Institutional investors are continuing to allocate to logistics real estate in Asia in the face of Covid-19, taking the view that the long-term structural benefits are enough to justify high current prices.
Asset owners from Asia Pacific had allocated $1.1 billion to logistics this year as of May 18 compared with $434 million in the same period in 2019, according to Real Capital Analytics (RCA). By contrast, allocations to offices fell from $9.9 billion to $6.9 billion and retail from $3.0 billion to $858 million.
As of May 15, the average Asia Pacific listed industrial property real estate investment trust (Reit) was trading at a 55% premium to NAV, according to CBRE. The average office Reit was trading at a 8% discount. The CBRE US industrial Reit index was up 6% year-to-date as of April 30, with the US office Reit index down 23%.
“It is probably too soon to detect over-pricing or clear mis-pricing in the other direction, however the second quarter valuations may paint a clearer picture,” said Graeme Torre, Asia Pacific head of private real estate at Dutch pension fund manager APG.
The logistics sector is one of APG’s largest property allocations in Asia. On April 23, the institution set up a $1 billion joint venture with retirement fund giant Canada Pension Plan Investment Board (CPPIB) and operator ESR to create a logistics portfolio in Korea, adding to $1.5 billion of investment the three had already made in Korea.
Torre told AsianInvestor he was watching short-term valuations intently, noting that occupier demand for logistics in Korea had increased this year. He added that some of the effect on real estate performance from depressed economic activity had been counteracted by an uptick from enquiries of e-commerce operators as consumers migrate their shopping activities to ordering online rather than going out to the shopping centres.
“With the growth in streaming services being used at home and in the office, plus people’s greater reliance on e-commerce, the demand for logistics and data centres [since the Covid-19 outbreak started] seems to have proved our thesis that these sectors will show resilience at times of market movements and external influences. But we are not alone here with this thinking,” Torre said.
In Europe, including the UK, recent gains may have made prime logistic asset prices in the region too high, said Mat Oakley, head of commercial research for Europe, the Middle East and Africa (Emea) at property services firm Savills.
“Prime logistics yields have been lower than prime offices for some time,” he told AsianInvestor. “But 60% to 70% of the market is linked directly to retail in some shape or form. In the UK and Europe, rent collection has been reasonably good compared to the retail sector but [revenues from] services charges have not been so good. The logistics sector is not a universal safe haven,” he said.
Henry Chin, head of research for Asia Pacific and Emea at CBRE, said modern and last mile logistic facilities would be the most resilient assets in the sector, adding that logistics valuations reflected a bifurcated sector: “if your tenants are e-commerce [companies] your assets will continue to outperform, if they are manufacturers, it will be challenging.”
Other investors said they were continuing to invest in the sector and saw prices were reasonable. Gaw Capital, a Hong Kong-based real estate private equity firm, has been closing mandates on warehouse deals negotiated before the virus outbreak in recent weeks, via co-investments with existing LPs, said Christina Gaw, the firm’s head of capital markets.
Logistics and data centres are among the few resilient, domestically driven sectors where she remains confident that investors demand remains strong, she told AsianInvestor.
Prices for assets in other real estate sectors have not yet fallen to reflect the impact of Covid-19, she added. “Even during this crisis, real assets are not cheap, with QE [quantitative easing] instituted by governments, we are seeing that while sellers may be feeling pressure, but are not ready to sell because they are not distressed.”
Joseph Lee, co-chief executive and president of Igis Asset Management in Seoul, acknowledged that prices for logistics assets are continuing to climb. He said he was concerned by the current peak pricing but feels it is justified by the prospects for long-term structural growth in the sector.
He is particularly focusing on the the sector in Europe, which he said has the benefit of stability, cheap financing costs and the fact that hedging the Korean won against the euro remain cheaper than doing so against the dollar.
“Due to competition for logistic opportunities, capital values have increased with continuous yield compression in recent years. Online traffic [and e-commerce] has increased: that trend will continue. And the sector has huge long-term structural advantages,” said Lee.
He is targeting a leveraged internal rate of return of between 6% and 8% on logistics deals, and 6.5% yield across the whole real estate portfolio.
In 2019, Igis bought portfolio of three Amazon centres across Europe for €400 million ($435 million), before launching a retail fund for the assets that was heavily oversubscribed. Lee said that differences in the appeal of different markets were marginal as long as the occupying creditworthy blue-chip operator such as Amazon.
“Most Korean investors have a very strong appetite for logistics. In particular there is a huge appetite from retail investors who like the secure income return with stable investment.”
On 12 May London-based Apeiron Capital and Seoul-based Midas International Asset Management acquired a €200 million German logistics portfolio from Healthcare of Ontario Pension Plan on behalf of undisclosed investors.
One investor told AsianInvestor that a Korean-based platform being marketed by adviser Morgan Stanley in Hong Kong, that had limited interest from prospective buyers at the start of the year has now seen an active bidding process involving a number of investors. Morgan Stanley told Asian Investor the sales process was at an early stage and declined to comment.
Investors globally had worried about logistic prices being too high before the crisis, said David Green-Morgan, managing director for Asia Pacific at RCA. “The question has been where the next phase of supply will come from to maintain the momentum [of purchases]."
Torre said that future logistics opportunities may emerge in Southeast Asia. “Where the new opportunities will exist will depend on a number of things, not least how the global supply chain is reconfigured when everyone starts back to work. Countries such as Vietnam or Indonesia for example, which present well as manufacturing bases, may eventually be a beneficiary following this disruption,” he said.