Institutional investors find bright spot in Asian logistics

Asian investors might be pulling back from logistics, but one country's resilient sector may provide an exception.
Institutional investors find bright spot in Asian logistics

High prices, rising construction costs – which are squeezing margins – and the need to trim allocations to real assets to rebalance portfolios following losses in equity markets, have seen institutional investors pull back from Asia’s property sector this year.

But some advisors and managers have pointed to the resilience of some pockets in the logistics sector in Japan, the region’s second largest after China.  

Suchad Chiaranussati, chairman of SC Capital Partners, the $3.8 billion real estate manager based in Singapore, said that almost half of his investors were holding back on commitments across private real estate strategies globally, although specialised strategies in asset classes such as logistics and data centres were still popular.

Allocations to Asian property markets slumped by 50% in Q1, to $27.2 billion, the lowest level of activity for any quarter in more than a decade, according to the latest APAC Capital Trends, Q1 2023, published by MSCI Real Assets (formerly Real Capital Analytics).

The logistics sector was worst hit: investors flows fell $4.6 billion compared with Q4 2022, a fall of 44%, the highest percentage fall of any sector in the region.

In logistics and data centres, where a shortage of assets has seen many investors allocated earlier in the development cycle in recent years, the sector has been hard hit by rising construction costs.  

“Total construction costs have risen between 30% and 70% for logistics and data centres – both core and shell,” said Chiaranussati, adding that China was the only country that was not facing major cost escalations.

Since last summer SC Capital has been raising assets for its sixth pan-Asia opportunistic fund, which it plans to close at $1 billion. On 19 July, it announced it was teaming up with the Abu Dhabi Investment Authority (ADIA) and Goldman Sachs Asset Management to acquire a portfolio of 27 resort hotels in Japan for $900 million.

"Rising construction costs have the potential to negatively affect investor appetite. They may lead to reduced profit margins, increased project risks and/or a reassessment of the project viability," said Ben McGeachie, industrial, science and technology lead for Asia at construction company Turner & Townsend.

In May, Pamela Ambler, head of investor intelligence, Asia Pacific at JLL told AsianInvestor that crucial to the recovery of transactions would be the willingness of buyers and sellers to bridge the current gap in expectations when it comes to prices “Investors are still reassessing the cost of capital and returns,” she said.


Some industry advisors and consultants, however, believe the appeal of the logistics sector in Japan, could be an exception to the regional trend.

Ben Chow, vice president, head of real assets research, Asia for MSCI, told AsianInvestor that demand for Japan’s industrial sector from investors remained strong.

“Japan is the one market which is in vogue at the moment. Investors scaled back their acquisitions in mid-2022 but given the low interest rate environment and the resilience of the sector in the face of the years of record supply, yields have continued to compress into 2023,” he said.

Unlike those in Australia and South Korea, Japan’s industrial yields – which move inversely to prices – have continued to fall in the first half of 2023, down 20bps, and are now 60 bps lower than they were in Q1 2020, according to MSCI Real Assets. By contrast yields for the sector in Australia have recovered 35 bps this year, and those in South Korea, 25 bps.

Chiaranussati, meanwhile, added that those committing to logistics investments are focusing on prime locations.

Other experts believe that demand may not be long-lasting.

High construction costs are contributing to investors’ cooling appetite for the logistics sector, especially in Tokyo, according to according to CBRE’s Asia Pacific Industrial & Logistics Trends Q1 2023 published in May.

“In Japan, US investors turned from net buyers to net sellers in the first quarter of the year, due to more divestment by large investors to satisfy fund redemptions in their home market,” the report said.

“[In Tokyo] development is not feasible at present as construction costs are high and rents have little room for further growth … Investors are opting to focus on secondary cities where more stock and higher yields are available,” it added.

McGeachie said that Singapore, Tokyo, and Osaka are experiencing the highest construction cost escalation in Asia.

He added that, while low cap rates - which move inversely to prices - may provide a degree of protection to investors during a cooling market by preserving property value, they also suggest reduced income potential and may increase overall investment risk.



¬ Haymarket Media Limited. All rights reserved.