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In conversation with Devashish Gupta, Senior Director of ESR

June 18, 2020
in Articles
In conversation with Devashish Gupta, Senior Director of ESR

Please introduce ESR to the readership…

ESR is the largest APAC focused logistics real estate platform by gross floor area (GFA) and by value of the Portfolio Assets, and has the largest development pipeline in aggregate across the major APAC markets as measured by GFA from July 1, 2019 to December 31, 2020 (as per JLL Industry Report in the ESR Cayman IPO Prospectus dated October 2019).  As of December 31, 2019, ESR managed 17.2 million sq.m. of logistics space (comprising of completed, under construction and land stage assets) across 307 assets. Our Assets under Management is approximately US$22.1 billion.

ESR develops, manages and invests in modern logistics facilities that cater to e-commerce companies, 3PL providers, bricks-and-mortar retailers, manufacturers, cold-chain logistics providers, data centres and others in APAC as logistics infrastructure continues to evolve for the modern economy.

We develop best-in-class modern logistics facilities primarily in Tier 1 and 1.5 cities in APAC by targeting strategic locations near key hubs, major seaports, airports, transportation hubs, industrial zones and data consumption/ availability zones. We operate in the Peoples Republic of China, Japan, South Korea, Singapore, Australia, and India; markets we believe will drive future growth across APAC.

ESR has built an integrated fund management platform which offers a variety of products across the spectrum of profiles and strategies. Through our fund management platform, as at December 31, 2019, we manage 30 private third party investment vehicles across APAC and two publicly listed REITs in Singapore.

Why is logistics booming now?

There are several structural forces behind the success of the logistics sector.

  1. Size of the economic block – The APAC region comprises of over 3.6 billion people (around 50% of the global population) and over US$30.6 trillion of GDP (over 33% of the global GDP). Six economies in APAC – China, Japan, India, South Korea, Australia, Singapore along-with Indonesia, Vietnam and Thailand – account for close to 92% of the nominal GDP in APAC. APAC’s GDP/ capita growth is likely to outpace US and EU by 250 basis points.
  2. Growth in number of middle-class households – Disposable income and consumption levels are key factors driving logistics market growth. Average household personal disposable income almost doubled in China and has grown by around 50% in India over the past decade (based on constant 2015 prices and purchasing power parity basis). Over a similar period of 15 years, total logistics facilities in select China Tier 1 cities increased by close to 500%. Middle class spending is likely to grow 3x from $12.3 trillion to $36.6 trillion from 2015 to 2030. 
  3. E-commerce – Research predicts that Asia-Pacific e-commerce sales will increase at a CAGR compound rate of 23.4% over a 5-year period till 2022, rising to US$4.17 trillion. China crossed US$2.0 trillion in 2019 which is nearly 3x of the US sales. As per CBRE, every US$1 billion in e-commerce sales translates into 100,000 sqm of distribution-space demand which is over 3x the logistics space required in a retail format. In a post Covid world the e-commerce trend Is likely to grow further due to social distancing norms.
  4. Lagging per capita modern stock of logistics – ESR APAC markets have circa 9x the population of the US with less than 1/11th the modern logistics space per capita and the enormous gap will narrow. There is a very significant inherent demand from tenants looking to improve efficiency by moving from Grade B/C warehouses to modern Grade A distribution centres.
  5. Infrastructure development – Currently the logistics cost to GDP ratio in developed markets like the US and Singapore ranges between 7.7% to 8%. The same metric measures at 14% to 15% for China and India and 20% to 27% for Thailand, Vietnam, and Indonesia.  Greater infrastructure spending leads to better roads, containerization and higher truck loads and therefore big box warehousing. Regional governments realize that development of infrastructure will lead to lowering of logistics costs as a percentage to GDP thereby increasing overall productivity.  That was the evolution of modern logistics in US after the Eisenhower road system was built. Asia is fast catching up with significant infrastructure investments.
  6. Changing consumer behaviour – Consumers today demand higher degree of customized products and require them instantaneously. This is leading the growth in data driven (through analytics) smart logistics facilities.

Going beyond a broad definition of logistics – where are we seeing most growth? (inner city, out of town, business parks?)

There are several ways to look at growth vectors:

  1. Disintermediation leading to growth in both big-box outer city and smart inner-city logistics. The traditional supply chain was a linear model and required several layers of stocking the goods at different stages. The modern logistics strategy requires a big box storage warehouse outside of the city limits that can act both as a fulfilment centre to an inner city highly automated smart logistics last-mile facility and also a direct delivery to end consumer for non-time sensitive items. We anticipate significant growth in both segments.
  2. Data Storage – Data Centre growth following the explosion in data creation and consumption due to ecommerce, 5G, AI, automation, and the internet of things. These require lower latency requirements and regulations to in-source data within country limits.
  3. Cold chains – As processed foods and protein intake grows across emerging APAC so will cold storage grow very rapidly.
  4. Light Assembly – Several countries allow assembly-storage-delivery from the same location. This segment is likely to see growth as emerging APAC countries industrialize.

How are these markets reacting to Covid-19?

The exact extent of damage/ demand destruction caused by Covid is yet to be assessed. There is likely to be re-distribution of supply chains leading to a short-term demand/supply mismatches of warehousing space at a few locations, but we do not anticipate any medium/ long term adverse effects. ESR’s stabilized portfolio currently has an occupancy rate of 93% and there is strong demand from e-commerce, food, and consumer-staples-related tenants.

Construction timelines for development projects have not been affected significantly. Disruptions to construction timelines across the entire ESR development portfolio has been minimal except for a very few projects that took a longer time because of government approvals.

ESR has successfully raised new commitments across our APAC countries over the last 2 quarters and our liquidity remains very strong and with cash of USD 884.2 million (as on 31st December 2019). We remain in a position to avail of opportunities that the market is likely to present.

Are we on the road to recovery and what shape will this recovery take?

It may be premature to speculate on the recovery path. It depends on the confidence of the consumer and their ability to purchase. The other key factors are the availability of a vaccine and a potential second wave of the pandemic. We anticipate that the logistics RE sector will remain resilient even during this interim low growth period. Most companies and countries have realized the fragility of the just-in-time supply chain model after experiencing shortages during Covid. This is leading not only to restocking of the depleted supply chain to average levels but to significantly higher levels to meet a future demand surge.  

Will this be a good vintage?

We anticipate some medium-term pain due to Covid but the secular force of consumption and lack of modern Grade-A space across APAC countries should make any year a good vintage in the next few years. Logistics developers focus on yield-to-cost. While the current vintage may benefit from lower land costs there is an equal pressure on rentals. The key point therefore is the risk-taking appetite for institutional capital. Current capital flows and interest in the asset class suggest that most investors would like to increase their exposure to the asset class. Large scale risk-averse capital is flowing into the few core portfolios available in the region but even a larger scale of capital from sophisticated investors with history of investing in APAC is flowing into development vehicles.

How should investors play the market right now?

Relatively speaking, the logistics asset class is new in the region and there is a dearth of large core portfolios. Hence the best way for investors to take exposure is via development. It is important to partner with a credible operator, who has a vertically integrated in-house team, have a geographically diverse presence and a significant alignment of interest. ESR has over 650 people across our operating markets with land sourcing, design & architecture, development, procurement, construction, and asset management all done in-house. This allows for significant time and cost efficiencies but most importantly differentiated land sourcing capabilities from unique off-market land sellers.

A clear benefit of a pan-APAC platform like ESR is our ability to service tenants with a very similar product across all our operating geographies to help them to find a regional solution. As supply chains re-organize and trade dependencies change, an integrated regional play will become critical for success. Another key aspect is alignment of interests; ESR participates in each asset with a substantial equity contribution as our philosophy is to develop and manage the assets in the long term, rather than selling them on stabilization. 

What profile of investor are you looking to reach?

ESR has a strong base of its traditional investors comprising of SWF, pensions and insurance companies from Asia, North America and Europe. We have historically developed platforms with investors that typically like to commit in multiple of hundreds of millions of dollars in country specific vehicles. Recently we have begun developing strategies to provide diversified access to investors who seek a broader exposure to APAC logistics.

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