Key players move on industrial infill

Industrial property in Western Australia remains one of the most sought-after asset classes globally, and recent developments in manufacturing and trade are only amplifying its appeal.

 Recent research by CBRE shows Australia’s industrial market to be the tightest in the world, with Perth recording the most significant supply squeeze to July this year, with a 0.5 per cent vacancy rate reported.

Colliers International pegged that figure at 0.2 per cent, encompassing industrial space above 5,000 square metres. Rental prices for the asset class have grown by close to 20 per cent this year, after stagnating at less than $100/sqm for several years.

Growing returns amid burgeoning demand driven by mining, manufacturing, logistics and environmental initiatives is prompting property owners to add value to their existing assets or buy new stock where possible.

While there’s increased demand for DevelopmentWA land in its outlying industrial estates such as Henderson and Neerabup, areas closer to Perth are still considered prime stock by many.

For Julie Drago, who runs industrial property group Hero Properties and syndicator Realside Ovest, securing sites in Perth’s metropolitan corridor has become a key focus in recent months.

“We are now looking to acquire some existing assets, so we [have] redirected a little bit,” Ms Drago said.

Realside Ovest, a collaboration with Realside Property’s Mark Vonic, has primarily targeted assets further from the CBD, including Henderson and East Rockingham.

The fund is part way through constructing 20,000sqm of workshop space in East Rockingham and Wattleup on the back of pre-commitments from machinery group H-E Parts International and steel and concrete reinforcement group Bestbar.

Ms Drago’s family business, Hero Properties, holds stock in Kewdale, Welshpool and Forrestfield, with some assets in Forrestfield transferred to Ovest.

Realside Ovest's property at 49 Nardine Close, High Wycombe. 

The fund is also undertaking due diligence for a 1.5-hectare vacant site in Kewdale, where it intends to bring new stock to the market.

“We are still looking for the infill sites, for little pockets everywhere … between one-to-two-hectare infill development sites, we’re interested in looking at that,” Ms Drago said.

She said while industrial property near Perth was in short supply, recent changes to market conditions could result in more opportunities in these areas.

“I think there’s going to be more coming to the market,” she said.

“The recent interest rate rise has probably repositioned where we saw the yields before … I don’t think they’re going to be as tight as what they have been, so we see some huge opportunities coming our way.”

Ms Drago explained that developing industrial land in infill areas required a different approach than in outlying corridors.

“The rates you pay for the land out there [infill] are a lot more expensive, so the only way you can stack it up is if you can get more plot ratio,” she said.

“Traditionally, you would buy a 5,000 square metre piece of land, put a 2,500 square metre building on [and] you used to be able to get enough return to pay for the yard too.

But nowadays, when you’re starting to pay more for land, you’ve got to go ‘okay how do I stack that up?’ “[You can] stack that up by putting more building on there [or doing] mini-industrial estates where we’re sharing it out … or you can find operators that don’t need a lot of yard.”

Late last year, industrial property yields in WA approached an all-time low of 4 per cent.

This reflected the strong appetite for industrial land and was coupled with a record $1.96 billion across 972 transactions in WA’s industrial market in 2021, according to Ray White data.

This was largely driven by institutional giant Dexus making a play into WA’s warehouse and logistics space by acquiring Jandakot Airport and the surrounding industrial land in a deal with Cbus and the separately listed Dexus Industrial REIT.

Knight Frank’s recent national industrial market report showed that yields for Perth’s industrial property were between 4.25 and 4.75 per cent for prime assets.

It also showed that WA had the fastest rate of rental growth nationally, at 18.8 per cent year-on-year.

Realside Ovest's 4 Lodge Drive in East Rockingham. 

Owner landscape

Initially dominated by a handful of prominent families, the ownership structures of WA’s industrial land have shifted in recent years, with increasing interest from institutional investors.

Recent research by real estate group Cygnet West shows the bulk of the transactions in the state’s industrial market in the past five years involved institutional groups.

Cygnet West head of industrial agency Greg O'Meara told Business News the interest from real estate investment trusts had grown significantly since he started working in the sector 16 years ago. “When I started, the list of ownership by REITs institutions was pretty thin,” Mr O'Meara said.

“WA was a bit of an afterthought, and those who owned property here almost owned it by default; it might have been part of a different portfolio nationally [but] that’s changed.”

Mr O'Meara used Charter Hall as an example, with its purchase of the Coca Cola factory in 2018 on a 15-year leaseback and the Brownes Dairy in Balcatta in 2020.

“The amount of property owned by the REITs certainly has grown as a percentage,” he said.

Mr O'Meara added that he did not see a slackening off in the industrial market, as he believed it would grow organically in line with Perth’s population.

Syndicators including Westbridge Funds Management and Realside Ovest also have a strong foothold in the space.

Private players who have held onto pockets of industrial land for decades, including Applecross-based Eastcourt and Kewdale’s Coxon Group, are benefiting from strong capital growth.

Hero Properties also falls into this camp, founded in 1970 by Ms Drago’s parents Nat and Emilia Taddei.

Eastcourt chief executive Tom Oosterhof told Business News the company’s acquisitions had been few and far between during the past decade, as competition for industrial space intensified.

However, the group bought land in Hazelmere in 2019 and is in the process of developing that into new industrial stock, together with its Kenwick assets.

“The policy around land supply with industrial property has always been around looking for the next area, whether it’s far north or far south,” Mr Oosterhof said.

“But at the end of the day it’s the occupiers that dictate where they need to be.

“It’s just the reality that they need to be in well-serviced locations … Kewdale, Welshpool, Canning Vale and those sorts of well-established industrial areas are always going to remain relevant by pure fact of their utility for the occupiers.”

Tom Oosterhof is developing about 35 hectares of industrial in Hazelmere and Kewdale. Photo: David Henry

Mr Oosterhof said tenants’ demand for sites in infill locations had been a significant driver of Eastcourt’s strategy since the 1990s.

“Over that period of time we’ve been strategically acquiring areas of Greenfields land that are well located in closer proximity to the traditional core areas,” he told Business News.

He said Eastcourt was in the process of bringing about 25ha of land in Hazelmere and Kenwick to the market, which would provide up to 100,000sqm of net lettable area to industrial operators.

“That’s really a function of the great demand for space amongst operators, particularly in warehouse, transport and logistics, and having the land available and bringing it to market at the right time,” Mr Oosterhof said.

Expansion

Realside Ovest has raised $121 million via its first two funds since May 2021, to acquire 35ha of industrial property comprising 128,000sqm of net lettable area across 10 properties.

Its tenants include Steelforce, Mader Group, Elders, H-E Parts and Tianqi Lithium.

The funds, dubbed Ovest 1 and Ovest 2, have a combined end value of close to $280 million, with an 8 per cent cash return and 14 per cent initial rate of return over five years.

The group plans to launch a third fund before the end of this year.

Ms Drago explained that moving into the syndication space aligned with her company’s plans to grow into national markets, with assets in South Australia and prospective opportunities in Brisbane.

“The syndicate model gave us an opportunity to expand [to] a larger footprint, but also the risk appetite of the family board wasn’t there anymore,” Ms Drago said.

“My mum and dad retired, and they got to the point where they said, ‘We’re quite happy with our portfolio, we don’t really want to grow anymore’.

“I want to grow the model, [and] when I met up with Mark Vonic, that gave us the opportunity to be able to take this on a national basis.”

Ms Drago said a lot of Realside Ovest’s growth stemmed from its established clients looking to expand their footprints, including to other states.

“Our growth has been organic, because it’s coming from our existing tenant base who come to us and ask if we can help them in Brisbane or Sydney, for example,” she said.

The fund has land under option in Geelong, led from tenant demand in WA.

“It’s us trying to help our tenants on a national basis, [which] is helping our growth.

To have that pre-commitment in place really makes it easier to stack a deal up,” Ms Drago said.

Other players Adrian Fini and Ben Lisle-led developer Hesperia has taken a similar approach to DevelopmentWA in preparing industrial land for market.

Its 72ha Roe Highway Logistics Park in Kenwick, developed with Tattarang, was reportedly purchased by Charter Hall earlier this year, but the parties involved would not comment on the mechanics of the deal.

The company has brought more than 280ha of industrial land across six estates to the market and secured a further 150ha to deliver further supply.

Hesperia director Judd Dyer said the company was responding to increased demand from investors for core located logistics assets with strong environmental, social and (corporate) governance credentials.

“Our Roe Highway Logistics Park is one of our most successful industrial precincts to date, from both a sustainability and commercial perspective, [and] the recent investment by Charter Hall Group is recognition of this,” Mr Dyer said.

“Demand for industrial property remains extraordinarily strong and we see no signs of this dropping off in the near term.”

 Institutional giant Dexus, which manages $1.1 billion of WA industrial land, mainly in Jandakot, reported strong leasing activity in its industrial assets in its recent full-year results.

Dexus head of industrial development and transactions, Chris Mackenzie, signalled further expansion of the company’s industrial footprint in WA after its entry to the market with Jandakot last year.

“We actively look for opportunities that cater to the specific and diverse needs of our customers across our national footprint and are currently looking at complementary sites to our Jandakot holding,” Mr Mackenzie told Business News.

“The WA industrial market shares similar trends to its eastern counterparts, with historically low vacancy driven by online operators expanding their operations in response to the e-commerce trend.”

He said the group anticipated strong ongoing enquiry, which would translate to rental growth.