GIC, Singapore’s giant sovereign wealth fund, is swooping into Canada to acquire Summit Industrial Income REIT for $4.5-billion, more proof that warehouse properties in major urban centres such as Toronto and Montreal are some of the hottest real estate to own anywhere in the world.
GIC’s acquisition, announced Monday, is structured as a joint venture with Dream Industrial REIT split 90 per cent and 10 per cent, respectively. Together, they are paying $23.50 in cash per Summit unit, a 31 per cent premium to Friday’s closing price.
Summit’s units traded at about $22.40 each late Monday morning, recovering most of their drop over the past six months. They set a record high of $23.89 per unit in October, 2021.
Canada’s industrial warehouse owners are enjoying some of the strongest business fundamentals across all classes of real estate. Demand for domestic warehouses is so strong that the national vacancy rate has fallen to a record low of 1.6 per cent, according to commercial real estate services and investment firm CBRE Group Inc. Supply of properties is so tight that some landlords have been able to raise rents more than 100 per cent in tenant turnovers and lease renewals.
However, publicly-traded industrial REITs have struggled of late because the e-commerce boom has taken a hit, with major online platforms such as Amazon and Shopify warning that the pandemic gains were an anomaly and are starting to reverse.
Interest rates have also jumped and continue to climb higher, which makes commercial mortgages more expensive. Incessant inflation has also sent development costs soaring.
At the same time, higher rates give investors more options to earn similar – or better – yields. One-year guaranteed investment certificates, for instance, now pay close to 5 per cent annually. Summit Industrial REIT’s units paid a 3.2 per cent annual distribution yield as of Friday’s market close.
The headwinds have spooked many public investors and REITs of all stripes have been trading at deep discounts to their net asset values. As of Friday, Summit’s units were trading for $17.93 a piece, below analysts’ average calculation of the REIT’s net asset value, which was $19.66 per unit.
Summit Industrial exclusively owns Canadian warehouses and its units had dropped 21 per cent in 2022 before the acquisition announcement. Yet when the REIT last reported quarterly earnings, in August, management disclosed that its average rent increase this year when a lease was renewed or in a tenant turnover was 46 per cent. As well, the national average rental rate across all Canadian industrial warehouses rose to a record high of $12.25 per square foot. Five years ago, it was less than $7.
Warehouse demand started climbing around 2016 as e-commerce gathered steam, then skyrocketed through the pandemic. Although the e-commerce boom has cooled, overall online sales are still growing, and CBRE estimates that for every billion dollars in e-commerce sales in Canada, approximately 1.25 million square feet of warehouse inventory are needed. That means another 90 million square feet of space could be needed in the next five years. Canada currently has 1.9 billion square feet of industrial space.
Warehouses are also expected to be needed as just-in-time inventory systems become more prevalent, with companies increasingly turning to onshore sourcing in order to mitigate the supply chain issues. High transportation costs have also boosted industrial property values, because logistics and transport expenses typically account for 70 per cent of supply chain outlays, while real estate is only 5 per cent of the burden. Having warehouses closer to the customer, then, can help save money.
Even though Summit’s units had sold off over the past six months, they were still up 144 per cent over the past five years before the takeover was announced - and that was before accounting for monthly distributions. The equivalent return for the S&P/TSX over the same period was 22 per cent.
Summit isn’t the first Canadian industrial warehouse owner to be acquired by a global institutional investor. In 2018, Blackstone Group acquired Pure Industrial Real Estate Trust for $2.48-billion.
If the Summit takeover is approved by unitholders, Dream Unlimited, a holding company run by Dream Industrial founder Michael Cooper, will serve as the asset manager for the joint venture. In a news release, Dream said it will keep “the majority of Summit employees” after the deal closes.