This article is sponsored by Mapletree.
What interested Mapletree in logistics as an asset class?
We have been a big fan of logistics RE since 2003 and it now constitutes about a third of Mapletree’s business. Whether we are B2C or B2B oriented, logistics is the lifeblood to support the growth in trade, e-commerce and consumption.
The need for supply chain management is now becoming very clear. For instance, cross-border trade or increasing e-commerce businesses will need support infrastructure to deliver goods either to the storefront or straight to homes. In larger economies such as the US, China or Japan, there is a surge on logistics RE demand as e-commerce grows. Many retail shops may be shutting down or downsizing their physical stores as the shopping landscape transforms, but warehousing fulfillment centers are seeing respectable growth in demand.
Mapletree has been plugged into this logistics growth since 2003, when the supply chain network in Asia was very nascent. Back then, people were confounded as to why Mapletree was interested in investing in nondescript sheds when our competitors were building Grade A office buildings. However, we were looking for stable cashflows and long-term growth trends which had already taken root in the Western developed economies. We believe that logistics RE, globally, will continue to offer both investment and development opportunities.
Investing in any RE asset requires convincing investors on risk-return. Why does logistics continue to resonate with investors?
The risk profile of logistics is slightly different compared to retail or office and, in our view, favorable from a risk-return perspective. The tenants that take up space typically fall into three categories. The first being end-users such as the supermarkets, and they usually enter into long-term leases with us, which means limited downside leasing risk.
Second, e-commerce is premised on being able to deliver a wide range of goods directly to buyers quickly and at competitive pricing. Thus, e-commerce players such as Amazon and JD.com may ink slightly mid- to long-term leases for different categories of logistics facilities – from large regional centers to urban last-mile collection centers.
The third category comprises third-party logistics players, who provide back-end logistics services, such as breaking bulk or pick-and-pack, to retail stores or e-commerce players. Their leases tend to be shorter as they depend on back-to-back contractual agreements with their principals. Taken together, all these make the leasing risk for logistics very manageable, as there is a good spectrum of long, medium, and short-term tenants, which allows stability in the cashflow, along with upside rental potential.
Development also has limited downside risk. The cost of building a warehouse could be in the order of 30-40 percent of what it would cost us to build a Grade A office of the same square footage. As such, the development risk is more controlled and at the same time lowers the bar for going into various countries for development.
From a property yield perspective, logistics can give about 200-300 bps higher returns than commercial RE asset classes. Hence, this is financially an attractive asset class, especially given the backdrop of growth in e-commerce and trade.
Mapletree is headquartered in Singapore with a portfolio across the region. From a development and investor perspective, where are the best logistics opportunities?
Mapletree has invested in the Asia-Pacific logistics market directly using its own balance sheet, primarily to undertake development projects and also through its sponsored Mapletree Logistics Trust, which largely acquires investment properties. More recently, we have successfully closed a $4.5 billion AUM logistics fund focused on 262 assets in the US and Europe with investors mainly from Asia and the Middle East.
Singapore has a high concentration of warehouses, one of the highest in the region. However, Singapore is also a small and competitive market. Given its transparent legal and investment environment, there are many competitors for the logistics asset class in Singapore. Hence, we must look further to new markets for continued growth.
In Asia-Pacific, there are two huge markets: China and India. We continue to deploy substantial capital to invest in China because of the demand, population and consumption growth. However, with few high-quality warehouses capable of meeting the demand growth, we chose the development route and now have more than 40 logistics parks developed or developing across first-tier and second-tier cities – mostly oriented towards domestic e-commerce.
We are trying to get into India as it is a nation of 1.37 billion people with a growing middle-class. While it may be tough to make inroads into the country, it is encouraging to note that there have been increased interests and transactions from institutional investors in this market. Getting clean land titles remains a challenge and we are hopeful that we can make some headway soon.
Japan is already quite advanced in the logistics business, but until recently the available warehouses were small and obsolete. With growing demand for better facilities, many developers, including us, are building efficient multi-story ramp-up warehouses. We are also on the verge of exiting a 51 billion yen ($464 million; €417 million) logistics development fund which we syndicated some five years ago in Japan and will continue to expand in that market.
Hong Kong SAR, other than the current short-term issues of civic protests, continues to have high demand for logistics, but the biggest issue is land supply. We were fortunate with the successful government tender in Tsing Yi for a relatively big piece of land, and continue to look for good opportunities.
We have also completed a fair number of acquisitions in Australia and begun developing logistics facilities. Similarly, we have developed and will continue to develop several logistics parks in Vietnam and Malaysia.
With such intimate knowledge of Asia-Pacific, why has Mapletree chosen to expand into a global platform? What advantage does that global approach yield?
There are largely three main factors. First, logistics as an asset class has a certain stickiness with its tenants: we build commonality and relationships. For instance, we engage our global tenants to understand their requirements for locations in Europe or Asia. Chinese players are also starting to come out into the broader Asian context. Hence, we can better serve our tenants if we have a global footprint to cater to their needs.
Second, there are vast sources of capital from Asian institutional investors such as sovereign wealth funds and pension funds, as well as private equity investors and family offices looking to deploy funds globally. We think our strength lies not only in bringing Western capital into Asia, but also in structuring products abroad for our Asian investors. There has been an increasing demand for such products that we can structure in our role as a resourceful capital manager with a good track record.
Third, from the perspective of Mapletree as a company, in order to scale to the level we want, we have to be a global player and not merely an Asian one. We predict that most of our future growth will come from overseas markets.
To effectively manage these overseas markets, we have set up quite a lot of office infrastructure abroad because real estate is a highly local business. We now have only one third of our workforce headquartered in Singapore. Investing and operating our property assets have to be managed on a local basis, even as we expand globally.
What should a modern global logistics portfolio look like?
Ideally, there should be a balance between developed and developing markets to manage risk and to balance risk-return profiles. We need to assess each market to find out what the key drivers are.
For instance, we are active in Poland as we believe Central Eastern Europe will emerge as a service center for Western Europe because of its lower costs and convenience. Another good attribute for a logistics portfolio to have is a mix of income-generating assets complemented by a pipeline of development properties, and have appropriate vehicles and investors to support the respective growths.
In markets such as China, we will continue to buy land, build, and then decide whether to put the assets into private equity funds or offer them to our publicly listed REIT. A mix of developed and developing markets, coupled with a mix of investment and development capability, is where we think our investment into the logistics space will yield immediate returns and extend the runway into the future.
Your focus in Europe is the UK and Poland. Why those markets in particular?
Poland is strategically located between Eastern and Western Europe. Many operators are putting their facilities in Poland because of the cost differential, and we have to follow where our clients want to go. Provided the costs of transportation are lower than the savings, we will explore going further into Central or Eastern Europe in the near future. We’re also keeping an eye on China’s push into Europe, such as its Belt and Road initiative. We think some nodal points along the way will become good logistics markets. Nevertheless, we will continue to look for assets at logistics nodes in Western Europe. We currently do not have any exposure in the UK, but are seriously looking to acquire both existing assets and land for potential development. Ironically, we believe UK logistics will benefit from Brexit, as businesses there will need more facilities to store their goods.
Looking at North America, whose market is late-stage, how do you achieve value-add?
Although the US market is more mature, we still expect rental growth to continue to be robust on the back of structural changes resulting from e-commerce growth. Moreover, as one of the few operator-managers with good logistics RE in the world, we are looking for different ways to extract value beyond market growth.
Within our US portfolio, there is the potential to unlock value by increasing the leasable area through tenant expansions. This can be done by building out available land, and offering value-add propositions such as refurbishing and rebuilding for new tenants. Hence, we have teams on the ground to actively asset manage these properties. We now have two main offices in the US – one in New York and one in Los Angeles – and regional offices in Dallas, Atlanta and Chicago.
Looking to this year and beyond, do you foresee any headwinds that might cool appetite for logistics, and how is Mapletree preparing to face them?
Many investors that follow us abroad are looking at sustainable returns. Logistics is arguably the most sought-after asset class. Some downsides come from the continuous trade war, which can hit our end-users and ultimately our rental income. So far, we have been lucky: it has not had any impact on us.
The other challenge is, of course, looking for opportunities, especially in disruptions due to technology and market trend changes. Getting capital is not a big issue for us, but getting deals is more so, since RE is a very local business. So, we do need to continuously get our infrastructure and manpower up to speed to look for deals. To progress to the next step (like development) we need to build up quite fast. However, we think this asset class is more resilient than the others, so we remain committed to logistics RE in spite of the challenges.
Breaking new ground
Mapletree Logistics Hub Tsing Yi was Mapletree’s first greenfield development in Hong Kong SAR
In 2013, Mapletree won a bid for a 226,000 square foot site in Tsing Yi, Hong Kong SAR, for HK$1.69 billion ($218 million; €196 million). Known as Mapletree Logistics Hub Tsing Yi, it was Mapletree’s first greenfield development in Hong Kong SAR. In March 2016, Mapletree completed the 11-story, ramp-up, Grade A warehouse with a net lettable area of 1.6 million square feet. In October 2017, Mapletree sold the 100 percent occupied warehouse to its REIT, Mapletree Logistics Trust, for HK$4.8 billion.