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While many real estate asset classes are going through
tumultuous times brought on by COVID-19, one asset class defies
that trend and continues to be in high demand by domestic and
global investors – logistics assets.
Earlier in the year, the Australian Financial Review
reported that there was an estimated $30 billion of investor
capital which looked to drive a surge in the development of
large-scale automated warehouses in Australia over the next decade.
JLL’s 2020 Australian Industrial Investment Report forecasted
the value of Australia’s industrial investment market to rise
by almost a third from $88 billion to $114 billion by 2024.
Hand-in-hand with this growth, is the recent uptake of
automated/high-tech logistics solutions by companies such as
Woolworths, Coles and Amazon which has featured in the news with
increased frequency.
Contributing factors for this growth
Some of the key contributing factors for this growth are:
Population growth
In the last 20 years, Australia has increased its population by
a third. In 2018, Australia’s population was projected to reach
30 million within the next decade. While these figures may be
impacted by the short-term dip in immigration as a result of
COVID-19 restrictions, it is anticipated that the overall
population growth will continue its upward trajectory.
With such population growth comes rapid urbanisation and
economic opportunities, as well as an increase in both domestic
demand and exports to the Asia Pacific region which has similar
growth trends.
Evolving retail and global players
Over the past decade, the retail sector has been undergoing
seismic change. With the rise of global online retailers and
marketplace platforms such as Amazon and the influx of established
international brands such as Zara, H&M and Uniqlo into the
Australian market, the domestic retail sector has seen significant
disruption.
A common distinction of these international retailers is their
comparatively more evolved retail strategies which aim to provide
customers with a highly responsive experience including accurate
and up-to-date product availability information, rapid delivery
times and efficient customer returns. All of which point towards
the need for an efficient logistics solution.
Technological developments
Increasingly sophisticated technology presents opportunities for
companies to reduce costs, increase scale, and improve speed and
agility across their entire logistics supply chain. Processes that
were previously done manually are now performed by automation
technologies almost instantaneously.
Warehouse management systems keep track of inventory in real
time, ensuring stock-levels are topped-up as needed. Autonomous
vehicles move pallets, robotics identify and pick items from
shelves, and highly-developed order management software ensures
orders destined for the same area are despatched together.
Mistakes caused by human error are reduced, and workplace
injuries resulting from the operation of heavy machinery are
minimised. The efficiencies and benefits automated logistics
technology offers continues to grow.
Continuing cost pressures
Most sectors face the pressure of keeping costs low to maintain
returns. A prime example of this is the supermarket sector in
Australia. The entry of Aldi in the Australian market in 2001 has
seen an increase in competition in this sector. Transitioning from
the strategy of reducing the cost of goods by applying pressure on
farmers and suppliers (which has proven publically unpopular), the
supermarket retailers have looked towards automation to reduce
operational costs and achieve better returns.
Recent examples include:
- Coles: $950 million in two new automated distribution centres
(DCs) in NSW and QLD. With a further partnership
with Ocado to build two automated centralised DCs which is
anticipated to boost Coles’ online sales by about $1 billion,
double its home-delivery capacity, reduce cost-to-serve and lead to
improved profit margins for Coles Online. - Woolworths: $560 million in its first automated DC in VIC, and
a further up to $780 million in two new automated and
semi-automated DCs in NSW. - Drakes: $125 million for an automated DC in QLD which can
handle 23,000 individual product lines.
This trend is not limited to the supermarket retailers and there
are an increasing number of automated DCs across the broader retail
and logistics sectors including:
- Amazon: $500 million in a 200,000 sqm automated DC in NSW which
will double its capacity. - Jaycar (electronics retailer): $80 million for a 21,595 sqm
automated DC to be built in NSW. - eStore Logistics (logistics provider for retailers such as
Kogan.com): two automated DCs in VIC which will increase its
capacity from 105,000 orders a day to 200,000 orders a day, and
further plans to expand.
COVID-19
With the onset of COVID-19 and social distancing restrictions
which have become the new normal, this has further
accelerated the adoption of online commerce.
Ben Franzi, General Manager for Australia Post’s parcel
& express services, notes that “the group’s e-commerce
business rose 80% in the first eight weeks of the pandemic compared
with the same period a year earlier.” Data from Shippit, a
retail logistics software platform, also recorded Australia’s
online sales volumes have hit peaks which are 20% higher than Black
Friday and Cyber Monday sales last year.
The above factors have led to an increased focus on an efficient
logistics strategy. This in turn has seen an unprecedented growth
in logistics assets and particularly, the adoption of automated
logistics solutions. With this trend, coupled with the current
challenges in other asset class during the pandemic, there has been
a significant shift by institutional developers and investors
towards the logistics sector:
- Charter Hall: raised a further $1.25 billion for its largest
unlisted industrial fund since the start of fiscal 2021. - Stockland: plans to increase the value of its logistics
development pipeline and to grow its workplace (business parks) and
logistics portfolio to 25 per cent of its total assets by
2024. - GIC: invested a further $366 million to boost its stake in an
unlisted logistics property trust with Dexus.
Challenges
While the adoption of automated logistics solutions continues to
surge, it is still comparatively new in the Australian market. This
can bring unique challenges in the procurement of such a
solution.
Land availability
To maximise the returns on what is a significant initial
investment, automated DCs are often built on a much larger scale.
For example, the Woolworths DC in Victoria is a 70,000 sqm, 45
metre-high bay facility on a 15.9 hectare site.
With a lack of zoned industrial land, especially in markets like
Sydney, and low vacancy rates in logistics assets (3.8% in the east
coast), the availability of suitable land for DCs which are
sufficiently close to metropolitan areas can be a challenge.
A potential solution to this issue is the conversion of
large-format retail centres to logistics assets, a trend which has
taken place in the United States. This may be followed in Australia
with Dexus purchasing a 25,770 sqm large-format retail centre in
Western Sydney in October 2019 with the plans to convert it into
industrial property over the next 5 years.
International suppliers
As the uptake of automated logistics solutions in Australia is
fairly recent, most of the automated logistics solution providers
have been international suppliers (albeit with an increasing
Australian presence as more Australian companies seek to adopt
automated solutions).
This presents certain challenges:
- the risk appetite for suppliers in Europe and America can be
quite different to what is considered ‘market’ in Australia
and can require extensive negotiations around key risks such as
liability caps and exclusions; - with different legal systems, the supplier’s familiarity
with Australian or common law legal concepts may be limited,
particularly if the supplier is based in a civil law jurisdiction
and the parties need to work together collaboratively to address
such issues; - performance security, which is common in the Australian market
both in terms of the usual provisions of such bonds and the
requirements for bond issuers, can require extensive negotiations
if the supplier wants its trading bank (a non-Australian financial
institution) to issue such a bond, and such issuer has its own
requirements for such bonds; and - jurisdictional issues including the law which applies to the
contractual arrangements, enforceability of security (including any
parent company guarantees), and dispute resolution processes (e.g.
the seat of arbitration and the rules which will apply to such
arbitration).
Performance obligations
The primary driver for investing in an automated logistics
solution is the performance efficiencies that such a solution
promises. To mitigate the risk of such performance promises not
being fulfilled, it is essential to document:
- performance requirements including minimum acceptance
thresholds; - testing and commissioning requirements;
- performance liquidated damages; and
- defect rectification processes and any post-installation /
maintenance services to be provided.
These issues can be complicated by the fact the solutions are
often bespoke or supplier-specific and cannot readily be resolved
by engaging another supplier to step in if issues arise.
Technology
A key component to any automated logistics solution is the
information technology component that drives it. This technology is
becoming more and more sophisticated, meaning that automated
logistics projects often involve a complex myriad of licensing and
implementation issues.
It is critical that the IT aspects of an automated logistics
solution project are considered early on and properly managed both
on a technical level as well as within the procurement and services
contract.
Key areas which need to be considered include integration of new
and existing IT system, data compatibility and migration, software
licensing, version control and escrow arrangements, and disaster
recovery plans.
Other challenges
Some of the other key challenges we have seen arise with such
projects include:
- Compliance with Australian standards or
requirements (eg occupational health and safety
requirements, and electrical safety standards) as the suppliers may
be unfamiliar with these requirements; - Interfaces and integration – including between
the technology and any automation work, and the landlord works with
any automated systems installation works; and - Industrial relations issues particularly where
there may be associated job losses as part of the transition to an
automated logistics strategy.
Opportunities
While the near-term economic outlook may falter due to COVID-19,
there will be continued growth in the logistics sector, and the
drive towards automated logistics solutions will continue.
TMI Insight has estimated that that there will be an estimated 3
million sqm of industrial leases due to expire over the next four
years. Together with the acceleration in online retailing, this is
likely to see the next generation of supply chain transformations,
with increased investment in logistics and automated logistics
solutions becoming mainstream in Australia.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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