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Cold storage in a heated logistics market?

April 3, 2017 / By

Traditionally considered a niche category of industrial assets and often overlooked, cold storage assets are now highly sought-after. Last year was a record-setting year for the industrial real estate sector in Australia. Record transaction volumes were recorded for the third year in a row, with sales transactions volumes totalling AUD 6.908 billion (US$5.280 billion) nationally. Cold storage sales volumes have also grown in recent years.

We identify two major reasons for this:

Positive top-down fundamentals
Food and beverage export and import growth over the past three years has been well above the 20-year average (Figure 1). In 2016, food and beverage exports totalled AUD 26.1 billion (US$20.0 billion) while imports totalled AUD 17.0 billion (US$13.0 billion). Growth in the value of cross-border trade has been supported by the depreciation of the AUD and recent free-trade agreements.

The expansion of cross-border trade is evident in our recent industrial take-up figures. Owner-occupiers and tenants such as PFD Food Services, Hello Fresh, Martin Brower, Rand and Newcold (a new entrant to Australia) have all taken up new cold-storage warehouse space in Australia. In Sydney, where residential developers are displacing industrial tenants from sub-markets such as South Sydney and the Inner West, a lack of smaller accommodation options will see growth in demand for secondary assets or a ‘flight-to-quality’ to high-end facilities.

Increased tenant retention and premium to market rents
In an environment where institutional landlords compete fiercely, owners have sought new measures to retain tenants. The specialised nature of cold storage assets encourages tenants to commit to longer lease terms (typically 15-20 years).

We have tracked over AUD 1.66 billion (US$1.27 billion) of cold storage transactions nationally since 2007. The ten largest sale transactions showed an average lease expiry (WALE), weighted by income, of 14 years. High-quality tenants, such as Coles, Woolworths, Metcash and Inghams were involved in all 10 transactions.

The specialised machinery and associated software required to run cold storage assets typically involve higher fit-out and maintenance costs than traditional warehouses.  In order to compensate for higher initial capital outlay, rents and escalations are generally set higher than market. For example, at a major industrial estate in Sydney’s Outer Central West, a speculatively constructed warehouse, leased to an online grocery retailer, achieved a 40 per cent rent premium in comparison to a standard distribution warehouse of similar size located next door, in the same estate. This is despite the 9,500 sq m warehouse/office facility being generically designed, then fitted out for refrigerated warehousing accommodation.

Investors seeking prime industrial property should consider cold storage/refrigerated assets. Given that investors find it increasingly difficult to replace secure income streams, these assets are also likely to continue to be highly sought after.

Figure 1: Australian Imports and Export Volumes: Food and Beverage
Chart1_3Apr2017
Source: Australian Bureau of Statistics

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