While the Covid-19 pandemic has upended most industries and dragged the global economy into recession, it’s been a boon for logistics assets, Jeffrey Perlman, chairman of ESR, the largest logistics real estate platform in Asia pacific.
“Logistics hasn’t skipped a beat over the past three to four months even in the midst of the pandemic,” Perlman said in a video interview earlier this week with Mingtiandi. “It’s been a busy period. Investors have really looked to prioritize logistics over almost any other property type within real estate given a lot of the resilience that we’ve seen in logistics on the back of e-commerce.”
While the Covid-19 pandemic dragged commercial real estate transaction volumes 44 percent lower to $55 billion across the Asia Pacific in the first half, the industrial sector saw a much smaller decline in transactions, according to a report published by Knight Frank today.
Logistics as Bright Spot
“Industrial is most insulated as investors are keen to deploy capital into logistics facilities and data centers that have increased in importance during this period,” said Neil Brookes, head of capital markets for Asia Pacific at Knight Frank.
That capital could come in part from the $38 billion capital that private equity funds had raises for investments into the commercial real estate market in the Asia Pacific as of December 2019, according to Knight Frank. That figure represents a nearly eight-fold increase over the $5 billion in dry powder that fund manager had raised for APAC real estate investments in the two years before the global financial crisis, according to Knight Frank’s analysis.
With that cash ready to deploy, investors could be looking to boost their exposure into logistics assets on the back of the growing importance of e-commerce, Perlman, who is also managing director and head of Southeast Asia at Warburg Pincus, said. The New York-based private equity firm, which has over $58 billion of assets under management is a key shareholder in ESR.
Traditionally, fund managers allocated 20-25 percent of their portfolios into bricks and mortar retail assets and only 10 percent into logistics assets, he said. That ratio is increasingly tilting in favour of logistics given the rapid growth in demand for such assets, he added.
Pandemic Accelerates E-commerce Adoption
The e-commerce boom is a key driver for rising demand for warehouses, Perlman said, adding that the Covid-19 crisis is helping to accelerate the adoption of e-commerce.
“Everyone knew that e-commerce was growing in its importance,” said Perlman. “But now even the older generation who had never bought anything online in advance of the crisis have been forced into it. They’ve seen that it’s quick, it’s affordable and it’s convenient. Going forward, they’re probably going to continue using e-commerce.”
The rapid growth in online consumption will have a huge impact on logistics developers as e-commerce companies typically require three times more warehouse space than bricks and mortar retailers, Perlman said.
Boom in Grocery, Meal Deliveries
Besides online fashion retailers, demand for warehouses is being fueled by grocers, pharmaceutical companies and food delivery firms as consumers hauled up at home because of social distancing measures aimed at curbing the further spread of Covid-19 turn to online shopping. For instance, Grab and Foodpanda have been setting up so-called cloud kitchens to help restaurants cope with a surge in demand for cooked meals.
The manufacturing sector is another driver of demand for warehouses, according to Perlman. Because the pandemic has disrupted global supply chains of many industries, manufacturers are increasingly looking at building greater levels of local inventory and in turn will need to add warehouses across multiple markets to enable just in time deliveries to their clients, he said.
As working from home becomes the new normal, Perlman said demand for self-storage will likely grow across the region as people who increasingly work from home would want to free up space to facilitate remote work from their apartments.
Logistics Demand to Continue for Several Years
“The effects of Covid-19, including large-scale lockdowns and remote working, have driven demand for e-commerce and last-mile delivery across the Asia Pacific,” Colliers International said in a report published on June 29. “Interest in third-party logistics, cold chain and dry logistics facilities should stay firm for several years.”
ESR is among the most active investors in logistics assets across the region, having put together $2.2 billion of investment partnerships targeting the sector so far this year. The deals include a partnership with Singaporean sovereign wealth fund GIC in Australia and a tie-up with the Canada Pension Plan Investment Board and Dutch pension manager APG Asset Management in South Korea.
In June, the Hong Kong-listed warehouse developer bought a portfolio of logistics facilities in the eastern Chinese province of Jiangsu. Then in July ESR announced a joint venture with Canadian insurer Manulife to take over four properties it had developed under a fund invested by Dutch pension fund manager PGGM.