This article is sponsored by Mapletree.
After years of Mapletree’s logistics business being mainly focused on its home region of Asia, since 2018, it has become a global player building significant portfolios in the US and Europe. The Singapore-based developer and investment manager has a portfolio of both private funds and Singapore-listed real estate investment trusts. Logistics assets now make up about one-third of its S$74.6 billion ($55 billion; €48.4 billion) of real estate assets under management.
PERE talks to Michael Smith, regional chief executive officer, Europe and US, about the group’s rapid expansion in those markets and its plans for the future.
Mapletree is now one of the top managers of logistics real estate worldwide. How has the business developed over time?
Mapletree’s origins can be traced back to PSA Singapore. In 2000, the port business and its ancillary real estate were split, with the latter eventually becoming Mapletree. Some of those original assets included a few warehouses, so logistics is in our DNA. The first Singapore real estate investment trust launched by Mapletree was Mapletree Logistics Trust (MLT) in 2005.
MLT started out with an initial portfolio of 15 assets worth S$422 million and now has 183 assets across nine countries worth S$12.4 billion, including the proposed acquisitions of 13 properties in China and three properties in Vietnam. Today, we have S$26.1 billion of logistics assets across the Mapletree Group. In addition to private funds and public REITs, we also acquire and develop logistics assets using our own balance sheet, which means we can continually feed our managed vehicles.
Mapletree’s early expansion in logistics was in Asia-Pacific, but more recently – and my focus since I joined in 2017 – has been to expand our footprint in the US and Europe, which now comprises 88.5 million square feet across 421 warehouses in Europe and the US. In 2018, we acquired S$5.9 billion of warehouses in the US and Europe, the majority of which went into our first private fund, Mapletree US & Europe Logistics Trust (MUSEL). As it was an opportune time to buy logistics assets, the fund has performed very well.
At the same time, we built our operational capacity, opening five offices in the US and three in Europe. We then went on another acquisition spree in 2021, focusing on the US, acquiring S$4 billion in July and September. Those assets were syndicated in the Mapletree US Logistics Private Trust (MUSLOG). We had a lot of repeat investors and the fund was oversubscribed.
Why has recent expansion been heavily weighted toward the US?
The US logistics market is one of the strongest markets that we operate in right now. There are structural forces underpinning demand for warehouses in the US that will have positive impacts for years to come, including rising e-commerce penetration and a reconfiguration of the supply chain away from a ‘just in time’ to a ‘just in case’ inventory model.
This reflects the fact that over the past two years, our occupiers have had to hold more stock to ride out supply-side shocks. This growing demand has outstripped supply, and vacancy rates are at all-time lows, down to 3 percent to 4 percent in most markets. On the supply side, construction costs have escalated significantly by about 15 percent year-on-year.
Are many of the same factors at work in Europe, making it similarly attractive?
We are strong advocates of the European logistics market, but do not see the same levels of rental growth as we are seeing in the US. Demand is stronger in the UK as it has higher e-commerce penetration versus continental Europe. Contracted rental growth in Europe is also indexed to inflation, which has remained muted compared to US leases, which have fixed 2.5 percent to 3.5 percent annual escalations.
Everyone wants to buy logistics assets. Does that mean you need to pay through the nose for large portfolios?
It is certainly a more competitive marketplace than I have ever witnessed, but Mapletree’s strong balance sheet enables us to buy portfolios outright without relying on debt financing. We are able to buy first, then syndicate, which means we have fewer elements to juggle when bidding for a portfolio. When we have aggregated a portfolio of sufficient scale, we then invite like-minded equity investors to participate alongside us and secure non-recourse debt financing for the fund. Our strong balance sheet also allows us to hold assets during the aggregation phase.
So far, we are pleased with the pricing at which we have acquired our assets. I think we have been in a real sweet spot whereby cap rates have been at a level where the prevailing interest rates have provided a decent positive carry. However, that spread may be squeezed if interest rates rise and cap rates continue to compress on the back of strong demand for logistics assets.
What is the picture for logistics cap rates in the US today? How much room is there for further compression?
Cap rates have compressed so much that it may now be difficult to acquire a quality portfolio in either Europe or the US for above 4 percent. In 2018, we were buying in the 5 percent to 6 percent range, implying that values may have risen by up to 50 percent in some markets. This reflects both strong rental growth and the denominator effect of cap rates falling substantially.
We did well with MUSLOG in bundling together some assets that we had owned since 2018 with two large portfolio acquisitions – the stars were aligned and it worked for both investors and ourselves. It will be more challenging going forward if cap rates compress further and interest rates rise. There is still a lot of capital out there, especially for logistics, but rising interest rates will inevitably dampen cap rate compression at some point.
It has been a great time for logistics real estate, but things look tougher from now on. Where are you looking for growth?
We have a significant logistics footprint in Asia-Pacific. In challenging markets such as China, India and Vietnam, many of our peers tend to look for joint venture partners. However, we prefer outright ownership so we can manage our exits into either our private or public vehicles.
We can do this because we have experience, knowledge and local teams on the ground. This is something we have been replicating in the US, where we have accumulated knowledge from operating 355 warehouses. That knowledge should enable us to pivot toward development going forward, allowing us to replicate what we have learned in places like China. The next obvious direction is to expand our development capability in Europe and the US.
Is there a particular Mapletree model with regard to logistics? What do you do differently?
It would be disingenuous to say we have the ‘secret sauce,’ but we know enough about global logistics to know the importance of location. You want to be in as many high-quality locations as possible. Although we do not expect there to be any major disruptions to logistics real estate, any weakness is likely to be felt more in tertiary locations.
We see opportunities to transfer some of our knowledge of building vertically in Asia to other markets. We have built ramp-up warehouses in Japan and China, while in Hong Kong we have built an 11-story ramp-up warehouse. These types of vertical warehouses are not typical in the US, but there will be more pressure on the best-located sites in the future, so there might be a need to densify and get more usable area out of the land.
There are few truly global logistics real estate businesses, which puts us in a fortunate position to work with major occupiers as they globalize their businesses, for instance Chinese e-commerce companies that may want to develop a global presence. We also offer a range of exit options for our private funds, such as MUSEL and MUSLOG. We can explore divesting assets via trade sales, merging the private funds into one of our listed REITs or launching a new REIT through an IPO.
We have an enviable track record of generating value for our investors by exiting our private funds through these options. For example, MJLD, a Japan-focused logistics development fund, developed a portfolio of high-quality warehouses. It would have been ideal for our public logistics vehicle, MLT, to have acquired the portfolio, but Blackstone offered a compelling price, so we sold $1 billion of those warehouses to them. MJLD eventually achieved a return of 1.8 times the equity multiple and a net internal rate of return of 23.7 percent.
Having development, asset management, REITs and private funds skills, alongside global logistics knowledge and a strong balance sheet, gives us a lot of options and the ability to pivot our business to where the best opportunities lie.
Making warehouses greener
Mapletree is committed to delivering high ESG standards across its business, and that is no different in the logistics sector, says Smith
The need to cut greenhouse gas emissions means warehouse location is more important than ever. A warehouse an hour closer to a key market is curbing emissions every time a truck makes that journey, Smith points out.
ESG in logistics must be a partnership between owner and tenant, because “although we own the four walls, the slab and the roof, the tenant owns everything inside,” meaning that initiatives such as energy efficiency measures must have tenant buy-in.
Smith says: “We have been working to include green lease clauses in our standard lease templates and environmental provisions in our fit-out manuals. There is a lot of money spent on fit-out – by both the tenant and landlord – when a new tenant leases space in our properties. We see this as an opportunity to improve the environmental footprint of our properties in partnership with our tenants, who may have their own ESG requirements too.”