Online retail spurs space mission

The retail revolution is boosting investment opportunities in property and logistics.

Summary: With online retail stores on the rise across Australia, so is demand for warehousing facilities to store the goods being ordered, and for transport and logistics companies to ship them. For savvy investors, there are good opportunities in the listed and unlisted industrial property space, as well as in listed transport stocks.
Key take-out: As well as institutional buyers moving into the industrial property sector, significant interest has been coming from private investors drawn to the high yield and low vacancy rates.
Key beneficiaries: General investors. Category: Industrial property.

Australia’s online shopping boom is producing indirect opportunities for savvy investors, well beyond the retail sector itself.

Investment opportunities are coming to life across listed industrial property trusts and logistics companies, as the online retail revolution increases demand for high-quality storage facilities and delivery channels.

More customers are turning to the internet each year to purchase their goods from online retailers such as ASOS, Catch of the Day and Milan Direct, as well as from major listed retail groups such as Coles (WES), Myer (MYR), David Jones (DJS) and Harvey Norman (HVN).

Though online retail only made up 6% of total retail sales at July this year, with an annual turnover of $14.1 billion, it has grown 21% year-on-year since 2009, by far outpacing traditional retail’s 1-2% growth over the same period.

Warehouse space is increasingly being sought after across Australia, and this growing demand is driving down vacancy rates in industrial property and sustaining rents, in stark contrast to the situation across the retail and office property sectors.

“The next phase of online retail is not accepting the stock that’s there,” National Online Retail Association CEO Paul Greenberg says. “Rather it’s going to be more driven by these dynamic models [purpose built warehouses] that require certain requirements.”

Australia’s biggest online furniture retailer Milan Direct, which is growing at around 100% year-on-year, has changed warehouses 14 times over the last seven years. The company has gone from occupying a 2,000 square metre warehouse in 2007 to a 15,000 square metre warehouse located in Laverton, Victoria as well as a second warehouse in the UK.

CBRE senior research manager, Luke Dixon, says newer warehouses are ranging from 10,000 square metres up to even 30,000 square metres, compared to older sizes of between 1,000 and 10,000 square metres.

Rather than lease or buy its warehouses, Milan has partnered up with a third-party logistics provider (3PL) that it rents them from.

“Online retailers are coming to the conclusion that managing and running industrial space is not core business, so they are looking to third parties who have more expertise in that,” Dixon says.

Logistics growing

Australia Post, once thought of as a relic of the pre-technology era, reported its second year of double-digit profit growth last year as it capitalises on its vast distribution network for parcel delivery. One of its “Future Ready” initiatives has been to introduce parcel locker facilities where customers enter a code to pick up their order at any time.

In the non-government sector ASX-listed Toll (TOL), Linfox and other heavyweight logistics companies also recognise the growing demand and are aggressively pursuing market share.

Toll partnered with online retail and auction company GraysOnline late last month to increase the workload for its new Toll Consumer Delivery segment dedicated to online parcel delivery service.

Construction began on a $170 million freight sorting facility in Sydney in July – the biggest of its type in Australia – adding to three similar investments in other states totalling $103 million over the past few years.

REITs in action

But Australia Post, Toll and many other logistics firms are also renting a significant amount of warehouse space and listed real-estate investment trusts have taken notice; investment in industrial property surged almost 50% to $441 million in the second quarter of this year.

Dixon says REITs including Goodman (GMG), Dexus (DXS) and Australand (ALZ) have been aggressively pursuing transport logistic firms.

Goodman Group – which does 30% of its work for online retailers – is at the forefront in constructing purpose built warehouses for the sector.

The stock tops Morgan Stanley’s list of outperforming REITs. The broker sees 17.8% upside over the next 12 months, with structural demand driven by the rapid rise in online retail listed as one of its main reasons for the optimistic outlook.

New REITs are also beginning to enter the market as confidence builds post the federal election. Investment firm Fife Capital is launching a $180 million industrial property trust through an initial public offering (IPO). It begins trading on the ASX in October.

The trust holds eight properties in its portfolio, with tenants including Australia Post, Bluestar Logistics and K&S Freighters, and is forecast to pay a dividend yield of 8.25% per annum.

Private interest

It’s not just institutional buyers foraying into the market either, with significant interest coming from private investors drawn to the high yield and low vacancy rates.

“There has been no question that there has been quite a bit of money – particularly in the ultra-high-net worth space – that has gone into commercial property,” says Deutsche Bank’s head of private wealth Chris Selby.

However, he says many of these individuals had invested up to 18 months ago when the sector was more depressed and ultra-high net worth overseas investors are now buying a lot of these properties off them at a much higher price.

The shortage in supply of prime-grade warehouses is another major issue for private investors because the developers who build them tend to hold them in their portfolios to lease rather than sell.

If the opportunity does arise, Dixon urges caution when investing in industrial property. A number of tenants are opting for shorter lease terms as they adapt to become more flexible in the changing market. He says investors should seek a property where its location is appealing to a blue-chip company wanting a long-term lease, such as Coles.