Regional Real Estate Research
Why are logistics warehouses being sought after in Asia?
CONTENT INTRODUCTION SECTION 1 – Private Consumption
• Young Population
• Growing Urbanisation
• Burgeoning Middle Class
• China as the Key Driver
• Online Retailing
SECTION 2 – Real Estate Investment
• Global Risk Aversion
• Development Cycle
• The Opportunities Are There
• Winning Strategies
• Key Challenges and Threats
• Logistics Warehousing and Rental Outlook
• Industrial Yield
• Logistic Yield
COLLIERS' VIEW
INTRODUCTION The increasing volatility of prices in various asset markets and the growing difficulty of finding reasonable risk-adjusted returns have pushed investors into niche real estate sectors such as hotels, serviced apartments and logistics warehousing. Logistics warehouses have come onto the radar of most prospective investors simply because this unique property sector offers them the benefits of stable rental income and premium yields. For this report, we conducted a comprehensive review of the key market drivers of the logistics warehousing sector, including the strength of local private consumption, the ever-increasing rate of urbanisation, and the skyrocketing volume of online retail sales. Besides the support of retail consumption, the resilient performance of Asia’s industrial production offers solid evidence to support the strong case for investing in the region’s logistics warehouses. This report also explains why this unique sector has hitherto been overlooked, and why investors should consider it now.
1
A Resilient Market The prolonged sovereign debt issues in Europe and the uninspiring pace of recovery in the US have flustered global markets to varying degrees. Yet economic activity in Asia has remained largely resilient to such external threats, because most of its countries have been prudently managing their debt level relative to GDP.
Despite slackening demand for imports in western economies, Asia’s industrial production has continued on an upward trend. Although external shocks, such as the global financial crisis in 2008/2009, resulted in slight disruption, the region’s industrial output, as a proxy for the general demand for logistics warehouses, grew at a CAGR of 10.4% between 2009 and 2012. Interestingly, its current growth momentum is faster than it was during the precrisis period (i.e. from 2002 to 2007) after Asia benefited greatly from China’s entry into the WTO in 2001.
Asia Industrial Production Index 300
60%
250
50%
200
40%
150
30%
100
20%
9.3% pre
- 50
Jan-13
Jun-12
Apr-11
Nov-11
Sep-10
Jul-09
Feb-10
Dec-08
Oct-07
May-08
Mar-07
Jan-06
Aug-06
Jun-05
Apr-04
Nov-04
Sep-03
Jul-02
Feb-03
Dec-01
Oct-00
May-01
Mar-00
Jan-99
Aug-99
Jun-98
Apr-97
Nov-97
Sep-96
Jul-95
Feb-96
Dec-94
0%
Oct-93
0
May-94
10%
Mar-93
50
-10%
9.11 Incident
"GFC" Shock
- 100
-20%
- 150
-30% Source : CEIC
% change year-on-year
10.4%
9.3%
Jan-92 Aug-92
Index (2000 = 100)
GFC
10.4 % after
Besides the proactive initiatives implemented by various governments to boost their internal consumption, Asia’s demographics bode well for private expenditure in a number of countries where the average age of the population is young, household income is consistently rising, and the number of middleclass families is growing. All these factors have formed a solid base for increasing retail sales. Fundamentally, the demand for logistics is a function of external trade. Yet the growing significance of private consumption expenditure in Asia has gradually redefined the prospective demand for logistics real estate in the region.
Note : The Asia Industrial Production Index is an aggregate indicator of the overall industrial production volume in Asia. It covers 21 countries. The Index is updated every month by CEIC, and it starts with a baseline of 100 in the year 2000.
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SECTION 1 Private Consumption Private consumption by the local population on general merchandise is a key driver of the demand for logistics. Such merchandise includes a range of fast-moving consumer goods (FMCGs) for daily consumption. Another is the spending of wealthier households and inbound visitors on luxury items. The growth in private consumption reflects not only the region’s relatively bright economic prospects but also its encouraging demographics, including a young population, the sustained pace of urbanisation, and the emergence of middle-class households. All of these are expected to underpin private consumption expenditure in the future, and the consequential demand for logistics real estate to cater for local distribution.
Young Populations The spending momentum in Asia is going to be sustained by the fact that its average population age is young. As of 2010, around 45% of Asia’s 4.2-billion population was aged between 20 and 49. This demographic group tends to have a higher disposable income and spending capacity. The percentage will remain largely unchanged between 2010 and 2020.
As of 2010, around V
of Asia's 45% 4.2-billion population was V
Among Asia’s key markets, China is going to be the powerhouse in terms of growth, given its huge population and proactive government initiatives, which include constant reviews of its economic model and the continued development of infrastructure links to foster internal consumption by allowing the country’s second and third-tier cities to catch up with its firsttier ones.
aged between
20&49
The trend in individual Asian cities is exemplified by the increasing number of high-income singles and families (known as “DINKS” – Double Income No Kids). Besides general merchandise, this population sector has a growing appetite for luxury products.
Asia Population Distribution 10%
2010
2020
9% 8% 7% 6% 5% 4% 3% 2% 1%
80+
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
0%
Source : United Nations, Department of Economics and Social Affairs
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5
Growing Urbanisation
Burgeoning Middle Class
The continued improvement of infrastructure and further economic growth are driving the demand for labour in Asia’s cities. Around 200 million more people will move into them between 2012 and 2017. In addition, the unemployment rate in most Asian cities is currently below its historical average level, thus indicating that a tight labour supply will fuel the growth of wages, and thus private consumption expenditure.
Asia’s strong economic growth will do more than boost the volume of sales in its retail markets; it is also going to increase the number of middle-class families and high-net-worth individuals (HNWIs) who can afford to buy high-end luxury products. The chart below estimates the sharp increase in the number of middle-class households that will occur between 2010 and 2020. In fact, according to the Boao Review, 696 million of the world’s 2 billion middle-class inhabitants lived in Asia in 2010. The projection suggests that the number of Asia’s middle-class people will increase by 158% to a total of 1,794 million by 2020. In terms of geographical distribution, China and India will account for 80% of this net increase.
Forecast Growth in Urban Population ( 2012 - 2017 )
China 87.1 India 42.5 Indonesia 24.2 Source : The EIU
Regional Real Estate Research I June 2013
Growing Middle Class in Asia Number of people (million)
Number of people (million) Pakistan 11.3 Philippines 10.3 Vietnam
3.8
Malaysia
3.0
Thailand
2.1
South Korea
0.8
Singapore
0.7
Taiwan
0.6
Hong Kong, SAR
0.1
Asia
2010
2020
696 1,794
179 China 607 82 India
127 Japan 122 308 Rest of Asia
536
530
Source : The Boao Review Note : “Middle-class” households are defined as households with a daily expenditure of between US$10 and US$100 per person, based on 2005 purchasing power parity items
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The propensity to spend money on luxury goods in China is undoubtedly rising, due to the sustained accumulation of wealth in the country during the past decades. According to projections by Euromonitor, the number of high-income households (i.e. those earning US$35,000 or more in a year) will grow more than threefold, from 20 million in 2011 to 65 million by 2020, whereas the percentage of high-income households is forecast to increase from 5% of the total in 2011 to 15% in 2020. More importantly, the number of middle-class families in China will increase significantly during the same period. For example, the number of upper-middle-income households with earnings of between US$15,001 and US$35,000 will nearly double to around 135 million.
Household Income Distribution in China
100%
As a Percentage of Total Number of Households
90%
1% 5%
High (More than US$35,000 p.a.)
Middle (US$7,500-15,000 p.a.)
Upper middle (US$15,001-35,000 p.a.)
Low (Less than US$7,500 p.a.)
5% 15%
14%
16%
80%
70%
32% 28%
60%
50%
40%
80%
29%
30% 51% 20% 24%
10%
0%
2005
2011
2020 (Forecast)
Source : Euromonitor
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10
China as the Key Driver
Online Retailing
The total volume of retail sales in Asia increased by 12% year-on-year during 2012; and it surpassed US$7,000 billion for the first time, thanks to the robust growth of consumption in mainland China. The top three locations in the region by market size – mainland China, Japan and India – constituted more than 80% of the total pie. In fact, mainland China’s US$4,000-billion market has been the key contributor to its overall growth. Besides economic growth, the unrelenting increase in household
The volume of retail sales conducted via the Internet has ballooned over the past decade, due to the continued advances of information technology and greater Internet connectivity. The increasing use of broadband connections via smartphones has added extra momentum to the growth of online retail sales. These rose nearly threefold between 2010 and 2012. Yet there is still a huge amount of room for further growth. The volume of online sales is forecast to soar by a further 260% in the five years up to 2017. The pace could be even faster if the current percentage of online sales to total physical sales of 2-3% catches up with mature economies, such as the 5-7% in the US. Demand for logistics facilities to get these physical products delivered from retailers and wholesalers to companies and private individuals is reckoned to be equally strong.
incomes resulting from the tight labour market and minimum wage legislation should create a strong impetus for China’s sustained growth. According to the EIU’s projection, China is set to overtake the US for the first time ever as the country with the world’s highest volume of sales during 2013.
others
more than
80%
China, Japan and India Retail Sales in Asia (By Country / City)
On-line Retail Sales (Asia Pacific)
2013
450
2014
Forecast
5,000 400
4,500 350
Value of Sales (USD billion)
Value of Retail Sales (US$ billion)
4,000
3,500
3,000
2,500
2,000
300
250
200
150
1,500 100
1,000 50
500
0
China
Japan
India
Source : The EIU
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Indonesia Sourth Korea
Thailand
Taiwan
Philippines
Malaysia
Vietnam
Hong Kong
Singapore
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source : Euromonitor
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SECTION 2 Real Estate Investment The popularity of logistics warehouses in Asia as a form of investment has increased in the past couple of years, due to a significant shift of focus by real estate investors away from just short-term capital appreciation towards yields and income security. This can be explained by the fact that sustained economic uncertainties in the marketplace have made global markets increasingly volatile.
Global Risk Aversion Global risk aversion is the buzz phrase among many real estate investment managers nowadays, and people are increasingly going for yields. Also, investors are getting more and more concerned about the growing policy and liquidity risks in some Asian markets. For example, the residential sector is becoming very politically sensitive, as a number of local governments are determined to curb any dramatic increases of local housing prices in order to counteract the risk of a real estate bubble. At the same time, it would be more difficult for investors to exit the market if there is an oversupply situation and a lack of market liquidity. The commercial sector has a good level of liquidity and there is constant demand. Yet it is always a challenge for investors to secure investment-grade developments at prices that match their target returns. Moreover, it is too difficult for general players to participate in the retail property market, unless they have already built up a team of retail-focused staff on the ground, and have the assistance of local experts.
Development Cycle Although logistics warehousing is a highly-specialised property sector, the level of risk during its development is relatively low, because it progresses from a bare site to completion without too many complications. And it is easy to replicate after the first project has been completed successfully, as developers and their local partners grow increasingly familiar with various aspects of the process, for example quality requirements and building specifications.
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The Opportunities Are There
Asia Real Estate Investment Sales Transaction Volume
Investors tend to adopt a defensive mode when it comes to risk aversion. Many would prefer to stick to the basics and work on realistic return parameters. Asian investors have been challenged with yield compression in a number of property sectors. However, there are still industrial and warehousing opportunities that yield a net operating income of over 8% per annum say in China, if investors go out to find them.
120
Value of Transactions (US$ billion)
100
80
60
40
20
0
2007
2008
Office
2009
Industrial
2010
Retail
2011
Apartment
2012
Hotel
Source : RCA Note : Properties and portfolios $10 million and greater
Winning Strategies
Key Challenges and Threats
While the market in Asia is competitive, it is also big enough to accommodate more investors. In China, demand for modern logistics facilities in second and third-tier cities has been growing rapidly. Given the current distribution of economic activity across the country, investors will have a better chance of winning market share if they plan and invest concurrently in both first and second-tier cities. The experience of seasoned market players shows it makes more economic sense to develop a cluster of three or four warehouses in one city, so that they can leverage their total fixed costs better and gain more market exposure and visibility.
A key challenge for most prospective investors is the fact that the logistics warehousing market is not transparent, especially in China and Japan, plus the fact that stock is not readily available for sale. The value of sales transactions of industrial and logistics developments in Asia forms just a minor 7-10% of the total pie, according to statistics provided by RCA. The thin sales transaction volume is attributable to the lack of modern logistics facilities on the supply side, relative to the inherent demand created by ever-growing economies. A significant number of existing logistics warehouses in China are not yet up to international standards. Many of them are simply converted, dilapidated factories. The conclusion is that demand for modern logistics warehouses will continue to outstrip the level of supply, at least in the near to medium term.
As previously discussed, teaming up with local partners who understand the local market and sourcing suitable developments are the best strategies for most players. Changes of government personnel are a key risk factor in the majority of Asian emerging markets. In the case of new construction, frequent changes to the statutory requirements concerning building services also affect the total cost and timeframe of construction.
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joint-venture
A partnership with a local developer can help V investors avoid some of V the above risks, notwithstanding the fact some would argue that partnering itself creates risks !
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Logistics Warehousing Rental Outlook
Industrial Yield
Three most-popular logistics hubs in Asia : industrial and logistics rentals there currently average US$22 per sq. ft. per annum.
As a general investment benchmark, the average industrial capitalisation rate in Asia fell to an all-time low of 5.8% in 2Q 2012; but it edged up again to 7.1% in 1Q 2013, according to statistics provided by RCA. The increase in cap rates reflected growing uncertainty in the traditional warehousing sector about the sovereign debt problems in the Eurozone, which had still not been fully resolved. However, strong demand continues for quality logistics warehouses and distribution facilities, particularly those supported by seasoned managers, and the average capitalisation rates have been compressed.
TOKYO
Hong Kong
In China, the norm is around US$6-7 per sq. ft. per annum; and in most Chinese cities, they are expected to increase in the order of 3-5% per annum, thanks to the sustained growth of industrial production, cargo throughput volume and local retail sales.
Singapore
Beijing is going to deliver an exceptional performance, primarily due to the accelerating expansion of its third-party logistics (3PL) companies and e-commerce sector. Meanwhile, the growth momentum is going to be sustained by the city’s lack of new supply of quality, modern logistics facilities. In Tokyo, the leasing market has remained steady, and it is well supported by a number of local logistics companies. Given the length of leasing contracts, in the region of 5-10 years, rents in Tokyo are expected to stay relatively flat. In India, the leasing market’s outlook continues to look positive, thanks to the demand from light industry and IT/ITes sector. Meanwhile, the Indian government has supported the upgrading of local infrastructure to international standards. Backed by demand from end users, rents are forecast to rise by around 5% in 2013.
Asia Logistics / Industrial Rentals ( By Key Markets )
Asia Industrial Capitalisation Rates
25
Industrial Capitalisation Rates
25%
10-year US Bond Yields
Average Industrial Cap Rate (2007-2012)
9.0%
10% 10%
10
5%
5%
5% 4%
5
5% 3%
Capitalisation Rates/Bond Yields (% per annum)
Rental (US$ per sq ft per annum)
15%
15
Forecast Growth (% Change year-on-year)
8.0%
20%
20
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0% 0.0% 1Q
2012
4Q
3Q
2Q
1Q
2011
4Q
3Q
2Q
1Q
2010
4Q
3Q
2Q
1Q
2009
4Q
3Q
2Q
2008
1Q
2007
4Q
Guangzhou
3Q
Beijing
2Q
Shanghai
1Q
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Delhi
4Q
Source : Colliers
Tokyo
3Q
Singapore
2Q
Hong Kong
1Q
0%
0
2013
Source : RCA; CEIC
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Colliers' Views Without doubt, the universal golden rule for real estate investment is “Location, Location, and Location”. Yet the property sector that has been gaining popularity in the past couple of years has been “Logistics, Logistics and Logistics”. Perhaps, the best buzzword nowadays would be “Logistication”!
Logistic Yield Asia Logistics / Industrial Yields ( By Key Centres )
In our view, the key reason for the change in emphasis has been a shift in the strategy of investors towards risk-averse properties, particularly since the global financial crisis. Put simply, growing price volatility in traditional commercial real estate sectors and the increasing difficulty of sourcing reasonable risk-adjusted returns have pushed more investors into logistics warehousing – a niche property sector that demands a good combination of physical (i.e. quality real estate) and intangible (i.e. value added by a seasoned management) elements.
12%
Yields (% p.a.)
Risk-free Rates
10%
Yield (% per annum)
8%
Logistics warehousing is a proven defensive play with long-term growth potential. Demand for it in Asia is currently being fuelled by positive demographic factors (e.g. the average population age and the pace of urbanisation), the political policies being pursued by individual countries, and growing private consumption expenditure in the region. However, there has always been a lack of supply of good-quality logistics warehouses with high physical specifications and management support by third-party logistics (3PL) operators. A lack of investment-grade assets available for sale has been the main reason why the sector was largely overlooked in the past.
6%
4%
2%
0%
India
China
Japan
Singapore
Hong Kong
Source : CEIC; Trading Economics Note : Risk-free rates refer to long-term government bond yields
Due to the sustained flow of investments into Asia, and the region’s subdued inflationary environment, risk-free rates have consistently fallen by around 35 basis points over the past 12 months. The logistics and industrial property yield spread compared to these risk-free rates narrowed further during the 12 months up to 1Q 2013. However, the spread widened in Japan. Ten-year Japanese government bond yields fell to 0.58%, as of April 2013, due to the government’s determination to loosen its monetary policy in order to spur inflation. The J-REIT market has become active as a result of the enhanced volume of liquidity. In Hong Kong, investment yields by valuation are in the order of 3.60%, due to sustained demand from end users, the strong appetite of private equity investors, and expectations of further capital appreciation arising from the industrial revitalisation initiatives being pushed by the government. In China, long-term real estate funds have been eyeing opportunities for modern warehousing facilities for long-term growth in both the first and second-tier cities. Investment yields for quality logistics premises in China currently range from 6 to 8% per annum. Given genuine support from occupiers, overall investment yields have remained more than 300 basis points above the risk-free rate. The yield spread in India is similar, where demand from manufacturers wishing to upgrade remains strong. In Singapore, the yield spread is more than 400 basis points, despite genuine rental support, as capital growth expectations have been moderated by the government’s new cooling measures.
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Pros
Cons
Strategies
Growing demand for quality warehouse
Complex local rules and regulations
Partnering with a right local expert
Short development cycle; easy to replicate
Easy to introduce competition
Building up a critical mass; Targeting 3-4 development per city
Premium yields
Liquidity risk
Going for a long-term hold to enjoy steady rental return
For many years, so-called logistics warehouses have been dominated by local players. The widely varying standards of service quality they have offered has resulted in very different rental and occupancy performance. However, demand for top-quality logistics warehouses managed by trustworthy 3PLs is actually expanding, due to the growing requirements of principals engaged in the entire supply chain management process – notwithstanding the challenges posed by the global economic slowdown. In fact, macro-trends in Asia have remained very solid, as can be demonstrated by the resilient performance of both the region’s industrial output and the volume of retail sales. Last, but not least, the key challenge for prospective investors is perhaps how to team up with a local partner who possesses the best local knowledge about areas such as rules and regulations, in order to source opportunities that offer a yield spread of at least 300 percentage points above the corresponding risk-free rates.
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For further details, please contact: Executive Sponsor
Piers Brunner Chief Executive Officer, Asia piers.brunner@colliers.com Tel: +852 2822 0727
Author
Simon Lo Executive Director Research & Advisory, Asia simon.lo@colliers.com Tel: +852 2822 0511 Jessy Chung Analyst Research & Advisory, Asia jessy.chung@colliers.com Tel: +852 2822 0643
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