TOL - 24th Apr, 2024
The return potential in this asset class is beginning to ramp up
After a brutal, once-in-a-century pandemic, a combination of factors is creating a strong environment for this asset class.
Ordering furniture, homewares, and clothes online was already a phenomenon before the onset of COVID-19. However, the pandemic created an even larger tailwind for online operations than was expected even by the most bullish businesses. As companies of all industries were forced to move online and everyone was shopping at home, firms needed more options to ensure product supply could be maintained - a challenge that exists to this day.
That, in turn, has spurred a huge increase in demand for warehouses and logistics facilities. And, thanks to geopolitical risks and the supply chain crises sparked by the pandemic, it's also caused a spike in demand for large-scale manufacturing facilities as companies make the conscious decision to create their products closer to home (or wherever their customers are).
Combine these three tailwinds and you get a strong environment for industrial property. But, as always, the devil is in the details (and the returns).
So, to find out what this unique asset class can offer and why it's worth an investor's attention right now, we sat down with someone who knows a thing or two about industrial property - Trilogy Funds Executive Director – Lending and Property Assets , Clinton Arentz, in this episode of The Pitch.
EDITED TRANSCRIPT
Hello, I'm Hans Lee from Livewire Markets and welcome to The Pitch. Joining me today is Clinton Arentz from Trilogy Funds. Clinton, let's talk about something that you know a lot about and that's industrial property.
What is industrial property?
Arentz: It's a good question to start with because it is a growing sector, and the types of uses for industrial space are expanding all of the time. The rise of e-commerce and supply chain logistics management has changed industrial [property] permanently. We see it as a rapidly expanding field with a range of different uses in what you might loosely call warehousing and industry.
Why is now the time to invest in industrial property?
Arentz: You've got an economic reboot, post-COVID. A lot of companies want to get on with rebuilding their businesses and expanding their networks and their supply delivery capabilities. We are seeing demand push right across the country for good warehousing space. And as I say, that can take several different forms.
A lot of companies are bringing their manufacturing back onshore. A lot of companies are aware now of the vulnerabilities of supply chains, particularly international support around supply chains. So they want to bring that onshore and they want to be closer to their customers.
The rise of e-commerce, as I mentioned, has just driven that growth exponentially because every e-commerce user generates warehousing space. Not just retail but delivery to get those goods to the door needs warehousing space, usually closer to home than it's ever been before.
How is Australian industrial property different from other jurisdictions?
Arentz: Industrial property in Australia typically attracts a higher rate of return than perhaps internationally in that sense. Traditionally, it's attracted a reasonably high rate of return against residential, where it has a much higher rate of return, and against commercial as well.
How do you see returns in this particular sub-sector panning out over the next 5 years?
Arentz: I think they're only starting to get their growth patterns. Now, as I say this reboot post-covid takes a while. Manufacturing and delivery take a while to establish these premises and take a while to create. And of course, we're waiting for more available land so we can build new premises around the country.
So, as I said, there's tremendous demand push. Tenants are really screaming out for space in some areas and councils need to focus more on rolling out land availability so that this space can be created.
Lee: And I take it that scarcity of the land coupled with the large demand, those are really key tailwinds?
Arentz: Look, they are the economic drivers and they're the income drivers definitely.
How do you see yields and distributions holding up for industrial property in an environment where income investors have so many choices?
Arentz: They have choices, but they don't necessarily have the choice of a long-term stable income stream. We have a weighted average lease expire (WALE) in our trust of approximately six years. Some of our assets are up to 10 years in lease expiry.
That's a certain income stream for typically that period of time. That's a pretty attractive return prospect for some investors who want to sleep at night and still get a reasonable rate of return.
Lee: You're talking about a weighted lease average of six years, some of them up to 10 years. What does that actually mean if I'm an end investor?
Arentz: It means you're not incurring re-leasing costs. It means you're not incurring vacancy costs or under your holding costs. A steady, reliable income stream is the key to that.
Find out more about Trilogy Funds here.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
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