Navigating industrial property investments in 2024

As Australian commercial real estate continues its course through uncertain economic times, industrial property remains in the spotlight, backed by its sterling performance last year. Nils Miller, Chief Executive Officer of BC Land, points out that discerning investors will likely face the challenge of identifying the bright spots within this competitive landscape in the year ahead.

With industrial property vacancies in prime locations across the eastern seaboard remaining under 2%, and dipping below 1% in Sydney, the sector has delivered impressive results. According to Miller, industrial properties have recorded leading returns over both the five and the ten-year horizons at 15.3% and 13.9% respectively.

Although a softening of demand was in the forecast for late 2023, due to a slowdown in the global economy, unexpected events such as Houthi rebel attacks in the Red Sea have had a pronounced effect on the market, hitting logistics-related assets particularly hard.

Since the onset of COVID-19, online shopping has become ingrained in consumer habits, fuelling a strong and persistent demand for logistics services. “Today, global uncertainties are almost certain to ensure the asset class will continue to rank as a major source of growth in 2024,” noted Miller.

Logistical delays, spurred on by factors including potential industrial action at DP World, have led businesses to reevaluate their space requirements. Many are now opting to maintain or increase their physical footprint to allow for greater stock levels, an approach sharply contrasting with the previously more common practice of downsizing to sub-lease excess spaces.

Furthermore, developments in air freight, which witnessed a decrease in costs coupled with a boost in supply, have made it an increasingly attractive option for the transport of some goods. This shift is reflected on the ground, with growing demand for logistics sites within Australia.

Miller highlights the area near the upcoming Western Sydney Airport as especially sought after, given its 24/7 operational capacity that promises significant advantages for freight operations. “Logistics operators want to locate near a hub and Badgerys Creek is that location,” he said, pointing out the economic viability of the projects there, thanks to the relatively lower land values compared to traditional hubs like Mascot.

Touching on the evolution of investment strategies, Miller observes a shift in institutional property portfolios, which now favor a more selective approach, with a particular focus on industrial properties. This targeted investment strategy is attracting North American and Asian institutions, drawn by Australia’s political and economic stability, and niche opportunities within sectors such as logistics.

“Logistics operations and assets are also seen as capable of better withstanding economic fluctuations,” Miller remarked, highlighting the sector’s resilience in times of economic instability. As online purchases continue to dominate the retail space, investments in logistics infrastructure appear to be a prudent move for those seeking stable returns.

Miller situates the Western Sydney International Airport, a $5.3 billion infrastructure project, at the center of growth expectations for the region. With the majority of the construction completed and the airport expected to operate without a curfew, he believes this development will serve as a catalyst for further economic activity, attracting a diverse range of businesses and spurring on residential development trends.