The Brief

An experienced investor with a substantial existing portfolio, looking to establish exposure in a new state. Scale mattered — an asset large enough to be worth the diligence and the ongoing attention — and the client understood industrial well enough to be interested in what most buyers in the sector overlook.

Replacement Cost, Not Yield

Industrial is the one asset class where a hard floor under value can actually be calculated. Land, plus the cost of constructing the building today, plus the time and holding cost to deliver it. That is what a competing developer has to spend before they can offer a tenant an alternative.

Buy well below that number and something useful happens: new supply stops being a threat. A developer cannot deliver a competing building and let it at a rent that undercuts yours, because their cost base is higher than your purchase price. The market has to reprice upward before your competition can even be built.

This is where we would push back on the standard framing of industrial acquisition. Most buyers rank assets by yield, then check the location. Yield is set by sentiment and by whoever else was bidding that month. Replacement cost is set by concrete, steel, land and labour, and it does not move on sentiment.

The obvious caveat, and it is a real one: below replacement cost only means something if the building is worth replacing. Functionally obsolete stock is cheap for reasons that are permanent — inadequate clearance, awkward column spacing, poor truck access, insufficient hardstand. A discount to replacement cost on a building nobody would build is not a discount. We tested the physical specification against current occupier requirements before the number mattered at all.

What We Resolved Before Settlement

The entry yield of 5.5% was never the yield the client was buying. We negotiated a five-year lease extension with the sitting tenant as part of the acquisition, taking effect within nine months of settlement and lifting the net yield to 6.28%.

The sequencing is the point. A buyer who settles first and negotiates afterwards is negotiating from a position where the tenant knows the asset is already bought. Resolving it before exchange means the income improvement is contracted rather than hoped for, and the client is not paying for an outcome they then have to go and create.

There is also longer-term optionality in the holding. The improvements lend themselves to subdivision into multiple units, which would diversify the tenancy base away from a single covenant and lift income further. We did not pay for that and we did not underwrite it. It is a decision available to the client in five years, not a component of the price today.

The Outcome

A significant industrial holding in the Logan corridor acquired at circa $9m, well below replacement cost, on a 5.5% net initial yield rising to 6.28% net within nine months through a lease extension negotiated before settlement — with subdivision optionality sitting behind it.