Asia Logistics, Industrial Rental Growth Slows Amid New Supply

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According to CBRE, the Asia Pacific region demand for logistics space was driven by three sectors in the first quarter of 2015 that included e-commerce, automotive and manufacturing. There is a projected 65.6 million sq. ft. of new logistics warehouse space being built in 2015, and the majority of this will be led by Seoul (20%), Shanghai (20%) and Tokyo (17%). This year's upcoming supply pipeline may result in rental rates moderating if any signs emerge of slowing demand. Coming off a record year of warehouse completions, the Singapore and Melbourne markets continue to digest the new supply, impeding rental growth.
 
The steady increase in new supply continued to dampen the strong regional rental growth witnessed over the past four years. The CBRE Asia Pacific Logistics Rental Index increased by 1.1% year-on-year in Q1 2015, the slowest annual growth recorded since Q1 2010.
 
Other APAC highlights include:

• With a diverse demand across the region, Q1 saw 3PLs and e-commerce companies in China, Japan and South Korea continue to expand their networks in response to the growth of online retail, whilst automotive manufacturers were active in markets such as Shanghai, Guangzhou and Seoul. Elsewhere, food-related logistics firms drove demand in Auckland and Beijing. On the other hand, Australian markets such as Brisbane, Adelaide and Perth saw weak consumption demand due to the slowdown of mining and commodity sectors. Hong Kong recorded slowing demand while Singapore demand remains muted.

• The Philippines continue to be the fastest growing manufacturing country in the region, with industrial production forecasted to increase by 10.8% year-on-year in 2015. Vietnam also recorded steady manufacturing growth despite a slight fall in employment in March. These economies continue to offer lower input costs and cheaper labor and as a result, are attracting electronics and textile production to relocate from its traditional base in China. Due to the favorable exchange rates, Japan and Australia saw increased manufacturing external demand, however, domestic demand remains weak.

• Subdued manufacturing conditions led to modest rental increases in factory rents across Asia in Q1. The CBRE Asia Manufacturing Rental Index increased by 0.2% quarter-on-quarter, the slowest rate of growth recorded since the start of 2013. The increase was driven by Guangzhou, Shanghai and Shenzhen.

 
Darren Benson, Executive Director, Industrial & Logistics, Brokerage Services, CBRE Asia, said, "The industrial and logistics sector--in Asia specifically--continues to be driven by e-commerce firms and 3PLs, a trend that is driving demand for modern logistics developments and networks across the region. In particular, we see that e-commerce is having a changing effect on most markets, especially China, Japan, South Korea and India. We saw from CBRE's APAC Market Outlook 2015 that up to 40% of modern logistics space in major metro areas in India is currently being led by e-commerce groups. The trend for e-commerce companies to build their own logistics networks is encouraging logistics developers to acquire land and develop logistics centers, or engage in build-to-suit projects to capture this demand. Forming strategic partnerships with logistics developers still looks to be the major opportunity for investors to enter this sector this year.
 
Despite the significant amount of new logistics warehouse space being built in 2015, there remains a shortage of quality assets available for sale, posing a barrier to entry for many investors. We can see this in Guangzhou and Shenzhen, where these markets continue to be undersupplied, with the small amount of new stock receiving strong enquiries from 3PL occupiers."
 
Jonathan Hsu, Head of Occupier Markets Research, CBRE Asia Pacific, also commented, "In Q1 2015, we saw certain markets record strong demand, but in places such as Singapore and Hong Kong, demand weakened in this sector due to several reasons. In Singapore, the labor shortage and weak manufacturing outlook affected demand for lower-end warehouses whilst in Hong Kong, due to the weak retail market and high cost of ramp-up facilities, the demand has shifted towards more cost-effective cargo facilities. We are still seeing hesitation amongst Hong Kong retailers in leasing space in warehouse and logistics facilities. With occupiers being more cost-conscious in Hong Kong, demand is likely to spill over the border into Shenzhen, boosting demand and lifting rents in this market. South China will also see an active automotive sector in Guangzhou which will spur rental growth in this market. Elsewhere, in Australia, we are seeing that subdued demand and less positive economic prospects will delay the logistics rental recovery to 2016.
 
For occupiers, CBRE recommends those in tenant-favored markets such as Singapore, Tokyo, Brisbane and Seoul to leverage on current market dynamics to negotiate favorable leasing terms, whilst occupiers in landlord-favored markets such as Hong Kong, Guangzhou, Shenzhen and Shanghai to speed up their leasing decisions to secure logistics space for vital operations. Occupiers will need to decide their long-term strategy and choose strategic locations wisely."