COVID-19 has hit APAC’s property investment markets hard, with the hospitality, retail and office sectors in particular bearing the brunt of lockdowns, travel bans and work from home directives.
One sector that has remained resilient through the crisis, however, is logistics.
Over $7 billion in capital has been raised in funds and JVs over the last six months targeting Asia Pacific logistics assets, according to a new report released by property management and advisory firm JLL.
According JLL data, logistics rents remained largely steady across the region in 2Q 2020, while office and retails rents and capital values have fallen in 8 out of 10 key regional markets. Logistics transactions were down just 6% y-on-y in the first quarter, comparing very favourably to a 32% fall in overall transactions across the whole APAC real estate market.
So, what are the key drivers behind the success of logistics? Why has it performed relatively well through the crisis and what are the factors that are driving investor interest in the sector for the longer term.
The JLL report sees a short-term spike in logistics demand driven largely by the rapid expansion of online grocery spending. In addition, some retailers and manufacturers have been forced to stockpile inbound goods and parts due to the significant drop off in non-grocery retail sales.
Meanwhile increased risk of supply chain disruption has led companies to look for ways to add redundancy and flexibility to their supply chains. This means more logistics facilities, often closer to the point-of-delivery.
On the supply side, there have been construction delays in some markets, leading to fears of a supply side squeeze.
The longer-term investment picture – Why logistics, why APAC?
APAC has seen rapid urbanisation in the past ten years, with the number of people living a city up 20% in the period. Private consumption in China and India is forecast to grow at a CAGR of over 6% between 2019 and 2024 (Oxford Economics, 2020). The region’s middleclass population is expected to grow by over 72% in the next ten years, while the middleclass population in Europe and America is expected to remain flat. APAC’s newly wealthy, urbanised population will need ever more logistics space to serve its growing consumption needs.
APAC is also a leader in E-commerce, with online shopping accounting for 20% of all retail sales, as compared to 14% globally. Typically, e-commerce firms offer a greater product range, hold greater inventory and require more space for outbound shipping and product returns than bricks-and-mortar retailers. Globally E-commerce logistics spending is expected to grow at a 2019-2024 CAGR of 15% with APAC taking a significant share in this growth.
Supply chain modernization is also a key driver for investment in APAC. Tenants are looking for highly efficient facilities, offering automation and streamlined processes, in premium locations. However modern logistics space in APAC as a proportion of total logistics space is still relatively low. As a result, a number of high specification modern logistics facilities are expected to be built in 2020 and 2021 across China, Japan, South Korea and Australia.
As part of the modernization of logistics facilities, the evolution of last mile delivery networks will have significant implications for the design and development of logistics facilities. Some key emerging last mile trends include the shift to urban logistics, delivery optimisation, cross docking centres, and the use of autonomous vehicles. The projected market for autonomous last-mile delivery worldwide is expected to grow from $12 billion in 2019 to $92 billion in 2030.
JLL’s report also highlights an increase in multi-storey logistics developments across the region. While these have traditionally been limited to densely populated markets, such as Hong Kong, Singapore and Japan, where space is at a premium, multi-storey logistics developments are now starting to spring-up in markets such as Australia and India.
Transport Intelligence forecasts that US$106 billion will be spent on APAC contract logistics in 2020, an increase of US$55 billion in 10 years. JLL estimates that 1 sqm of new prime logistics space is needed to service every US$600 increase in contract logistics spending. With spending on APAC contract logistics forecast to grow by around 7% a year between 2019 and 2024, more than triple the growth rate in North America and Europe combined, a corresponding growth in logistics space is expected.
How has the investment market reacted to the rise of logistics?
The report highlights the institutionalisation of the logistics sectors with the world’s largest institutional investors increasingly making investments into logistics funds and acquiring logistics assets.
Global industrial volumes rose by 30% in 2019 (RCA, JLL, 2Q20), overtaking retail as the second most active sector. Investment momentum continued into 1H20, with global volumes totalling US$60.2 billion, ahead of the US$46.8 billion in the retail sector.
As investment in the sector has gone increasingly institutional and large scale, there has been a growing trend towards acquiring logistics platforms rather than individual assets. This helps investors secure tenant networks achieve scale quickly.
Logistics capital values have recorded a strong compound annual growth rate (CAGR) of around 6.4%, over the past ten years, with rentals showing a CAGR of 3.2% over the same period. While JLL expects growth in values to slow in the next three years to 2023, the structural divers listed above should help maintain investors’ confidence logistics sector.
In conclusion expect more opportunities and investments in logistics across APAC for several years to come.
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