The Southeast Asia region has attracted far less attention from logistics real estate investors than the large developed market of Japan and the developing market of China. However, evolving supply chains and the growth of e-commerce mean the region is becoming more attractive.

It boasts a population of 685 million and is increasingly linked by the ASEAN group, which is working to strengthen trade and reduce tariffs in the region. Markets vary from small but valuable Singapore to the large but underexploited Indonesia.

Stuart Gibson, co-founder and co-CEO of Asia-Pacific’s largest real asset manager, ESR, says: “Southeast Asia is becoming more and more important for the group. Countries such as Vietnam, Thailand and Indonesia are becoming centers for manufacturing and increasingly high-tech manufacturing. Although we cannot replicate the scale we have in China in these markets, there is a lot of potential.”

“We have seen significant moves into Vietnam from Chinese manufacturers looking to diversify”

Jack Harkness

The key factors driving regional logistics demand are rising wealth, the growth of domestic e-commerce, and changes in global supply chains. Chua Tiow Chye, deputy group CEO at Singaporean investment manager Mapletree, says the sector “has benefited from the region’s growing domestic consumption in tandem with a fast-growing middle class and the strong adoption in e-commerce during the pandemic.

“Rising industrialization and export manufacturing is another demand driver for logistics space, especially in Vietnam. Additionally, multinationals’ strategic shifts towards strengthening supply chain resilience, such as ‘China plus one’ and ‘just-in-case’ management instead of ‘just-in time’ have been accelerated by the pandemic.”

A recent HSBC survey of European and North American businesses invested in the region found that 61 percent expected organic growth of more than 20 percent this year, while 90 percent planned to invest in new markets. A major attraction for both consumer-focused and manufacturing businesses is the region’s youthful demographic, with a median age of 32. Education standards are high and English is widely spoken.

As elsewhere in the world, the pandemic encouraged more online shopping in Southeast Asia, but this was also boosted by 80 million people gaining internet access in the region in 2020 and 2021, according to management consultancy Bain & Company. This brought internet penetration to 75 percent there, compared with 92 percent in the US.

This e-commerce growth has driven accelerated activity from e-commerce and third-party logistics companies. However, the uncertain global economy means that businesses are more cautious in the short term.

While the longer-term outlook is positive for Southeast Asia logistics real estate, tenants are more cautious over the outlook for the coming year. Jack Harkness, director, regional industrial & logistics services, Asia, at Savills, says: “We have seen demand from tenants linked to e-commerce definitely slowing down in Southeast Asia. Tenants are also looking for maximum flexibility from commercial terms, due to difficulty in forecasting growth rates over the next 12 months as nations emerge from covid and the global economy slows down.”

Government-imposed measures to fight the covid-19 pandemic led to lockdowns which impeded economic activity in many nations, but measures imposed in China, the world’s biggest manufacturer, sent shockwaves around the world.

In the era of globalization, manufacturers and logistics companies relied on “just in time” supply chains – with minimized inventory and rapid movement of goods – to slash margins and boost efficiency.

Coronavirus costs

The upheaval of covid, which imposed breaks and blocks in the supply chain, demonstrated the failings of this model and drove a move towards “just in case” management, with higher inventories and more redundancy in the system. The need for more inventories has driven logistics demand everywhere, and Southeast Asia is no exception.

Another consequence of covid was that manufacturers who had centralized production in China to take advantage of a large, skilled and relatively cheap workforce, realized that problems in that country could damage their business worldwide. They have begun to diversify production to nations such as Vietnam and Thailand.

Chinese businesses have been as keen to do this as non-Chinese manufacturers. A further factor, independent of the pandemic, is that labor costs are higher in China than in developing Southeast Asian nations.

Savills’ Harkness says: “We have seen significant moves into Vietnam from Chinese manufacturers looking to diversify, and this is set to continue.”

For example, BYD Auto, a Chinese electric vehicle manufacturer, signed a deal in September to open its first Southeast Asia manufacturing hub in Thailand. It has since been reported to be planning a similar investment in Vietnam. Meanwhile, Apple supplier Foxconn is set to invest $300 million in expanding its Vietnamese plant.

Although China overturned its zero-covid policy and is expected to recover over the next 12 months, diversification strategies are expected to remain in place. Mapletree’s Chua says: “Even as China re-opens, we expect the China plus one or manufacturing diversification strategies to continue. Multinational corporations will search for alternative or complementary locations for better access production facilities firstly, followed by new and growing consumption markets.”

Demand for space comes from e-commerce companies, manufacturers, third party logistics companies and cold storage companies. The latter’s expansion is being driven by rising demand for high-quality food and more groceries delivery.

There is also demand for a variety of space, says Chua. “We see demand for both larger distribution hubs as well as demand for smaller last-mile logistics. Ultimately, demand for a property will be influenced by its location, accessibility, proximity to the market, and readiness for expansionary space within the facility.

“The last criterion is increasingly important in a dynamic market, as tenants want to be able to scale up quickly in response to end-market demands. Hence tenants are pursuing larger, more flexible, and scalable space with option for expansion.”

Vietnam is undoubtedly the Southeast Asian nation of greatest interest to logistics real estate investors. The nation’s economy proved extremely resilient to the effects of covid, despite five months of lockdown in 2021. GDP growth, which stayed positive in 2020 and 2021, is predicted by the World Bank to hit 7.5 percent for 2022 and 6.7 percent this year. Foreign direct investment rose 16.2 percent year-on-year to $15.4 billion in the first nine months of last year.

Region of riches

ESR’s Gibson calls Vietnam a “shiny gem.” The company began work on 700,000 square meters of logistics space in that country in 2022. In January, ESR was the lead investor in a $450 million fundraising round by BW Industrial, the largest industrial and logistics player in Vietnam.

The nation has a population nearing 100 million and a youthful demographic, notes Mapletree’s Chua. “Vietnam looks the most promising as it will benefit from strong domestic consumption in view of its favorable demographics and the growing digital transformation in the country. Vietnam tops the tech growth market index where it has a projected compounded annual growth rate of 8.9 percent between 2022 and 2026, the fastest of any of the 51 countries surveyed in the Financial Times-Omdia Digital Economies

“Even as China reopens, we expect the China plus one or manufacturing diversification strategies to continue”

Chua Tiow Chye

Harkness says: “Vietnam offers not just a large workforce, it is developing the infrastructure to support a larger manufacturing and consumer sector.” Vietnam is building new road and rail infrastructure around Ho Chi Minh City and Hanoi and between manufacturing regions and ports to reduce journey times for domestic and export goods.

Thailand does not have Vietnam’s strong GDP growth – 3.6 percent is predicted for this year – and lags in population (72 million), however its consumer and manufacturing markets are both growing.

Foreign firms such as Foxconn and BYD Auto are investing heavily in Thailand. The Eastern Economic Corridor (EEC), Thailand’s prime industrial area, attracted 358.8 billion baht ($10.8 billion; €10 billion) worth of investment last year, an increase of 84 percent from 2021.

Overseas logistics real estate players are entering the market. ESR bought a land parcel in Bangkok last year while Thai-controlled Singaporean developer Frasers Property is active in the sector. A number of Thai residential developers, including SC Asset Corporation, Chewathai and Origin Property are beginning to diversify into industrial and logistics properties.

The physical geography of Indonesia – it is an archipelagic state consisting of 17,000 islands – is a challenge for logistics networks, although the island of Java is home to the capital Jakarta and half of the nation’s 275 million population.

Lack of infrastructure and transparency remain barriers to entry for logistics investors. However, the nation’s growth trajectory – GDP growth of 4.8 percent is predicted for 2023, in line with the 10-year average – and its large population mean there is long-term potential.

Malaysia has been of less interest to overseas real estate investors, although investors such as ESR, Mapletree and Singapore’s CapitaLand, via its Malaysian real estate investment trust, have projects there. Although Malaysia has higher GDP per capital than Indonesia, Vietnam and Thailand, it has a population of only 33.5 million.

Despite its small size, the Singapore logistics market has proven popular with regional players – Mapletree has S$2.5 billion ($1.9 billion; €1.7 billion) of industrial and logistics assets under management there – and has good growth prospects despite a slowing global economy. Savills predicts 5 percent rental increases in 2023 for both warehousing and manufacturing.

With the exception of Singapore, Southeast Asia’s logistics real estate markets are highly fragmented, with relatively small amounts of modern space provided by a mix of local developers, some sector specialists and regional players. “The supply of modern Grade A logistics facilities in Southeast Asia is limited, thus presenting an opportunity,” says Chua.

With evolving supply chains, a growing consumer class across the region and its considerable population, Southeast Asia is set to be an important focus for logistics real estate investment in the long term.