APAC logistics: how long & how strong?

The e-commerce boom finds its way into APAC logistics

The enduring, structural shift towards online shopping, greatly accelerated by a global pandemic and stay-at-home mandates, has driven a big uplift in demand for logistics and warehousing space. Innovative use cases from advanced manufacturing, food preparation and even agriculture are adding to tenant demand, at a time of surging investor interest and new supply.

For investors looking at the soaring APAC logistics sector in 2022, there are several timely questions.

• What is the outlook ahead for APAC logistics?
• Are investors late to the party?
• Are we building too much stock?
• What is the scope for tighter yields and more rental gains?
• Is the market overshooting?

Assessing APAC logistics outlook, partway through the upswing

Structural trends are winning trends. A surge in online retail is driving robust demand for APAC logistics, greatly accelerated by recent stays at home, to mitigate the pandemic and rising costs of fuel. This uptrend still has more to run, even in e-commerce market leaders like South Korea and China.

Figure 1: Online retail sales are surging, partly displacing older, COVID-disrupted retail formats

Figure 2: Online shopping adoption continues to rise strongly, led by South Korea and China

Go big and go home. The scale of this APAC buildout is perhaps difficult to comprehend. An annual increment of US$630 billion in APAC online sales requires ~500 new modern logistics warehouses each year, just to enable the seamless distribution networks that deliver goods at the click of a mouse.

Think outside of the packing box. The boom in e-commerce and the need for more distribution capacity are not the only sources of occupier demand growth. There are broadening use of industrial space across this region, particularly with the rise of alternative uses as factories, farms and flex office.

Building too early or too much? Amid a massive building boom, investors need to assess the supply pipeline when entering the market, to see if the new stock would be swiftly absorbed or sitting vacant, due to potential demand-supply mismatches, particularly in terms of timing and/or location.

Figure 3: APAC industrial markets diverge widely on rental growth, given supply

Investors shift decisively. Investors are keenly shifting into this sector, given challenging conditions in retail and hospitality and lingering uncertainty around office. Consequently, logistics asset prices are lifting aggressively in APAC markets and portfolio premia for stabilised assets are on the rise.

Figure 4: Investors have moved keenly into APAC industrial and logistics

Realised as real performance. It took several years for the promise of e-commerce to be realised as stronger occupier demand. Now, the return profile is lifting as robust investor demand drive down cap rates and sustained occupier demand support a firmer pace of rental growth.

When does the logistics party end? There is still scope for outperformance ahead, given robust tenant and investor demand relative to other sectors. The drivers of logistics returns are steadily shifting from cap rate compression to rental gains, which requires more active asset and tenant management.

What is the strategy? In our view, the focus is more skewed to urban-infill last-mile logistics in wealthy cities, closer to consumers, enabling tighter delivery windows and facing fewer supply risks. There is still room for big city-fringe gateway centers, more so in regions with robust growth prospects.