Asia logistics still attractive despite narrowing yield gap over offices

Investors are increasing allocations to Asian logistics despite its disappearing yield advantage over office assets.

Dr Henry Chin, global head of investor thought leadership and head of research, Asia Pacific, at CBRE in Hong Kong, told AsianInvestor that mainland China, Australia, and Japan were the main focuses of investor interest in Asia. “Increasingly, CBRE is seeing keen interest in India, Indonesia, and Vietnam from funds [and] partnerships,” he added.  

Rushabh Desai, CEO of Allianz Real Estate’s Asia Pacific business, told AsianInvestor that logistics assets remain cheaper than prime offices in leading cities like Shanghai or Beijing. The company was looking closely at China, where it has logistics allocations both directly and via funds.

“In India, we also see a fairly healthy arbitrage [between offices and logistics],” he said, contrasting the situation against Australia, Japan and Korea, where prices in the two sectors were broadly similar.

DIMINISHING RETURNS

Finding Asian markets where logistics continued to provide better yields than offices is increasingly hard, according to Ben Chow, head of analytics for Asia Pacific at Real Capital Analytics in Singapore. “Transacted industrial yields have compressed so much over the past 18 months that the traditional 75 to 100 basis point spread to office yields has all but evaporated this year,” he wrote in an August report.

Chin said that logistics comprised 23% of investor flows into Asian property in Asia Pacific in the first half of 2021, compared to 12% in the first half of 2019. 

Desai said the growth in China’s REIT market also created arbitrage opportunities between the value of REITs and underlying assets.

Allianz Real Estate has a local China team based in Shanghai, and Desai emphasised the importance of local knowledge in Asia’s logistics sector, which had significant differences between countries. “China is a leasehold model, so we look at the remaining land tenure and the permits on the land defining what you can build. Every market has its own nuances.”

Alek Misev, senior portfolio manager for property at Aware Super in Sydney, told AsianInvestor that the fund was looking to acquire a platform in Asia – preferably in a developed market – in the next two to three years. “In five years, we would like to have a presence in Asia like we have in Europe or the US, in our preferred sectors of industrial and multi-family. We are looking for one or two platforms, depending on the opportunities. We have nothing currently and this is a key region globally,” he said.

NEW IN THE GAME

The head of Asia for a large European insurance company, who asked not to be named, warned against the hazards of investing in Asia’s emerging logistics sector.

He said he had been approached several times in recent months by local logistics operators, whom investors increasingly partner with for the development and operation of buildings, seeking the final tranche of financing – typically below $50 million – on deals whose total size was between $300 million and $500 million. He questioned the Asian operators’ expertise, noting track records were typically shorter than those of their peers in more developed markets such as Europe or the US.

“It’s not clear that they have the expertise to pull the deal together from end to end,” he said, adding that in many cases deals that were presented to him often comprised core investors who were connected socially or through family connections. 

Besides the risk of over-paying in a sector where prices are rising fast, direct investors face concentration risk when investing in logistics, Mary Power, principal consultant and head of property at Jana Investment Advisors in Melbourne, told AsianInvestor.

“When you buy industrial assets, you are buying one covenant. In retail, you might be buying 50,” she said, referring to the large number of tenants in a shopping centre compared to the single tenant in a typical industrial building. She said that, as prices for logistics assets increase, so does the importance of having strong covenants with highly creditworthy tenants, including the leading e-commerce companies such as Amazon.

Investors in Asia have a particular focus on the Weighted Average Lease Expiry (WALE), a metric used to measure a property portfolio's risk of going vacant by weighting tenants’ remaining lease periods with factors such as income or occupied area of tenants.

CHALLENGES AHEAD

How Asia’s logistics sector will perform in the face of future economic headwinds is still unclear. While some sectors were tested during Covid, logistics generally performed very well, even in the case of assets with weak covenants. “They were stress-tested over the last 12 to 18 months; in industrials the rent collections have been very good,” she said.

But Power noted that the prices of these assets had not yet been tested by a prolonged recession. In these cases, she said that tenants with traditional old-economy business models could struggle.

AUSTRALIAN PREMIUM

The focus on Asia comes as investors note high prices and the scarcity of opportunities in Australia.

Desai said he was wary of locations where the yields for logistics assets was approaching – or had passed – those available in prime office assets, such as Australia.

“How much more premium do we expect, given that logistics is increasingly located outside the big cities?” he said.

According to CBRE, Australia’s industrial and logistics super prime yield has compressed by 134 bps between 2018 and 2021. For offices, yield has compressed over the same period by 39bps. The spread between the two sectors fell from 0.7% in 2018 to -0.25% in June.

Prime yields for industrial and logistics are 4.35% in Sydney and 4.45% in Melbourne, compared to 3.35% in Greater Tokyo, 3.5% in Hong Kong, and 5.5% in Greater Seoul.

In August, Troy Rieck, CIO of Australian superannuation fund LGIAsuper, told AsianInvestor that in the last year, the fund had increased its allocation to Australian logistics via the Charter Hall Prime Industrial Fund (CPIF), which had taken on $2 billion in the year to June. 

In May, he told AsianInvestor he was also preparing to take advantage of high prices in logistics and related sectors to sell assets already owned by the fund at the right price. 

However, Benjamin Martin-Henry, RCA’s Asia Pacific head of analytics in Sydney, said that Australia’s e-commerce sector was still less mature than Asia’s, meaning that tenant demand provided strong growth opportunities. “The penetration rate [of e-commerce] is markedly lower than Australia's Asian counterparts, so investors are buying into the expected growth. For example, online grocery shopping is very much in its infancy in Australia.”