This article is sponsored by ESR.
On November 1, 2019, APAC-focused logistics platform ESR completed a $1.8 billion flotation on the Hong Kong stock exchange. “There are several advantages to being a public company,” explains Stuart Gibson, who leads the business alongside fellow co-founder and co-chief executive officer Jeffrey Shen. “We expect to get an official credit rating which will hopefully reduce our cost of capital. Also, a lot of the investors we deal with, especially in Europe and North America, can only invest in publicly traded companies, so that was a part of the investment universe that we were missing out on. Thirdly, floating on the stock market gives a growing company a bit of luster, especially when trying to attract the best talent in Asia.” Gibson and Shen tell PERE’s Stuart Watson about the opportunities that the reinvigorated business will seek to capture in perhaps the most dynamic global region for logistics real estate investment.
What is the appetite among institutional investors for logistics property in Asia-Pacific?
Stuart Gibson: Asia, rather than Europe or the US, is where the global growth is right now, so there is a huge wall of capital that wants to get into this space and only a handful of platforms across the region creating new assets.
We are continually working with our partners to accommodate the capital that wants to get into the business and fund our development pipeline. There is an increasingly strong interest from Canadian, European and Singaporean investors in logistics property in the region. Many of them are among the most informed and experienced investors in this asset class.
Which regional markets offer the opportunity to invest at scale?
SG: We see tremendous opportunities in our three core markets of Japan, China and South Korea. Some investors perceive Japan in general as a mature market where returns and growth are low, but in the logistics sector quite the opposite is true. In view of the cost of capital, development yields and cap rates, capital values in Japan are huge. In terms of e-commerce, which is a key driver for business growth of logistics real estate, Japan lags behind its neighbors, even though it is often associated with the latest technology and coolest gadgets. E-commerce penetration is 6 percent in Japan while in China and Korea it is around 25 percent, but it is catching up.
Jeffrey Shen: In China, e-commerce continues to boom. E-commerce companies require space for moving in and out their goods, which creates volume and velocity. This is where we come in. ESR is a major landlord for e-commerce companies in China, with 1.6 million square meters (17.2 million square feet) – 45 percent of our leased area in China – occupied by leading e-commerce tenants such as Cainiao and JD.com as of June 30, 2019.
Korea has high capital values and there is a lot of investor demand for large-scale modern, tenant-based logistics properties. Robust online consumption growth and 3PL service providers continue to drive demand. We are the one institutional developer delivering high-quality, leasable space for a myriad of customers at the moment.
More recently, ESR has also established a presence in India, Singapore and Australia. What is the potential for logistics investment in those countries?
SG: India is a really exciting market and is garnering increasing investor attention. It has some of the attributes of China in terms of scale, although it does not have the same velocity yet. We entered the market two years ago and have 854,900 square meters (9.2 million square feet) either built or under construction and a further pipeline under MOU of 2 million square meters (21.5 million square feet) as of June 30, 2019.
JS: In India, a local team with deep experience and teaming up with pre-eminent partners are key to success. Our partnership with, for example, Lodha Group and Future Group to develop large-scale, state-of-the-art properties exemplifies this strategy. There is also a growing trend of gravitating towards ‘built-to-suit’ facilities, which have higher lock-ins.
For Singapore, it is a different strategy. In the low interest-rate environment, REITS have emerged as a choice of growing appeal as a result of the low bond yield. This is particularly true with the island state, where REITS are increasingly popular. But when it comes to REITS, size matters. We acquire REITS with assets of good potential and achieve consolidation and scale. Through creating more scale, we enjoy more liquidity.
SG: For Australia, it is an ideal market for core investors that are looking for stable return. The land is freehold, not leasehold as in some parts of Asia, which makes investors more comfortable with the risk there. We have undertaken mergers and acquisitions to grow our platform, acquiring the entire equity interest in Commercial & Industrial Property Pty (CIP), and 100 percent of the securities of Propertylink to boost our portfolio. We are building up our pipeline and a strong fund management platform.
What will be the main challenges and opportunities in Asia-Pacific markets in the coming year?
SG: The challenge of acquiring land is always on our minds, but the team has been doing that for many years. The biggest risks are more perceived than manifest. When there is a cooling in the rhetoric around the China-US trade dispute, investors start to back off. There are other geopolitical issues like the tensions between Japan and Korea, the potential for conflict in the Middle East, and Brexit. Each of those things individually will not have a big impact, but if you get a confluence of these factors, investors can be inclined to sit on their hands.
JS: With the uncertainties and the changing trade policies, governments make efforts to boost domestic consumption, driving a growing demand for more logistics space. The majority of ESR tenants service domestic consumption and this creates opportunities for us.
SG: We see rising opportunities in light manufacturing, cold storage and data centers, and we are considering what we can do with the skill sets that our team already possesses to support businesses in these sectors.
JS: Geographically, there will be opportunities for expansion in countries with a growing consumer class. South-East Asia offers very promising opportunities for growth with the rising middle class in the region, as well as increasing affluence and online penetration in some of the markets. But to tap the opportunity, deep local experience and good partners are crucial. The future is now. The year 2020 will herald a decade of new, exciting opportunities for logistics real estate in Asia-Pacific, and we are confident that it will be a great time ahead for all of us in the region.
Case study: ESR Kuki Distribution Center, Japan
Conquering a development challenge
Few projects illustrate the lengths to which logistics developers must go to secure development sites in the notoriously tight Japanese land market as well as ESR Kuki Distribution Center.
ESR Kuki was approached and had an opportunity to discuss with the Tokyo University of Science about a surplus campus in Kuki City in Saitama in the Tokyo Metropolitan area. However, it took three years and over a hundred meetings to work with local planners to secure the necessary permits to build a four-story warehouse.
ESR advised the municipal authorities to convert the lecture theatres that occupied half the site into a community center, while the facility was built on the remainder of the plot. “It is a great testament to the patience our team needed to get through the urban planning and re-zoning process. That can be a real headache, but it turned out to be one of the most successful projects across the whole group,” says Gibson.
The 1.6 million square foot development was completed in September 2018, and in January this year ESR announced that Amazon was to take approximately 780,000 square feet. The other half of the warehouse is tenanted by a number of e-commerce-related businesses serving the northern Tokyo area.