KordaMentha Real Estate is zeroing in on value-add opportunities in the industrial property space.
“We want to invest in value-add industrial properties, particularly at the moment when there’s a fair bit of instability in the markets,” KordaMentha Real Estate’s Tom Korda (pictured) told ANZPJ.
KMRE acquired six warehouse units in one line in the outer-east Melbourne suburb of Bayswater last month.
Together, the six separately strata titled units offered a lettable area of 2,512 sqm; weighted average lease expiry (WALE) of 1.7 years; and a passing income of circa $294,000.
Korda said the assets offered capital preservation because they were buying them below replacement costs, as well as potentially healthy yields once the rents reverted to market rents.
“We see them being potentially 30% to 40% under let – maybe more – just given the leases were about two to three years old,” Korda said.
“The WALE is about 1.7 years, so once those leases start turning over, you’ll get some pretty good rental reversion.
“We are looking for value in real estate, particularly at the moment when you can’t rely on interest rates and you can’t rely on the financial markets to help you out, so you’re really looking at the intrinsic value of the property.”
KMRE’s industrial focus has been centred around value-add returns, having already invested in assets across Melbourne and the Gold Coast.
The business bought a cold storage facility in Laverton North in Melbourne’s west for $21 million through a sale-and-leaseback transaction in mid 2019 and then divested it at a 40.3% net internal rate of return (IRR) last year.
The property had an 8,600 sqm building leased to 2026 on a 3.7-hectare site in the emerging Yatala Enterprise Area between Brisbane and the Gold Coast.
“We bought it at a 5.5% yield, but the site coverage was only about 25%,” Korda said.
“We could develop another 8,300 sqm on the front of the site, so we felt like we got that land at the front at effectively for free.
“We’ve actually got a 15-year pre-lease on the front site and we’re going start building next year for that tenant.”
Potential headwinds for industrial
Korda said there was a lot of rhetoric about industrial rents rising off the back of low vacancy, low supply and high levels of take-up.
“There is going to be rental growth, but I don’t think it’s going to grow as much as the market believed 12 months ago,” Korda said.
“Mainly on the basis that businesses sort of tap out at a certain level of cost. Rents are a large portion of costs for a lot of businesses and there’s a point where businesses will start to push back.
“Online take-up is increasing and has improved in Australia. It’s well behind the US, so it can continue to improve… but if you head into a potential recession or some turbulent times, the first thing that comes back is retail spending.
“While people are adopting online shopping more, they might spend less money. So, in terms of the required space for these large distributors… if spending decreases, the forecast for their space might reduce.”
Korda said the supply chain issues seen over the past two years as a result of the COVID pandemic may start to stabilise, which may also impact space requirements.
“If supply chains normalise, as in things start moving around the country and the world faster, then it doesn’t require people to store goods for as long because they’re not storing for ‘just in case,’ they might revert to a better blend of ‘just in case’ and ‘just in time’,” he said.
Korda said there were certainly opportunities to buy properties that were under-rented at the moment and capture the reversion to today’s market rent.
Industrial and logistics outlook
Despite the potential headwinds for industrial and logistics property, Korda said the investment outlook remained strong with a lot of institutional capital targeting the sector.
“The amount of money after industrial is something that I don’t think the Australian real estate market has seen before across the board,” Korda said.
“So that’s going to put a floor on where values go. There’s going to be some buffer compared some of the riskier asset classes or some of the asset classes that were more affected by COVID.
“In terms of future valuations, there’s going to be a softer landing probably back to values that were still at record highs one or two years ago. But ultimately demand is still really high.”
He said the leasing market was great, but warned of demand coming off if there was some recession or if supply chains returned to normal.
“I’m still bullish on industrial, but I think the biggest issue right now is finding value in certain assets… it’s quite hard to justify some of the yields when your interest rates are leaning towards 5% to 6%,” Korda said.
“In some cases, you might not be hitting the Interest Cover Ratio covenants from day one. So you’ve got to adjust your pricing expectations accordingly to make sure that you are complying with the requirements that the banks set, given the leverage you generally require on value-add to core-plus investments.”
KMRE is the multidisciplinary property advisory and investment arm of KordaMentha, an advisory and investment firm with almost 400 specialists across Asia-Pacific.