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