It's been a volatile time for commercial property after all of the interest rate rises. Some properties are facing a lot of uncertainty, like office properties because of work-from-home changes. But logistics and supply-chain properties are seeing huge demand.
Office properties are starting to see large write-downs of their valuations. The ASX share DEXUS Property Group (ASX: DXS) recently gave a couple of updates. It said that its office portfolio value had decreased by around 7.7% compared to prior book values because of "higher capitalisation rates and discount rates".
It also recently sold a Sydney CBD 'A grade' office building at 44 Market Street for a 17.2% discount to the December 2022 independent valuation.
The DEXUS Property industrial portfolio only decreased by 0.2% in value with "strong rental growth largely offsetting the impact of higher capitalisation rates and discount rates."
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Why are industrial properties doing so well?
According to reporting by The Australian, there is strong institutional demand for industrial properties.
The newspaper reported on comments by LOGOS head of funds management in Australia and New Zealand, Sean Singh, who said that every investor that has an Asia-Pacific strategy wants to focus on developed markets like Australia and Japan, and that 'industrial' is one of the main focuses.
Singh noted that underlying market dynamics are driving interest in the sector and the range of industrial leasing deals being struck in Australia was "quite phenomenal". The fund manager noted:
Even when you look at the vacancy on a global relative basis, Australia, and Sydney, has the lowest vacancy in the world.
It's incredibly tight, but we're still seeing lots of demand, from both new and existing tenants.
The occupancy rate and rental growth is very strong for the logistics and supply chain sector.
According to reporting by the Australian Financial Review, the industrial segment could be worth more than the office sector by 2026.
Which ASX shares are ways of getting exposure to this trend?
Centuria Industrial REIT (ASX: CIP) is the largest industrial real estate investment trust (REIT) focused on purely Australian industrial property, with a large weighting to logistics properties.
When the Centuria Industrial REIT's latest quarterly update was released, the fund manager of the business said:
Pleasingly, as a result of our active management approach and the strong market conditions, year to date re-leasing spreads have increased to an average 28% increase over prior passing rent. To further capture tenant customer demand, CIP is progressing more than 57,300sqm of high-quality, sustainable industrial space through its development pipeline.
It had a portfolio occupancy rate of 98.5% for the quarter.
Goodman Group (ASX: GMG) is one of the world's largest owners and developers of industrial property, with Amazon being one of the ASX share's biggest tenants by rental income.
The boss of Goodman said with its FY23 third quarter update:
The scarcity of space in our locations, and customer need for more productive and sustainable solutions is supporting underlying property fundamentals. These are driving development demand and rental growth. Despite the global macro economic volatility, we have almost zero vacancy and continue to execute on our development strategy with annual production rate for FY23 averaging around $7 billion.
The third and final ASX share I'll mention is Dexus Industria REIT (ASX: DXI). The fund manager of that business Alex Abell said a few weeks ago:
Strong industrial rental growth continues to enhance future cash flows, which has largely offset the impact of cap rate expansion across DXI's $1.4 billion portfolio.
