Big sheds turn heads

As an asset class, industrial property has shown resilience, reliability and long-run returns like no other.

In the post-pandemic landscape, its credentials have only been heightened and industrial property is proving to be the preferred investment vehicle for a broad range of both seasoned and newcomer investors.

Investment research firm MSCI has reported that total industrial property returns rose to 21.8 percent over the year to March – the highest total recorded since the inception of its industrial index 27 years ago.

This latest MSCI data demonstrates how record-low interest rates have escalated the competition for industrial property assets leading to yield compression which has lifted values and, in turn, total returns.

In launching Bayleys Research’s latest Auckland industrial market update, Scott Campbell, Bayleys’ national director of industrial sales and leasing, says the “big shed” industrial sector has taken everything the global pandemic threw at it, and emerged a winner.

“It’s a sector that barrels onwards, with industry data confirming that on 15-year long-run income return averages and capital growth indices, industrial property heads the league table.

Campbell says Auckland industrial land values went up circa-22 percent in the past 12 months and developable land is still very hard to come by, with the majority held in institutional or high-net-worth ownership.

“In one way or another, online shopping is driving the majority of activity in the industrial market today,” he says.

“Bullish eCommerce consumer patterns and the demand for last-mile fulfilment space have been accelerated by the COVID-factor – as has the requirement for cloud-based data providers – which is translating to demand for large sites in core locations.

“International research by global management consultants McKinsey, estimates that in an eight-week period, the pandemic outbreak accelerated business adoption of digital tools and services by the equivalent of five years.”

Campbell says keeping up with the demand for well-located, quality industrial property is becoming increasingly fraught and the development pipeline is largely pre-committed.

“According to Stats NZ, building consent approval was issued for 1.14 million square metres of new industrial development across the country during the year to April 2021, up 16.6 percent on the total recorded a year prior.

“In the Auckland region, land zoned for industrial use is pretty much all spoken for – even as far south as Drury where all titled land has been snapped up and developers are awaiting the next tranche to come to the market.

“Given the sheer demand for industrial property and the ever-growing eCommerce market, developers, occupiers and investors are hanging out to see more industrial land released – or other land rezoned – to meet this surge.”

Bayleys Research estimates that there is around 500,000 square metres of new industrial development on the drawing board in the Auckland market, to be cycled out over the next two years – generally for new warehouse space in developments larger than 10,000 square metres.

“Much of the new space that will come on stream between now and 2024, is pre-committed, with business operators working closely with developers on build-to-spec’ projects,” says Campbell.

“The huge uptick in eCommerce is fuelling the urban logistics component of the market, with the growth of non-customer-facing dark stores for grocery fulfilment just one of the areas gaining traction.

“Global eCommerce platform Shopify reports a record number of new New Zealand eCommerce stores opened via them in 2020, with strong growth in the last five years further accelerated by the pandemic.

“As of mid-July 2021, there were 15,900 live Shopify stores in New Zealand, and this is just one of the contributors to the unprecedented demand for physical warehousing.”

Urban logistics

The continued growth of Auckland city and the increasing penetration of eCommerce are the unique demand drivers for the urban logistics segment of the Auckland industrial market.

NZX-listed investment vehicle Goodman Property Trust has been a proactive contributor to this supply-constrained market and John Dakin, chief executive officer for Goodman’s New Zealand operations, says the decision to concentrate its portfolio in the industrial sector has been deliberate and well-timed.

“We’ve repositioned our $3.8 billion portfolio over the last five to 10 years, focusing our investment strategy on the urban logistics sector,” he says.

“The outperformance of the industrial sector has reinforced the benefits of this strategy, which has delivered great results for our investors and customers, with the future growth profile looking equally strong.”

Undeterred by the competition for sites in the Auckland market, Dakin says as it is New Zealand’s gateway city and the country’s largest consumer market, it remains Goodman’s preferred investment location.

“Appropriately-zoned greenfield development opportunities are becoming rare and are highly sought after in the Auckland region,” he says.

“Our own development programme is increasingly focused on well-located infill sites, close to transport infrastructure and large consumer populations.

“We currently have over $250 million of development projects underway, with around 75 percent of these on infill sites.”

The redevelopment of the former Foodstuffs distribution centre in Mt Roskill is a prime example of Goodman’s strategy.

“Alongside State Highway 20 and the Waterview Tunnel, it’s an ideal location for fulfilment and logistics businesses hence we’re intensifying the site with a highly sustainable development masterplan anchored by New Zealand Post.”

Dakin says Goodman Property Trust’s connection with the ASX-listed Goodman Group provides valuable insights into emerging trends allowing it to stay relevant and competitive.

“Goodman Group is a global investor and fund manager with around $55 billion of funds under management in Asia, Australasia, Europe and North America.

“The growth in demand for distribution space associated with eCommerce is more progressed in European and Asian markets, where online sales make up a higher proportion of total retail sales.

“In New Zealand, it’s around 11 percent compared to more than 20 percent in many of these other markets.

“The potential growth in demand from fulfilment and delivery services is directing our investment decision making.”

Also in line with global trends, Dakin says Goodman expects these occupiers to have increasing requirements around automation, incorporating warehouse systems and technologies that provide them with a competitive advantage, along with clear sustainability goals.

“The demand from customers for highly sustainable and carbon neutral property solutions is a well-established offshore trend that is now emerging in New Zealand.

“We see immense benefits in decarbonising our business and offering highly sustainable, energy efficient solutions for our customers.

“This is reflected in our development programme where we are now targeting a 5 Green Star rating for all our new projects and adopting practices and materials that reduce greenhouse gas emissions in the construction phase.

“Any embodied carbon within these projects will also be offset.”

Another international trend, yet to hit our shores, is vertical industrial development.

“With land even more constrained in many of the offshore markets where Goodman operates, multi-level industrial development is becoming more common,” explains Dakin.

“The trend could potentially come to Auckland as the development of the city intensifies.”

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