Large populations, rapid urbanization, growing wealth and consumers who are willing and increasingly able to shop online are driving the logistics sector in Asia.
Asia is home to more than half the global population and more than half the world’s urban population. Large, robust economies in the region underpin rising wealth and a desire to spend, supported by relatively high internet penetration. The success of the rapid and sustained growth in online sales rests on modern logistics infrastructure, as timely and efficient delivery is key to the success of online retailers. However, the region faces fundamental weakness in transport infrastructure to support delivery channels.
The Logistics Performance Index (LPI), a benchmarking tool to identify challenges and opportunities in the performance on trade logistics, highlights the inadequacy of transport networks across the region. The Asia Development Bank estimates that between 2016 and 2030, an investment of US$8.4 trillion in transport infrastructure will be needed to address this shortfall. Countries have responded by upgrading aging and/or developing new transport infrastructure, as well as more ambitious initiatives like China’s “One Belt, One Road” initiative.
However, these developments often reduce the existing logistics stock to make way for new roads, railways and airports. At the same time, infrastructure projects are opening new areas for logistics developments as internal transport connections across countries spread outside urban areas. This fits neatly with the requirement for logistics real estate space, which ranges from less than 100,000 square feet for small distribution hubs for last-mile delivery to large warehouses greater than 500,000 sq ft for the last 500 miles.
Relative to major hubs elsewhere in the world, Asia is under-provided with modern logistics space; only Tokyo matches the supply elsewhere – and even then, only the smaller global hubs. The Asia Pacific – developing Asia, in particular – lags the rest of the world in terms of logistics supply and sophistication, presenting a significant opportunity for real estate investors and developers.
Logistics an attractive investment
Technology is blurring the lines between traditional real estate sectors – office, retail and industrial. The logistics sector sits where industrial and retail intersect, with broadly three types of assets occupying the spectrum in between.
Small distribution hubs for last-mile delivery are located inside or close to urban areas, and increasingly in what were historically retail submarkets. Yields for these assets are converging with secondary retail yields as intense competition drives their yields down. Performance is underpinned by robust rental growth and yield compression.
Medium-size warehouses located outside urban areas, with long leases and strong covenants, such as Amazon, trade like bonds and yields are similar to those commanded by the small last-mile distribution centers. However, the residual land value of the small urban assets is higher and risk is lower than that of larger assets.
The third type of logistics asset is large distribution centers located in rural areas, operating on tight profit margins and hence rental growth is limited and performance is steady but modest. Over the last 10 years, the industrial sector in Asia has outperformed offices by an average of 133 basis points per annum on stronger income return. As the logistics sector matures in Asia, performance is expected to mirror that of sophisticated markets such as the UK, where distribution warehouse yields are now equal to London City offices and unit shops in major towns (ex-London). Additionally, capital values of small industrial units are nearly double that of large industrial assets. Given this outlook, we believe it is a favorable time for investment in Asian logistics.
Our strategy within global real estate
In the UK, we prefer high-quality, higher-yielding industrial type assets and resilient, high-quality retail assets located in areas that lack competition. Elsewhere in Europe, expectations have not changed dramatically despite political uncertainty; core markets are forecast to produce attractive risk-adjusted returns supported by low development and accommodative monetary policy.
Meanwhile, recovering markets continue to rebound, generating higher absolute returns. Expectations for continued US economic expansion amid low supply growth should continue to drive rental growth across most property types and markets. “Gateway” office markets continue to attract well-heeled foreign buyers and support pricing, although both tenant demand and asset performance are stronger on the West Coast than the East. In Asia, we prefer industrial assets underpinned by e-commerce. Developed Asia office assets are generally close to the peak of their cycle.
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