It has been a tough year so far for property investors, however one segment is weathering the storm better than most.
Real Capital Analytics data show Asia Pacific office transaction volumes fell -59% year to date (June 8th, 2020) compared with the same period in 2019. Retail dropped -68% by same metric. However, Industrial and Logistics transactions fell by only -24%, suggesting the segment has proved more resilient in the face of the Covid-19 crisis.
According to Simon Smith, Savills Asia Pacific Head of Research and Consultancy: “Industrial and logistics properties, especially warehousing, have been at the top of many investor lists for a while now. The sector taps into megatrends such as the growth of online retail, and almost every market in the region is undersupplied with modern logistics space.”
The segment continues to grow in appeal to global investors as a stable and secure asset class. While industrial and logistics have been resilient across most of Asia Pacific real estate markets, Savills takes a closer look at China, India and Vietnam.
China: Different Regions, Different Picture
While China was hit first by the pandemic, it has recovered slowly, with varying impacts to the logistics sector across different parts of the country.
In Wuhan at the epicentre of the outbreak, the impact was “enormous”, says Andrew Zhou, Savills Wuhan Director of Commercial and Industrial. “All business activity has been severely restricted, especially logistics and this will continue. Investor interest has slumped due to the perception of risk; however, some investors are preparing for the market to bottom out.”
However, Gandi Gong, who leads Savills Business Park and Industrial Services team in Southern China, says demand has remained fairly strong throughout the pandemic, with Manufacturing and Logistics serving bricks-and-mortar retail faring the worst. “Demand from fresh food distributors, online retail, and the medical sector has increased significantly, which has played a supporting role in the logistics property market recently,” he says.
Betty Mao, Savills Shanghai director for Business Space and Industrial Services, covering Jiangsu, Zhejiang and Shanghai, says the impact in her region has not been extensive and big-name logistics developers continue to build new space. “A large amount of warehousing will be launched over the next 12 to 24 months,” she says. “The logistics leasing markets in first and second tier cities are still hot, and there will be no shortage of tenants pre-letting space under construction.”
The Covid-19 crisis may also boost land supply for logistics as local governments look to boost struggling incomes and Manufacturing. She adds. “As a result of Covid-19, a lot of manufacturing firms have developed problems, which in turn has caused local governments to increase land supply. This may help logistics enterprises acquire good quality, well located sites. Government tax requirements for logistics enterprises are always the most important condition; if these can be met, the land can be acquired for logistics.”
Overall, across China, demand from overseas real estate funds and domestic logistics developers remains strong and they are actively looking for investment opportunities, says Gong. “As there are few high-quality logistics projects for sale in the current market, there have been few recent transactions.”
India: Unlocking Manufacturing Growth
Still under Covid-19 lockdown, all business sectors in India are suffering, however the outlook for Industrial and Logistics is brighter than most. The industrial sector is set to benefit as multinationals seek to diversify manufacturing locations.
“India is emerging as an alternate manufacturing investment destination to China,” says Srinivas N, Savills India Managing Director, Industrial & Logistics. “There are about 1,000 foreign manufacturing companies planning to shift their manufacturing base to India from China, out of which 300 are actively pursuing production plans in mobiles, electronics, medical devices and textiles.
“The Government of India and State Governments are making an all-out attempt to attract foreign firms and in a major boost to domestic Manufacturing, the Government recently slashed corporate tax rates. This, together with the relatively recent goods and services tax and low labour costs, is encouraging foreign companies to relocate production bases to India, creating unprecedented demand for industrial and warehousing space nationwide.”
In the past two years, India logistics has seen a flurry of investment activity from overseas real estate investors such as GLP, Ascendas, Blackstone Group, Allianz, ESR and Morgan Stanley Real Estate.
“We anticipate an inflow of sizable investments into the country in 2020-21,” says Srinivas. “There are large US, Europe and Australia-based Industrial and Logistics park developers planning to enter India which are exploring partnerships, joint ventures, development management contracts and asset acquisitions. Meanwhile private equity funds are looking at investing in yielding assets and forward purchase deals.”
Vietnam: Supply Urgency
According to Focus Economics, Vietnam’s index of industrial production (IIP) in June 2020 was up 7% year-on-year (YoY), largely driven by Manufacturing and Electricity Production. Manufacturing and Industrial output is estimated to grow 2.71% overall in 2020, with 9.2% growth forecast in 2021.
Manufacturing PMI was 51.1 points in June 2020, up from 42.7 points in May, marking the first growth above the 50-point threshold since January. This rebound is attributed to a solid increase in new orders, overall purchasing activity increased, while pre-production inventories were at their highest since November 2018.
In June 2020, Vietnam had 336 IPs over a total approximate 97,800 ha. Of which, 261 IPs are operational while 75 are under site clearance or construction. Operating IP average occupancy is now 76% nationwide.
John Campbell, Savills Vietnam Manager of Industrial Services, emphasizes: “Demand continuing to outpace supply underscores the need for more segment supply in key industrial provinces. Occupancy rates in key hubs such as Binh Duong, Dong Nai, Long An in the South, and Bac Ninh, Hung Yen, and Hai Phong in the North, have all risen significantly since 2018”.
“Most H1/2020 lease transactions were derived from discussions which started last year, while many others were confirmed from companies in Vietnam looking to expand production facilities. The travel restrictions have limited ‘market entry’ enquiries, postponed site inspections from key international investors, in turn, reducing executed lease volumes with local developers”, he said.
While there are no guarantees for next year, Vietnam’s Industrial Sector reliance on continued supply chain migration out of China is increasingly apparent. Many landlords are anticipating a great year once travel restrictions are lifted.
For more information, please contact JCampbell@Savills.com.vn.