Industrial property is characterised by large warehouses on a city’s outskirts. As an investment option, it’s easily overlooked in favour of glossy alternatives. Over the last two years, however, we’ve witnessed growth in demand for industrial property assets from tenants and investors alike. Despite its simple exterior, industrial property’s solid foundations, rooted in essential trades such as manufacturing, logistics and mining, have seen it through trying times and made it one of today’s most attractive asset classes.
Notably, the industrial market has sustained high levels of investment volumes throughout 2022, further supporting the point that industrial property is a strengthening sector in Australia.
An ‘essential worker’ of the investment sphere
Over the last two years, we have witnessed the rise of a new e-commerce landscape, in the wake of major economic impacts such as COVID-19, natural disasters and ongoing geopolitical conflicts, including the Russia-Ukraine conflict. While the global trend toward digitisation was already prevalent, the pandemic forced countless businesses to move online sooner than expected.
The accelerated growth of e-commerce and restructuring of supply chains, has caused demand for warehouse and logistics space across Australia to soar.
Industrial property has been largely immune from the falling rents and vacancies seen in the commercial, office and retail sectors in recent years.
The national industrial and logistics vacancy rate across Australia’s five major cities has been driven to a historic low of 0.8%, paving the way for rental increases and a reduction in tenant incentives and rent relief.
A recent report from CBRE has indicated that, due to weather and supply chain disruptions, some new development projects have been delayed until 2023, indicating demand for industrial space will continue to outstrip supply.
A property sector like no other
However, while the global pandemic may have brought attention to it, industrial property has long been a solid investment option.
Tenants have specialised needs, so industrial properties can generally secure longer lease agreements. This provides an added level of stability for investors. They are also often signed on net leases, meaning tenants bear costs that would otherwise be paid by the owner, such as operating costs, land tax, insurance and maintenance.
However, the challenge for investors is that unless you have a few million dollars to invest, industrial property is an almost unattainable investment option. That’s where property trusts come in.
Opportunity to invest for a fraction of direct ownership cost
Property trusts are an alternative investment option that makes industrial property, and many other property sectors, attainable for investors at a fraction of the cost of direct investment.
Instead of committing the substantial upfront capital that would be required to purchase the property on your own, and committing time and additional funds for management, expenses and capital improvements, you can purchase units in a property trust.
Property trusts pool your money with that of other investors to purchase one or more properties on behalf of the trust. They aim to provide regular distribution payments throughout the life of the trust, derived from rental income.
In the current environment, industrial property can provide competitive yields that are difficult to achieve from other asset classes, provided the property has a good tenant on a longer-term lease.
For example, the Trilogy Industrial Property Trust paid investors an average of 7.50 CPU p.a.* annualised for the 12 months to 30 September 2022.
Potential for capital growth
In unlisted property trusts, your capital remains invested until a withdrawal offer is made by the trustee or at the end of the investment term. This means investors have the opportunity for potential capital growth.
Low vacancy rates have been translating into strong capital appreciation, with industrial land prices in west Melbourne, for instance, more than doubling in the past four years, according to recent data from CBRE.
It’s important to note, however, that distributions are not guaranteed, nor is the return of initial capital invested.
But that’s not all. Property trusts offer several additional benefits.
By pooling capital, multi-asset industrial property trusts hold a range of properties, offering diversification across a range of property types, locations, tenants, industries, and importantly, lease terms.
Like many things in life, investments come with risk; so, it’s important that not all your investment ‘eggs’ are placed in the one basket. A diversified investment strategy aims to lower your portfolio’s risk, while achieving more stable returns.
Property trusts may also provide a tax-effective income opportunity. The income distributions you receive may include tax-deferred amounts due to non-cash deductions of tax concessions available to property trusts.
Tax liability for these amounts is deferred until your units in the trust are redeemed and are therefore subject to capital gains tax rather than income tax.
Depending on your marginal tax rate and individual circumstances, this may reduce the total tax you may otherwise have paid. We recommend you speak to a taxation adviser before making any investment decision.
When you invest in a property trust with an experienced fund manager, they leverage their expertise in investment and property to source and acquire properties that meet the trust’s stated investment and risk management criteria.
They also take care of the ongoing management for you, including maintenance, administration and rent collection, any capital improvements, valuations, the sale of assets and preparation of tax-related statements.
Our approach to investing
The Trilogy Funds approach to acquiring properties for our Trilogy Industrial Property Trust (Industrial Trust) is grounded in behavioural economics. We take a contrarian approach to acquire assets that are expected to increase in value over time, even if they are currently out of favour.
The Industrial Trust’s first assets were purchased close to the bottom of the property price cycle in Mackay, Queensland, an area that had suffered from the mining downturn of 2014. We saw its potential to provide value, and it has.
Since its launch in 2018, the Industrial Trust has grown to $193 million^^ in assets under management, with a diversified range of assets across both regional and city areas throughout Australia; with a range of quality tenants and lease terms and industrial asset types.
*Average net distribution amount for the 12 months to 30 September 2022. Net distributions are variable each month and are net of management fees, costs and assume no reinvestment. Distributions are paid monthly in arrears. Please note, past performance is not a reliable indicator of future performance.
^^As at 30 September 2022.
This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the Trilogy Industrial Property Trust ARSN 623 096 944. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 30 September 2022 and by considering the Target Market Determination (TMD) dated 30 September 2022 for the Trilogy Industrial Property Trust ARSN 623 096 944 available at www.trilogyfunds.com.au. The PDS and the TMD contain full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.