Packaged for Delivery: E-Commerce is Fueling the Asia-Pacific Region’s Rapidly-Developing Logistics Landscape


Featured in Institutional Real Estate Asia-Pacific’s February 2019 issue:

The logistics sector has become a global darling.

Few real estate property types currently enjoy such rosy demand drivers. With e-commerce forecasts rising, big tech targeting a smartphone in every hand, and deliveries possible in a matter of hours, modern logistics facilities are serving an increasingly-important role in the global economy.

This is not a controversial view. In fact, in 2018 prime logistics yields compressed below prime office yields in the United States, according to Real Capital Analytics. Now the true value in logistics investment lies in targeting underdeveloped and underserved markets (see “Logistics cap rate spreads”, below). We believe the Asia Pacific logistics market offers one of the best combinations of strong growth potential and institutionalization globally. Major players are competing to buy properties, portfolios and entire platforms in an effort to establish a competitive foothold in this emerging space as demand continues to exceed supply of modern facilities.

Logistics cap rate spreads to office and local risk-free rate, Q3 2018

Sources: JLL, Oxford Economics, Heitman Research

The logistics landscape in Asia Pacific is rapidly developing, but it would be foolish to paint each market with the same brush. The region’s heterogeneity is one of its strengths. Logistics investors have a variety of options to choose from when looking to build a portfolio in Asia Pacific. More-established markets, such as Australia and Japan, have already seen heavy institutional investment for more than a decade, while institutional penetration in South Korea is just beginning to take off. China is also seeing rapid development in its logistics infrastructure, though investors face high barriers to entry.

In all markets, cutting-edge fit-outs, large floor plates, capacity for automation, and last-mile solutions are in high demand. Urban densification is fueling the need for modern logistics supply chains. Below, we briefly explore three of Asia Pacific’s most-compelling logistics markets, and the risks and opportunities associated with each.


Though Australia — primarily the eastern seaboard markets of Sydney, Melbourne and Brisbane — is one of Asia Pacific’s most-established logistics markets, recent economic growth and new developments in e-commerce are giving the sector a second wind. Inc celebrated its one-year anniversary in Australia in December 2018 and is gradually expanding its offerings. For one, the company commenced sale of non-perishable foods this past October. It has been active in the leasing space, first taking 24,000 square meters in a facility near Melbourne and successively leasing 43,000 square meters in a facility outside of Sydney.

E-commerce providers are still working to develop modern supply chains. Leading Australian real estate group Dexus estimates the same-day retail delivery market is still less than A$300 million (US$216 million), less than one-tenth of what it is in the United States. In Sydney, JLL reports gross annual take-up has exceeded 1 million square meters for the past three years, well above the 10-year annual average of an estimated 700,000 square meters.

Logistics land prices have increased sharply. Australia is not typically viewed as a land-scarce market; prime logistics hubs in the eastern seaboard, however, have become crowded. Over the past two years, Dexus notes logistics land values have risen more than 50 percent in some areas of western Sydney, while values in western Melbourne have climbed 60 percent, and those in southern Brisbane are up 30 percent.

Such price increases are narrowing yield spreads versus prime office assets. Colliers International notes prime logistics assets near Sydney are trading at estimated yields in the low 5 percent range. This is roughly 50 basis points above grade A offices in the central business district. Moreover, logistics-facility cap rates have tightened at a faster rate, compressing a further 50 basis points in Sydney over the past 12 months against 30 basis points for the more-institutionalized grade A office market.

B2C e-commerce penetration by country, 2017

Sources: Estimates based on Economist Intelligence Unit; Bank of International Settlements; Korea Ministry of Strategy and Finance; Japan Ministry of the Economy, Trade and Industry; Heitman

Amid this exuberance, investors must be mindful of potential oversupply, as well as technological obsolescence. JLL data indicates the amount of warehouse supply delivered in Sydney and Melbourne over the past 12 months exceeds their respective 10-year average by 65 percent and 52 percent. Take-up is also strong, but the number of speculative projects is increasing. Furthermore, automation and distribution technologies are advancing rapidly. Buyers must be confident a potential acquisition remains competitive through its investment horizon.

We expect warehouse spreads will continue to narrow against office assets as the sector benefits from ongoing structural transformation. Distributors are exploring new ways to store and ship fresh food, and automate new parts of their supply chains. This ongoing transformation should provide more opportunities for logistics investors, independent of the state of the business cycle.


The Japanese logistics market is relatively young. Mitsubishi Estate Co, Mitsui & Co, and Sumitomo Mitsui Trust Bank listed the country’s first dedicated logistics J-REITs in 2005–2007, when warehouse assets traded at spreads of about 200 basis points over offices. At the time, Japan’s logistics infrastructure was still fragmented. Most corporates kept company warehouses on their balance sheets, and the individual assets tended toward small, non-standard, inefficient schemes.

After the global financial crisis, large overseas developers began to target Japan’s market in earnest. Groups such as Prologis and GLP identified the country’s fragmented, heterogeneous warehouse stock as an opportunity for disruption. They moved in and began to construct large-scale, multi-floor, technologically-advanced warehouses in key distribution corridors. They offered to lease the space to domestic corporates, and helped standardize parcel sizes and shipping methods. This standardization spurred the growth of Japan’s third-party logistics industry, which eagerly took control of distribution and helped corporates streamline supply chains.

Major domestic developers followed with their own high-tech development programs. Today, many large domestic players have their own warehouse brands. Several are following with REIT listings — 2018 alone saw the listing of CRE Logistics REIT in February and Itochu Advance Logistics Investment Corp in September, bringing the number of listed industrial J-REITs to eight.

Developers are pouring new, high-grade product into the market. Tokyo is in the midst of a logistics construction boom, with total stock expected to increase 40 percent from January 2018 through December 2019. CBRE data indicates take-up is strong, however, with most projects completing as pre-leased. The same data states vacancy for assets more than one year old is only 1.4 percent.

Nevertheless, growth in supply means investors must be selective in future acquisitions. Fringe submarkets along the northern edge of the Ken-O Expressway, for example, are starting to see material vacancy. Some assets are reportedly remaining as much as 25 percent vacant through their first year of operation. A sparse (and declining) local workforce, as well as inferior connectivity, are giving occupiers pause in these select areas.

Other submarkets remain sound. Occupiers are eager to secure space in quality distribution hubs as business-to-consumer (B2C) e-commerce volumes rise. Japan’s B2C e-commerce penetration is still only 5.8 percent of total retail sales, according to the country’s Ministry of Economy, Trade and Industry’s latest annual report. This is significantly behind other developed nations and even some emerging markets (see “B2C e-commerce penetration by country, 2017”, above). Penetration in Japan is steadily catching up, however, as the country sheds its cash economy for credit cards and e-payments. Though logistics supply figures are intimidating, underlying take-up should keep pace in prime hubs as large supply chains move online.

This, in turn, is likely to draw more investment to the sector. Cap rates for prime assets in Tokyo had tightened to approximately 4.0 percent as of early December 2018, but properties are still trading almost 150 basis points above prime offices. Though rental upside is limited, we expect this spread to narrow further as logistics assets become a more integral component of the Japanese economy.

Logistics investment volumes, select markets

Sources: RCA, Heitman Research

South Korea

It is popular to claim South Korea’s logistics market today resembles that of Japan’s 10 years ago. There is some truth to this statement. South Korea now appears to be experiencing the same rapid acceleration in supply and investment seen in Japan after the global financial crisis.

One major difference is strong e-commerce demand is already manifest in South Korea. According to the Ministry of Economy and Finance, B2C e-commerce penetration has already reached more than 20 percent of retail sales. The online sales market has seen a compound annual growth rate of 25 percent over the past five years. CNBC analysis indicates South Korea’s current growth trajectory puts it on track to surpass Japan and the United Kingdom during the next five years to become the third-largest e-commerce market in the world, behind only the United States and China. Infrastructure development is under way that should help e-commerce growth. New highway expansion projects, such as the second Gyeongbu Expressway linking Seoul and Busan, will improve connectivity.

The country’s warehouse stock is not equipped to meet this demand. Despite its impressive online infrastructure, South Korea’s physical logistics infrastructure is outdated. Only 5 percent of Seoul’s warehouse gross floor area is in facilities of 30,000 square meters or more, according to Savills Korea. Fit-out is generally of low quality, and leasing brokers report difficulty in filling mandates for modern, large-scale space.

This supply/demand mismatch is now attracting heavy investor interest. RCA data shows logistics investment volumes in 2017 totaled KRW 2.5 trillion (US$2.2 billion), more than double any other year on record. 2018 looks to approach similar levels, with nearly KRW 1.0 trillion (US$894 million) deployed in the first half (see “Logistics investment volumes, select markets”, left).

As in Japan, the first wave of investment appears to be largely from offshore capital. Savills Korea estimates offshore capital accounted for 70 percent of investment volumes in 2017. This is in stark contrast to the office sector, where offshore investors contribute a minority of volumes.

We expect South Korea’s large, institutional pension funds and asset managers will get more involved as the sector becomes established. This should further tighten the cap rate spread over traditional office assets. Modern distribution centers are currently trading at cap rates of about 6 percent, offering a comfortable spread of more than 160 basis points versus traditional office assets. This spread has been tightening at a rate of more than 25 basis points a year for the past three years. South Korea is home to some of the world’s largest pools of pension and insurance capital; domestic warehouses are likely to see additional yield compression as these investors enter the logistics market.

The bottom line

Ample opportunity remains for offshore capital to get involved. The South Korean logistics sector is expanding rapidly but is still a long way from meeting pent-up occupier demand. As in Japan and Australia, we expect occupiers to continue to seek space in prime transportation corridors near major population centers. New players must do thorough analysis to ensure they fully understand the supply and demand dynamics at play in each submarket.

Ultimately, the compelling combination of strong growth potential and institutionalization has propelled the Asia Pacific logistics sector into the minds of both domestic and overseas investors. The sector will continue to play a key role in portfolio construction. It is important to understand the nuances of the industrial market across each country, however, and tailor investment strategies to address the specific risks and opportunities unique to each region.

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