Undersupply of Logistics Property Amid Rising E-commerce

Asian Property Review talks with Nicholas Holt, Asia Pacific Head of Research, Knight Frank on the outlook of logistics real estate in Asia.

1. Which countries in Asia are seeing a spike in demand for logistics real estate due to rising E-commerce?

Based on our research (see table below), key markets that have seen strong demand for logistics real estate in recent years were South Korea, China, and India. Note that our data only covers recorded transaction data and does not include end-user development.

Looking forward, a good proxy on which markets will see strong e-commerce related real estate demand would be to look at their projected e-commerce sales volumes; since both are highly correlated. Based on BMI’s research, Table 2 shows the top 5 markets by their 2021 e-commerce sales volume; together they account for 93% of all e-commerce sales in Asia.

2. Is E-commerce the only reason for the rise in demand – are there also other factors at play?

Taking a step back and looking at a more macro picture, the rise of the Asian middle class has and will be a major factor drivIng the rise in logistics real estate demand given the overall consumption increase; all boats rise with the tide.

Let’s take the German luxury car industry as an example. Note that car sales would least likely be impacted by e-commerce given its large ticket sizes. For VW, China now accounts for 39% of its total global car sales. This share is expected to grow further as China’s middle class rises and further shun local marques for their western counterparts; given the idea that west is best for quality. To keep up with the ever growing demand and improve their customer experience, VW will have to actively stock its cars throughout major markets in China – this in turn will lead to greater warehousing space requirements across the country.

3. What is your projection for the outlook of logistics real estate in Asia for 2019?

Referring to point 1 and 2 reasons and the IMF upgrading its Asia Pacific GDP growth forecast by 10bps to 5.6% for 2019 back in April; we remain positive on the outlook for the logistics market in Asia.

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4. Who are major players in this segment in Asia? Name some of the companies.

Non-exhaustive list of some of the industry’s biggest players:

  • Goodman Group
  • Prologis
  • Mapletree
  • Ascendas
  • e-Shang Redwood
  • Warburg Pincus
  • Blackstone
  • GIC
  • CIC

The list above are traditional developers or funds, but we are also seeing the tech giants themselves directly investing into logistics real estate themselves. Take the two deals below on Alibaba’s subsidiary Cainiao.

June 2018: Alibaba’s Cainiao $1.53bn investment into HK Airport logistics hub

  • Cainiao beat Global Logistics Properties (GLP) to win the bid to build a logistics hub at HK’s airport
  • HK’s airport is expanding and cargo volume is expected to significantly increase
  • HK is set to be a global delivery network hub connecting China and South East Asia
  • Cainiao is planning another 5 more logistics hubs globally
    1. Dubai
    2. Kuala Lumpur
    3. Liege, Belgium
    4. Moscow
    5. Hangzhou

April 2018: Alibaba’s Cainiao to invest c.$330mn into logistics and digital hub in Thailand

  • Part of Thailand’s $45bn Eastern Economic Corridor (EEC) project spread across three provinces on the country’s Eastern Corridor aimed at promoting growth

5. What are the challenges facing this segment even as demand rises?

The major challenge facing this segment would be an undersupply of “suitable quality” spaces. Besides just four walls and a roof, e-commerce
players require warehouses with suitable specifications given the amount of technology they bring along with them (e.g. electrical load, floor loading, access points for pickup trucks etc). This is a major reason why we are seeing the tech end users entering the space to develop their own warehouses. In terms of areas of undersupply, significant parts of developing Asia, including China, India and parts of SE Asia lack the modern logistics facilities to carry out e-commerce functions.

6. What is your view of co-sharing industrial or warehousing space? Do you think it would work just as well as in tourism accommodation?

I think co-sharing warehousing spaces could work for seasonal related industries, where space use would only be for a certain fraction of the year. Other than that, I believe security would be the biggest hurdle a co-sharing warehouse space would need to overcome to take off.

In the tourism segment, I believe there is an element of this at work with hostels and especially AirBnB, which is taking market share away from the traditional hotels sector.

Nicholas Holt

7. Which locations are preferable for such e-commerce fulfilment operations – urban locations or suburban/rural? Pros and cons of both?

Fulfilment preferences highly depend on the market as both urban and suburban locations work.

In the US where the population sprawl is large, Amazon’s distribution supercentre network model works. However, in Asia where the population is located in dense urban centres; urban mini last mile fulfilment centres are ideal.

The main pros and cons of being located in an urban setting rather than being located on the city outskirts would be balancing both cost and speed. The speedier (i.e. closer to customer) you are the more costly it becomes. The idea is to find the right balance between both factors to ensure the most ideal customer experience.

8. How would the US-China trade war affect E-commerce and its supply chain, including logistics? Would prices rise and would this impact on demand for logistics/ warehousing space?

Narrowing down to the Chinese market, the trade war will definitely impact e-commerce’s supply chain as consumers seek alternative non-US or domestic sources for the same goods. However, its impact on logistics remains to be seen – a laptop from the US and a laptop made locally still needs to go through the same fulfilment centres prior to customer delivery. We believe the impact would be lesser on demand for logistics / warehousing space.

9. Which countries in Asia have the cheapest industrial/logistics real estate?

The cheapest industrial/logistics real estate in Asia are in the emerging markets of India, Chinese Tier 2 cities, and South East Asia; where rents costs cap out at US$5 psf per annum compared to other developed markets such as HK at US$19.10 psf per annum.


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