Top 3 capital market trends to watch in the APAC logistics sector

Logistics has remained resilient with over US$7bn in capital raised in the last six months.

COVID-19 has impacted Asia Pacific real estate investments, demand, rents and capital values in 2020. Yet, one sector remains resilient - Logistics. In the last six months, over US$7.0 billion in capital has been raised via joint ventures and funds targeting Asia Pacific logistics assets.

In the first half of 2020, overall real estate transaction volumes in Asia Pacific fell 32% year on year, yet logistics transactions reached US$11.1 billion, just 6% lower than the same period a year ago (JLL). Office and retail rents, plus capital values have declined in 8 out of 10 key markets in 2Q 2020, while logistics rents were largely flat across the region. This paper highlights key trends that will continue to drive the growth of investments into the Asia Pacific logistics sector.

Here are the top capital market trends to watch in this sector, according to JLL:

1. Rapid institutionalisation

Global industrial volumes rose by 30% in 2019, overtaking retail as the second most active sector. Blackstone’s acquisition of the GLP portfolio in the US during the third quarter of 2019 for US$18.7 billion - the largest real estate deal in history – boosted volumes in the year. Investment momentum continued into 1H20, with global volumes totalling US$60.2 billion, ahead of the US$46.8 billion in the retail sector (RCA, JLL, 2Q20).

Asia Pacific industrial transactional activity remained particularly strong. Industrial volumes totalled US$26.7 billion in 2019, up 25% from five years earlier. In comparison, retail volumes remained nearly flat over the same period.

The COVID-19 pandemic has undoubtedly impacted deal flow. Uncertainty around underwriting assumptions (for example, rent assumptions, vacancy forecasts, costs of capital), travel restrictions, and lack of pricing visibility has limited volumes in 1H20. Despite these headwinds, investor sentiment towards the logistics sector remains positive.

Once some of the uncertainty around the COVID-19 pandemic lifts, Asia Pacific industrial transaction volumes are expected to continue to grow, supported by the completion of new logistics stock. A sizeable portion of new supply is large scale modern logistics assets of institutional grade. Despite some short term headwinds, a large proportion of new supply is expected to be sufficiently stabilised for potential divestment within six to twelve months of completion.

2. Pursuit for platform deals

There is an increasing trend towards acquiring logistics platforms rather than individual assets. This is occurring for two main reasons:

An example of a platform acquisition is Prologis’ US$4 billion takeover of Industrial Property Trust in January 2020. Going forward, private equity funding into the logistics sector is expected to grow by 5-10% CAGR over the next decade (JLL estimates). As with Europe and the US, we expect Asian investors to access existing private equity or special manager-managed portfolios and develop the expertise to enter joint venture deals with specialized logistics developers, such GLP, Prologis, Goodman and Mapletree.

3. Resilient value upside

Over the last decade, logistics capital values recorded a strong CAGR of around 6.4%, faster than the rental CAGR of 3.2% over the same period. In 2009-2013, Asia Pacific logistics capital values recorded a CAGR of 8.7%, supported by robust rental growth momentum in Shanghai, Beijing, Hong Kong, and Singapore. Between 2014-2019, capital values grew slower but still at a healthy CAGR of 4.1%.

Looking forward, logistics capital values are forecast to grow by a slower 2.0% per annum on average between 2020 and 2022. Subdued rental growth as new supply comes on-line and a slowing yield compression cycle will underpin this slowdown. Transaction volumes could also be lower in the immediate term given the disruption caused by the COVID-19 pandemic. Nonetheless, investors’ confidence in the structural drivers for the logistics sector is expected to remain intact, and capital values are likely to stay firm, with still modest yield compression expected in some markets across the region.