Logistics property developers had a good year in 2015, and piggybacking off the dramatic expansion of e-commerce sales worldwide, this trend is set to continue.
It is important to note that sector growth is not entirely down to e-commerce, however, with the relative inefficiency of e-commerce-dedicated warehousing, it is this segment of the industrial real estate market which is showing the greatest demand for space.
In developed markets such as Western Europe and the United States, there is a mismatch in supply and demand, with the former significantly lagging the latter, and causing real estate providers to raise prices. In an interview with the Wall Street Journal, Prologis CEO Hamid Moghadam recently stated, “We’ve never had higher occupancy, and I don’t think rent growth has ever been this high.”
This situation has caused some problems, as the cost of both land and construction rises. Nonetheless, the sheer scale of demand is huge. Though it is in many ways an exceptional example, Amazon has seen dramatic growth in its North American fulfilment space over the past five years, with a compound annual growth rate of 34.5% (see below).
The picture in emerging markets also shows a skyrocketing demand for modern warehousing, with e-commerce again representing the principal driving force. As shown further in Ti’s report, Global e-commerce 2016, Asia is the epicentre of this growth, which puts companies such as Global Logistic Properties (GLP) in a very strong position.
Borne out of the Chinese and Japanese operations sold off by Prologis during the financial crisis, Singapore-based GLP is the largest logistics property company operating in China by a distance (controlling 20% of total warehousing space), and plans to break ground on 3m sq m of new projects in 2016. In the words of the company’s CEO, “That’s twice the size of our largest competitor’s entire portfolio”.
Despite China’s economic slowdown in 2015, the company saw a year on year EBIT increase of 91% in the third quarter (ended December 2015), and like Prologis in the USA, will benefit from increasing rents in the coming months.
Significantly, two of GLP’s most significant customers in China are the aforementioned Amazon, and local B2C e-commerce giant JD.com, which is similar in that it operates its own supply chain, and has an appetite for more warehousing capacity.
Another example of e-commerce-driven logistics property investment in China is the continued growth of the Alibaba-affiliated Cainiao Network, the organisation developed to handle the former’s logistics requirements. Whilst the company provides only limited information about its activities, three of its major shareholders are property development and investment firms, who stand to benefit from its growth. An IPO is looking increasingly likely to occur at some point, which will shine more light on the situation.
Whilst companies such as Ocado are introducing innovative ways to make use of existing warehouse space, it appears as though e-commerce fulfilment operations will continue to be highly space-inefficient for the near future. Combined with significant pent-up demand for more space, derived from the e-commerce boom, this all suggests that logistics property developers are looking at a very profitable year.
Source: Transport Intelligence, 10 February 2016
Author: Alex Le Roy