Industrial Real Estate Investing Guide for Beginners

Industrial Real Estate Investing

What is industrial real estate?

Industrial Real Estate can be broadly defined as those properties which accommodate industrial activities including production, manufacturing, assembly, warehousing, research, storage and distribution of goods.

There are specific areas zoned in cities designated to industrial real estate, which controls where these spaces can be constructed and operate. This is to make sure that the site’s activity does not disrupt businesses or residences that might have otherwise been placed nearby – in effect cordoning off industrial activity from residential and commercial offices.

The location of industrial property is highly influential on the success metrics of a business located there due to its impact on overheads, production and distribution. With the increasing influence of e-commerce and change in customer expectations, such as same day delivery, it is becoming even more important for logistics users to strategically locate their hubs closer to more densely populated areas.

Why invest?

Why invest in industrial real estate?

In recent years, the demand for industrial property has increased, with the growth driven by e-commerce, food logistics and infrastructure investments. The New Zealand economy has proven resilient and is well placed to benefit from strong GDP growth into 2022. This is expected to further benefit the industrial real estate sector.

Additionally, land in desirable, centralised locations for industrial real estate development is becoming scarce. This in turn puts pressure on supply chain efficiencies. Given that half of supply chain costs come from transport, and only 5% from occupancy costs, finding a location which will minimise those costs is key – this means a location with good access to suppliers and customers is key.

These factors are expected to provide a continued strong tailwind to the industrial real estate sector.


 

How to invest in industrial real estate

If you want to ride the wave of industrial property investing, there are several of different options available to you as an investor, being:

industrial buildings Purchase a direct whole industrial property. This can be cost prohibitive to individual investors given the relatively high value of assets.
Property fund managers or syndicators offer the ability to buy a “share” in an asset in the form of an industrial property fund – this usually has a minimum investment amount.
Listed entities where you buy and sell securities/shares in a trust on the NZX.

Buying a direct property as a sole investor obviously would carry more risk due to the high cost of exposure to the individual property.

By investing via an unlisted property fund or in a listed REIT, you are placing your trust in the property fund manager and responsible entity. Property fund managers are regulated by The Financial Markets Authority (FMA) and you should always make sure they have longevity and a strong track record.

What are the main drivers behind the changing face of industrial real estate in New Zealand?

There are a number of larger economic and social themes which are creating significant change in industrial markets generally, with a flow-on effect to the type of industrial property most likely to be in demand.

eCommerce

eCommerce has changed traditional retailing forever – warehouses are the new source of goods, and the effect has been felt in traditional bricks and mortar retailing space – which has declined in line with increasing demand for industrial space in which to store, pack and ship packages. The most recent e-commerce industry report published by NZ Post1 notes the increased online spend over 2020, a trend which was accelerated by Covid-19. According to this report $5.8 billion, or 11% of total retail spend was done online. Despite this strong growth in online spend, comparisons with more established global e-commerce markets such as the UK  and US (>20%) indicate that there is still plenty of room for growth.

Graph source: Bayleys | Property Council New Zealand2

Logistics

The need for faster, more efficient delivery of packages has led to increased tenant demand for metropolitan/centralised industrial sites. This has continued to position industrial as a highly desirable investment asset class.

More than 90% of the freight is transported by road in New Zealand, and 42% of the freight is transported within the “golden triangle”. The golden triangle region consists Auckland, Hamilton, and Tauranga – which account for 50% of New Zealand’s economic output and is home to half of the country’s population. There is an expected population growth of 31% by year 2043, resulting in an unprecedented demand for freight handling facilities in the golden triangle3.

At the same time, demand for large industrial distribution centres, as the first sorting point, particularly for imported goods, is also on the rise.

Manufacturing

The final driver of changes to the industrial real estate market is the renaissance of manufacturing. Clean manufacturing is on the rise, as a result of the so-called ‘fourth industrial revolution’, or the use of transformative technologies to connect the physical world with the digital world.

Trends such as the use of advanced automation and robotics, machine-to-machine and human-to-machine communication as well as artificial intelligence and machine learning are helping manufacturers control two of their longstanding challenges – high labour costs and distance to markets.

Real-time access to production information, logistics and monitoring means better connectivity between customers and supply chains, as well as greater flexibility to produce differentiated products and services on a small scale.

According to a report by global management consultancy Bain & Company, automation powered by the rise of artificial intelligence, will be a key driver of change4.


1 “The Full Download: 2021 New Zealand eCommerce Review”; NZ Post, 2021
2 “July Market Outlook 2021”; Bayleys | Property Council New Zealand, July 2021
3 “New Zealand Freight and Logistics Market – Growth, Trends, COVID-19 Impact, and Forecasts (2022-2027), Mordor Intelligence
4 “The Collision of Demographics, Automation and Inequality”; Bain & Company, February 2018

What are the different types of industrial real estate?

There are broadly four kinds of industrial real estate:

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1. Distribution Centres

Specialised hubs that deals with the storage and shipping of goods.

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2. Cold Storage Facilities

Temperature controlled, refrigerated facilities for food or other perishable supplies.

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3. Transport Logistics

Where all activities relating to transport, logistics and the distribution of goods are carried out.

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4. Manufacturing

Facilities where the primary purpose is the manufacture or processing of goods or materials.

Where to invest in industrial property?

It’s always critical to do your research if you are choosing to invest in industrial property – or any type of property for that matter. Remember the golden rule when it comes to property of ‘Location, location, location’.

Different cities will have different levels of activity and infrastructure spending which may or may not support the sector. Additionally, macro-economic trends can also impact on your investment’s short and long term returns.

The current larger economic and social themes include the eCommerce boom, the renewed logistics sector focus, which are impacting on the need for centrally located industrial properties.

All of these factors should be taken into consideration when deciding where to invest in industrial real estate.

Auckland

According to the most recent Colliers report, Auckland is the most active industrial market in the country, approximately accounting for one-third of the sales in recent years1. Auckland’s industrial leasing market has shown resilience in the face of extended periods of trading restrictions. The overall vacancy rate is projected to have fallen in the six months to August 2021 to 1.9%, from 2.2%2.

With leasing options becoming harder to find, pressure is building particular around the prime end of the industrial market. This is evident in the increased interest in the industrial sector, specifically in the Waikato, Bay of Plenty and Canterbury regions, which are largely limited in sales activity by the number of properties being released to market.


1 “Auckland Industrial Report | Second Half 2021”; Colliers, December 2021
2 “Commercial and industrial sales likely topped $12B in 2021”; Colliers, January 2022

Industrial Real Estate Investment

Centuria NZ Industrial Fund

CNZIF's purpose is to provide investors with the opportunity to invest in a portfolio of strategically selected industrial real estate assets that provide both tenant and location diversification within this strongly performing sector of the New Zealand property market.

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