In a year marked by uncertainties for commercial property markets, Australia's cold storage sector is somewhat defying expectations. With sales volumes already surpassing $400 million as at 1 August 2024, nearly matching the entire previous year's results; this real estate niche is proving its resilience and enduring appeal to investors. Investment yields may have grown but have settled within a narrow band highlighting that cold storage assets remain hot property in the industrial real estate landscape.

This robust performance in 2024 is not an isolated phenomenon, but rather the latest chapter in long term transformation and growth for the asset class. The cold storage sector, a specialised subset of industrial real estate, has maintained its appeal to investors despite market fluctuations over the past decade in Australia. This resilience underscores the sector's strength and its continued importance in the industrial property landscape.

The market, often referred to as "food & beverage" or “refrigerated warehousing”, began gaining popularity as an asset class during the 2015 to 2018 period. During this time, it transformed from being primarily owner-occupied to a dynamic investment opportunity, driven by technological innovations and changing consumer demands for faster perishable food distribution.

The market saw substantial growth in the following years, with transaction activity increasing year-on-year. This growth was fueled by the completion of quality stock, increasing retail demand for fresh food, and rapidly changing health science needs. The market reached its peak during COVID-19, with sales turnover hitting an impressive $1.6 billion in 2021. Yields during this period ranged from as low as 3.3 per cent to 7.6 per cent, a significant compression from the six to eight per cent range seen just a few years prior, largely driven by low cost finance coupled with strong institutional demand for industrial assets in a chase for yield.

However, the post pandemic period saw a market correction. Transaction levels have decreased, aligning with an overall decline in commercial investment activity due to rising interest rates and subdued property investment sentiment. This shift has led to a correction in yields from their historic lows, with ranges narrowing and moving upwards. Despite this correction, 2024 has looked to reinvigorate demand for cold storage assets. Sales volumes to 1 August 2024 have achieved $413.6 million, approaching the full-year results of 2023. A re-rating of yields has also been significant, with the range achieved in asset sales this year narrowing to between just six and 6.6 per cent. This demand has been primarily driven by offshore buying groups, notably from the USA, Canada, and emerging groups from Japan. The sector has also seen expanded use in health sciences, particularly for the manufacturing, storage, and transport of medical-grade products.

Geographically, Melbourne has dominated investment activity, with land availability and cost being significant factors contributing to new supply. Currently, over 110,000sqm of refrigerated industrial assets are under construction across Australia, with Victoria leading in both metropolitan and regional locations, followed by Brisbane and Sydney. These assets are largely purpose-built with tenants in place, catering to either food distribution or pharmaceutical use.

The investor landscape has evolved significantly over the years. There's been a noticeable increase in interest from offshore and institutional groups, while owner-occupiers have become more active as sellers. Net buyers now primarily consist of cross-border investors, institutional investors, and REITs, attracted by high user demand, low vacancy rates, and quality rental rates in the current high-inflationary market.

Looking ahead, the cold storage sector is expected to remain an attractive investment opportunity. The ongoing need for these specialised assets has not gone unnoticed by investors seeking alternative, high-yielding opportunities in the current environment. The sector's growth is likely to be sustained by expanding needs in both the fresh food and beverage industry together with health sciences, borne out of Australia's continued population growth.

While the Australian cold storage market has experienced some yield corrections, it remains firm in the eyes of industrial investors. Its evolution from a niche, owner-occupied asset class to a sought-after investment opportunity underscores its potential for continued growth and stability. As Australia's population continues to grow and the demand for efficient cold chain logistics increases, this specialised asset class will undoubtedly be one to watch in the short to medium term, maintaining its strong position in the industrial real estate landscape.