Demand for hi-tech logistics facilities close to major cities in land-constrained markets is driving up rents and “playing into the strengths” of industrial property juggernaut Goodman Group and its near $40 billion global portfolio, according to chief executive officer Greg Goodman.
“Globally, we are edging towards 99 per cent occupancy which is indicative of what is happening [in the sector], and of what we own, why we own it and where,” Mr Goodman told The Australian Financial Review as Goodman Group provided a strong September quarter update.
“In the major cities, there is more demand for logistics than can be supplied. Occupiers are trying to get more costs out of their real estate and put more technology into their buildings so they can turn over stock more quickly and deliver it more swiftly,” he said.
“This tech driver really plays into our strengths and where our properties are located. In places like Shanghai, London, Sydney and Los Angeles, there is a shortage of supply of modern logistics than can service customers in a really efficient way.”
Mr Goodman, a 30-year-plus veteran of the industrial property sector, said a structural shift was underway in urban markets driven by technology that would play out for the next 5-10 years.
“This is not just an arbitrage by investors on the bond price matrix, this is a long-term story,” he said.
As part of its September quarter update, Goodman re-affirmed its full-year earnings forecasts of earnings per security growth of 7 per cent and reported a bump up in like-for-like net operating income to 3.3 per cent from 3.2 per cent over the quarter across its $39.6 billion portfolio.
Shares not cheap
Mr Goodman said rental growth was occurring across its portfolio as its customers, which include the likes of Amazon, Walmart, Wesfarmers, DHL and Toll, invest in the evolution of their supply chains including “high-quality industrial facilities, close to their customers, that are designed to house their investment in technology”.
As an example of the demand-supply imbalance, Mr Goodman pointed to a market like South Sydney, where industrial rents were now over $200 a square metre compared with an average of about $120 per sqm as more older-style facilities are converted to apartments and data centres.
“Scarcity of sites in infill areas and growing competition from other uses is driving intensification of existing properties into multi-storey and higher value assets. This continues to be a theme across our portfolio,” Mr Goodman said.
Over the quarter cap rates for prime logistics continued to tighten with Goodman forecasting a yield on cost of 7 per cent on its $3.6 billion global pipeline of 75 projects, down from 7.2 per cent reported at the end of June. Mr Goodman said the tighter yield reflected the quality of its projects and that profitability remained “very strong”.
Peter Zuk, senior analyst at broker Shaw and Partners, said while Goodman’s guidance had been reaffirmed, he thought it would “surprise on the upside”.
“We remain of the view that Goodman is well placed to keep delivering attractive earnings growth over the medium term,” Mr Zuk said.
“From a valuation perspective, we do not see the stock as cheap (Goodman securities trade above $10, more than double their NTA of $4.64).
That said, Goodman is one of the few listed REITs globally that is focused on the industrial sector and we expect it will continue to receive investor support due to: its strong balance sheet, its attractive EPS growth outlook, and its leverage to the “growth in e-commerce” thematic,” he said.