PODCAST: Record Aldi deal evidence of supermarket strength

Sale-and-leaseback deal reflects defensive strategies in uncertain times

June 05, 2020

A portfolio of Australian distribution centres has recently been sold for A$648 million, a signal of appetite for warehouses amid increased supermarket spending during COVID-19 lockdowns.

In the country’s largest industrial transaction of the year, the four Aldi distribution centres were acquired by a joint venture between Charter Hall and insurance giant Allianz in a sale-and-leaseback deal.

As real estate investors navigate the economic fallout from the COVID-19 pandemic, they are hunting for defensive strategies that are more likely to see them safely through the downturn.

This is particularly true of tenants in the grocery and non-discretionary industries, which are at the forefront of changes in consumer behaviours, leading to increased long-term demand, says Tony Iuliano, head of industrial capital markets and logistics.

“This portfolio owned by global supermarket operator Aldi had all the right investment ingredients: institutional grade distribution centres in the sought after food sector, triple net leases, seven-year lease covenants, and total income of A$30.1 million per annum,” he says.

The volume of capital looking to be placed in industrial assets is significant, Iuliano said on the Perspectives Podcast.

“From our recent experiences, particularly with the Aldi process, we went far and wide around the globe with that process, and what we identified were probably an additional 10 to 15 other groups that weren't in the market previously. So the demand will continue to grow.”

Australia’s dominant grocers have benefited significantly from lockdown measures throughout March and April. Unprecedented demand for non-discretionary goods in stores and online as shoppers stocked up and panic-bought, led to a revenue increase at Woolworths of 10 percent in the most recent quarter.

Coles saw sales go up by 13 percent over the same period, while Australia has since been identified as one of the worst panic buying nations in the world.

As stockpiling behavior escalated, supermarkets opened pop-up distribution centres in New South Wales, Victoria and Queensland to cope with the surge in demand, while Coles and Woolworths had to shut down their home delivery services until they could mobilise resources.

While German retailer Aldi has also benefited from increased demand for food, its sales long term are expected to be boosted by its relative value proposition as consumers feel financially uncertain following the crisis, according to the Aldi: Coronavirus (COVID-19) Company impact report.

The four distribution centres in the Aldi portfolio are located along Australia’s eastern seaboard, in Prestons and Minchinbury in Sydney, Dandenong, in Victoria and Brendale, in Brisbane.

As economic uncertainty continues, sale and leaseback deals are expected to increase over the remainder of the year as some retailers leverage the opportunity to take capital out of their real estate assets and invest it in their core business, or online channels.

“We have witnessed capital inflows opening and back in the market over the past four weeks looking for stabilised secure cashflows with the opportunity to grow and develop relationships beyond the initial purchase,” Iuliano says.

“Corporates will continue to capitalise on the high demand for transactions involving portfolios that increase scale in the Australian industrial market through sale and leaseback deals.”

The Aldi deal reflects a return of confidence to the industrial and logistics sector, says Jamie Guerra, head of industrial and logistics in Australia for JLL.

“What we're now seeing is some return to a more normalised market. But it's led to some behavioural changes and some increased demand as a result of circumstances. That’s linked to the way shoppers are behaving online, and also to suppliers wanting to have greater certainty, so greater holdings of stock, following all the supply chain disruption we saw at the height of the pandemic.”

 Investors have renewed focus after the disruption of the pandemic, says Fergal Harris, head of Australia Capital Markets, JLL.

“This deal demonstrates the depth of capital locally and internationally for high quality assets, in spite of the challenges that have prevailed over the past few months.”