Rising e-commerce and a growing middle class population in emerging countries are driving demand for logistics space at an unprecedented rate.
The reliance and need for logistics space is at an all-time high, driven by advancements in the e-commerce sector, says JLL. “Logistics continues to be a go to theme, given pre-existing structural shortages and vast new demand driven by e-commerce retailing. This is perhaps the only sector where investor opinions were uniformly bullish, and unsurprisingly the sector once again tops our sector survey rankings,” Urban Land Institute (ULI) states.
In 2017, retail e-commerce sales worldwide amounted to USD2.3 trillion and this is projected to double to USD4.88 trillion within 4 years.
Developer willingness to build new facilities without pre-commitments from tenants is testament to the strength of the market. In 2018, investments poured into this sector especially in major cities in China, as well as Australia and Seoul.
Since September 2018, China has recorded a 52% year-on- year jump in e-commerce-driven real estate development. This was followed by South Korea and Taiwan with respective increases of 17% and 12%; while Japan, India, Hong Kong and Singapore have each recorded 7% growth, says Knight Frank.
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5,9″ ihc_mb_template=”1″]
“Over the past 10 years, APAC e-commerce-related real estate investments have a 36% CAGR [compound annual growth rate], which is very healthy and expected, given the e-commerce boom,” says Nicholas Holt, head of research at Knight Frank Asia Pacific.
Recent e-commerce booms in China, led by Alibaba and JD.com; in Korea by GMarket; and in Singapore by Lazada have all accelerated investments in recent years,” Holt continues.
China and Japan are the largest logistics markets in the region, but the past 12 to 18 months has seen growing interest in India and Southeast Asia. The latter two regions don’t have very modern warehousing but they have the advantage of low labour costs, cheap land and a growing urban middle class eager to jump into the consumption lifestyle.
Consumers’ expectation for speedy delivery has universally jumped to the point that to remain competitive, deliveries need to be same day, next day or within 2 days hence putting pressure on e-retailers to locate their last mile delivery hub as near as possible to their customers.
As a result, demand is unrelenting for inner-city distribution centres, with investors seeking out underused and lower- grade office, retail, and industrial spaces near city centres.
Says Casey Robinson, Research Director of Australia-based m3property: “This ‘last mile’ issue is resulting in shifting patterns of demand for industrial land. Infill locations are being sought in population centres to reduce delivery times, together with larger sites in outer areas for storage and distribution to the infill locations as well as delivery to customers in outer areas.
Significantly, the demand is pushing up land values and rental rates. In South Sydney, for example, the supply of vacant industrial land is extremely limited, owing to the largely built-up nature of the precinct, as well as ongoing stock withdrawals and rezoning of former industrial sites to accommodate other uses. This is driving up land values and rents.”
It has been reported that between 2013 and 2017, industrial take-up within Sydney’s inner locations by transport, logistics and e-commerce sectors has recorded a five-fold increase.
INNOVATIVE SOLUTIONS
As a result of the persistent demand on a global scale, innovative ways have been designed to overcome the shortage. Building upwards such as multi-level warehouses or multiuse buildings such as the Smart Shed are some of the recent design adjustments.
Shared or multi-client warehouses where different producers or suppliers, sometimes even rival companies, share the same warehouse facility operated by another private party are also becoming much more common. Major businesses and expanding startups are benefiting from such warehousing services which free them from having to invest into their own warehouse or long-term leases.
In land-scarce and expensive Hong Kong and Singapore, multi-level industrial has a foothold while Australia is likely to reach up to five levels, says Robinson.
Multi-level warehouses have been hailed as a game-changer as they require new systems and new considerations when valued. According to Robinson, the issue is whether this new specialised building is going to result in buildings becoming too tenant- specific and therefore reduce future tenant appeal. While some of the technology incorporated in buildings may be transferable, others may not, resulting in it having to be removed / altered before another tenant is able to lease the building.
Multilevel industrials currently have mixed success – Robinson cites three examples, the first being the two-level SEGRO X2 located at Heathrow which took eight years to fully let after completion; the second has more to do with lack of demand – Uniserve has yet to build its multi-level warehouse in Felixstowe even after approval in 2014.
On the other hand, Amazon currently operates successful multi-level warehouses in the UK, with plans to build more.
The multiuse Smart Shed is a variation on the same theme of innovation; essentially, it is a building adapted for multiuse and is geared towards logistics convenience. They can be located anywhere – in the centre of town, and can be multi-storey.
Closely aligned with the need for innovation is the adoption of high tech to increase efficiency – these include automated stock management and storage systems, materials handling automation (including high-speed unit and voice picking and robots), intelligent conveyor systems, wireless communications and even a complete AI automated system.
FINDING SPACE
But for now, the challenge is to get the space itself – it is one of those rare sectors where the demand side is completely outstripping supply, says an analyst.
“The name of the game today is to buy land and construct, or if you can pick up a brownfield site that already has the approvals, then take it up and construct. With an approved piece of land, for every good parcel there are at least two or three tenants waiting,” the analyst concludes.
Apart from Europe, Australia and the US, logistics space is also a popular play in Japan, either purchasing portfolios or looking to develop individual facilities, particularly in build- to-suit situations. Demand is also booming in Vietnam, Indonesia, and especially India.
The U.S.-China trade war could affect industrial space in China, but respondents of the ULI survey say the main driver of the Mainland logistics market today is domestic consumption and e-commerce, which is also the case across the region.
Among the best bets to invest in logistics real estate today are Mumbai and Bangalore in India and China’s larger cities due to the huge domestic demand. Take note however, despite a decade of development, these places are still fundamentally undersupplied with modern logistics space.
Ho Chi Minh City in Vietnam stands out in 2018 as a clear winner from the US-China trade war. Manufacturers and international capital are already beating a path to the ASEAN nation due to fears of high tariffs from the trade stand-off.
Not all developing markets are hot for logistics however. Jakarta has lagged behind mainly due to its problematic barriers to entry such as high industrial land prices despite a structural shortage of modern logistics space. According to a recent report from Cushman & Wakefield, Jakarta industrial land sales were down 60 per cent year-on-year in the first half of 2018.
Going into 2019, how will logistics real estate fare? Says Knight Frank’s Holt: “Given the projected higher GDP growth in Asia Pacific, I believe the outlook will be positive.”
With demand outstripping supply, it looks like this niche sector will continue its winning streak through 2019; certainly it was the sexiest property class in 2018.
[/ihc-hide-content]