Investors seek to stock up on logistics assets
Ask most people about their views on logistics, and their eyes are likely to glaze over. Talking about warehouses, supply chains and packages is hardly exciting stuff.
Ask an Asian real estate investor, however, and you’re likely to get a very different reaction.
Logistics assets have become one of the hottest plays in regional property markets. The region has witnessed rising consumption, growing middle-class populations and increasing smartphone usage – including mobile payment solutions over the past decade. These trends have sparked an explosion in e-commerce and manufacturing across the region.
That has necessitated more logistics assets, as individuals buy goods online and ask for them to be delivered somewhere in the real world. To support this need, companies have had to create and operate technology-enabled warehouses and storage facilities across key markets in Asia. The long term promise of these assets has attracted investors from around the world.
So far China, Japan, Korea and Australia have gained the most attention. But over the past 12 months several emerging Asia markets, including India and Southeast Asia, have started to pop up on the increasingly competitive logistics map too, offering more investment possibilities.
Jonathan Hsu, head of research of M&G Real Estate Asia, told AsianInvestor: “Over the next four to five years, e-commerce is forecast to grow by $100 billion in the core Asia Pacific ex-China [Australia, Japan, Hong Kong, Singapore and South Korea].
"Research shows that for every $1 billion in e-commerce sales generated, about 100,000 square metres of [storage] space is needed. So that means we can expect about 10 million square metres of net demand from e-commerce players in the region."
SORTING AND SELECTING
The drive to build logistics-related infrastructure is visible across much of Asia, although each market sits at a different point of evolution.
Japan, which has experienced a drive to build modern high-tech logistics facilities to support manufacturing and export demand for close to a decade, has the region’s most advanced logistics market, followed by Australia and Korea.
However, China’s use of automation and robotics is taking warehousing and distribution to a new level of sophistication. One example was Cainiao, a Chinese logistics firm majority-owned by e-commerce king Alibaba, which opened a warehouse manned by more than 700 robots in the last quarter of 2018 to handle the huge sales wrought by Singles Day in November. A report by Forrester in September 2018 estimated that 502 million online Chinese shoppers would generate $1.1 trillion in e-commerce sales during the entire year.
No other market comes close to that scale, but logistics markets in India and Southeast Asia are also growing as manufacturing relocates from China.
“Markets such as Indonesia, Philippines and Vietnam all have potential for growth given the scale of their markets [with their populations of around 100 million or more],” said Singapore-based Kang Puay-Ju, Asia-Pacific head of real estate at Aberdeen Standard Investments (ASI).
According to a study by Google and Singaporean asset owner Temasek in November 2018, Southeast Asia’s e-commerce industry doubled its 2017 volume to reach $23 billion last year, while the number of online shoppers rose from 50 million in 2015 to 120 million.
“With more than 90% of Southeast Asians connecting to the internet primarily through their smartphones, this is one of the most mobile-first internet regions globally,” the report noted.
Those trends suggest demand for e-commerce and logistics-related infrastructure will only keep growing.
INSTITUTIONAL ATTRACTION
Investors looking to get exposure to the logistics industry typically do so via four avenues: listed and unlisted equities, and listed and unlisted debt.
“It really depends on the investor’s risk profile as to how they choose to invest,” said ASI’s Kang.
Investment returns vary greatly depending on the strategy and geographic focus. “Returns can go upwards from mid-7% (for core institutional markets such as Tokyo, Seoul and Singapore) to 10% for higher-risk tier-2 Chinese cities,” said Louise Kavanaugh, who heads Asia-Pacific real estate fund management at Nuveen, the investment management arm of the Teachers Insurance and Annuity Association of America.
“The composition of return profile depending on markets will also vary, from income (for developed markets) or capital value-driven (for higher risk, emerging markets). “Development projects could see higher returns – dependent on their risk profile,” added Hong Kong-based Kavanagh, estimating such projects could offer annual returns in the mid to high teens.
Investors in development strategies help to finance the building of new logistics facilities.
Several institutional investors have been willing to buy the assets directly or with partners. The Canada Pension Plan Investment Board (CPPIB) is one. At the end of March 2018, the pension fund had invested about $15 billion of the $72.5 billion it holds in Asia Pacific in property markets stretching from Japan to Australia.
“We review our portfolio regularly to account for changes in market conditions and to enhance the quality of the overall portfolio,” said Jimmy Phua, head of real estate investments for Asia at CPPIB. “As such, we also regularly dispose assets that no longer meet our prevailing criteria.”
Logistics is CPPIB’s fastest-growing sector exposure both globally and within emerging markets. The fund targets private direct investments as it primary investment approach, usually in the form of joint ventures or club deals with experienced partners.
So far CPPIB has invested in logistics-related investments or JVs in markets such as Korea and China, and intends to raise its focus on Southeast Asia. “We are in the early phase of investing into Southeast Asia,” he told AsianInvestor. “As we gain experience, we would decide if we expand to more countries or concentrate on just a few. Our current focus in Singapore, Indonesia and Malaysia.”
German insurer Allianz’s property investment arm also has big plans for logistics investments in Asia. “As a sector, logistics is one of our preferred real estate sectors globally. In Asia, it is even more relevant with all the structural and demographic changes taking place, along with the growth in e-commerce,” said Rushabh Desai, Asia-Pacific chief executive of Allianz Real Estate.
The insurer typically invests into logistics via funds in countries where assets have to be developed. “We select a fund manager with a proven track record and develop assets via the [logistics] fund,” said Desai. It typically holds such assets for three to five years.
When investing for the longer term, Allianz prefers stable (core) assets, which can offer steady cash yields, which the insurer might buy on its own or through joint ventures, he added. These assets could be held for anywhere between five to 10 years.
AREAS OF OPPORTUNITY
Like other institutional investors, Desai said he likes Japan, noting there is a “lot of demand for modern logistics facilities in areas such as greater Tokyo and greater Osaka”. He also pointed to a lot of opportunity in growth economies such as China, India and Indonesia.
In November, Allianz tied up with ESR, a logistics operator, owner and developer co-founded by private equity firm Warburg Pincus, to develop a $1 billion portfolio of logistics assets across eight cities in India. The sub-continent’s e-commerce market is expected to hit $84 billion by 2021, up from $24 billion in 2017, as its growing youth population enjoy more internet accessibility and rising incomes, according to a joint report by Deloitte and the Retail Association of India published in February.
Desai noted that some structural hurdles have also been resolved in recent years. One example is the introduction of India’s goods and services tax in 2017. The major reform has ushered in a uniform tax rate across the country, enabling freer movement of goods and brightening the outlook for logistics.
This story was adapted from a feature in the Spring 2019 edition of AsianInvestor magazine.