In 2018 and 2019, the Global Real Estate Fund (the Fund) acquired logistics assets in Sydney and Melbourne at a time when rental levels were equivalent to £5-£6 per square foot, while a corresponding asset in London would have commanded a rent of between £20-£25(2). Although Australia was relatively late to adopt online shopping, this growth was accelerated  by the Covid-19 pandemic, providing another boost for logistics and warehousing.

Strong fundamentals in key markets

The Fund holds three Australian logistics direct real estate assets, two in Sydney and one in Melbourne which continue to deliver resilient total returns. In key markets such as Sydney and Melbourne, industrial vacancy rates are at or below 1%(3)and consequently rental growth remains robust. The Fund owns an industrial warehouse in Melbourne: our tenant vacated earlier in the year but within a matter of weeks we were able to agree terms with a replacement tenant  – a building supplies company listed on the Australian stock exchange. The new terms reflect a  20% increase in the rent (compared to the level the previous tenant was paying) and a 4% annual escalation and a market rent review in year 5.

We also own two warehouses in Sydney, in both cases the rent the tenants are paying is substantially below the market level due to the recent voracious rental growth.The lease on one of these warehouses is due to expire in 2026 and the tenant wishes to extend beyond this date. As part of these negotiations we have been able to agree a rental uplift of almost 70% from current levels from 2026 onwards.

Focus on sustainability

As part of our sustainable approach to the long-term investment process, we seek to improve and refurbish properties in order to improve their building rating and ensure that they do not become “stranded” assets. These measures include proactively improving the property’s carbon footprint and aiming to meet environmental targets in 2030 and 2050. Based on GRESB – a global real estate sustainability benchmark – the abrdn Global Real Estate Fund has a four-star rating, scoring 84 points out of 100(4).

A backdrop that favours a focus on total return

We forecast returns for around 240 markets across the world and aim to tilt the portfolio towards areas that are well positioned to deliver a strong return. We focus on gaining exposure to markets that demonstrate imbalances in supply and demand.

Over the past decade, returns have benefited from yield compression, and our strategy was supported by an environment of low interest rates. More recently, against a backdrop of mounting inflationary pressures and rising interest rates, returns have been driven by higher – or potential for higher – incomes.

Final thoughts

Although an inflationary environment is not generally considered positive for the real estate sector, our focus on rental growth – and the potential for future rental growth – is designed to underpin total returns and provide a long-term solution for clients.

Visit our Investing for Income campaign page where you can read our other case studies and find out more about our total return mindset.