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Will 'Amazon Effect' mean a boost for warehouses?

Total warehouse space stock in Singapore has doubled from 4.9 million sq m in 1998 to about 10.7 million sq m in 2018.

MOUNTAINS and heaps of boxes and parcels overflow in a Chinese warehouse, while a dozen workers attempt to process the pile of customers' orders generated from Singles' Day. You may have seen pictures or videos of this scenario online. This is just a small fraction of the behemoth which is the e-commerce industry. Over the past few years, the exponential growth of e-commerce has affected various types of real estate in different degrees.

One such impact is the "Amazon Effect" which refers to the effects of online e-commerce or digital marketplace on brick-and-mortar retail stores. The Amazon Effect is also blamed for the decline in demand for physical retail space.

Most people would commonly associate the e-commerce industry with warehouses where goods and parcels are stored, processed and shipped out. Hence, it is assumed that the rise of the e-commerce industry would increase the demand for logistics properties or warehouses. This assumption will be explored in this report.

A warehouse is a large building where raw materials or manufactured goods may be stored prior to their distribution for sale. Currently there is about 10.7 million square metres (sq m) of warehouse space in Singapore, of which a significant indeterminate amount is occupied by the e-commerce industry and its various players.

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The e-commerce companies in Singapore that use industrial space can be broadly divided into five groups.

  • Online marketplace platforms are the middle-person platforms for merchants or vendors to list and advertise their products. Some examples of such platforms are eBay, Qoo10, Zalora, Shopee, Lazada, Taobao, Shop-Back and Carousell.

These platforms facilitate the online transactions between buyers and merchants. Among the various groups of e-commerce players, they have the smallest physical footprint and are unlikely to occupy any significant warehouse space. The physical space that such online platforms would generally require is likely to be office space for back-end operations.

  • Start-up retailers who started their businesses on their own websites and domains. Some prominent examples based in Singapore are Love, Bonito; Fayth; HipVan; FortyTwo and various blogshops that have established a good following for their online brands.

These businesses usually do not require much warehouse space as they could use other types of industrial space such as B1 industrial space, which is zoned for light and clean industries, to store their inventories and for their office operations.

There is a wider selection of B1 industrial units in terms of sizes and locations compared to warehouse units. Furthermore, it is more economical for small start-up firms to rent a small light industrial unit than a bigger warehouse unit.

  • E-commerce retail players with inventories are companies with their own online marketplace platform and hold their own inventory of products. The e-commerce retail players based in Singapore that hold inventories require warehouse space to store their products. The two most prominent examples are Redmart and Amazon.

Currently, Redmart has a 14,000 sq m warehouse in Jurong, storing more than 100,000 products including fresh produce, which are delivered to customers from the warehouses after online orders are processed.

Amazon occupies a 9,300 sq m warehouse near the Jurong district, which is owned by Mapletree Logistics Trust (MLT). The Amazon warehouse was opened in 2017.

  • Third Party Logistics providers (3PL) - The 3PL are involved in the consolidation and processing of online orders that are shipped out from overseas suppliers. They are responsible for the last-mile delivery that delivers the orders to the customers. Some examples are SingPost, NinjaVan and DHL.

In order to store and process items from overseas, locally based third-party logistics providers occupy large warehouses with high ceilings that are able to contain tall racks for efficient processing and storage.

These logistics providers require more warehouse space than most of the other e-commerce industry players.

  • Traditional retailers that have ventured into e-commerce arguably occupy the largest amount of real estate space in terms of both retail and warehouse space. These businesses have a longer history as traditional brick-and-mortar stores.

However, they ventured into e-commerce in recent years without abandoning their conventional retail space. Their websites or mobile apps allow the customer to purchase online and have the products delivered to the customer directly from their central distribution warehouses.

Some examples are FairPrice, Challenger and Courts.

Their foray into e-commerce does not necessarily generate new demand for warehouses nor contribute to the e-commerce industry's demand for warehouses because these retailers already have their pre-existing warehouses in operation before they ventured into e-commerce. Therefore, venturing into e-commerce helps them to regain some of their market share which has been lost to other e-retailers in recent years.

Among the different groups in the e-commerce industry, the 3PL and e-commerce companies, such as Amazon and Redmart, are the biggest new users of warehouse space. The other players may not generate as much new demand for warehouse space in Singapore.

Examining the warehouse space sector over the past 20 years, total warehouse space stock has doubled from 4.9 million sq m in 1998 to about 10.7 million sq m in 2018. The stock of warehouses increased at the fastest rate from 2013 to 2017, when there were plans for Singapore to be a regional logistics hub. In 2017, a record-breaking 963,000 sq m of new warehouse supply entered the market.

The demand for warehouse space was also expanding in the past seven years. From 2014 to 2017, the new demand or net absorption of warehouse space, which averaged 567,700 sq m annually, was especially robust compared to the previous four years of 2010 to 2013, when 209,700 sq m of warehouse space was absorbed annually on average.

E-commerce in Singapore started to gain traction from 2013. It could have partly contributed to the increase in warehouse demand from 2014 to 2017.

However, the property market was not always able to absorb the supply of new warehouse space in the past seven years. As a result, the overall warehouse occupancy rate declined after reaching the peak of 94.7 per cent in 1Q 2012. In 2017, it fell to 89.1 per cent before it recovered modestly to 89.5 per cent the following year, partly due to the relatively low supply of new warehouse space completed in 2018.

Although e-commerce in Singapore continued to be popular in 2018, the net absorption of warehouse space actually fell 66.4 per cent from 800,100 sq m in 2017 to 268,700 sq m in the following year.

This indicated that the demand for warehouse space corresponded more with new supply rather than e-commerce. This is further illustrated by the high correlation coefficient of 0.86 between new supply and new demand for warehouse space.

Despite the impressive growth of e-commerce industry in recent years, it did not always result in a corresponding increase in demand for warehouse space.

This is because in the e-commerce industry, the majority of the players do not require significant warehouse space. Furthermore, some of the items bought through e-commerce are shipped directly from foreign vendors to Singapore customers and occupy local warehouse storage only briefly.

However, the demand for warehouses does not depend solely on e-commerce. There are many other industries that utilise warehouses in Singapore.

In conclusion, the growth in e-commerce does not necessarily lead to a corresponding increase in demand for warehouse space.

Just as e-commerce and online shopping is expected to evolve over time, so would the use and types of warehouse space. We can expect greater innovative use of new technology such as robotics and automation in the pursuit of greater productivity of warehouse space.

  • Nicholas Mak is the executive director at ZACD Group. Jean Choo is an analyst at ZACD Group.