Investment activity in the industrial sector in Asia’s first-tier investment markets such as Hong Kong, Tokyo and Singapore was largely driven by REIT-related acquisitions in 2005. Macquarie Goodman was observed to be actively seeking out industrial properties in Hong Kong in 2005, acquiring six warehouse and logistics facilities for a total cost of €353.9m (HK$3.532bn).
In Singapore, around €803.4m (S$1.62bn) worth of industrial real estate was purchased in 2005 as existing industrial REITs were seen expanding their portfolios while yet-to-be-listed REITs built up theirs.
In Japan, J-REITs which specialised in industrial assets continued to acquire logistics centres while international developers such as Prologis announced the commitment of US$375m to new development starts.
AMB purchased a site in Yokohama with the intention of developing it into one or more logistics distribution facilities.
Though the industrial investment market is perceived as comparatively less liquid and transparent, industrial rents are generally more stable as they are (relatively) less vulnerable to the kind of construction boom and bust which was witnessed earlier in the office sector. Their leases are generally longer and income stream is steady - which fits the REIT business model, where most of the rental income has to be paid out to shareholders as dividends.
The low interest rate environment seen in the market from 2003 to mid-2005 has contributed to excess liquidity in the Asian real estate market resulting in yield compression in many asset types including office. Consequently, industrial property investment became an important asset class for some institutional investors for diversification and yield accretion purposes, especially risk averse pension funds.
Yields for investment-grade industrial properties are generally more attractive, as in the case of Hong Kong, where initial industrial yields average 8% while other asset types range between 3.5% and 4.5%. In Shanghai, investment grade industrial properties range between 9% and 12%, (higher than other asset classes at 6%-8%) and also more yield accretive for a property portfolio.
Overall, logistics facilities have emerged as the major focus of the industrial market in many cities in the region and overall demand for this type of property is strong. Optimism is founded on the stronger global economy, thriving intra-regional trade, robust growth of the Chinese economy and surging third-party logistics due to the global outsourcing trend.
According to the forecasts of Datamonitor, global expenditure on third-party logistics is set to grow exponentially over the coming years to US$326bn by 2010, an increase of 47% from US$222bn as of 2005. Asia-Pacific will emerge as the main engine for growth, which is tipped to attract one fifth of the world’s third-party logistics expenditure by 2010.
As a company we remain upbeat on China’s logistics market. It is expected that China will remain the primary designation for companies to locate their manufacturing operations. Along with the surging domestic consumption and the opening up of China’s logistics market to foreign investors, market demand for logistical warehousing is expected to remain strong in the medium-term.
The logistics sector in Shanghai was active from an investment standpoint, as several overseas funds made their first-stage mainland China investments in 2005. These included Macquarie Goodman committing to acquire a site and develop a design-built warehouse for Exel Logistics with a total investment in excess of RMB 200m (€19.6m). Such investment activity clearly illustrates the appetite of large investment funds for income-producing industrial properties in Shanghai.
Indeed, many international third-party logistics corporations, manufacturers and retailers have contributed to the robust demand for quality distribution centres in China, whose relatively low labour costs and robust demand for consumer products will continue to attract foreign direct investment.
While the Chinese industrial property market generally provides a higher return, investors are more prone to risk which comes from regulatory uncertainty. Because industrial land is transferred through private treaties, in many cases in the PRC, this sometimes leads to overseas logistics developers losing out to local rivals who have better connections to enable them to buy land cheaply. All these add up to impact on the institutional perception of the PRC as a viable industrial investment destination.
Hong Kong, as a gateway to China, will continue to play a key role in facilitating trade flows between the mainland and its trade partners. The outlook for the industrial market in Hong Kong is upbeat over the medium-term on the back of limited supply and strong demand. Logistics properties will continue to attract strong investor demand, despite the fact that the previous upbeat rental appreciation eased off as end users exhibited growing resistance to further rental escalation.
Since 2003 an increasing number of Japanese companies have been turning to third-party logistics to improve operational efficiencies, a change which is also spurred by the increased sophistication with respect to global supply-chain management.
This, however, has not translated directly into rising rentals, since a fair amount of logistics space is due for completion in the next few years and the businesses driving occupier demand tend to be cost sensitive. However, on a positive note, we estimate the spread between prime office and prime logistics properties to further narrow from the current spread of 150-200 basis points, amid the growing overseas interest, most notably streaming out of the US and Singapore.
The huge potential for the logistics industry in the region is attracting many entrants. However, investors need to be wary of the type of facilities that they are buying into, in particular with regard to title deeds, as in some markets such as PRC, India and Vietnam, there is difficulty in accessing or procuring title documents.
Equally inhibiting are the opaque or semi-transparent market conditions, particularly the lack of public access to transactional records.
Margaret Ng is director of CBRE’s research for Asia. She is based in Hong Kong
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