GIC, Singapore’s sovereign wealth fund giant, is foraying into Canada to buy Summit Industrial Income REIT SMU-UN-T for $4.5 billion, further proof that warehouse properties in major urban centers like Toronto and Montreal are the hottest properties. own all over the world.
The GIC acquisition announced on Monday is structured as a joint venture with Dream Industrial REIT DIR-UN-T, split 90 percent and 10 percent. Together, they will pay $23.50 in cash per Summit unit, a 31 percent premium to Friday’s closing price.
Summit shares were trading at around $22.40 late Monday morning, recovering most of their decline over the past six months. They set a record high of $23.89 per unit in October 2021.
Canadian industrial warehouse owners enjoy some of the strongest business fundamentals of any property class. Demand for domestic warehouses is so strong that the national vacancy rate has dropped to a record low of 1.6 percent, according to commercial real estate services and investment company CBRE Group Inc. The supply of real estate is so tight that some landlords have been able to increase the rent by more than 100 percent of the tenants’ turnover and lease renewals.
Publicly traded industrial REITs have struggled recently, however, as the e-commerce boom has hit, and major online platforms such as Amazon.com Inc. and Shopify Inc. warned that pandemic gains were an anomaly and are beginning to reverse.
Interest rates have also risen and will continue to rise, making commercial mortgages more expensive. Constant inflation has also increased development costs.
Meanwhile, higher interest rates give investors more options to earn similar – or better – returns. For example, one-year guaranteed investment certificates now cost almost 5 percent per year. Units of Summit Industrial REIT were paying an annualized dividend yield of 3.2 percent at Friday’s market close.
The headwind has spooked many public investors, and REITs of all stripes have been trading at deep discounts to their net asset values. On Friday, Summit units traded at $17.93 apiece, below analysts’ average estimate of $19.66 apiece for the REIT’s net asset value.
Summit Industrial exclusively owns Canadian warehouses and its units had fallen 21 percent in 2022 before the purchase announcement. Yet when the REIT last reported quarterly earnings, in August, management revealed that its average rent increase this year for lease renewals or tenant turnover was 46 percent. The national average rent level for all Canadian industrial warehouses also rose to a record high of $12.25 per square foot. Five years ago, it was less than $7.
Demand for inventory started to rise around 2016 when e-commerce gained momentum and then skyrocketed during the pandemic. Although the e-commerce boom has cooled, overall online sales are still growing, and CBRE estimates that for every $1 billion in Canadian e-commerce, about 1.25 million square feet of warehouse space is needed. That means an additional 90 million square feet may be needed over 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 common as companies increasingly turn to onshore sourcing to mitigate supply chain issues. High transportation costs have also increased the value of industrial real estate, as logistics and transportation costs typically make up 70 percent of supply chain costs, while real estate accounts for only 5 percent of the burden. Placing warehouses closer to the customer can therefore help save money.
Although Summit’s units were sold out in the past six months, they still gained 144 percent over the past five years before the acquisition was announced — and that’s before factoring in monthly distributions. The corresponding return for the S&P/TSX in the same period was 22 percent.
Summit is not the first Canadian industrial warehouse owner to be bought by an international institutional investor. In 2018, Blackstone Group acquired Pure Industrial Real Estate Trust for $2.48 billion.
If shareholders approve the Summit deal, Dream Unlimited, a holding company led by Dream Industrial founder Michael Cooper, will act as the joint venture’s asset manager. In a press release, Dream said it will retain “the vast majority of Summit employees” after the deal closes.
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