As asset owners seek to build illiquid investments, their roving eyes are increasingly turning to logistics assets. But it's a complicated sector, and many of the most developed markets are hard to access while emerging markets offer their own political and transactional risks.
As a result, even the most promising markets need to fulfil some basic criteria to attract asset owner money.
To start with, the markets need to have at least have some basic supporting infrastructure, such as decent roads and connectivity to ports and airports, said Rushabh Desai, Asia-Pacific head of Allianz Real Estate, the property investment arm of German insurer Allianz.
Another important consideration is the ability to find good institutional partners. The Canada Pension Plan Investment Board (CPPIB), for instance, has tie-ups with logistics specialists from Australia (Goodman), Singapore (GLP) and India (IndoSpace).
“As such we are very selective about whom we partner with,” said Jimmy Phua, head of real estate investments for Asia at CPPIB. “We look for partners who are best-in-class in what they do, with similar long-term investment perspectives and [who are] aligned on corporate governance and risk management approaches.”
Of course, the pool of potential partners tends to be smaller in nascent markets. That means potential buyers for the assets are less plentiful too.
Allianz’s Desai added that, like CPPIB, his company would like to be a ‘first mover’ in some of the newer markets but it’s important to do the homework first.
“You really need to be convinced that within your holding period the market will be institutionalised, have a deep capital market offering multiple liquidity options, both private and public,” he said.
That sentiment is shared by Kang Puay Ju, Asia-Pacific head of real estate at Aberdeen Standard Investments (ASI), who noted that the developing logistics infrastructure in emerging markets is relatively risky due to planning, constructing and governance issues. That leaves overseas investors seeking returns of 20% or more to offset such risks, “but finding projects with such high returns may be difficult,” she noted.
Indeed, political risks, poor telecommunications services, lower financial accounts and mobile penetration may drag on prospects for investors looking to ride the boom in regions such as Southeast Asia, said Louise Kavanagh, managing director in US fund house Nuveen's Asia real estate team.
Even outside of emerging markets, aspiring investors are having to cope with the fact that there’s simply not enough institutional-grade logistics and warehousing properties.
“Even in markets such as Japan and Korea, which are more developed than emerging Asia, institutional-grade logistics properties account for a very small share of the overall stock of warehouses,” said Tom Moffat, Asia head of capital markets at CBRE, a real estate services firm. Less than 10% of Asia-Pacific warehouse stock is institutional-grade, he added
A combination of surging demand and limited availability of high-quality assets has had a predictable impact on the cost of logistics assets. Over the past five years, investment yields have fallen significantly as the assets have become more expensive.
Yet the potential returns remain relatively attractive in today's yield-starved environment.
Core logistics asset returns, on an unleveraged basis, are expected to be 6% to 7% per annum over the next five to seven years, Kang noted. For higher-risk strategies, unleveraged return for value-add assets is 7% to 9%, while development strategies offer up to 9% to 11%.
FROM STACK TO FLOOR
The rapid evolution of logistics in Asia is also leading investors to weigh their options in relatively new areas. Moffat said demand is mushrooming for logistics properties that cater specifically to ‘last-mile delivery' -- the movement of goods from a transportation/warehousing hub to the final delivery destination.
The focus of such last-mile delivery logistics is to ensure that online shoppers, increasingly used to instant gratification through developments such as one-click ordering, can get their deliveries as quickly as possible, sometimes within the hour.
That highlights what is usually the ‘make-or-break’ factor with property: location. The closer the warehousing facilities are to the shopper, the better.
“Generally speaking, the potential for rental growth is strongest in major cities for urban logistics, as proximity to consumers becomes more important,” said ASI’s Kang. “Although rental costs are higher than big-box logistics [distribution warehouses of more than 100,000 square feet], firms are willing to pay for better proximity to consumer markets.”
Another trend is rising automation. At its most advanced, a logistics facility could combine everything from autonomous cars, robots and delivery drones to real-time product tracking and automatic route-optimisation software.
“We see the line between technologically driven operating businesses and real estate is blurring,” said Alan Yang, chief investment officer of Singapore-headquartered Global Logistics Partners, a warehouse operator and investment firm that boasts partners such as insurer China Life and Singaporean wealth fund GIC.
He noted that GLP’s warehouses have ‘smart’ entrance gates that use sensors and data analytics to connect the trucks carrying the goods and operations inside the warehouse, ensuring goods are ready for shipping when needed.
“As the cost of technology and computing power continues to decline and the demand for higher speed, reliability, transparency and data-driven decisions in the e-commerce supply chain increases, logistics real estate is experiencing an accelerated introduction and innovation of new technology,” Yang added.
For now, all signs point to continuing growth in Asia’s logistics sector – and the investor money seeking to invest in it.
In the case of Allianz Real Estate, Asia accounts for about 6% of the insurer’s global real estate portfolio, but the insurer aims to raise that to 10% by 2020. “Logistics is a big part of what we do, so I would say 25% to 30% of the Asia allocation would be in the logistics space,” Desai added.
That kind of appetite suggests a buoyant level of demand for institutional-grade industrial and logistics properties in Asia, as long as returns continue to hold up. That offers a bright outlook for the real estate subset.
This story was adapted from a feature in AsianInvestor's Spring 2019 edition.