Industrial real estate: the untapped value in Asia-Pacific

The pandemic has driven a significant surge in demand for logistics over the past two years. This demand for logistics space, mainly driven by e-commerce companies, has shown signs of subsiding.

A combination of heightened inflation and a more cautious approach from businesses anticipating an impending economic slowdown has led to a tapering of consumption, thus impacting the demand.

While demand and leasing rates are no longer red-hot, the industrial real estate sector is resilient, with varying degrees of uptake across different regions in Asia-Pacific.

Tight capacity is helping to keep the price of industrial real estate relatively high by historical standards. While developers raced to build more industrial real estate in 2020 to meet demand, they have started cutting back their plans more recently amid rising borrowing costs.

In our Asia-Pacific Logistics Markets report for H1 2023, a survey of 17 key cities showed an average rise of 10.4% year-on-year in prime logistics rental figures. While the overall rise was fuelled mainly by resilient demand from e-commerce, third-party logistics (3PL) entities and manufacturers, it defied the significant economic challenges that prevailed during the same period.

Average rental growth for Q4 2022 in the region's logistics market slowed to 4.6% from six months ago compared with 8.8% year-on-year. Despite macroeconomic headwinds, demand for logistics space in Australia remained robust and continued to outperform the region.

Investors and developers are now shifting their attention to the financial and development aspects of the market. The rapid increase in funding costs has aligned with the yield compression experienced during the pandemic, raising concerns about potential overvaluation within the sector.

Additionally, the heightened market activity observed in 2021 has marked many assets for sale. Consequently, investment volumes for the first quarter of 2023 have reached their lowest point since the fourth quarter of 2019. However, it's worth noting that yields have expanded by 40-50 basis points across most of the region's markets since 2021.

As assets originating from the 2019-2020 period near their five-year refinancing and exit timelines, we anticipate a surge in motivated sellers in the near-to-medium term. This could potentially offer favourable entry points for investors.

The availability of institutional-grade assets in the Asia-Pacific region is struggling to keep up with the increasing demand. Rising land prices in key urban areas, driven by limited availability, have resulted in higher tenant expenses. Several governments are creating logistics precincts in nearby cities and provinces to tackle the challenges of demand and rental costs. However, achieving a scale and quality comparable to prime areas will require a few more years, keeping rental pressures in place.

Potential growth avenues in emerging economies

The region's diverse socio-economic landscape and extensive geographical reach imply that opportunities remain across various types of assets within the logistics value chain.

Though ripe with potential, emerging markets grapple with undersupply and underutilisation, leaving much of their promise untapped. From just 3% in 2013, investments into Chinese Mainland’s logistics real estate have grown over 20% of overall transaction volume in the last three years. In 2022, 80% was spent in lower-tiered cities.

While these locations lack the bright lights of a tier-one metropolis, lower living costs and lifestyle aspirations power spending – which Beijing strategically focuses on as it prioritises domestic consumption to drive growth.

This is a fundamental requirement for modern logistics properties. According to Morgan Stanley, consumption in these smaller cities could triple between 2017-2030 and account for over three-quarters of the rise in urbanisation. This substantial growth would entail significant demands across various sectors.

With evolving supply networks, Southeast Asia is also set to become an important investment market for logistics real estate. The region remains critical to supply chain diversification and, in the short-to-medium term, will be driven by the China Plus One strategy. In the long term, its e-commerce potential is massive, given its considerable and growing consumer class.