GIC, Singapore’s giant sovereign wealth fund, is entering Canada to acquire Summit Industrial Income REIT SMU-A-T for $4.5 billion, further proof that warehouse properties in major urban centers like Toronto and Montreal are some of the best real estate to own anywhere in the world.
The GIC acquisition, announced Monday, is structured as a joint venture with Dream Industrial REIT. DIR-A-T, divided into 90 percent and 10 percent, respectively. Together, they’re paying $23.50 cash per Summit unit, a 31 percent premium to Friday’s closing price.
Summit units traded around $22.40 each Monday morning, recouping most of their decline over the past six months. They set a record of $23.89 per unit in October 2021.
Canada’s industrial warehouse owners enjoy some of the strongest business fundamentals in all classes of real estate. Demand of Domestic warehouses are so strong. The national vacancy rate has fallen to a record low of 1.6 percent, according to commercial real estate services and investment firm CBRE Group Inc. Property supply is so tight that some landlords have been able to raise rents more than 100 percent tenant turnover and lease renewals.
However, publicly traded industrial REITs have struggled lately as the e-commerce boom has taken a hit, with major online platforms like Amazon.com Inc. and Shopify Inc. warning that gains from the pandemic were a hit. anomaly and are beginning to reverse.
Interest rates have also risen and are still rising, making commercial mortgages more expensive. Relentless inflation has also pushed up development costs.
At the same time, higher rates give investors more options for similar or better returns. One-year guaranteed investment certificates, for example, now pay about 5 percent a year. Units of the Summit Industrial REIT paid an annual distribution yield of 3.2 percent at market close on Friday.
The headwinds have spooked many public investors, and REITs of all kinds have been trading at deep discounts to their net asset values. As of Friday, Summit units were trading at $17.93 each, below analysts’ average estimate of REIT net asset value, which was $19.66 per unit.
Summit Industrial exclusively owns Canadian warehouses and its units had fallen 21 percent 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 at tenant turnover was 46 percent. Additionally, 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 began to surge around 2016 as e-commerce gained momentum and then skyrocketed during the pandemic. Although the e-commerce boom has cooled, online sales overall continue to grow and CBRE estimates that for every $1 billion in e-commerce sales in Canada, approximately 1.25 million square feet of warehouse inventory is 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, and companies increasingly turn to shoreside sourcing to mitigate supply chain issues. High transportation costs have also boosted industrial property values, because logistics and transportation expenses typically account for 70 percent of supply chain outlays, while real estate accounts for just 5 percent of the total. burden. Having warehouses closer to the customer can help save money.
Even though Summit units sold for the past six months, they were still up 144 percent over the last five years before the acquisition was announced, and that was before accounting for monthly distributions. The equivalent return for the S&P/TSX over the same period was 22 percent.
Summit is not 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 shareholders approve the acquisition of Summit, Dream Unlimited, a holding company led by Dream Industrial founder Michael Cooper, will act as asset manager for the joint venture. In a press release, Dream said it will keep “the majority of Summit employees” after the deal closes.