With foreign investment continuing to flow into Asia, logistics is emerging as a serious growth opportunity for providers, with Vietnam attracting most attention. Michael Grimes reports
In the recent report Emerging Trends in Real Estate Asia 2008 - produced by the research body the Urban Land Institute in association with the professional services firm PricewaterhouseCoopers - logistics assets were mentioned just three times in 53 pages.
The only hard data were restricted to average yields in Asia Pacific's four most established logistics markets - Hong Kong, Shanghai, Sydney and Tokyo. This may be simply because there is not much market intelligence for logistics investment outside those established markets.
What seems clear, though, is that as more foreign direct investment (FDI) moves into the popular housing and office markets in Asia Pacific and yields become compressed, then investors are likely to start looking for other growth opportunities in the region.
At first glance, logistics appears to offer those opportunities. Domestic demand for goods and services in Asia Pacific is on the rise as GDP climbs and disposable income increases. Gross yields in Shanghai logistics real estate for the first half of 2007 averaged 10.2% according to data supplied to the report by the real estate services companies Jones Lang LaSalle, CB Richard Ellis and ProLogis. After Chinese taxes are deducted on capital gains it leaves an average net yield of 8.1%.
Competition in the sector is increasing, according to the report. In 2006 there were only five or six funds allocating money to Chinese logistics. In 2007 the number had more than quadrupled. This does not necessarily spell trouble, though, as the Chinese government has a policy of moving economic development away from the rich coastal regions and this will require significant amounts of new infrastructure, including logistics centres. China's inter-urban road haulage network and rail freight network are currently poor, and distribution charges account for 16% of business costs, according to official statistics - an unsustainable burden in the long term.
The output value of China's logistics industry is expected to grow 20% annually to reach CNY1.2trn (€113bn) in 2010, said the organisers of the Asian International Transport and Logistics Exhibition held recently in Beijing. According to Jones Lang LaSalle, the total volume of modern logistics facilities in Shanghai was expected to have risen by 22.17m ft2 by the end of 2007, up from just 14.53m ft2 in 2006.
Looking at other established logistics markets in the region the picture is not so rosy. In Tokyo, for example, capitalisation rates have fallen to an average of 4.5-5.5% after a long period of logistics infrastructure stagnation.
The really good news on logistics is likely to come from Vietnam. The government there is active in building infrastructure and there is a gap in the market for third-party logistics providers of international standard. Although Vietnam currently has an estimated 800 logistics companies according to the Vietnam Economic Forum - a liaison service for foreign investors - most of them are too small to operate in global markets.
Claude Smadja, former managing director of the influential World Economic Forum said in a keynote address at MIPIM Asia, the real estate conference and exhibition held in Hong Kong recently that he thought Vietnam would be the next major success story for FDI in the region.
Alastair Orr Ewing, executive chairman, Vietnam, for Savills, the real estate consultancy, says: "The level of FDI growth in Vietnam has been spectacular. The figure for 2007 is going to be about US$16bn (€11bn) - that's about the same level of FDI as India."
In a recent survey of Japanese companies in Asia by the Japan Trade Promotion Organisation (JETRO), more than 75% of respondents selected Vietnam as the best investment destination for the next five to 10 years - the highest approval rating for any Japanese FDI destination in Asia. A total of 82.4% of Japanese companies already present in Vietnam plan to expand operations there.
JETRO listed Vietnam's advantages as political stability, high and stable annual GDP growth averaging 7-8% over recent years, low-cost and good quality labour and strategic location between the Association of Southeast Asian Nations (ASEAN) bloc and China.
In emerging markets such as Vietnam where manufacturing of textiles, footwear and packaging is at the lower end of the value-adding chain and margins are relatively modest, the potential for modern and efficient logistics to add value to the economy has been spotted.
The government has also recognised that quality infrastructure is a national strategic asset, and can attract high-tech companies operating higher up the value chain. It is supporting private sector logistics investment by providing cheap land and has also leveraged its contribution by attracting soft development loans from international aid agencies and donor countries including Japan.
In Vietnam the Saigon Hi-tech Park (SHTP) has attracted blue chip foreign customers over the past five years. The SHTP authority says it has focused on attracting investment capital in the high-tech markets of the US, Japan and the EU, including a deal with Intel Group, the US information technology firm.
The Vietnam Economic Forum says so far SHTP has licensed 27 domestic and foreign projects with a combined registered capital of US$1.4bn, including 14 FDI projects valued at US$1.28bn and 13 domestic projects valued at US$116m. Another 40 potential investors including Dell and accenture have expressed interest in the park and could bring in a further US$700m. SHTP was expected to have generated US$50m in export revenues by the end of 2007 said the Forum.
In November the World Bank announced it would provide US$457m in soft loans from its International Development Association (IDA) to fund Vietnam's infrastructure and its education system.
In August state media in Vietnam reported that the authorities in Ho Chi Minh City planned to build six new industrial parks by 2020 to complement the 16 industrial parks and export processing zones already located in a development area known as the Southern Hub. The reports said one of the six - a 162-hectare park at Phu Huu _ would provide warehouses, parking and facilities for marine logistics. The report added that the hub expected to attract US$560m in inward investment by the end of 2007.
"Private enterprise growth is increasing by something like 25% every year and the state sector is reducing," says Orr Ewing.
The challenge in Vietnam is that with such a young and heavily subsidised logistics sector on greenfield development and walk-in tenants, it is very difficult to establish true market values for re-sale or re-lease or for injection of assets into listed vehicles.
Logistics real estate of established investment grade standard is still in limited supply in Asia. Even in Japan and Korea, distribution centres are often well below western standards, say industry sources.
"We looked at some logistics opportunities in Korea, but were concerned the properties were basically sheds," says Christopher Kimm, regional director, LaSalle Investment Management, covering Korea. "Once there is a paradigm shift to something like Europe's product or the better quality product in Japan, then these kinds of sheds will become obsolete."
Kimm adds: "We did buy a central distribution centre for Coca-Cola in Korea. It was a great asset for us in its own right, but the price of land has gone up so much that we realised the optimal investment use for it was to redevelop it. We ended up selling it to a Japanese company. Once the lease is terminated they will probably clear it and build residential property."
Rob Blain, chairman and CEO Asia Pacific for CB Richard Ellis, says India is another emerging market where logistics investment opportunities for international players are currently scarce.
"The supporting infrastructure is limited in India, so logistics won't develop as quickly as it has in China. There is though a desire to develop logistics because of internal demand. A population of one billion needs distribution of food, and access to products. This is why India is trying to build special economic zones.
"Some of them have campuses of such high quality that if you closed your eyes and then opened them you could be anywhere in the developed world.
"Until there's enough of this quality logistics product to put into a portfolio they'll find it difficult to package these assets up for foreign investors. Developers are obviously looking for an exit strategy, though, and when the Indian government eventually allows them to inject these assets into vehicles listed perhaps in New York or London, I think these investments will go well."
Motive and opportunity may soon be available in South Korea after the government announced on 12 December that ProLogis, - the world's largest operator and investor in logistics real estate, with assets of US$1bn - had agreed a deal to inject US$600m FDI into the country to build logistics complexes. A further US$400m will be raised domestically by provincial government for the infrastructure project said an official from the ministry of commerce, industry and energy.
Logistics is growing in visibility as an asset type in the region compared with a year ago. This is partly because the user-occupier model previously seen in the established logistics markets of Japan and Korea is changing as conglomerates change their business models and liquidate non-core assets. This has led to logistics being increasingly outsourced to third-party specialists (known as 3PLs) and this in turn supports the leasing market. Such 3PL organisations have the expertise and the willingness to take on the commercial risk of investing in technologically advanced distribution systems such as radio tracking of consignments, barcode inventory and just-in-time delivery. Foreign companies already familiar with outsourcing of non-core activities are also entering Asian markets and providing business for 3PL operators, who again are more likely to seek the flexibility of leasing a distribution depot than tying up capital by purchasing one.
"Japanese companies in particular have come to recognise the importance but intrinsic complexity of supply chains - and the difficulty of getting them to operate properly," says Leonard Sahling, first vice-president, ProLogis Global Research Group.
"They also recognise that logistics and supply chain operations are not their core competency and are turning to 3PLs for expertise and help."
The story told in ProLogis's recent research paper - Japan's Logistics Property Markets-Drive to Efficiency - is both a warning and an education for emerging real estate markets about the need to innovate in the logistics sector.
"The vast majority of Japanese warehouses that exist today are cramped, tired spaces designed for storage and ill-suited for use as fast turnaround distribution facilities," says Sahling.
"Of those Japanese facilities completed prior to 2000, very few had been built expressly for the leased market," he adds.
"Mainstream Japanese companies preferred overwhelmingly to own all properties used in their operations, including distribution facilities. With real estate prices having risen steadily since the 1950s, many companies had been lulled into thinking that property prices would rise forever. In this environment, companies saw nothing but upside to owning their real estate facilities and rarely dabbled in the markets for leased warehouses and distribution space."
This lack of innovation had the effect of keeping Japanese distribution costs high relative to GDP. Since modernisation of Japanese facilities began in 2000, the share of total logistics costs to GDP declined.
In China - where according to official statistics distribution accounts for 16% of business costs - the authorities have also grasped the significance of improving the supply chain. To date, more than 20 Chinese provinces and 60 cities have initiated logistics development plans, says the news agency Xinhua.
The day after its Korean investment announcement, ProLogis said it was spending US$100m on new logistics developments in China.