Three reasons why fundamentals endure in Asia-Pacific’s logistics sector
DESPITE the higher-for-longer interest-rate environment, investments into logistics real estate in Asia-Pacific have witnessed sustained investor interest. Last month, Singapore state investor GIC made a significant move by acquiring six logistics assets in Japan from Blackstone for more than US$800 million. This high-profile transaction showcases the confidence of major investors in the logistics sector.
In another notable deal that took place in March this year, Mapletree Logistics Trust (MLT) expanded its portfolio by acquiring eight logistics assets across the Apac region, with a total investment of close to US$700 million. These acquisitions by GIC and MLT highlight the increasing sophistication of investors in the logistics industry and their continued recognition of the sector’s growth potential.
Still, like all sectors, logistics will have to adapt and respond to the post-pandemic landscape. After a record 2021, investments into logistics real estate in Apac has softened markedly, falling by more than 20 per cent in 2022. Still, while the rapid rise in the cost of funds catching up to the yield compression that occurred during the pandemic has sidelined investors, total investments of over US$40 billion remain higher than what was ever achieved in the years prior to 2021.
There is no doubt that e-commerce was necessary to navigate the pandemic, which, once lifted, will see online sales concentration dissipate. However, despite more consumers returning to physical stores, buying online will remain relevant because convenience cannot be beaten.
From panic buying to shoppertainment
The accelerated adoption of e-commerce during the pandemic has set the stage for its next phase of growth. With familiarity hot-housed during the pandemic, it is only natural that new marketing channels will evolve to drive digital engagement to a new level.
One of the marketing strategies that slowly gained traction pre-pandemic and which ultimately took off when global lockdowns occurred is shoppertainment. The convergence of entertainment and e-commerce elements has proved effective in creating an immersive and personalised shopping experience for consumers.
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According to TikTok and Boston Consulting Group, e-commerce gross market value in Apac is estimated to reach US$3.5 trillion by 2025, up from US$2.6 trillion in 2022. Powering this 10 per cent compounded annual growth rate over three years are new forms of digital engagement, such as shoppertainment, which is expected to be a US$1 trillion opportunity by 2025.
Building next-gen supply chains
Supply-chain bottlenecks, logistical disruptions, rising prices and the energy crisis have resulted in a structural shift from just-in-time to just-in-case strategies, leading to the top priority of building supply-chain resilience. Strict adherence to zero-Covid policies in mainland China demonstrated the risk of consolidating production activities in one location, prompting companies to recognise the need to bring manufacturing hubs closer to their end markets.
According to the latest American Chamber of Commerce in Shanghai’s annual business report, about one-third of the 307 companies surveyed had already redirected their investment planned for China elsewhere. While disruptions have since eased, Capgemini Research Institute and Global Investment Research revealed, based on a December 2022 survey, that disruptions persisting or worsening in the next six to 12 months remain a concern.
With the cost of production in mainland China no longer what it used to be, there is a proliferation of supply-chain networks in lower-cost South-east Asian economies and India. Moreover, these markets offer exposure to the rising middle class and digitally-savvy young demographics, as well as proximity to mainland China.
Focus on ESG
Environmental, social and governance (ESG) issues have gained significant attention in recent years, especially in the wake of the pandemic. While this has been overshadowed by strong market fundamentals in the logistics sector, ignoring the advantages of implementing sustainability initiatives today runs the risk of losing out both now and in the future.
An analysis by the Institute of Real Estate and Urban Studies in Singapore found that green-certified logistics properties performed better and had smaller drops in valuations compared to non-green properties during the pandemic. Green logistics and warehouse properties enjoyed an average value boost of 12.7 per cent, significantly higher than the 4.9 per cent boost for those without green certification.
Outdated facilities will need to be retrofitted and upgraded to meet expectations, or risk losing market share to competitors. Furthermore, owners risk losing rental value, returns and exit yields, as well as incurring higher operating costs from building inefficiency.
Supply shortfall spells opportunities
These long-term structural trends are expected to catalyse the region’s logistics sector into a cycle of growth and development. E-commerce is estimated to require three times more logistics space than traditional brick-and-mortar retail stores. As a result, the Apac region is projected to require 4.2 billion square feet (390.2 million square metres) of logistics space by 2027. However, according to Knight Frank’s latest research, The State of Logistics Asia-Pacific: Focus Report 2023, only 20 per cent of the necessary capacity is currently available.
Although regional stock is set to rise by 10.5 per cent in 2023, it remains insufficient to cater to the continuous growth of e-commerce. Compounded by construction delays, the current structural undersupply situation is likely to persist over the next three to five years, which will contribute to rental and pricing growth in the medium term. This presents opportunities for investors to utilise a range of strategies across the risk spectrum and different asset types in the region’s logistics ecosystem to position for long-term growth.
Knight Frank’s surveys also continue to indicate high investor interest in the sector, valued for its defensive qualities and exposure to the region’s demographic megatrends – a fact that sees facilities serving dense urban centres to be highly coveted. With signs that the ongoing hiking cycle is at the end of its tether, the current buyer-seller impasse is unlikely to last.
Across most of the region’s markets, yields have expanded by 40 to 50 basis points since 2021. As assets with a 2019 to 2020 vintage approach their five-year refinancing and exit horizons, we expect more motivated sellers to emerge in the next two years. Any repricing will present good entry opportunities, while contrarian strategies could pay off with a first-mover advantage.
The writer is the head of research at Knight Frank, Asia-Pacific.
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