Industrial REITs to outperform?

Overall views on the value of holding real estate investment trusts  (REITs) vary depending on the opinion held about the future of quantitative easing and the direction of long-term interest rates. But REITs with an industrial focus might just break the traditional relationship between yield and share prices, offering investors some alternatives.

Australia is teetering on the edge of either a business cycle expansion which would reignite risk assets, or a change in investor focus back toward safe havens as lower long-term government debt yields force investors to chase bond-like investments. This means picking the right REIT - with the most desirable exposure - is key.

Industrial properties provide a buffer against the tepid conditions that office and retail markets, which are largely influenced by the macro-economic environment,  are currently experiencing. Although confidence measures are increasing, office REITs are battling with aggressive leasing offers and retail REITs against online shopping.

For the industrial REIT sector, structural trends are dominating -  providing investors with a unique opportunity. 

The performance of industrial property such as warehouses is largely driven by fundamental trends. As the dominance of online shopping increases, the pressure on companies to find more efficient logistic systems is increasing, requiring more additional warehouse capability than previously thought (see David Gilmour's Online retail spurs space mission). So industrial property is coming into limited supply.

Changes in the way people shop has seen traditional distribution channels become near defunct. While the change has pressures for retail REITs, it offers an opportunity for other sections of the REIT market.

Performance-wise, industrial property has so far been the straggler. Income growth after expenses (net operating income) for industrial assets was the lowest across all property sectors, coming in at 0.8% on average for the last financial year. The belief is this will improve in light of a supply squeeze.

Stockland Corporation (SGP) looks primed to benefit from any gains across the industrial market. At the moment, Stockland has a 7% exposure to industrial spaces, which include warehouses, and the firm is targeting somewhere between 10 and 15% exposure over the next five years.

Currently the value of Stockland industrial assets is $800 million, or 10% of the portfolio, but it accounted for a significant 12% of net operating income for the group.

Another option to gain exposure to this sector of the market is Goodman Group (GMG), with just under half of its property assets based in Australia. Reporting for the financial year, Goodman confirmed it has $2.3 billion worth of work in progress globally, noting global demand for quality industrial space.

Industrial-focused REITs offer compelling investment fundamentals over the immediate term, even in these uncertain macro-economic conditions.