Asian warehouses: In the e-commerce sweet spot

E-commerce in Asia Pacific is growing by leaps and bounds. In 2019, the region’s e-commerce sales grew by 25.0% to USD2.271 trillion, representing 64.3% of the global market¹. As online shopping continues to gain traction, the storage of merchandise has shifted from a physical storefront to large-scale modern logistics facilities (distributor centres and backup inventory warehouses). In the race for speedy delivery and lower costs, many companies are turning to third party logistics (3PL) operators to distribute their products directly to customers.

In this regard, Asia Pacific is leading the world. In 2018, the region recorded USD358.8 billion in 3PL revenue, with Armstrong & Associates forecasting such revenue to further increase to USD538.2 billion by 2023. This robust growth rate of 8.4% p.a. is much stronger than in any other single region or economy, including North America (7.7%) and Europe (4.3%)².

By introducing modern logistics technologies, such as robotic warehouse systems, procurement analytics and the Internet of Things (IoT), 3PL operators can further reduce operational costs and improve efficiency, thereby shortening sales and delivery lead times and taking on more business. However, the logistics industry is highly competitive with key players striving to expand their market shares, putting considerable pressure on profit margins. Likewise, e-commerce players are also facing intense competition.

It is therefore no surprise that investors have turned their attention to physical logistic facilities as a play on the rising e-commerce trend.

3PL operators and e-commerce companies generally require up to three times more space than do traditional warehouse users³ to handle the greater diversity of products in today’s e-commerce environment. However, with the exception of Australia, there is currently a significant shortage of modern logistics facilities across the region⁴. This demand-supply imbalance suggests that the demand for such facilities will grow 6% (4% in 2018) p.a. in the next two years⁵.

Therefore, owners of logistics facilities – especially of facilities located in prime locations – are most likely to benefit, as seen in the rental growth of industrial property across the region in 2019 (see Fig. 1).

Fig. 1: Asia Pacific logistics rental growth (selected areas)⁶

China’s logistics property market is at the forefront of such growth opportunities. Since 2013, the country has been the world’s largest e-commerce market. In 2019, its online sales were estimated at USD1.935 trillion, representing 54.7% of the global market – a share nearly twice that of the next five countries (US, UK, Japan, South Korea and Germany) combined⁷. Furthermore, this growth trend shows no sign of slowing. As forecast by research firm eMarketer, China’s e-commerce sales are expected to increase to USD4.096 trillion by 2023⁸.

In 2018, there were a total of 610 million online shoppers⁹ and 50 billion parcels delivered in China. To continue to be able to offer domestic consumers speedy delivery (12 hours within city clusters and 24 hours nationwide)¹⁰, China’s 3PL logistics operators and e-commerce players are demanding more logistics and industrial distribution space.

So, despite slower economic growth and trade-related headwinds in 2019, China’s logistics rental market in the Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen) continued to grow (see Fig 2).

Fig. 2: Logistics rental index in China¹¹

In the medium term, as strict land policies continue to constrain the supply of new projects in Tier-1 cities, we expect to see several e-commerce players and warehouse tenants move to new industrial spaces in Tier-2 and Tier-3 cities, and even into rural areas where land is easier to acquire.

Case in point: in October 2018, Cainiao Network, Alibaba’s logistics arm, opened China’s largest automated warehouse in Wuxi – a Tier-2 city in Jiangsu province. With 700 robots processing thousands of parcels and assigning them to over 200 locations in East China¹², this kind of world-class facility will form the blueprint for China’s automated warehouses in the future.

Having said that, China’s e-commerce logistics warehousing remains largely underdeveloped today, with reports suggesting that nearly 98% of warehouses are old¹³. As such, warehouse owners who can upgrade their existing logistics spaces and embrace technological advancement will likely stand out from others. While still in the testing phase, drone delivery will eventually allow e-commerce logistics to capitalise on the opportunities in remote areas where land transport is too expensive.

Opportunities in logistic facilities do not reside only in the developing markets. In the more mature Japanese market, the expansion of e-commerce (JPY 18 trillion in 2018, see Fig. 4) and its relatively low penetration rate (6.2%) relative to global peers such as the US, UK and China, is driving demand for home delivery solutions, thereby raising transportation costs.

Fig. 3: Business to customer e-commerce (EC) market size and penetration rate (2010 to 2018)¹⁴

This trend, together with a shortage of truck drivers and a scarcity of modern logistics facilities (only 4.9% of total logistics facilities)¹⁵, has increasingly driven companies to relocate from ageing warehouses to modern facilities in prime areas. Vacancy rates in the core markets of Greater Tokyo, Osaka and Nagoya have declined, and in the Tokyo Bay Area, vacancy rates even fell to zero in 2019, the first time since 2008¹⁶.

Such strong leasing activity has attracted increasing interest from foreign investors. In December 2019, US asset manager Nuveen reportedly bought a warehouse – Amazon Japan’s backup inventory warehouse for Greater Tokyo – for USD365 million¹⁷. While earlier in July 2019, Blackstone Group acquired a portfolio of Japanese warehouses for USD920 million from Singapore-based Mapletree¹⁸.

We believe that well-managed industrial properties in prime locations should continue to enjoy steady rental growth and high occupancy in Japan.

The long-term outlook for Asia’s industrial property market looks positive. In a survey by PwC and the Urban Land Institute, institutional investors rated the industrial and logistics sector as having the most attractive investment prospects within Asia Pacific’s real estate sector¹⁹.

Institutional investors, including real estate investment trust (REIT) managers, who are looking to gain exposure to logistics facilities across Asia Pacific have embarked on an industrial property buying spree since 2019.

This has pushed the valuations of industrial assets into expensive territory in many cases. The average price-to-book ratio of industrial REITs in Asia, after a tremendous run last year, now exceeds the 5-year historical average by more than one standard deviation²⁰.

Still, industrial REITs are a resilient asset class given lower maintenance costs compared to retail and commercial properties. Given the rich valuations, we are currently selective within the industrial REITs sector, although we are on the constant lookout for new opportunities and valuation dislocation, with preference for sponsored-backed logistics Reits that have a strong development pipeline and capability and lease up assets well. Our portfolios currently consist of a diversified mix of retail, office and industrial REITs across Asia Pacific.