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Ross Lees
Commercial Property
+ About Ross Lees

Ross Lees is the Trust Manager for Centuria’s Industrial REIT, responsible for the REIT’s operation, performance and strategy. The REIT is Australia’s largest ASX-listed pure play industrial investment vehicle.

Ross has 14 years of industrial investment management experience, having joined Centuria from Dexus where he held senior transactional and portfolio management roles. Prior experience includes over six years at Stockland, and four years at Logos Property Australia having established and led their asset management platform.

Ross holds a Master of Applied Finance from Macquarie University and Bachelor of Business (Property Economics) from UWS.

Online retailing increasing demand for industrial real estate

Tuesday, April 30, 2019

The retail sector continues to perform well, despite recent gloomy headlines. Data shows that, to December 2018, retail sales (online and in-store) grew 3.1% year-on-year. Australia has a growing population (up 1.6% year-on-year) and 26 years of uninterrupted economic growth. So why the negativity?

As we see it, the challenge isn’t with retail per se. Rather, it is with traditional retail that hasn’t adapted to the new “omni channel” environment. Online retail sales are growing by over 25% year-on-year but this only represents 5.5% of Australia’s retail spend, suggesting the majority of retail growth is coming from online retail sales, while in-store retail sales stagnate.

The shift to online retail is creating negative sentiment towards owners of retail assets, with these assets struggling to maintain book values – and the stock market discounting owners of retail assets compared with other property asset classes.

What may not be expected is the fillip this is having on industrial property. Goods purchased online are generally shipped via a distribution centre, so the global growth in online retailing is increasing demand for industrial real estate.

Retail on the rise – but not for all types

Australian retail transactions reached $8.1 billion in 2018, the third-highest level on record, with A-REITs and private investors active on both sides of the transactions. However, A-REITs were highly selective in their choices – signalling some investors were more cautious about bricks-and-mortar retail fundamentals. There has also been less activity from overseas buyers (although acquisitions remain high by historical standards). Given the challenges facing traditional retailers, it’s likely that only those shopping centre owners with strong expertise will come out on top.

Recent sales by major players illustrate the challenges. In November 2018, Stockland sold two malls in the regional centres of Bathurst and Caloundra for a total 5.3% discount to book value, which Stockland attributed to a desire to reinvest in its commercial portfolio. And Australia’s second-largest listed mall landlord, Vicinity Centres, devalued its $15.8 billion portfolio by $37 million (0.2%) amid concerns that traditional shopping centres will come under further pressure this year.

E-commerce strides ahead

In the United States, online sales accounted for around 10% of total retail sales last year, while in the UK they accounted for 18%.

Online retail spending is likely to continue to grow in Australia, with growth in the use of mobile devices, and ongoing improvement of the overall online shopping experience. We see consumers’ expectations around convenience, value, and choice, continue to drive a higher proportion of consumers to shop online. They will also expect faster delivery times, streamlined (and free) returns, and ease of payment.

Online retailing across all categories is also rising, even in areas that traditionally relied on in-person shopping. Many consumers now participate in “show-rooming”, where they look in-store and then shop online for cheaper alternatives.

Retailers need to reassess supply chains

Many retailers are recognising the need to reassess their supply chains. Most traditional networks don’t include enough distribution centres to deliver goods cost-effectively and quickly – and this is a challenge as consumers demand ever-shorter delivery times.

Retailers also realise they cannot separate the online from their traditional shop-based business; rather, they need to be viewed as two parts of a whole. Successful retailers now think end-to-end, which means including transport and fulfilment centres in the mix. This is where industrial property, particularly warehouses located close to consumers and transport hubs, is benefitting.

Proximity to the consumer means cheaper transport costs and faster delivery times – both of which play an important role in overall profitability. And as the number of fulfilment centres for online retailing increases, so too does the number of businesses which service these centres, such as packaging companies. And both require industrial property.

Industrial property outlook

Growth in exports, business investment, and infrastructure, are driving demand for industrial property. There has been a strong flow of capital into the Australian industrial sector from a diverse range of investors – including domestic private and institutional groups, and offshore groups.

Supply is constrained however, and as a result, yields have compressed across the board. In Sydney, yields moved from 5.73% (in H2 2017) to 5.26% (in H2 2018); in Melbourne from 6.27% to 6.06%.

At the same time, the digital revolution and advances in technology mean that industrial property is changing from the simple, low-tech warehouses of the past. Today’s industrial property is more sophisticated, efficient, and flexible – ready to service a diversified range of industries.

As a result, prices have risen across the board – but more significantly in locations close to population hubs, where there is greater density and higher competition from alternative uses. 

While online retailing is providing a positive flow-on to industrial property, to regard this as a one-to-one increase in industrial space would be overstating the case. Certain types of industrial space will benefit disproportionately from the rise in online retailing. For online retailers in pursuit of supply chain efficiencies, “strategic proximity” is key: industrial property that is close to transport nodes and consumers will be the winners.

From an investment perspective, the same holds true. Industrial portfolios that align with the changing face of retail – by offering “strategically proximate” warehousing for online retailers – will be well-positioned to offer strong returns to investors.

Ross Lees is the Fund Manager for Centuria Industrial REIT

Disclaimer  
This article was issued by Centuria Property Funds No 2 Limited (Centuria) (ABN 38 133 363 185, AFSL 340304), a wholly-owned subsidiary of Centuria Capital Group (ASX: CNI), as Responsible Entity for the Centuria Industrial REIT (ASX: CIP). The information in this article is general information only and does not take into account the financial circumstances, needs or objectives of any person. Centuria is the responsible entity of listed and unlisted property funds, each of which are issued under a product disclosure statement (PDS) that is available on Centuria’s website centuria.com.au for all funds open for investment. An investment in any of Centuria’s property funds carries risks associated with an investment in direct property including the loss of income and capital invested. The risks relating to an investment are detailed in each Fund’s PDS and Centuria strongly recommends that the PDS be downloaded and read before any investment decision is made.  Centuria receives fees from investments in its property funds. Past performance is not a reliable indicator of future performance.

 

What’s next in industrial property investment?

Thursday, February 07, 2019

On the face of it, multi-storey warehouses seem to be the perfect solution to the challenges of an industrial sector both constrained by a shortage of land and driven to improve efficiency by a competitive market. And in Asia, this is exactly the response we are seeing: 60% of industrial warehouses in Singapore are multi-level, and numbers are rising quickly in China as well.

So, what about Australia – do multi-storey warehouses really stack up for our markets?

No sector of the economy has been untouched by technology – and industrial property is no exception. Advances in technology have changed the way we perform daily tasks, buy the things we need, and inform ourselves – and the flow-on effects are being felt by all businesses, sometimes in ways we may not have predicted. For example, many businesses that relied in the past on widespread physical distribution networks as their competitive advantage, are now struggling to maintain margins and margin differentials across markets, as the internet offers price transparency and online shopping options previously unavailable to consumers.

Online shopping has changed the playing field fundamentally for retailers. And as consumers’ focus has shifted to delivery speed, there have been flow-on effects in the way goods are warehoused and shipped; logistics are managed; and to the kind of industrial property most in demand. Warehouses located close to consumers – or at the very least close to logistics and transport hubs with access to main roads – have become highly sought after. So it would make sense that in locations close to consumers, where industrial land is at a premium, multi-storey warehousing could offer a solution.

In Asia, land for development is at a premium

In Asia, for these and other reasons, multi-story warehousing has been on the rise for some time.

Population density is higher than here at home and greenfield sites are almost non-existent. As a result, sophisticated urban planning is a necessity. Competition between residential and industrial developers is fierce, yet because residential development is a higher density use of land, it is incumbent on planners to find ways of allocating to industrial land without losing sight of the highest and best use of a scarce resource.

The solution to the conundrum in many areas has been to move to multi-storey warehousing – and to build transport links to match.

But in Australia, market conditions are different

In my view, here in Australia conditions are such that multi-storey warehousing is still a way away in the future, for a number of reasons:

1. Urban planning has been done differently in Australia

Australian urban planners have typically sought to replicate cities’ CBDs in other, secondary areas of cities, in a way that is not usual in Europe or Asia. In Sydney, areas such as North Sydney, Campbelltown, and Liverpool have been developed and presented as CBD-alternatives, but specific spaces for industrial areas have not been set aside in a planned way.

2. Transport and infrastructure is not world-class in Australia

Multi-storey warehouses can employ large numbers of workers, which can cause a problem if transport is not efficient. Urban planning is of a very high quality in Asia. Most workers catch public transport, and as a result, industrial areas are well-serviced by public transport. In Australia, the situation is very different. Most workers in industrial areas drive to work – our cities are more spread out, and transport links are often inadequate or non-existent. More workers would require more car spaces, and put more pressure on roads, many of which are already struggling to cope with our increasing population. If multi-storey warehouses were to be built in place of existing traditional warehouses, the volume of cars and trucks needing to get in and out of such areas would pose a serious challenge to the road network.

The NSW State Government is currently investing significantly in infrastructure, but the majority of this is not specifically designed to service industrial areas. And in fact, the areas of Sydney that would most benefit from multi-storey warehousing – Chullora, Mascot and Silverwater for example – are already congested with traffic from local residents as well as existing industrial development. It’s difficult to envisage these areas coping with a massive influx of workers without a significant pre-investment into new transport infrastructure, and this will not happen overnight.

3. South-Sydney – a perfect candidate?

South Sydney has been touted by some as a suitable candidate for the first multi-storey warehouses in Australia for number of reasons.

Firstly, South Sydney is unique in its proximity to the CBD, the airport and Port Botany. However, residential development has risen sharply over the past decades, and over 1.7 million square metres of industrial land have already disappeared as a result, increasing demand for industrial sites and pushing up prices. 

What’s left of the industrial areas has to work much harder, and this is the basis on which multi-storey warehousing has been touted as an option.  

At the same time, the Australian Government has created (and owns) the Moorebank Intermodal Company, which has been established to develop an intermodal terminal in Moorebank, in Sydney’s south-west, with the aim of managing expected growth in freight moving through Sydney.

The project aims to create 6,800 jobs and to reduce congestion growth in south-western Sydney by using rail rather than trucks to move shipping containers, thereby reducing the number of trucks on the road. It’s unlikely, given the investment in this terminal, that further warehouses that rely on movement by truck will be developed in the near future.

In conclusion, Asia and Australia are very different markets when it comes to industrial property and its uses. There is a shortage of greenfield land for new industrial sites in Australia, but not to the same extent as Asia by any means. In addition, our population is located differently, in residential areas that are often located further away from industrial spaces than more densely populated cities. Public transport is also a problem in Australia. It has been developed to service residential areas, which means many workers in industrial areas drive to work.

Furthermore, from an ownership perspective, potential revenue from multi-storey warehouses is higher than that from a traditional warehouse, but in order to benefit from increased revenue there are myriad of operational challenges, which would require significant investment to address. Owners’ business models would need to change: currently, users of industrial space are charged on a per-square-metre basis, whereas multi-storey warehouses imply a through-put model, which charges according to the number of trucks or other vehicles moving through the warehouse. For this to be possible in Australia, road infrastructure around industrial areas would need to be much improved. If it isn’t, the sheer increase in congestion associated with moving many more vehicles through a small space would negate any benefits of the larger warehouse space.

The bottom line?

At this point in time, weighing up the pros and cons, it doesn’t look like multi-storey warehouses are the solution to space constraints in industrial markets in Australia. In fact, at present they seem to raise more challenges than they offer solutions.

So what does this mean for the industrial landscape in Australia now? My view is that there may well be a case for multi-storey warehousing in Sydney and in other major cities in time. And as AI, specifically robotics and automation, continues to change manufacturing and eliminate some jobs, friction points will also change - as will the challenges of warehouses. At present, however, it’s difficult to see multi-storey warehouses stacking up.

Therefore, until the landscape changes, warehouses in central locations, close to existing transport and logistics hubs, will continue to be in strong demand and offer a premium to users in Australia.

 

What’s next in industrial property investment?

Monday, February 04, 2019

On the face of it, multi-storey warehouses seem to be the perfect solution to the challenges of an industrial sector both constrained by a shortage of land and driven to improve efficiency by a competitive market. And in Asia, this is exactly the response we are seeing: 60% of industrial warehouses in Singapore are multi-level, and numbers are rising quickly in China as well.

So, what about Australia – do multi-storey warehouses really stack up for our markets?

No sector of the economy has been untouched by technology – and industrial property is no exception. Advances in technology have changed the way we perform daily tasks, buy the things we need, and inform ourselves – and the flow-on effects are being felt by all businesses, sometimes in ways we may not have predicted. For example, many businesses that relied in the past on widespread physical distribution networks as their competitive advantage, are now struggling to maintain margins and margin differentials across markets, as the internet offers price transparency and online shopping options previously unavailable to consumers.

Online shopping has changed the playing field fundamentally for retailers. And as consumers’ focus has shifted to delivery speed, there have been flow-on effects in the way goods are warehoused and shipped; logistics are managed; and to the kind of industrial property most in demand. Warehouses located close to consumers – or at the very least close to logistics and transport hubs with access to main roads – have become highly sought after. So it would make sense that in locations close to consumers, where industrial land is at a premium, multi-storey warehousing could offer a solution.

In Asia, land for development is at a premium

In Asia, for these and other reasons, multi-story warehousing has been on the rise for some time.

Population density is higher than here at home and greenfield sites are almost non-existent. As a result, sophisticated urban planning is a necessity. Competition between residential and industrial developers is fierce, yet because residential development is a higher density use of land, it is incumbent on planners to find ways of allocating to industrial land without losing sight of the highest and best use of a scarce resource.

The solution to the conundrum in many areas has been to move to multi-storey warehousing – and to build transport links to match.

But in Australia, market conditions are different

In my view, here in Australia conditions are such that multi-storey warehousing is still a way away in the future, for a number of reasons:

1. Urban planning has been done differently in Australia

Australian urban planners have typically sought to replicate cities’ CBDs in other, secondary areas of cities, in a way that is not usual in Europe or Asia. In Sydney, areas such as North Sydney, Campbelltown, and Liverpool have been developed and presented as CBD-alternatives, but specific spaces for industrial areas have not been set aside in a planned way.

2. Transport and infrastructure is not world-class in Australia

Multi-storey warehouses can employ large numbers of workers, which can cause a problem if transport is not efficient. Urban planning is of a very high quality in Asia. Most workers catch public transport, and as a result, industrial areas are well-serviced by public transport. In Australia, the situation is very different. Most workers in industrial areas drive to work – our cities are more spread out, and transport links are often inadequate or non-existent. More workers would require more car spaces, and put more pressure on roads, many of which are already struggling to cope with our increasing population. If multi-storey warehouses were to be built in place of existing traditional warehouses, the volume of cars and trucks needing to get in and out of such areas would pose a serious challenge to the road network.

The NSW State Government is currently investing significantly in infrastructure, but the majority of this is not specifically designed to service industrial areas. And in fact, the areas of Sydney that would most benefit from multi-storey warehousing – Chullora, Mascot and Silverwater for example – are already congested with traffic from local residents as well as existing industrial development. It’s difficult to envisage these areas coping with a massive influx of workers without a significant pre-investment into new transport infrastructure, and this will not happen overnight.

3. South-Sydney – a perfect candidate?

South Sydney has been touted by some as a suitable candidate for the first multi-storey warehouses in Australia for number of reasons.

Firstly, South Sydney is unique in its proximity to the CBD, the airport and Port Botany. However, residential development has risen sharply over the past decades, and over 1.7 million square metres of industrial land have already disappeared as a result, increasing demand for industrial sites and pushing up prices. 

What’s left of the industrial areas has to work much harder, and this is the basis on which multi-storey warehousing has been touted as an option.  

At the same time, the Australian Government has created (and owns) the Moorebank Intermodal Company, which has been established to develop an intermodal terminal in Moorebank, in Sydney’s south-west, with the aim of managing expected growth in freight moving through Sydney.

The project aims to create 6,800 jobs and to reduce congestion growth in south-western Sydney by using rail rather than trucks to move shipping containers, thereby reducing the number of trucks on the road. It’s unlikely, given the investment in this terminal, that further warehouses that rely on movement by truck will be developed in the near future.

In conclusion, Asia and Australia are very different markets when it comes to industrial property and its uses. There is a shortage of greenfield land for new industrial sites in Australia, but not to the same extent as Asia by any means. In addition, our population is located differently, in residential areas that are often located further away from industrial spaces than more densely populated cities. Public transport is also a problem in Australia. It has been developed to service residential areas, which means many workers in industrial areas drive to work.

Furthermore, from an ownership perspective, potential revenue from multi-storey warehouses is higher than that from a traditional warehouse, but in order to benefit from increased revenue there are myriad of operational challenges, which would require significant investment to address. Owners’ business models would need to change: currently, users of industrial space are charged on a per-square-metre basis, whereas multi-storey warehouses imply a through-put model, which charges according to the number of trucks or other vehicles moving through the warehouse. For this to be possible in Australia, road infrastructure around industrial areas would need to be much improved. If it isn’t, the sheer increase in congestion associated with moving many more vehicles through a small space would negate any benefits of the larger warehouse space.

The bottom line?

At this point in time, weighing up the pros and cons, it doesn’t look like multi-storey warehouses are the solution to space constraints in industrial markets in Australia. In fact, at present they seem to raise more challenges than they offer solutions.

So what does this mean for the industrial landscape in Australia now? My view is that there may well be a case for multi-storey warehousing in Sydney and in other major cities in time. And as AI, specifically robotics and automation, continues to change manufacturing and eliminate some jobs, friction points will also change - as will the challenges of warehouses. At present, however, it’s difficult to see multi-storey warehouses stacking up.

Therefore, until the landscape changes, warehouses in central locations, close to existing transport and logistics hubs, will continue to be in strong demand and offer a premium to users in Australia.

 

How will Amazon affect Australian property markets?

Friday, July 13, 2018

Will it live up to the hype? That’s what Australia has wondered since Amazon first opened its digital doors domestically in November. Since then, it appears to have encouraged national take-up by banning its US site for Australian customers, supposedly due to the new GST regime that taxes overseas purchases of under AUD$1000.

But for investors and property managers, eyes have been on the impact in other ways. What does Amazon’s big entrance really mean for Australian retailing and for industrial property markets – and how should investors consequently position their portfolio?

Regarding retail, with online shopping still only accounting for 5.4% of Australia’s retail turnover, it’s unlikely Amazon will completely disrupt retailing in this country. Nonetheless, the entry of the world’s most valuable retailer will undoubtedly contribute to the rise of online shopping and affect existing e-commerce, with Amazon’s prices 17% lower than other Australian retailers for apparel, 16% for sports goods, and 11% for electronics.

The elephant in the shed

Even if Amazon’s effect is felt more on prices and margins than on overall sales, which seems likely, there will still be a flow-on to property markets. Whether retail landlords suffer, and industrial landlords benefit in direct proportion, or whether the status quo remains largely unchanged is the big unknown.

E-commerce retailers like Amazon still require space, albeit of a different nature. Since its first distribution centre opened in Dandenong at the end of last year and a second has since been announced in South West Sydney, there’s been much talk about the size of the disruption and what the giant’s next move might be.

For an estimate, we can look at Canada which, despite its larger population, has similar demographics and relative physical size and population density. Amazon occupies 12 industrial facilities in Canada, adding up to around 300,000m2 of warehousing in total. With 600,000-800,000m2 of new warehousing built here each year, we can safely say that even if Amazon achieved the same penetration in Australia soon, it would still only occupy half the new warehousing built over the next year.

The bigger wave

But beyond Amazon, consumer expectations for convenience continue to reign. This means that investors and landlords are right to think seriously about how to tailor their portfolios to respond to a changing retail landscape.

The vast majority of online purchases pass through a warehouse or fulfilment centre before being dispatched to the consumer and it is this demand for warehousing that will underpin the demand for industrial property going forward. The move from “shop to shed”, which started far before Amazon’s entry and will continue for the foreseeable future, has seen demand for traditional retail space fall – and it will continue to do so as long as e-commerce grows.

The type and location of a warehouse favoured by retailers will also be determined by consumer expectations – particularly around delivery times. Three years ago, a three-four day turnaround was considered a fast delivery by a majority of consumers (63%): now just over a third would agree (35%). These expectations have a real effect on revenues, with online retailers reporting most sales abandoned at the checkout stage if expected delivery is two days or longer. So retailers that want to survive must shorten their delivery cycle.

The distance (and infrastructure) between a processing centre and its consumers determines these delivery times. More, dispersed centres are therefore preferable, with knock-on effects – two (smaller or medium-sized facilities located in different markets) have become much better than one (large facility located further away).

Using what we’ve got

But building new facilities in such locations is often not possible, because greenfield land in centrally-located, high-demand infill areas is very rare. This means that adapting existing properties is key to meet closer-to-urban demand. Proximity to a motorway access point and distance from the CBD will make the difference to delivery times – and therefore to sales volumes in online retailing.

In addition to location, there is frequency of delivery. If the growth of online retailing can be described as a move from shop to shed, what we are now seeing in the push for fast delivery is a move from the big truck to the small, nimble white van.

Finally, with increasingly sophisticated technology requiring higher investment, large financial commitments from businesses are in turn lengthening lease terms. Businesses can’t invest in expensive technology unless they are confident of their financial strength and expect to be operating for the long term. This means that, while fifteen years ago, 5-years was considered a long lease in industrial markets, and 3 years was usual, today the average lease length in our portfolio is five years, and leases of 7-10 years are not uncommon. This can only be a positive for industrial landlords.

Amazon Australian is a significant event for our market, but its utmost significance is as a marker of the evolution in retailing that will continue to drive demand for space change: affecting traditional retail space and industrial property markets alike.

Greater demand for warehousing – particularly smaller, more central, with good transport and longer leases – should be mirrored by portfolios that want to win over the next few years.

This media release was issued on 26 June 2018. Issued by Centuria Property Funds No.2 Limited (Centuria) (ABN 38 133 363 185, AFSL 340 304). The information in this article is general information only and does not take into account the financial circumstances, needs or objectives of any person. Centuria is the responsible entity of the Centuria Industrial

 

 

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