Institutions considering including investments in Asia’s growth logistics real estate markets in their portfolios should target high-teen returns from their outlays. But they must also contend with the risks inherent when buying into markets with little transactional precedent. Indeed, underwriting is one of the main challenges to entry, Trent Iliffe, joint managing director at LOGOS Group, the pan-Asia logistics property specialist firm says as he describes the region’s potential right now.
PERE: In the last 12-24 months, Asia logistics has seen meaningful commitment from global investors. What are the driving factors?
Trent Iliffe: Globally, logistics continues to experience tailwinds relative to other asset classes. In addition, over the past 12-24 months, a number of markets in Asia have experienced relative macro and political stability, compared with the US and Europe.
The demand for e-commerce has been growing in many countries: from Australia to Singapore to China, and in the last 12 months, India and Indonesia. That translates into increased requirements for real estate products which provides increasing investment opportunities for global investors.
PERE: Are there any regulatory or policy changes, specific to any of these markets, that are drawing investors to make a push into logistics?
TL: In short, yes. It is country specific, but most countries have acknowledged the benefits of creating an environment supportive of foreign investment and enhancing the development of their supply chains.
In India, for example, the Goods and Services Tax has been a gamechanger with the country’s supply chain being totally restructured as a result. The GST has created significant demand for newer and bigger warehouses, whereas, traditionally, customers were able to occupy and operate in older and inefficient warehouses. From a capital partner perspective, this means we can put larger sums of capital to work to build larger warehouses.
PERE: What opportunities are international investors willing to commit capital to in the logistics sector in markets like India, China and South-East Asia?
TL: Investors want exposure to the growth potential these countries offer. However, they typically are not able to go in and buy the quality and stabilized assets they would like to own. Investors therefore accept they need to take development risk in these markets to create the right assets. This in turn emphasizes the need for them to partner with the right general partner to get the best solution.
Nearly every venture we are currently doing is a develop-to-core venture, where we buy land and develop assets to a high institutional standard. Subject to the market, the development may either be pre-committed or commenced on spec. In most markets we are building larger scale estates as opposed to doing single facility developments.
“It can sometimes be difficult, and, in some respects, is a little bit of a question of faith” Trent Iliffe
PERE: What does this development risk mean in terms of the kind of return premium that can be expected from investing in these markets?
TL: There is definitely a risk-adjusted premium for the first movers entering some of these growth markets. These premiums are probably at least 500 basis points in terms of levered total returns over and above what they expect to generate in a relatively core market like Australia or Singapore.
PERE: How is logistics currently positioned by investors vis-à-vis other assets in terms of the risk and return dynamics?
TL: In places like Jakarta and Mumbai, the other commercial property markets are more established than the logistics sector. They are also more competitive and there is more liquidity. Often, when investors are entering a new market, one of the key questions is about liquidity. Investors give a lot more consideration to how one would trade assets, if needed. So, in that sense, one is taking on a little bit more risk today when investing in logistics in some of these markets than you would take in the commercial or retail sectors, which have the track record and liquidity.
PERE: How do you respond to such investor concerns?
TL: It can sometimes be difficult, and, in some respects, is a little bit of a question of faith. In most markets, especially the growth markets, we are developing assets to a new standard of size and quality. There isn’t often comparable stabilized assets trading. However, all investors still want to understand what is trading and at what pricing from a domestic perspective.
As part of underwriting exit pricing on logistics, there is consideration given to the spread with the more developed asset classes like hotels, commercial and retail assets. There is an acknowledgement that logistics assets are not expected to trade at the same pricing as other commercial assets; there is a bit of a gap but often the observable spread to actual logistics sales evidence is exacerbated by the asset quality differential.
We are seeing in other more established markets like Australia the yield gap between commercial and logistics has come down over time. In Sydney, the gap between core logistics and core commercial is probably 50-75 basis points right now.
I think it will continue to compress over time across all Asian markets as more global investors invest in logistics and they understand the long-term return profile and associated risks.
PERE: Performance wise, will Asia’s growth markets perform better than the established markets in the region?
TL: The returns are similar in China, India and South-East Asia – in the high-teens. It is only when you get back to the more established markets like Singapore and Australia do they become low-teen. Of course, returns should be more significant in newer markets than they are in the established markets like Australia.
PERE: Are there any other trends that you expect will further drive growth in these markets in 2018?
TL: The biggest driver for logistics is infrastructure. As countries like Indonesia and India spend more money on roads, ports and airports, for instance, that will drive supply chain expansion. But another trend we are seeing is more automation and capital expenditure by the customer, which means they will be an occupier of their logistics facilities for a longer term. We’ve had cases in which the customer has spent more money on fit-outs, infrastructure and technology than it cost us to build the asset.
EMERGING ASIA PULLS IN BIG BUCKS
Some of the biggest logistics investments last year were in India, China and Indonesia
Suning Commerce Group and Shenzhen Capital Group set to raise largest ever China logistics-focused fund.
Initially targeting 5 billion yuan ($770 million; €640 million), with expectations of raising 30 billion yuan over time.
CPPIB’s partnership with IndoSpace for India logistics investment.
$500 million initial commitment by CPPIB.
PFA Pension and Ivanhoé Cambridge’s investment in LOGOS’s third China logistics venture.
$415 million in equity raised in total.
CPPIB and Ivanhoé Cambridge’s partnership with LOGOS for Indonesia logistics venture.
$400 million investment capacity.
Ivanhoé Cambridge and QuadReal Property Group back LOGOS India Logistics Venture.
$800 million investment capacity.
This article is sponsored by LOGOS Group. It appeared in the Investing in Logistics supplement with the February 2018 issue of PERE.