Occupier Demand, Rising Rents Continue to Fuel Urban Infill Industrial

31 January 2023

Australia’s largest listed pure-play industrial fund, Centuria Industrial REIT, has reported strong HY23 results underpinned by exceptional re-leasing spreads of 19%, up 8% on FY22, reflecting continuous industrial occupier demand within urban infill markets across Australia.

Approximately 83% of CIP’s portfolio is based in urban infill markets, which are in proximity to densely populated areas where occupier demand remains highest as these markets lend themselves to fast delivery times for ecommerce and logistics operators.

During the period, CIP leased 88,517sqm across 19 transactions, representing 7% of the portfolio’s Gross Lettable Area (GLA).

Key leasing transactions included the final 13,604sqm of CIP’s recently opened, multi-unit Dandenong South development, Southside Industrial Estate. The 40,500sqm estate was 100% occupied five months prior to practical completion in November 2022. Additionally CIP completed an early lease renewal across 22,481sqm at 82 Rodeo Road, Gregory Hills NSW bringing forward an uplift in rental income. 

Jesse Curtis, CIP Fund Manager and Centuria Head of Industrial, said, “Industrial market rents accelerated during the period due to record low national vacancy and continuous tenant demand, particularly in urban infill markets. This demand is reflected in CIP’s leasing activity and re-leasing spreads. CIP has further opportunities to execute new leasing and value-add initiatives to capitalise on the domestic market’s strong rental growth trajectory with nearly one-third of its portfolio expiring or value-add developments being delivered by FY25.”

Currently, 20% of CIP’s portfolio income is linked to CPI rent reviews providing additional strength to income growth. Additionally, 87% of CIP’s income is secured by blue chip national, multi-national or listed tenant customers.

Strong leasing activity also contributed to offsetting the REIT’s capitalisation rate expansion. Though CIP’s Weighted Average Capitalisation Rate (WACR) expanded 47bps to 4.66%, resulting in a 1.9% valuation decrease on a like for like basis, the reduction was primarily concentrated on two long WALE assets.

Valuations across the remainder of CIP’s active portfolio remained broadly unchanged. CIP’s portfolio is valued at $3.9billion across 88 high quality assets as at 31 December 2022. CIP maintains an 8.1-year portfolio WALE and high 98.7% occupancy. 

Lower portfolio value is also partially credited to $215.4million of strategic transactions executed during the period, including the sale of a c.50% interest in eight existing assets to an investment vehicle sponsored by Morgan Stanley Real Estate Investing (MSREI) for $180.9million resulting in a partnership known as Centuria Prime Logistics Partnership (CPLP). Additionally, CIP divested the $34.5million 30 Clay Place, Eastern Creek NSW asset during the period.

Proceeds from these transactions helped decrease CIP’s debt and gearing reduced to 31.6%, at the bottom end of CIP’s target gearing range.

Jesse Curtis, concluded, “With a substantially strengthened balance sheet CIP will continue to execute its core strategies across its urban infill industrial portfolio during the remainder of FY23. The portfolio is well positioned with high occupancy and strong, reliable rental streams. Though transaction volumes have moderated during 2022, industrial asset values are continuing to hold with uplift in market rental growth counteracting capitalisation rate expansion. CIP maintains its guidance while continuing to monitor broader economic conditions.”

CIP reaffirmed its FY23 FFO guidance of 17.0cpu and distribution guidance of 16.0cpu, paid in equal quarterly instalments, representing a 4.8% distribution yield.