last year.
"There seems few opportunities for further consolidation amongst the smaller industrial REITs," Mr Cuddy said.
"However, in terms of 'take private' and portfolio transactions, there is a lot of sophisticated foreign capital investing in industrial assets and so if scalable opportunities exist I think you will see these offshore groups actively participating."
Knight Frank's head of industrial Tim Armstrong said several groups had made smart plays last year in the area of industrial property consolidation.
"Fund level takeovers have proven extremely successful for many groups and we have seen evidence of this very recently with the Centuria/360 dealings," Mr Armstrong said.
"Often the challenge lies in the vast amount of capital currently available which can often re-capitalise funds that are under-performing or replace disgruntled investors.
Analysis of risk
"Across 2016 we witnessed a wide scope of opinion on risk profile and associated yield and the reality for many groups is that the cost of capital has dictated the need to adjust their mandates in terms of return..."
AMP Capital's managing director for office & industrial, Luke Briscoe, agrees that there is plenty of competition among landlords for the right industrial assets but said there would be a sharper analysis of risk before acquisition.
"Given the current market conditions we are very selective around the opportunities we take," Mr Briscoe said.
"AMP Capital funds with this exposure remain active in the industrial space, but note that it is a highly competitive market to acquire development-ready land in Western and South-Western Sydney and a measured approach will be taken when considering opportunities."
JLL's Mike Fenton expects many of the big institutional players will have to look to development.
"The focus on land will continue as most groups seek to create their own core product rather than rely on a fiercely competitive market for stabilised core assets," he said.
