This article is sponsored by ESR Group
The Asia-Pacific industrial and logistics sector continued to grow through the pandemic and is now in new territory with China finally emerging from its zero-covid policy. There is optimism about China’s recovery but market players are waiting to see its trajectory. The business of industrial and logistics is becoming broader with new customers and diversified businesses.
ESR, Asia-Pacific’s largest real asset manager, is expanding its logistics real estate business into the adjacent sectors of data centers, renewable energy and infrastructure. Co-founders and co-CEOs Stuart Gibson and Jeffrey Shen explain how logistics markets are reacting to the changing macroeconomic picture, the Asia-Pacific markets with most potential and why renewable energy is such a good fit for warehousing.
How is the current macroeconomic environment affecting logistics real estate in Asia-Pacific?
Jeffrey Shen: The environment in China has been rather different because so far high inflation and high interest rates have not impacted the nation. The biggest impact has been the pandemic and the hit to consumption and the domestic economy. Overall demand for logistics properties from e-commerce continued but there have been some supply imbalances in some cities. However, in general we have seen renewals and rental rates
I think most of us were surprised that the zero-covid policy has been changed so rapidly and in another direction. Now we will have to see how the recovery goes in the first half of the year; the government hopes for a rapid recovery, but we will see after the Lunar New Year holiday in late January how strong consumer confidence is.
We expect interest rates to remain low and to see more support for real estate from the government. This isn’t aimed at the logistics sector but we can still benefit.
Stuart Gibson: Japan is also in a different position than most of the rest of the world, it has very much been existing in a bubble. The Fed interest rate doesn’t apply to Japan and the general core inflation that you see in North America, Europe and other parts of Asia doesn’t really apply to Japan.
Recently, the outgoing Bank of Japan governor, Kuroda-san, said he wouldn’t object to a loosening of bond yields but nothing’s happened. We can still borrow at the same rates as six months ago. There was some construction materials inflation last year but that has tapered off somewhat and is starting to decline.
Also unique to Japan is the shortage of labor, which means construction will take longer. The shrinking population is also becoming more concentrated in large cities such as Tokyo, Osaka and Nagoya. As a consequence, we don’t do so much regionally.
In contrast, Australia has seen material interest rate increases, which has pushed cap rates out by 25 basis points, but we are also seeing 25 percent rental growth there. South Korea has seen rental growth of 5-6 percent, but we are close to an inflection point where the cost of capital is the same as cap rates.
The past few years have seen changes to global supply chains, will these continue?
“A continuance of deglobalization means bigger regional networks and less reliance on intercontinental inventory”
SG: It took decades for the industry to move to “just in time” logistics and lean inventory, so it is going to take a similar amount of time to embed the “just in case” model, which means firms are scaling up, doubling or tripling their warehousing needs. And a continuance of deglobalization means bigger regional networks and less reliance on intercontinental inventory.
JS: Regional and local third-party logistics companies are changing how they handle their business and that will mean more of a focus on regional business. Within China, the importance of serving major population centers will not change.
What is the outlook for developing logistics markets in Southeast Asia and India?
SG: Vietnam, Thailand and Indonesia are benefiting from the China plus one strategy, where manufacturers keep a foot in China but also do some nearby offshoring. Indonesia, Vietnam and Thailand are the chief beneficiaries and will see more high-end manufacturing in future too.
Of these markets, Vietnam is a real gem for us; we developed around 700,000 square meters of new space in 2022 and we have just invested in BW Industrial, which is the country’s biggest industrial and logistics player. We have also bought our first site in Thailand.
“Regional and local third-party logistics companies are changing how they handle their business and that will mean more of a focus on regional business”
India does have fantastic potential as it has a swelling consumption class: young people in steady employment who decide to go from an iPhone to a scooter. So, they are buying stuff and driving business growth.
However, India has 94 different provinces where things are done slightly differently, so it is harder to build scale than in China. It just takes longer, but our business there is growing and we also see a burgeoning tech sector, which will demand space.
Are investors continuing to support the sector?
JS: Our existing investors are big institutional investors and continue to be supportive. We have not seen any pullback and have benefited from increased demand for sustainable investments and resilient markets. We don’t see any shortage of capital.
The infrastructure fund is supported by Export-Import Bank of China, one of the biggest Chinese state-owned enterprises, and other SOEs. We are already looking at projects for the fund, which will invest in ASEAN countries in line with China’s belt and road strategy. We have integrated the infrastructure team from ARA Asset Management, after we completed the merger last January and have the team to build that business.
SG: Similarly, while we are always looking to see where headwinds might come from, we haven’t seen any pullback from customers either. Demand is still strong and we can say that the business went from strength to strength over 2022.
Where else are there growth opportunities to be tapped?
JS: We see more demand in China from life sciences and high-tech manufacturing. We are also committed to the data center sector. These sectors are somewhat different from warehousing as there is some clustering in particular locations, whereas all large cities need warehousing.
Taking advantage of the huge quantity of flat roofs we have in China means green energy produced by solar PV installation is a big opportunity over the next two to three years. The key is matching the electricity production from the portfolio with consumers, whether they are tenants or someone else. We have solar PV on a third of our roof space and are adding to that. And of course our portfolio is growing by four to five million square meters each year.
SG: A big focus for us is sectors which are adjacent to logistics, such as renewables, data centers and infrastructure. We closed a $1 billion infrastructure fund last year, for example, which could upscale over time.
Solar had a bit of a head start in Japan, because the government turned off its nuclear plants after the earthquake in 2011 and needed to find alternative electricity sources. We have built 35 MW of capacity and that will grow to 80 MW in three years.
Today, we are moving to selling electricity directly to tenants rather than to the grid.
Being involved in this range of adjacent businesses, all providing infrastructure to the new economy, adds significantly to what we can do. The data center business is a very harmonious adjacency for the distribution warehouse side of our business.
For example, if we have a dry warehouse with solar PV installed, we can provide 40 percent of its electricity needs, but there are times where electricity is produced but not needed. Our data centers, however, have a constant need for power, so we can send them renewable electricity, even if it is not the same electrons.
We are also looking at battery technology, so that energy can be stored on site. The technology is still not there for multiday storage, but it will be at some point. In future these batteries will come in containers to be bolted on the side of a building with a nice façade around them. For us the holy grail is for warehouses to be able to spend at least half a year off the grid.
I can’t see the day where data centers are 100 percent off the grid, but we would love to be able to say that 25 percent of the energy we use is completely renewable and self-generated. We are fortunate that we have the rooftops, we have the battery tech and the demand.
We are looking at other technologies as well as rooftop solar and have a team dedicated to investigating new technologies, such as onsite wind and geothermal. In South Korea we have formed a joint venture with SK Plug Hyverse and Coupang Fulfillment Services to develop the country’s first hydrogen-powered fulfillment center, using hydrogen fuel cells to power the forklifts.