Asset Quality, Location Key to Boosting Returns in Korea and Japan Logistics: MTD TV

Despite rising vacancy and oversupply in the broader Japanese and Korean logistics property markets, investors are securing attractive returns from quality assets in desirable locations within the two North Asian economies, according to senior executives from ESR, Qube Industrial and APG Asset Management. Watch the full recording>>

Properties in supply constrained areas which feature state-of-the-art specifications can provide opportunities to capture rental growth and boost asset valuations, Pierre-Alexandre Humblot, managing director of fund management and capital at ESR; James Lim, co-founder and CEO of Qube Industrial; and Brian Hung, director at APG Asset Management told Mingtiandi’s 2024 APAC Logistics Forum on Thursday.

“We have an internal valuation process where we look at the required returns of every strategy across the region, and both Korea and Japan are screening very favourably, although asset selection is very key, location is very key,” said Hung, who sits on the Asia Pacific private real estate team at the Dutch pension manager. “The longer term fundamentals are still sound, and if you can invest in the right locations, with the right specs, along with a good manager, that is an appropriate risk adjusted return that we can get both in Japan and Korea.”

The Japan and Korea-focused session, which was sponsored by Yardi, also revealed major trends continuing to draw investors to the two markets, with Japan benefiting from attractive yield spreads amid the country’s low interest rate environment, while Korea’s ameliorating supply and demand dynamics potentially offer investors an attractive window to deploy capital.

Window of Opportunity in Korea

Lim, whose firm was established in December as a joint venture between Korean third party logistics provider and warehouse developer MQ and US private equity titan Warburg Pincus to develop and operate grade-A logistics properties in Korea, sees a near-term window for investors to enter the logistics sector, as the post-pandemic supply surge begins to ebb, at the same time that e-commerce growth continues to drive demand for warehouse space.

“Given the current market conditions, we think that 2024 and 2025 present a very attractive entry point for investing into logistics in South Korea,” said Lim. “In fact, we think 2024 and 2025 could be potentially one of the best vintage years for investing in logistics warehouses, given the positive market outlook in the coming years, particularly as we see diminishing supply volume as well as growth in demand.”

With consultancy Savills expecting new supply of warehouse space to decline after having peaked last year, Lim sees the sector hitting a “supply cliff” in 2025 as high financing and development costs curtail new projects while existing supply is absorbed. That view was echoed by Hung, who sees supply “falling off” and take-up of existing stock persisting beyond 2025.

At the same time, continued e-commerce growth has boosted demand for warehouse space, with Lim pointing to last year’s 3.7 million square metres of absorption in the Seoul metropolitan area, which more than doubled the 1.6 million square metre volume achieved in 2022. The executive has seen tenants pay substantial premiums to renew leases within Qube’s portfolio, as e-commerce and third party logistics providers add high quality space in desirable locations.

“Although the current oversupply in the market has really stolen the headlines over the last two years, we’re still seeing a very strong absorption volume here in the Seoul metropolitan area,” said Lim. “There’s still very strong demand for high quality, logistics assets in key, strategic locations. In our portfolio, we have multiple assets in what we think is the one of the most sought after last mile locations in the nation, and one of the tenants recently renewed their leases at 60 percent over what they were paying before.”

Japan Carry Trade

With Japan’s logistics sector also seeing rising vacancy and supply, ESR’s Humblot also sees opportunities to capture rental growth in more desirable urban submarkets where there is limited new stock.

“Bifurcation is a phenomenon that you observe in every market around the world, and it’s true of Tokyo as well,” said Humblot. “If you look at the vacancy picture, it is increasing, but it’s quite localised…there are urban logistics markets closer to 23 Wards which are very much in demand, with very little supply coming. And in those markets we are observing 3 percent, 4 percent annual growth…so the value drivers now, for core as well as for development, is really that we are in an environment where, if you have a lot of acumen in picking the individual projects and location, you may see rental growth that exceeds your underwriting to the upside.”

Humblot also pointed to Japan’s logistics property market benefiting from global investors with pan-Asian portfolios seeking to arbitrage Japan’s lower interest rates by borrowing against income-producing Japanese sheds, which can easily service the low debt costs, and deploying the capital in higher interest rate markets such as Korea, Singapore or Australia.

Investors adopting this so-called “carry trade” form part of the $6.9 billion worth of Japanese logistics asset trades in 2023, according to MSCI Real Assets, which increased 38 percent from the previous year after interest rates rose in most major markets except Japan.

“That is the asymmetry between the Western and Western-pegged monetary system and the unique Japanese monetary system, where you can still get access to debt at 1 percent or sub 1 percent for assets that are yielding around 4 percent,” said Humblot. “That’s a great arbitrage, and Japan is the only place at this very moment where you can leverage property with an accretive impact on your returns.”

In addition to the influx in foreign capital, Japan’s logistics sector has also seen growing participation from domestic investors, whom Humblot noted have become increasingly sophisticated and are taking on additional development risk.

More to Come

Mingtiandi’s APAC logistics forum continues next week with a look at the Southeast Asia, India and Australia markets featuring speakers from ESR, Mapletree Investments, BW Industrial, and DWS and more.

On Tuesday, 18 June the event series continues with a panel focused on logistics opportunities in Southeast Asia and India, featuring Jai Mirpuri, head of Southeast Asia for ESR; Souvik Mukherjee, head of logistics development for India with Mapletree Investments, and Fion Ng, chief operating officer with Vietnam’s BW Industrial.

The final session in the series on 20 June takes a look at Australian opportunities with Simon Sayers, head of development for ESR Australia; George Anastasiou, head of real estate for Australia with DWS; Nicholas Bradley, joint managing director at Hale Capital Partners and Benjamin Chow, head of real estate research for Asia at MSCI Real Assets.