Amazon and the industrial property revolution: a focus for investor returns

Amazon and the industrial property revolution: a focus for investor returns

One of the biggest talking points of the second half of 2017 in the Australian economy has been the entry of Amazon into the local market, writes Steven Bennett. Brought to you by Charter Hall. 

Of course Amazon was already here by virtue of its mail order business based in the US. However, setting up major distribution facilities in Dandenong outside Melbourne, and as yet unannounced plans for more, has focused attention of the role and value of the type of property that is central to the Amazon business model, namely, industrial property. 

Most of us are familiar with the other major property sectors: we, or someone close to us, works in an office and we have all shopped at a shopping centre (retail property) at some point.

 

However, we are less familiar with the ‘nuts and bolts’ properties that are the silent drivers of the economy: the distribution centres for food and merchandise, the assembly and manufacturing facilities and food processing plants, and distribution warehouses of every shape and size, now more commonly referred to as logistic centres. Collectively these properties are known as ‘industrial’ property.

Property, yes. But which type?

Australians need little convincing of the role property can play in building a retirement nest egg. It seems we focus on some property sectors more than others, namely, residential for the average individual investor, and, for business owners, very often the premises out of which the business operates. On the surface both make sense, because they are what we understand.

However, one of the key rules of investing is diversification.

Have a spread of asset classes — equities, fixed interest and property (sometimes included in ‘alternatives’ - which not only includes property but real assets and, notably, infrastructure).

At the next level, have a spread of equities: local and international, remembering the ASX comprises only 1.5 per cent — 2 per cent of global listed equities, and drilling down, at the next level have a spread of companies and a spread of business sectors.

Following the diversification rule, when it comes to property many advisers recommend a mix of investment grade commercial office, retail, and industrial.

Interestingly residential is rarely recommended and, certainly not a sector in which professional investors — the big super funds, insurance companies and others — have traditionally participated in.

Why? Because the yields on residential are very low, in the order of 2-4 per cent gross and often significantly lower than that after costs, if not negative. 

Of course we all know there have been capital gains in some residential markets, especially Sydney and Melbourne over the past five years, but most professional observers believe the market has peaked and that the risks of investing now are substantial.

The contrast between industrial property and residential property outlook is stark.

The buoyant e-commerce sector is expected to rise by 60 per cent in Australia by 2020. ‘Supply chain efficiencies’ is a term you will be hearing more and more and, at the heart of this unfolding ‘industrial property revolution’ are combined distribution centre and warehouses which feature the latest digitally-based stock management and product dispatching capabilities.

New Woolies logistics centre an example of the soon to be ‘new normal’

Woolworth’s newest distribution centre, also in Dandenong, is a case in point. Scheduled to be operational in 2018 the property’s ownership is split between a number of Charter Hall managed funds, and is an excellent example of the evolution (or revolution!) in industrial property. In some respects these buildings have morphed from being storage and distribution assets to ‘property based machines’ designed to get goods to stores and/or individuals as quickly and seamlessly as possible. As e-commerce evolves and matures, customers are increasingly expecting a 24-hour interval between ordering and arrival of their purchases on their doorstep.

Industrial by nature and performance

In parallel with the ‘Amazon effect’ the financial performance of the industrial property sector has been a factor in its blossoming from the so called ‘ugly duckling’ to a statuesque swan. In the year to 30 June 2017 industrial property returned 10.4 per cent nationally and in excess of 11 per cent in NSW.

The Charter Hall Direct Industrial Fund No.4, which is currently open to investors, is attracting added interest based on both the ‘Amazon effect’ and a prospective total return of around 9-10 per cent per annum. The fund is currently paying 6.5 per cent per annum income distribution and has the potential for capital growth throughout its five-year term. In addition the fund has deferred tax advantages, the quantum of which varies according to the individual taxpayer's situation. 

A further investor attraction of industrial property investment is the very long leases usually associated with the sector, which provides stability and security for investors holding this class of asset. As one conservative but engaged investor in the sector commented recently: ‘Long live the industrial-property-revolution’.

Steven Bennett is head of direct property at Charter Hall. 

Amazon and the industrial property revolution: a focus for investor returns
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