Japan’s logistics industry is enjoying steady growth after a long period of stagnation as a shift in consumption patterns bolsters demand for warehouse space and boosts rents, according to a panel of experts from ESR, Ivanhoe Cambridge, Gaw Capital Partners and Phoenix Property Investors speaking at an industry forum on Thursday.
Known for its stable economy, Japan is undergoing a radical transition involving adoption of e-commerce, omnichannel distribution and cloud based services, with that change creating long-term demand for warehouse space,” Pierre-Alexandre Humblot, managing director and head of private capital at ESR, said in an appearance at the Mingtiandi Asia Logistics Forum.
“Japan’s market is really at a turning point – for the longest time, it’s a market where there was no rental growth rate,” Humblot said. Speaking of current conditions he said, “We have found that there were some markets where rental growth was topping 2 percent and that rental growth was positive across the board. Asset managers are seeing positive and possibly accelerating rental growth, which is a big deal in Japan.”
While agency data shows average warehouse rents having dipped slightly during the first quarter, Humblot said that despite any slowdown in the broader market, investment grade facilities are experiencing strong tenant demand.
Speaking at the same industry forum, which was sponsored by Yardi, Laurent Fischler, head of investment for Asia Pacific at Ivanhoé Cambridge, noted that there is still a long runway ahead for Japan’s logistics market, as e-commerce penetration remains low compared to other developed markets, and there is still limited stock of modern warehouse facilities.
Fischler said the real estate investment division of Caisse de dépôt et placement du Québec aims to ramp up its exposure to Japan in general, especially in the residential and logistics sectors, due to the strong macro fundamentals supporting their growth.
Ivanhoé Cambridge set up a $400 million logistics joint venture with PAG two years ago, and Fischler said Japan’s financial conditions offer attractive opportunities for fund investors looking for steady returns.
“In a global environment with rising rates and inflation, obviously Japan has been a major outlier because you’re still looking at low interest rates, positive spreads between your cost of debt and your yields,” he said, adding that it is one of the few markets with steady or falling investment yields.
“Occupancies remain reliably high, rent collections are always good. It’s very safe. Except for earthquake risk, it’s probably one of the least risky markets to invest in,” he added.
After entering Japan’s logistics market late last year with the acquisition of a seven-asset portfolio from Blackstone, Joseph Chan, managing director and principal for investments at Hong Kong-based Gaw Capital said his firm is finding tenants ready to pay more to lease its space.
“When we renew the tenancies, we’re still getting very decent rental growth,” Chan said. “(This) is very different from China, in Japan, at least in Tokyo, where most of our assets are based, we have got real rental growth today.”
Chan also pointed to the potential for exchange rate gains in Japan, which is drawing in investors as it continues to offer positive gearing, where financing costs are well below rental yields, as well as a stable economic environment.
“Japan is mature, it’s very steady. A lot of the tenants are also very loyal, they look at leases for a longer term and the rent does not fluctuate as much… The other mentality in Japan is it’s also very cost based.. they understand (inflation) so they are willing to adjust the rent upward based on the cost increases,” he added.
Location is Key
Also testifying to the growth in tenant demand for well-positioned projects was Kwang Joon Kim, executive director for Japan investments at Phoenix Property Investors.
Having acquired a logistics facility north of Tokyo in Ishikawa prefecture’s Kanazawa City with 35 percent occupancy, Kim said his team was able to boost tenancy levels while still in due diligence for the acquisition. Having completely let out the facility within six months of closing, his team was able to sell the property on to a new owner just a half year after picking up the keys.
Kim added that many of Phoenix’ development and forward purchase logistics projects in Japan are also getting pre-leased well ahead of completion.
“That’s a strong testament to the demand, but also we’re picking our locations very, very carefully. It’s really within key gateway cities where you have a population in excess of one to two million,” he said.
While Japan’s mature market is supporting investment activity, transactions will likely be concentrated in smaller assets in the near term as there is still a big gap in price expectations between buyers and sellers, according to Gaw’s Chan.
“For larger portfolios, the pricing has to be right, but for smaller opportunities I see a lot of off market opportunities, so just from that perspective, I expect the transaction volume to be quite steady,” he said.
Trades of logistics assets in Japan fell 10 percent to $4.52 billion in 2022 from $5.01 billion the year prior, according to data from MSCI. Last year’s total was also nearly a third less than Japan’s $6.4 billion average yearly transaction volume from 2015 to 2020.
*Land prices have gone up. So it’s really getting more difficult to find the more attractive deals but if you look closely enough and source hard enough, those attractive opportunities still do present themselves,” Kim said.
Sheds in Korea, Emerging Markets
Mingtiandi’s Asia Logistics Forum will be back next week with a pair of panels, looking first at opportunities in South Korea, followed by a session on investment in Asia’s emerging logistics markets.
On Tuesday, 23 May, Sanghwoi Bae, chief executive officer of ESR Kendall Square REIT will join a panel discussion dedicated to Korea’s logistics sector together with Harry Lee, managing director and Korean country head for Hines.
Also adding their insights in the session will be Brad Gladu, a manager with JLL’s capital markets team in Korea, as well as Leo Kwon, who heads the global platform investment team of IGIS Asset Management.
In the emerging market session on 25 May, Mingtiandi will welcome Fion Ng, chief operating officer of Vietnam’s BW Industrial; Hari Krishna V, managing director for real estate with CPP Investments, who also is part of the Canadian pension fund manager’s global leadership team; and Chong Chee Keong, general manager for industrial with Frasers Property Vietnam.