Industrial Real Estate can be broadly defined as all land and buildings which accommodate industrial activities including production, manufacturing, assembly, warehousing, research, storage, and distribution. In the context of this definition, it is understandable to have assumed that the Australian Industrial and Logistics sector had some difficult times ahead as we entered the Covid-19 pandemic in early 2020. Although the opposite has occurred thanks to the perfect storm of pre-pandemic strong fundamentals with Covid induced forces further fuelling the growth trajectory and ultimately rewarding investors with very strong returns.

Long term themes accelerated by the pandemic

• The grocery sector is a substantial and stable long-term driver of growth. Demand for Industrial and Logistics space is increasingly contributed by major food logistics operators with the exponential growth expected given online grocery is expected to increase from 20% of online sales in 2020-21 to 26% of online retail sales by 2024-25.
• Growth in the Pharmaceutical Life Sciences sector should accelerate and contribute to demand for Industrial and Logistics property. Australia is an appealing location for occupiers in the life sciences space for various reasons including a skilled workforce, IP protection, world-leading research institutions, and supportive government initiatives.
• Australia’s e-commerce growth potential is substantial. Although COVID-19 has accelerated Australia’s e-commerce penetration rate from 9% in 2019 to 13% in 2021, the current rate lags the global average rate of 22%. CBRE forecasts Australia’s e-commerce rate to reach 20% by 2025.

Looking ahead

Returns generated from the Industrial and Logistics sector continue to be compelling for a range of investors in Australia and globally. The long lease nature of the sector with fixed rental reviews, coupled with a relatively low cost of debt continues to provide attractive yield spreads.

Inventory strategies are changing with occupiers holding higher levels of inventory expected to result in greater demand for floor space. Driven by supply chain disruptions from the COVID-19 Pandemic, companies are shifting away from lean supply chains with low inventory levels towards holding greater buffer stock to adequately service consumer expectations.

The outlook for the Australian Industrial and Logistics sector remains positive and given the sector tailwinds, it should continue to remain an attractive asset class for investors in the medium to long term. In particular, the global structural e-commerce tailwind is relatively immature in Australia and is expected to further fuel the trajectory of growth.