From AI to rising interest rates, these properties are benefitting from megatrends

Stock market investors are very familiar with mega-trends - but property investors are also catching on.
Hans Lee

Livewire Markets

There will always be sceptics but mega-trends help provide a narrative for investors to make big money. You need not look further than the huge surge in interest in artificial intelligence (AI) related investments for proof of this. 

But it's not just the stock market that is being radically upended by the AI story. Property is also being shaken up by the narrative - specifically in industrial property where the need for innovative and advanced e-commerce, storage, and warehousing solutions has become more pronounced. Someone who knows this all too well is Clinton Arentz, Head of Lending & Property Assets at Trilogy Funds. 

Arentz, who helps run the Trilogy Industrial Property Trust, has seen this huge growth in demand first-hand. It is a demand growth profile which, by the way, has not been perturbed by rapidly rising interest rates (in fact, rising rates have helped the Trust). 

In this edition of The Pitch, Arentz faces our questions on the effect that megatrends like rising interest rates, AI, and immigration are having on the industrial property landscape. Then, he shares a story about an investment that he's made on behalf of clients which proves why this part of the property market is not one to sleep on.


EDITED TRANSCRIPT

How has the post-COVID environment of higher interest rates affected the opportunities in industrial property?

Arentz: You've got to take a longer-term view. I mean, we're moving back to the long-term interest rates we're used to seeing over multiple previous decades. So I think it's more a stabilisation of the market than anything. I mean, going through the COVID period when rates were so low was an unnatural period to go through. That drove yields down and made it harder for us to acquire properties. We're seeing more properties come to market now at attractive yields, so we're definitely in a buying frame of mind. 

Lee: So the normalisation of interest rates is a good thing?

Arentz: 100%, yes it is, because that's what helps free up the yields a little bit with tighter interest rates, capitalisation rates compress, and of course, the returns to investors are less. So under this scenario, we'd see a rising investor return environment coupled with very strong demand and rising rent to support long-term values. 

Immigration is one key demand driver for residential property rentals. Do you find that's also a trend that's probably a tailwind for industrial property? And if so, how? 

Arentz: Yes, it is a tailwind, absolutely, for two reasons. Firstly, all of those migrants, bless their hearts, creating demand which takes you back to more requirements for industrial space. 

Secondly, they also fulfilled an important shortage of workers that we've suffered chronically from for the last few years during COVID and post-COVID. So companies that wanted premises but couldn't get the staffing to man those premises are now free to move forward securing premises and expanding their businesses. 

How do you as an industrial property fund manager look at the AI or the big data trend?

Arentz: We see that more as an e-commerce function, which drives the demand for space. As I've mentioned, e-commerce creates a lot of warehousing demand in that sense. And of course, the warehousing is getting more sophisticated and that's where AI kicks in because some of these warehouses now are laser-level, they need much higher roof heights, they are all robotically operated, and they are all tuned into very modern practices. And so these businesses of ours are very much trying to stay ahead of the curve on that technology.

Is there an asset that you have invested in that maybe demonstrates how you are taking advantage of some of those mega-trends? 

Arentz: What we typically like to find is a land-rich asset. So these are large warehouse premises. It might be multifunction uses within the industrial category, but if they're land-rich and the tenants are growing well, we can often expand premises. 

So twice now, we've secured assets with surplus land that we could build additional space for those tenants, renew their leases, improve the rental income from those tenants, and create a more sustainable, viable, long-term tenant for the trust. 

I've got one in central Queensland, which was a manufacturing company. Their growth was such that they needed a 50% increase in floor space. We had the land available to do that on the immediate block, and the same was true in Carrum Downs in Melbourne, where we did a similar thing for an international company. It is a large bedding manufacturer that imports and distributes from that location. We were able to increase the size of those premises considerably as well. Once again, renew the lease to a new longer term and improve the rental [term] accordingly. 


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Hans Lee
Senior Editor
Livewire Markets

Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...

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