Why we’re seeing opportunities in the industrial property sector

As we expand our funds offering at Westbridge, we’re continuing to see particular promise in the industrial sector, with supply and demand dynamics driving key opportunities for investors.

Below, I discuss what’s underpinning the appeal of this sector, along with the specific opportunities we see emerging from the current market.

Demand is high…

Across Australia, we’re seeing multi-faceted demand for industrial and logistics assets driven by a range of key factors.

Firstly, Australia has and continues to be a key beneficiary of the prolific growth in online shopping and home delivery.

A recent report from Australia Post confirmed that online shopping accounted for 16.8% ($63.6 billion) of total retail spending in 2023, with an additional 1.5 million households in Australia choosing to do their retail shopping online compared to 2019.

To put this into perspective, online shopping sat at roughly 10% of total retail sales in the pre-pandemic period.

What’s more, statistics indicate there’s further growth ahead. In the US, home delivery makes up 20%-plus of all retail sales and is projected to increase to 33% by 2030 – a sign of the potential upside still to go in Australia.

All this is driving the need for more warehousing space to store inventory.

And this isn’t just limited to online shopping. Physical retailers are also looking for ways to meet evolving demands from consumers who are increasingly expecting faster availability of stock. As a result, many of their key suppliers and manufacturers are requiring more space to store and manufacture inventory locally to speed up supply and distribution.

This trend has no doubt been amplified by the global supply chain disruptions brought about by the pandemic, which saw many businesses considering the need to manufacture and store stock locally.

…but industrial property development isn’t matching demand

While demand has been thriving, supply hasn’t come close to matching evolving space requirements.

According to Colliers, in the third quarter of 2024, the national vacancy rate across the logistics and industrial property market was just 2.7%.

This vacancy rate has risen in recent months. However, this chiefly reflects the completion of large (10,000 square metres-plus) developments that have yet to attract committed tenants.

In fact, commercial real estate agents Cushman and Wakefield say close to six out of ten new developments since 2020 have focused on this sort of larger stock.

Yet in the first half of 2024, close to eight out of ten leasing deals involved mid-sized spaces of 3,000 to 10,000 square metres – signifying high levels of demand from small to medium-sized businesses

The bottom line is that we’re building bigger spaces while there is still substantial unmet demand for mid-sized industrial properties. And this is leading to a shortage of stock in this segment of the market.

High building costs are driving up rents

Adding to this demand and supply imbalance, the same factors that have driven post-pandemic residential building costs higher are also being felt in the commercial property market.

Strong demand in the mining sector, and a variety of major infrastructure projects, are soaking up skilled tradespeople, leaving the construction industry facing an acute shortage of workers.

At the same time, we’ve seen tremendous growth in land values. These factors combined have driven a 60% increase in the cost of building new industrial assets.

This is not only putting a further squeeze on supply, it’s also underpinning rental growth, with rents needing to reach a certain threshold to ensure new developments remain economically viable.

It’s likely rents will stay near or above replacement cost for the forseeable future in order to get more supply of stock to the market.

Long leases are a plus

As well as potential for rental growth, one of the key points of appeal of the industrial market is that tenants like to sign up to long leases. After all, relocating can be a huge and costly undertaking, more so because it often means relocating large and complex equipment.

And, as I’ve mentioned above, tenants don’t have a huge choice of high-quality, vacant facilities to pick from in the current market. Providing their space requirements don’t change, this means they’re more likely to stay in premises that suit their needs, especially if the asking rents are within market ranges.

This tendency for long leases is great for an investor’s cash flow. When it’s backed up by a tenant with solid credentials, an industrial property can be an extremely attractive asset for investment funds seeking to deliver regular income returns to unitholders.

Industrial property investment – where we see opportunities

All the above factors are making industrial property an appealing prospect in the current market.

At Westbridge, we see particular opportunities in the $10-$40 million price range, which captures those mid-sized properties that are enjoying strong tenant demand backed by tight supply.

This market segment also has additional appeal from a buying perspective, as it tends to be outside the scope of most smaller investors and slightly below the usual range for institutional investors, meaning there can be less competition for quality assets.

There are other factors that we believe make this segment of the market so compelling.

The prospect of rate cuts in the new year will help to compress yields as pricing readjusts to new debt rates, which will assist in driving capital returns within managed funds.

And with replacement costs high in the industrial sector, Westbridge believes there are opportunities to target existing properties suitable for conversion or refurbishment, as a means of delivering a faster response to high demand compared to new builds.

It’s an exciting time to be engaged in the industrial property market, and one we look forward to tapping into for our investors.

Now Open: Westbridge Industrial Opportunity Fund

Leveraging strong market headwinds, the Westbridge Industrial Opportunity Fund offers a compelling opportunity to invest in Australia’s high-demand industrial property sector. The Fund aims to deliver a balanced blend of growth and income, focusing on nationwide assets with strong value-add and income growth potential.

  • Target Return: 11-13%* IRR (Internal Rate of Return)
  • Investment Focus: Blend of income and capital growth potential
  • Structure: Open-ended Fund with five-year withdrawal options
  • Investment Amount: Minimum initial investment of $100,000
  • Eligibility: Open to wholesale investors

*The target IRR includes all distributions paid as well as the net amount (after payment of estimated costs and expenses and estimated liabilities of the Fund) which would be paid to Unitholders if the Assets were sold. Special Distributions are subject to Fund strategies being achieved as outlined in the IM. Target returns are not promised nor guaranteed and are based upon a number of assumptions. Their achievement is subject to risks. The target return range is a target only, not a forecast and it might not be achieved. Please refer to the Information Memorandum for more information, noting the section on financial information and risks before deciding whether or not to invest.