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Industrial developments and commercial real estate lending

There is no doubt industrial property is a critical part of the Australian economic landscape.  About A$38bn[1] a month worth of goods are imported into Australia – usually via ship into capital city ports which then makes its way into our homes, offices and hands via road transportation (and likely with a hefty price markup).  At some point it is likely your purchase has had a short stay in at least one warehouse.

CBRE forecasts the industrial and logistics investable universe in Australia will reach A$410bn in the next decade, and potentially become the largest commercial real estate asset class in the short term.

With the demand for well-positioned, quality industrial property likely to remain strong, we have high conviction that lending to this sector can be an excellent and resilient source of income.

E-Commerce trends are a great predictor of industrial property health.  The COVID-19 pandemic saw a significant rise in the volume of online sales and online purchasing has stabilised at this higher level, despite physical retail returning to normal trading.  Approximately 15% of Australians’ total spending is online (Statista 2024) and we have the fourth largest e-commerce economy in the Asia Pacific, behind China, South Korea and Japan.   That’s around A$3.5bn a month just in online purchases! The vast majority of those purchases will have been shipped from a warehouse, or through a warehouse.

The e-commerce boom has been responsible (according to CBRE) for lifting warehouse rents by 45 percent since 2021 and with vacancy rates amongst the lowest in the world, particularly in Sydney and Melbourne, this trend shows no signs of reversing.

Third party logistics companies such as Amazon, StarTrack and Toll Group will be a major driver of industrial demand, with many e-commerce companies serviced by such providers.  In fact, over half the leasing transactions in 1Q24 were to the transport, postal and warehousing sector. 

Vacancy rates remain very low even with additional supply coming to market.  Rental growth is expected to remain strong and we expect the persistent congestion at global shipping ports and supply-chain shocks from conflict in Europe and the Middle East will mean companies choose to hold more inventory, rather than less, to ensure their supply remains consistent.

Capital values – last year approximately A$5bn of warehouses were sold, but CBRE predicts there is approximately A$20bn of capital that is looking for a home in this sector (and did we mention the low vacancy rates?), so there is definitely demand for finished product.

What do we look for in an industrial lending opportunity?

When considering lending to industrial projects, we are focused on a number of factors:

Position, position, position – An industrial asset is likely to be more valuable when it is located near points of infrastructure necessary for distribution.  This would include proximity to airports, shipping ports, railways and highways.  In Sydney we see the western growth corridor with access to M5 (direct to Port Botany), M7 (M1 national highway) and the under-construction Western Sydney Airport at Badgerys Creek to be key sites for industrial property construction. 

Type of construction  – By its nature, industrial construction is often less complex than office or residential, and with construction techniques such as tilt-up (essentially, pre-fabricated reinforced concrete), can be significantly faster.  So time from initial loan to completion can be quicker than in other areas of the market.

Lease-up/pre-commits – With vacancy rates being near historical lows, the demand for new and well positioned prime industrial sites is strong and pre-committed construction accounts for approximately 50% of the 2024 development pipeline.  Speculative builds without pre-sales, or land well positioned to benefit from sound DA plans (where services are connected or imminent) can offer a higher credit premium (and by extension, often lower gearing levels).  Either way, we have to be convinced about the likelihood of an effortless sale of the asset or refinancing of our debt at completion.  Either works.  Extra points for getting comfortable with both.

Borrower experience –  It is critical to examine this carefully before we extend credit.  Has the Borrower done this type of construction before?  If not, is there a reputable and experienced third party contractor?  With a pre-defined loan term, we need to make sure the project is built to the correct specifications within the proposed timeframe, even though we might build in contingencies for cost and time. 

With Sydney, Melbourne and Brisbane featuring heavily in the most attractive markets for development opportunities and with these three cities having the lowest vacancy rates it is easy to see why an interesting industrial development opportunity features high on the list of transactions we would consider for client portfolios.

If you’d like to learn more about how we think about industrial development and investment opportunities, or would like to learn more about how you can get access to these types of investments, please contact our team.