A mismatch between growing demand for logistics assets in South Korea on the back of a thriving e-commerce sector, and relatively outdated supply of warehouses and distribution centers, is attracting more institutional capital to the asset class.
The latest example is the Toronto-based Canada Pension Plan Investment Board that made a $500 million commitment to a new logistics-focused investment vehicle set up by e-Shang Redwood (ESR) earlier in August. The new vehicle’s assets will be developed and managed by Kendall Square Asset Management, a South Korean subsidiary of Hong Kong-based logistics operator and developer ESR.
CPPIB made a debut in the logistics sector in South Korea in 2015 when it teamed up with the Dutch pension fund asset manager APG, and ESR to establish a $500 million investment partnership, which targeted a develop-to-hold strategy.
For CPPIB, this second round of investment, targeting a core-plus and value-add strategy, supplements its debut partnership to take advantage of the opportunities in South Korea’s logistics market, according to Jimmy Phua, managing director and head of real estate investments in Asia, at CPPIB.
“Between the relatively high penetration of e-commerce in Korea, more conglomerates outsourcing warehousing, and domestic investors still staying out of real estate development, we believe the Korean logistics market to be attractive in spite of increasing investor interest,” Phua said.
In the first quarter of 2018, grade A office effective yields in South Korea were 5 percent, while prime logistics gross yields were 7 percent, according to the service provider CBRE.
“We still see a healthy spread between office and logistics yields in Korea that we want to explore,” Phua noted. “The returns are also still favorable, but both the spread and return will narrow as more investors will eventually move into development of logistics,” Phua said.
CPPIB’s investment follows a number of overseas firms actively investing in Korea logistics over the past few years. In April 2018 for instance, Frankfurt-based DWS, formerly known as Deutsche Asset Management, acquired the 474,000 square feet Logiport Icheon, located southeast of Seoul, for 61.2 billion won ($54.6 million; €47.2 million). Chicago-based LaSalle Investment Management was the seller in the off-market transaction.
Indeed, logistics transaction volumes of hard assets totaled 825 billion won ($738 million; €641 million) in South Korea in 2017, up 55 percent from a year before, according to data by another real estate services firm Savills. International buyers accounted for 75 percent of this total.
In addition to buying stabilized assets, investors have also been pursuing a development play to build assets to cater to the need for contemporary logistics facilities. Approximately 18.8 million square feet of new Grade A logistics space is scheduled to be completed in 2018, three times than in 2017 and the largest annual total ever recorded, according to real estate services firm CBRE.
“The recent period also saw growing demand for cold chain logistics facilities, driven by the rapid expansion of the fresh food delivery market. E-commerce players are diversifying the selection of goods they offer, further increasing their demand for logistics space,” added Claire Choi, head of research, Korea at CBRE.
All this demand is stemming from a continuing increase in online and mobile shopping. According to the government bureau Statistics Korea, online shopping transactions in South Korea touched 8,7 trillion won ($7.8 billion; €6.8 billion) in April 2018, up 22 percent from April 2017. Meanwhile, mobile shopping transaction volumes in the same month were estimated to be 5.4 trillion won, a 33.6 percent growth from the previous year. Online and mobile transactions are expected to continue to expand, with Statistics Korea predicting e-commerce market to grow at 21 percent this year.