Emerging Markets to Benefit From Supply Chain Diversification, Search for Yield: MTD TV

Investors are turning to Asia’s emerging logistics markets, including India, Indonesia and Vietnam, as the search for yield continues and companies restructure their supply chains to mitigate future disruptions, according to an industry forum on Thursday.

Speaking at the Logistics Investment in Asia’s Emerging Markets panel at the Mingtiandi Asia Logistics Forum, Kieran O’Flynn, head of leasing for Southeast Asia at developer and fund manager Logos said that the ASEAN region is becoming more attractive as cap rates in more developed markets compress, at the same time that it presents a geographical advantage for companies looking to expand beyond China.

“Because of the lockdown that is progressing in China, groups can no longer take the approach of wait and see, they’ve got businesses to run,” O’Flynn said. “They want to make sure that those launches remain on track so moving forward, there will be less of a reliance on contract manufacturers who have a presence in China. So I think you’re going to see those contract manufacturers having to expand into India, Indonesia, and definitely Vietnam.”

This ongoing shift comes at a time that warehouse deals are on the rise in India, Indonesia and Vietnam, with transactions of incoming-earning assets in all three countries surpassing their pre-pandemic averages by at least 50 percent last year, according to figures from MSCI.

Economic Growth To Boost Sheds

Speaking at the same panel – which was sponsored by Yardi – BW Industrial chief financial officer Paul Wee pointed to a series of factors helping to boost demand for industrial space in Asia’s developing markets.

“It’s a confluence of tailwinds from multiple sources, first of all supply chain reconfiguration, China Plus One, e-commerce, tailwinds coming from favourable policies from the government and then of course, the macros have been great – whether it’s GDP (gross domestic product) or manufacturing indices – they all have been tracking up particularly since the beginning of the year,” he said.

In Vietnam alone, Wee observed how investment in industrial real estate stayed active even amid the pandemic, with asset trades happening at cap rates of around 10 percent at the start of 2021 at the same time that yields were compressing in more developed markets.

Dennis Yeo, head of investor services and logistics & industrial for Asia Pacific at Cushman & Wakefield, also pointed to the emerging markets’ fast-growing economies – with Southeast Asian nations projected to outpace China’s expansion this year – and the rising middle class as key drivers of the warehouse sector.

“In the case of say, India, Indonesia, maybe Vietnam to a certain extent, the rent increase will come, it will come sooner than most people expect… because we now have international players that come into the market and the international players demand international standards, in terms of how they do their business, how they store their goods, how they deliver their products,” Yeo said.

“All that put together actually gives you drivers for the demand of industrial and logistics space,” he added.

Long Way To Go

While the panellists are seeing improvements in the sector, CPP Investments’ managing director for real estate, Hari Krishna said these emerging Asian markets still have a long way to go in catching up with their more mature peers like China, both in demand and absorption levels.

“We are the largest institutional owners of industrial real estate in India, which as you can see is a small number by any standards. So that itself is an indication of India still being an emerging market as far as industry is concerned,” Krishna said.

In assessing investment returns in these markets, he said looking at a total return approach is more applicable than the yield approach since most of the returns are coming from a combination of core assets and development projects of modern facilities.

“Also from a liquidity perspective, we haven’t seen public vehicles getting established unlike in office where public vehicles like REITs have been established, a lot of capital has been rotated, a lot of divestments have taken place, so that’s something which is still sort of underway,” he added.

Over the medium term, Logos’ O’Flynn said he also expects occupiers operating in emerging markets to look for ways to modernise their facilities through automation and to begin competing more directly with the more developed markets in the region.

Innovation Up Next

The emerging markets panel was the fifth session in the Mingtiandi Asia Logistics Forum 2022, which will continue on Monday, 30 May, as MTD TV takes a deep-dive into how e-commerce is driving innovation in the warehouse sector.

The sixth and final session of the forum will be an exclusive joint interview with Dr. Michael de Jong-Douglas, group head for customer solutions and partnerships with the logistics division of ESR and Tim Foster, head of supply chain and logistics advisory for Asia Pacific at Cushman & Wakefield.

To date this third annual edition of the logistics forum has attracted nearly 3,000 viewers from around the world, making it the largest warehouse investment conference in Asia Pacific.