This article is from the Australian Property Journal archive
GOODMAN Group continues to ride the industrial real estate boom, upgrading its guidance yet again as warehouses and sheds remain in huge demand.
Goodman is forecasting full-year earnings per share growth of 13.5%, up from the previous guidance of 11%. Distributions forecast was unchanged at 30c per security.
Operating profit rose 11.5% to $877 million, and operating earnings per security lifted 10.7% to 46.4.
“Goodman Group’s continued strategy – to focus on high-quality properties in high barrier to entry infill locations – has produced strong results for 1H23,” said group CEO Greg Goodman.
“Despite the volatility in the global economic environment, we delivered a strong operating performance and financial results, and we expect this to continue into the second half of FY23. “
Lower valuation gains against the prior corresponding period meant statutory profit was almost halved to $1.097 billion. There was still $1.4 billion of revaluation gains across the group and its partnerships, driven by rental growth increasing to 4.2% on a like-for-like basis.
That, along with cash flows, offset a 20 basis point rise in the investment portfolio’s weighted average capitalisation rate to 4.2%.
Assets under management lifted 17% to $79.5 billion.
Occupancy was at 99%. The group leased 3.7 million sqm across calendar 2022, equating to $484.4 million of annual rent, and portfolio weighted average lease expiry lifted to 5.4 years.
“On average, new leases are subject to higher annual reviews than the existing leases with a significant opportunity for income growth given the level of underrenting in the US, Australia, New Zealand, Europe and the UK,” Goodman said.
Development work in progress was up 9% on to $13.9 billion, across 85 projects, with a forecast yield on cost of 6.4%
Goodman has started construction on a 115,000 sqm warehouse in Melbourne’s western suburb of Truganina that will become Metcash’s new wholesale distribution centre for its Victorian IGA supermarkets.
The facility was an end value of $300 million and will replace Metcash’s current facility, which is 90,000 sqm across four buildings in Laverton.
Matthew Moore, senior vice president, Moody’s Investors Service, said, “We expect the group’s earnings to continue to be supported by demand for logistic assets in key infill locations, which are benefitting from increased adoption of e-commerce globally and the need for greater supply chain efficiencies and productivity.
“While we expect some further widening of capitalization rates, robust rental growth combined with low supply in Goodman’s key markets will continue to support asset valuations.”
Gearing is at 9.7%, with look-through gearing at 20.7%, while Goodman has available liquidity of $2.8 billion.
“Goodman’s credit metrics remain strong for its rating. We expect this to continue on the back of further earnings growth, the group’s low gearing levels, and its conservative financial policies.
He said development margins remain strong despite cost inflation pressures, reflecting the group’s cost management and healthy rental growth outpacing the increase in construction costs.
Meanwhile latest data shows 2022 was another strong year for industrial and logistics trading, despite a performance downgrade from record levels in 2021, leading investors to continue to chase the sector throughout 2023.
According to a the latest research from Colliers, industrial investments will continue to outperform returns from the office and retail sectors as they have for the last five years.
Though the $7.9 billion of industrial and logistics assets traded nationally in 2022 represented a 50% drop from record trading levels in 2021, asset repricing in mid-2023 will see an increase in capital.
The average deal size was also down last year, at $37.7 million from $73.7 million in 2021.
National prime average capital values also expected to fall by around 10% by mid-2023, from the late 2021 peak of $3,415 per square metre, before pocking up again.
“Interest rates are expected to moderate mid-year, resulting in an uplift in asset values, driven by yield stabilisation and continued rental growth which will see pricing match peak values recorded in Q1 2022 by the end of 2024,” said Gavin Bishop, head of industrial capital markets at Colliers.
“Following a slowdown in investment activity over the past six months, new pricing benchmarks in H2 2023 will attract capital which has been sitting on the sidelines, and promote strong investment activity for the second half of the year.”
Over 2022, both listed and unlisted domestic institutions were the most active buyers, accounting for around 59% of assets sold by value nationally.
When the expected pricing reset occurs mid-year, those with access to offshore capital will be most active, with the low vacancy and rental growth trend to combine with yield stabilisation.
“Yield stabilisation will be underpinned by the moderation of interest rates and funding costs, determining the price readjustment that many sellers have been waiting for prior to bringing assets to the market,” said Luke Crawford, director of research at Colliers.
Crawford added that 2022 saw less corporate sale and leasebacks, while private investors sold 46% of assets and institutional groups only became more active in selling over the final quarter.
Since Q1 2022, industrial and logistics yields have softened by 85 basis points, though selected markets saw softening close to 110 basis points and are expected to ease another 50 basis points by mid-2023.
At which point, yields are set to stabilise and bring the national prime yield to just over 5.25%, with prime yields in Melbourne and Sydney set to sit close to 4.75% and 4.5% respectively.
With vacancy rates averaging 0.6% nationally over 2022 and gross take-up exceeding 4.85 million sqm, occupier demand will see the potential for more than 3.6 million sqm of new industrial space delivered in 2023.
According to CBRE’s Market Outlook report, this constrained level of supply in the industrial and logistics market is a global low and will contribute to single digit rental growth across much of the country this year, with 58% of the sector’s 2023 development pipeline already pre-committed.
Demand also pushed prime national weighted rents up by 21.6% in 2022, reflecting greater than six times the 10-year annual average of 3.5%.
“Investors have been motivated by the growth in rents and e-commerce, actively targeting conveniently located infill areas, which represented over half the value of industrial asset transactions for 2022,” said Bishop.
“The opportunity presented by imminent rental growth upside also saw the emergence of a two-tiered market last year, with sharper pricing occurring for assets with shorter lease expiry profiles,” added Bishop.
CBRE is expecting a 50% decline in occupier demand this year, with high single digit rent growth expected in most markets and CAGR of 5% nationally over 2023-26.
2022 saw an average WALE of 4.0-years, down from 7.3-years in the year prior and 9.9-years in 2020.
“For shorter WALE assets prospective purchasers have been willing to pay a low initial yield given the immediate upside in rents, which will ensure yields for these assets are expected to see more modest levels of softening over the next six months,” said Bishop.
Over the year, NSW saw the most significant amount of transacted industrial assets at $3.3 billion, followed by Victoria at $2.3 billion and Queensland at $1.4 billion.
“Against a backdrop of an uncertain global market, Australia’s industrial and logistics sector is expected to remain the standout performer in 2023, underpinned by continued asset income growth, which will drive performance over the next 12 months,” concluded Crawford.
