Investments in Japanese logistics strategies are gaining in favour as markets reel from geopolitical tension and macroeconomic shocks, according to experts from GLP, EQT Exeter, APG and MSCI who joined a Mingtiandi event on Thursday.
Speaking on MTD TV’s Japan logistics investment panel, APG Asset Management director Brian Hung said the country’s logistics market has generally outperformed most of its peers in Asia Pacific and will likely continue taking the lead given a relatively stable environment and a healthy e-commerce sector.
“When we look at the logistics sector across the region, Japan certainly still fares better than some of the other markets that we’re currently looking at and for logistics development in particular, it’s probably one of the top markets that we have conviction in,” Hung said. “I think there’s certainly a lot of uncertainty, geopolitical risk is a big one, inflation, and rising interest rates and as I compare across the region, Japan is again, one of the ones where we feel more stable and more defensive.”
This faith in the stability of the Japanese logistics market comes after the country led Asia Pacific for trades of income earning logistics assets over the past six years, when it averaged $4.5 billion in such trades annually, according to MSCI.
Sheds Staying Full
While a surge in development activity led to a record-breaking 860,000 square metres (9.25 million square feet) of new warehouses being added to the market during the first quarter of 2022, EQT Exeter’s head of Asia Pacific Matthew Zann, expressed confidence during the panel, which was sponsored by Yardi, that end-user demand is adequate to fill all these new sheds.
“There’s always been these periods when people say there’s oversupply or undersupply, but the fact is the structural changes in the market have meant that there’s still a massive need for modern logistics,” he said, noting that the growing number of modern facilities came just in time to fulfill requirements and that his team are “not seeing any slowdown on the demand side from the customer.”
Asked for his views on the supply-demand situation in Japan, Yosuke Fujioka, head of investments and fund management for Japan at GLP, said there is “healthy absorption of the supply” in the market this year as the continued rise of online shopping bolsters demand for warehouses.
With the shed sector continuing to expand, and investors diversifying beyond their traditional focus on commercial real estate strategies, Japanese logistics is also gaining greater prominence with new cohorts of investors.
“I think that’s the trend that we’ll be seeing for the past couple of years that we haven’t seen in the last 10 years is that the groups and the variety of investors are looking for this product has widened significantly,” Fujioka said. “Before, it was the sovereign wealth funds and insurance companies, etc, who had experience in this region in the market, but now, we have been communicating with a lot of groups and investors that haven’t been able to build relationships before but they are very kind of bullish and about the market in Japan and also logistics.
Rising Costs, Lower Yields
Benjamin Chow, head of real estate research for Asia at MSCI, echoed the view that Japan provides a safe haven for investors, but pointed out that returns are being dented by construction costs, which are putting pressure on already compressing cap rates.
EQT Exeter’s Zann said combatting high development outlays means keeping other operational costs at a minimum since there is not much headroom for developers to increase rents in Japan, unlike other markets.
On cap rates, MSCI’s Chow said the market’s average yield has dipped to around 4 percent so far this year, dipping below the average over the past three years. The range of yields also has narrowed from 4 to 7 percent prior to the pandemic to levels that are now ranging from 4 to 5 percent.
“Preliminarily at least for this year, the average yields are already slightly lower than full-year last year,” Chow said. “Another thing that we’ve seen is the range of yields has kind of narrowed since the COVID era began in 2019… so I guess this would suggest to me equally that investors are gravitating more towards prime properties and perhaps those with longer WALE or even higher quality tenants.”
“If you want the good stuff, you have to be prepared to pay for it.”
Logistics Forum Continues
MTD TV will be back next week featuring two sets of experts discussing logistics investments in South Korea and emerging Asian markets.
For the South Korean panel on 24 May, Mingtiandi will welcome Sanghwoi Bae, chief executive at ESR Kendall Square REIT; LaSalle Investment Management’s head of Korea Steve Hyung Ki, Hines director for Korea investments Harry Lee, and JLL’s head of South Korea Chae Hun Chang.
Then on 26 May, the forum will continue with a panel on logistics strategies for emerging markets in the region. Joining us for that session will be Logos’ head of leasing for Southeast Asia Kieran O’Flynn, CPPIB managing director and head of real estate for India Hari Krishna V, Cushman & Wakefield head of investor services for logistics and industrial in Asia Pacific Dennis Yeo, and BW Industrial chief financial officer Paul Wee.
The series will conclude on Monday, 30 May, with a panel on e-commerce and innovation in the warehouse sector, featuring speakers from ESR, Cushman & Wakefield and more.