How has the pandemic changed logistics in Asia-Pacific?
RW: Covid-19 has shown that logistics is an essential support function to the economy. The pandemic has accelerated several pre-existent global trends and changed the way we live, work and shop. Research points to many of these consumer behavior shifts becoming permanent. A prime example is Southeast Asia, which has added 70 million new digital consumers since the start of the covid pandemic.
Our Asia-Pacific panel
Head of South Korea, LaSalle Investment Management
Head of Asia, Goodman
Managing director, BPEA Real Estate
Managing director of fund management, GLP
PM: E-commerce growth has taken center stage. As a result, the logistics sector has emerged as an essential service to support a rapidly growing digital economy. The pandemic has also disrupted supply chains and the nature of future supply configurations. This has resulted in more demand for warehouse space, as companies require additional space to hold more inventory, and increasing demand for new, efficient facilities to be developed in the future.
SK: An indirect impact of the pandemic has been a rise in construction costs, particularly for steel.On the logistics tenancy side, occupancy rates have continued to outperform relative to established property types, such as the office sector. This was even the case in markets in South Korea, where the economy did not shut down and the workforce continued to go to the office.
AT: The lockdowns and social distancing measures expedited the existing shift in consumer behavior and distribution channels, which really accelerated the development of Asia’s logistics market. This trend was particularly evident in China, where online purchases of groceries and other fresh food achieved record growth during the initial lockdowns. We don’t expect this transition to slow down after covid-19.
Which market will see the most interest this year?
RW: No particular market jumps out. Globally, all markets for logistics remain strong and interesting. All over the world, companies are rethinking their supply chains and the resiliency of their operations, which is driving up demand for highly functional, modern warehouse space. There is research estimating that every $1 billion increase in online sales equates to a need for an additional one million square feet of warehouse space. In 2022, you will see GLP expand our businesses and investments across all of our core markets, including China, Japan, India and Vietnam.
PM: We believe the industrial property market will maintain investor interest in 2022, as structural changes continue to result in a pivot from retail to industrial and logistics. The acceleration of e-commerce has made the global industrial asset class increasingly sought after, and we see the most interest in the big consumer markets of Asia – the gateway cities with large populations, high disposable incomes and high rates of technology adoption.
SK: We believe institutional investors will continue to be interested in Asia’s logistics sector, particularly in South Korea, Australia, Japan and China in 2022. The pandemic has ushered in permanent changes in consumer spending habits, with a wider demographic of the population purchasing commoditized items as well as higher-value products online compared with pre-covid. The continued growth of the e-commerce sector correlates with our investment strategy to both develop and acquire modern logistics facilities in these markets.
AT: We continue to see strong investor interest in China, which has represented nine of the 11 transactions valued above $100 million in Asia since 2019. It is the region’s largest market and one of the least developed. Approximately 90 percent of existing warehouse stock in China is obsolete in terms of specifications and construction standards, and is generally not sufficient to meet the requirements of modern logistics users who often deal with high-flow-through logistics operations. We believe that China is at the onset of a multi-decade transformation.
Which market is most unfairly overlooked?
RW: There are many smaller markets in Southeast Asia that are not covered yet. The reason for this is the issue of getting them right-sized in a reasonable timeframe. From that perspective, Vietnam is one of the most attractive and underpenetrated markets with attractive population dynamics, a growing economy and a middle class, which all support domestic consumption.
PM: With strong investor appetite for logistics properties, all markets have been attracting attention. There doesn’t appear to be any differentiation between the quality of assets. However, we believe that in time, there will be a bifurcation to higher-quality assets in the key gateway cities where cashflow growth and resilience are expected to be greatest.
SK: Asia-Pacific represents a diverse region of different countries with individual real estate market fundamentals and cyclical positionings. Our approach has been to focus deeply on our key targeted markets in South Korea, Australia, Japan and China, and pursue growth and overlooked opportunities within those markets, identifying undersupplied locations for logistics developments from outside of Seoul in South Korea to Greater Nagoya in Japan.
AT: Southeast Asia has huge potential, as many countries in the region have the same characteristics as China – booming demand and a chronic shortage of modern logistics stock. Indonesia, Malaysia, Thailand and the Philippines all have positive long-term tailwinds from rising income levels, growing consumption, and a developed internet and e-commerce economy. But they remain underpenetrated, with most warehouses still substandard facilities owned by local developers.
Thinking about logistics, what concerns you the most?
RW: A lot of capital has flowed into the sector, but the challenge is creating and finding the right product and being able to deploy the capital into the right opportunities. For GLP, the key is having established and experienced teams on the ground with the expertise and knowledge to deliver that product. Global customer relationships are also an area of differentiation, as they provide visibility over market trends and opportunities.
PM: With demand for logistics properties so high, there is increased requirement for land and facilities close to consumers. We need to ensure that planning regimes allow for flexibility and higher density to maximize the ability to meet this demand.
SK: Supply chain and demand imbalances, which may potentially create bottlenecks impacting the day-to-day operations of logistics tenants, the potential for inflation and debt capital markets to impact real estate values, and the continued uncertainties around new variants of the coronavirus.
AT: The biggest thing that keeps us up at night is being able to find enough talent to scale our platform and meet the growth opportunity. We’re constantly looking for talented professionals across all aspects of our logistics platform, from execution to construction to leasing. The sector is growing so quickly that it’s an ongoing challenge to find the best people.
What will be the biggest change in logistics in 2022?
RW: The biggest challenge for the sector remains discipline. In an environment where everyone is chasing the same thing at the same time without prudence and investment discipline, shortcuts can be made and the risk of mistakes increases.
PM: We will see an accelerated focus on sustainability. As the global property sector currently accounts for almost 40 percent of total greenhouse gas emissions, it’s imperative that property owners focus on reducing emissions and their environmental impact across the board. At Goodman, our sustainability approach is about practical initiatives that have the most positive impact and drive long-term value for our stakeholders.
SK: A broader continuing trend for 2022 and onwards will be of tenants relocating out of older and obsolete warehouses into modern logistics facilities in strategic locations. The trend will support and accommodate tenants’ growth and transformation into an increasingly digital and ‘just-in-time’ business model, and allow them to maintain their competitiveness and respond to customers in their respective business segments, whether in B2B or B2C.
AT: ESG is an area we’re really focused on, and we think it has the biggest potential for change across the industry in 2022. Responsible investment is a core component of our strategy, and we believe that firms that are more conscious of their wider responsibility will deliver the best economic returns. For example, we are currently looking to install solar panels across our logistics facilities, and hope that the cost of installing solar panels will continue to fall over time, to the point that this becomes the standard across the industry. This could create a fully sustainable industry.