Industrial sector outperforms thanks to e-commerce boom: says BDO’s Annual Survey

29 November 2018

The e-commerce boom has resulted in strong rental growth for industrial property, spilling over into a stellar performance by the listed industrial stocks.

Australian Real Estate Investment Trusts (AREITs) who own and manage industrial assets, were the best performers in the annual BDO survey, released today.

Industrial REITs showed a 26% total return over the 12-month period to June 2018, with big performances from Centuria, Industria, Charter Hall Group, and National Storage, who all ranked in the top 10 of this year’s survey.

BDO’s National Leader of Real Estate and Construction, Sebastian Stevens, said strong rental growth, driven by an ongoing e-commerce boom, had underpinned industrial property making them an attractive investment.

“Online shopping accounts for over $23 billion annually in Australia, and the reliance and need for warehouse space is at an all-time high, driven by advancements in the e-commerce sector. Retailers rely on supply-chain efficiency to deliver goods with speed, and this has had a big effect on the industrial property market which has spilt-over into demand for the Industrial REITs.”

“The same e-commerce trends continue to impact the retail sector, with a healthy 14.1% return. Flagship assets and those weighed towards non-discretionary retail had strong reporting seasons as they diversify and differentiate from the online market.”

“The pub sector continues to perform well with ALE Property Group coming in at number one in the survey, up from second place last year and in the top three for the fourth consecutive year. In the office market, assets in the Sydney and Melbourne markets are benefiting from high occupancy rates and stable income.”

The Top 10 Performers in BDO’s AREITs 2018 survey were:

  1. ALE Property Group – owner of Australia’s largest portfolio of freehold pubs properties (86 pubs)
  2. Rural Funds Group (RFF) - is a unique Australian real estate investment trust engaged in leasing of agricultural properties and equipment
  3. Cromwell Property Group – a property fund manager of commercial properties who have total assets under management of $11.5 billion across Australia, New Zealand and Europe.
  4. Centuria Industrial REIT - own a portfolio of 37 industrial assets located in key metropolitan locations in Australia. CIP’s portfolio is valued at c.$1 billion
  5. Convenience Retail REIT - wholly owns a portfolio of 69 service station and convenience retail assets in Australia, with assets totalling c.$340 million
  6. BlackWall Property Fund - operates subsidiaries involved in workspace networks earning income from desk leasing in Australasia and property fund and asset management.
  7. Industria REIT - owns a portfolio of 24 industrial and business park assets across Sydney, Melbourne, Brisbane and Adelaide, valued at c.$687 million.
  8. Charter Hall Group - invests in high quality office, retail and industrial spaces with a large presence of corporate and government tenants. 
  9. Shopping Centres Australasia Property Group - owns a diversified shopping centres portfolio valued at c.$2.5 billion.
  10. National Storage REIT - owner / operator of self-storage centres.

The AREITs delivered a total return of 13.2% over the 2017-18 financial year (S&P/ASX 200 AREIT Accumulation Index). This matched the broader market (S&P/ASX 200 Accumulation Index) which returned 13% in 2018. This was a rebound for the sector after the negative 6.3% return delivered in the 2016-17 year.

“The end of the year saw significant asset revaluations which capped off a 2018 where Net Tangible Assets (NTA) per share values increased 9.7% on previous year. The strongest revaluations were in the commercial and industrial sectors,” Mr Stevens said.

“Gearing remains stable for the AREIT sector, a constant theme in recent years. AREITs with lower gearing are trading at higher premiums to NTA and sector average gearing was 25.9% in 2018.”

“Looking ahead, despite some macro challenges, with the underlying metrics of sustainable income, occupancy and asset values remaining positive, AREITs remain well placed as the go-to defensive asset for investors.”

Andrew Wilkinson, Managing Director of ALE Property Group commented that in the next 12 – 18 months: “underlying fundamentals of higher quality A-REITs will shine through when they have taken pre-emptive steps to put in place longer term interest rate hedging across a large amount of their debt. Well-located property with long term leases to strong tenants are expected to continue to perform well for A-REITs and their investors. The biggest challenges facing the wider sector include tougher retail conditions, the risk of rising base interest rates and softening demand for secondary quality real estate.”

The survey, now in its 24th year, ranks the S&P/ASX 200 A-REIT Index trusts based on key financial and investment indicators in the 12 months to 30 June each year.

The full report and analysis is available at www.bdo.com.au/en-au/a-reit-survey-2018