Structural tailwinds favour this side of property, says Charter Hall

If you listen to the market noise, property is taking a beating. While quarter-acre blocks may be front of mind, listed property as a whole fell 11.4% in 2022 (based on the S&P/ASX200 A-REIT Accumulation Index). It’s not the whole picture though and certain sectors continue to consistently perform. Industrial property is one of them. This part of the market is benefitting from several global trends and is far less tied to challenges caused by rising interest rates.

“This has led to vacancy rates across the industrial sector being less than 1% nationally which is currently the lowest global vacancy rate! In turn, this has translated to a 22% growth in Australian industrial market rents over the last 12 months,” Bennett says.

It therefore shouldn’t come as much of a surprise that the Charter Hall Direct Industrial No.4 Fund was the top performing property fund in Livewire’s database for 2022 (you can read the full list here). It returned 8.9% for the year and offered five-year performance of 11.7% pa.

Bennett expects the trends industrial property has seen in the past couple of years to continue to benefit it this year.

So what does investing in industrial property actually look like and how should investors be evaluating properties? 

One important criterion is proximity to key infrastructure. In this Q&A, Bennett discusses why this is important and some of the properties in the Charter Hall Direct Industrial No.4 Fund. He also covers the themes and opportunities he is monitoring in 2023.

1. Could you pick three elements of your investment process and explain how they contribute to the Charter Hall Direct Industrial No.4 Fund investment performance?

1. We buy industrial and logistics properties that are located close to key infrastructure, such as roads and highways, ports, airports. They’re also underpinned by high underlying land values. These are the locations that attract the highest quality tenants and where tenants want to be.
2. A key strategic advantage is Charter Hall’s ability to acquire the best properties for our funds. Charter Hall has the largest transaction team in the country and these property experts are focused on sourcing, finding and acquiring quality and in-demand industrial properties. We have the best deal sourcing capability which means DIF4 benefits from a fantastic acquisition pipeline. Additionally, Charter Hall is the largest manager of commercial real estate in the country, and we are actively sought out by sellers and tenants who want to do sale and leasebacks and private vendors and agents who show us buying opportunities that others in the market don’t even get to see.
3. Another strength of Charter Hall is our focus on developing strong tenant customer relationships. To achieve this, we have property experts located in all the major states of Australia where we own the assets. Having happy and engaged tenants opens the door to outcomes that benefit both our tenants and investors, which in turn maximises investor returns. Examples of this include agreeing early lease extensions to secure long dated income and rolling out solar/energy initiatives to improve the environmental footprint and appeal of our properties to tenants.

In summary, if you are making a property investment make sure the Manager has access to a strong deal pipeline and have a team of property experts located on the ground where they own properties. You simply can’t manage a property investment from a different location.

2. Which properties have made the most meaningful contributions to your performance over the past year and why?

There are strong structural tailwinds which industrial property has been, and we believe will continue to be the beneficiary from, including the rise of e-commerce, increasing use of automation, a global trend of the onshoring of supply chains and a growing Australian population. This has led to vacancy rates across the industrial sector being less than 1% nationally which is currently the lowest global vacancy rate! In turn, this has translated to a 22% growth in Australian industrial market rents over the last 12 months. As a property owner, low vacancy and growing rents are nirvana.

If we want to get into specifics then our best performing assets in DIF4 included properties located in the Sydney (Eastern Creek and Ingleburn), Melbourne (Altona) and Canberra (Hume) industrial markets.

3. What would trigger you to sell a property?

You always need to consider selling properties – at least the good managers take that approach. Active portfolio management is a key element of our investment strategy at Charter Hall. The team reviews the property portfolio on an ongoing basis, creates strategic asset plans that cover leasing, capital expenditure, ESG requirements, risks and opportunities. Following that process, or when we believe value has been maximised, assets are then sold.

In 2022, DIF4 sold several assets identified as non-core to the portfolio. They were sold for around 20% more than their carrying or book value and provided investors with strong investment performance across the life of DIF4’s ownership.

4. Could you talk through some of the largest properties in the fund and why you chose to invest in them?

DIF4 now has a $3.5 billion property portfolio and it is important to note that the fund has strong diversification across its portfolio and is 100% leased with zero vacancy. Many of the fund’s major tenant customers are very well-known iconic Australian companies that have significant market-share across their industries and strong balance sheets. These tenant customers include: the Australian Government, Kmart, Bunnings ( both Kmart and Bunnings are owned by Wesfarmers (ASX: WES), Woolworths (ASX: WOW), Coles (ASX: COL) and Visy.

5. Which properties worked against you in 2022 and do you expect this to change in 2023?

No properties materially worked against us in 2022. We didn’t have any material tenants vacate our properties, we did not provide any rent relief off-the back of COVID, and valuations were stable to slightly up. Having said that, some properties obviously didn’t grow as strongly as others.

The biggest headwind we faced, and which applied to most investment classes, was related to the rapid increase in debt costs. However, this was partially mitigated by our long-term debt facilities and hedging of interest expense.

6. 2022 was difficult for many investors, do you expect 2023 to deliver better results?

Looking into the future is always a difficult question to answer. DIF4 produced a solid total return of positive 8.9% in the 12 months to 31 December 2022 and has achieved an 11.7% p.a. return since it launched back in 2016 – and we are pleased to say this outperformed the funds benchmark over all-time periods. We do note, past performance is not a reliable indication of future performance.

Even with dramatically higher interest rates over the last six months we haven’t seen this impact industrial asset pricing in a material way for most industrial properties. The reason being is that whilst the cost of capital for a purchaser has increased, it has in most cases been offset by the strong 22% market rental growth in the Australian industrial market over the last 12 months.

We think that 2023 will provide an opportunity to pick up some great assets that will add to the quality of the DIF4 portfolio and hopefully without as much external competition for them as we have seen in the last few years.

7. Are there any opportunities you are monitoring or major themes you expect to benefit the property portfolio in 2023?

The industrial sector has been the beneficiary of some enduring structural tail winds and we believe the industrial and logistics property sector is well positioned to continue to benefit from. For example, e-commerce will continue to grow, which is a continued positive factor for industrial tenant demand.

ESG is becoming a greater focus for both investors and tenant customers. 

At Charter Hall we deliver sustainability initiatives across our portfolio (including solar and LED lighting). Ultimately, not only is ESG the right thing to do but commercially it is a requirement because the tenants that DIF4 targets have a strong preference for properties and managers that help them meet their corporate objectives around ESG.

You should expect to see us continue to curate the property portfolio and sell off smaller non-core assets where value has been maximised and to take advantage of less acquisition competition in the market to pick up some great properties for the fund.

Managed Fund

Charter Hall Direct Industrial No.4 Fund

Australian Property

View

Never miss an insight

If you're not an existing Livewire subscriber you can sign up to get free access to investment ideas and strategies from Australia's leading investors.

You can follow my profile to stay up to date with other wires as they're published – don't forget to give them a “like”.