PART 2: The Capital

R E S E T 2 0 2 2

PA R T 2 : T H E C A P I TA L

There are concerns over how quickly pricing in the industrial sector has increased over recent years, especially since the pandemic, though overall the outlook remains positive. Many believe the sector remains undersupplied while the more conservative expect slower, but positive growth and few believe the sector is too hot to invest

which supports investor “averaging in” mentality. Investors targeting industrial development need to have a clear understanding of construction costs. Raw material pricing has increased, as have labour costs. General tightness in the availability of materials and labour have also pushed out construction times, further contributing to an overall increase in project costs. While this is a growth sector, largely underserved in many markets, return metrics still need to meet current input development costs.

INDUSTRIAL Outside of office assets there are two front-of-mind sectors: industrial (including its emerging sub-sectors) and alternatives. The industrial sector has a buoyant future, driven by a bourgeoning middle class that is forecast to increase by 1.5bn people (2020-30), which will drive the need for goods and services. There is clear evidence of China+ manufacturing strategies benefitting markets in South East Asia and India. Here, there is no shortage of demand, though rental growth is highly variable as developers compete to secure landbanks and bring product to market. In mature markets, there has been considerable cap-rate compression which has helped lift property book values. To an extent, this has been supported by prime rental uplift – arguably most visibly in Australia but also in Hong Kong, Japan, Singapore and South Korea. Investors are also increasingly looking for value-added opportunities in industrial sub-sectors such as self-storage and cold storage.

IT IS RARE TO PICK MARKET INFLECTION POINTS PERFECTLY. RATHER IT IS MORE IMPORTANT TO “AVERAGE IN” OVER TIME AND UNDERWRITE CAUTIOUSLY TO BALANCE THE PEAKS AND TROUGHS OF THE MARKET. MAINTAINING A SUPPLY OF DRY-POWDER CAPITAL IS ESSENTIAL AND FOR MANY INVESTORS, SO IS MAINTAINING A CAPABLE DEVELOPMENT OR OPERATIONAL PARTNER TO PERMIT ONGOING INVESTMENT INTO ASSETS.

Expect counter pressures between

increasing construction costs and limited supply of high-quality greenfield industrial land, especially in developed markets. Capital partnering offers a solution to meet desired development return metrics.

FIGURE 1: FOCUSING ON THE LOGISTICS SECTOR, WHAT BEST DESCRIBES YOUR MINDSET?

Growth sector - undersupplied

Rents will match construction costs

Yields will remain tight

Slow growth - but will meet hurdles

Rent growth to o set capital growth decline

Sector is too hot

0% 5% 10% 15% 20% 25% 30% 35% 40%

Source: Cushman & Wakefield

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