In Brief

• We believe the outlook for the industrial sector in Asia-Pacific is favorable, supported by projected long-term growth in consumption, wealth and trade volumes—all positives for industrial real estate.
  
  
• The investment opportunity varies by country and supply and demand drivers are not limited to e-commerce; other forces include the need to update warehousing for modern supply chain management, rapid infrastructure advancements, population growth and supportive government policies.
  
  
• We anticipate attractive growth prospects and strong income yields in the sector.


• An allocation to industrial real estate in Asia-Pacific may also offer diversification benefits and enhance the stability of portfolio returns.

Asia-Pacific industrial real estate: More than an e-commerce story

Industrial real estate around the globe has become a highly sought-after sector among investors. We view it as particularly attractive in the Asia-Pacific region with sound prospects for growth based on strong long-term demand drivers and solid fundamentals. APAC industrial real estate has been a top performer vs. other APAC sectors despite the global pandemic. Investment in the sector rose 30% year-over-year in 2020, a trend expected to continue throughout 2021.¹

Key APAC industrial real estate markets recorded positive leasing activity, rental growth and tightening capitalization rates.² Industrial asset pricing has remained firm through the pandemic. To-date, asset valuations in Australia, Japan, South Korea and China’s key logistics hubs appear to have strengthened in 2H 2020.

The resiliency can be attributed, in part, to e-commerce’s accelerated expansion, triggered by social distancing and the decline in mobility due to COVID-19. But the sector’s relative success and positive outlook are more than a pandemic or e-commerce story. The industrial real estate sector’s fundamentals have been in place for years and, in our view, continue to augur well for investors.

We also believe the time is ripe. With the possibility of medium-term inflation, the sector provides the potential for attractive income yield. Plus, we expect an allocation to offer diversification benefits and enhance the stability of returns.

Positive demographics

Asia-Pacific population expansion is projected to be the strongest among global regions, driving demand for warehouse space (EXHIBIT 1).

Faster APAC population growth, particularly middle class and urban, should drive demand for warehouses

EXHIBIT 1: COMPOUNDED ANNUAL GROWTH RATE (CAGR) PROJECTION, URBAN POPULATIONS BY CONTINENT 2020-2030

Source: Population Division, Department of Economic and Social Affairs of the United Nations 2019 (data latest available as of March 30, 2021).

Inter- and intra-regional trade is also expected to continue growing (EXHIBIT 2a) while the share of total consumer purchases done online should accelerate (EXHIBIT 2b). Combined, these factors have increased demand for warehouse space among e-commerce and logistics companies. At present, demand often exceeds supply. The evolution of supply chain management has fueled the expansion of third-party logistics (3PL) players and Asia-Pacific has the world’s fastest growing 3PL sector, which needs more sophisticated, modern warehouses to enhance productivity, and this demand is likely to continue.³ The expansion of knowledge-based industries such as biomedical and information technology should further support occupier demand for high-tech manufacturing space in select markets.

APAC interregional and intra-regional trade is expected to continue growing, along with the share of retail sales occurring online

EXHIBIT 2A: APAC TRADE VOLUME (USD TRILLIONS)

Source: CEIC, J.P. Morgan Asset Management Real Estate–Asia Pacific; data as of December 19, 2020.

EXHIBIT 2B: ONLINE SALES PENETRATION RATE FORECAST

Source: Oxford Economics; data as of September 30, 2020.

Japan: Growing warehouse demand continues to outpace economic expansion

Japan offers significant growth prospects for the industrial real estate sector, particularly the modern warehouse segment. Since 2014, the growth in demand for warehouse space has outpaced economic expansion by more than 15 times,⁴ mainly driven by strong revenue growth from the 3PL and e-commerce industries. Modern warehouses are in short supply and occupancy levels remain high even as supply has increased substantially. Infill sites for warehouse construction are particularly scarce and the ability to source suitable land in desirable locations, such as along primary transportation nodes and within logistics hubs, is expected to remain challenging.

China: Accelerating retail and e-commerce expansion

Warehouse demand in China is driven by the rise of the middle class, strong consumption growth and the staggering pace of e-commerce expansion. The growth in retail sales is anticipated to remain the highest among major Asian economies, particularly in the Yangtze River Delta region, and should be stimulated by further internet penetration amid rapid infrastructure advancements (e.g., 5/6G technologies). The development of artificial intelligence and robotics will likely further transform supply chain management and lead to even greater demand for warehouses with modern specifications. As in other countries, industrial land for warehouse development is in short supply—particularly in prime logistics hubs—and the prospects for rental growth are expected to remain strong.

Singapore: A diversity of industrial segments

Singapore has a range of industrial segments accessible to investors including warehouse, factory, high-specification manufacturing and business parks. As a logistics hub for South East Asia, the warehouse sector benefits from rising trade volumes as well as e-commerce growth in the region. E-commerce sales are expected to more than double by 2025.⁵ Singapore is also a leading destination for high value-added manufacturing, supported by its strong knowledge-based economy and the government’s strategic development policy. Combined, these factors have contributed to the sectors’ resilience even during the global pandemic, as evidenced by the stability of rents and occupancy rates, a trend expected to continue.

Australia: A mature market with growth potential

Australia’s real estate market has a large, mature warehouse sector. Occupier demand has been driven by steady consumption growth, backed by an accommodative immigration policy that has expanded the population (and consumer base). The online sales penetration rate is forecast to increase from 10% in 2019 to 16%–18% by 2025,⁶ adding more growth momentum. Trade volumes have also grown. Major infrastructure projects, such as the inland rail line, are expected to further improve logistics productivity and add more demand for warehouse space. The supply of warehouses will likely remain constrained by the limited availability of both land in infill locations and development opportunities in prime locations. Together, these factors should bode well for rental growth.

New Zealand: Steady warehouse demand with supply constraints

Similar to Australia, warehouse demand in New Zealand is largely driven by growth in population and related domestic demand. Higher trade volumes have also bolstered warehouse demand. E-commerce in New Zealand is behind other markets in the region and has room to grow. In Auckland, the supply of industrial land has fallen short of demand because of tight competition for land and topographical constraints. With steady demand drivers and tight supply, the warehouse sector should remain resilient.

Investment implications: Benefits and risks of investing in APAC industrial real estate

The industrial sector across Asia-Pacific has clearly visible long-term demand drivers and supply constraints, making it an attractive investment opportunity with what we believe are sound prospects for growth. Risks include trade and supply chain disruptions, as well as the potential obsolescence of assets as occupiers become increasingly sophisticated. Where it is a suitable option for investors, we see the potential for diversification, stable returns and attractive income yield, based on the contractual rental step-up clauses prevalent in most industrial leases across the region—particularly desirable in light of the possibility of medium-term inflation.

As it has in other regions, APAC’s industrial sector has matured, gaining further depth, transparency and liquidity as it has become more institutionalized. We also expect liquidity to remain elevated after the pandemic, given investor interest. Nevertheless, valuations have remained attractive as industrial real estate’s yield spread over long-term bond yields has been healthy. The spread over office yields is also still positive in most APAC markets.

In sum, we believe industrial real estate in Asia-Pacific has the potential to provide multi-faceted benefits for yield-seeking investors and an attractive risk-adjusted return and to play a pivotal role in a well-balanced real estate portfolio.

¹ “Asia Pacific Investor Intentions Survey 2021,” CBRE Research, January 2021.

² The ratio between a real estate asset’s income and its current market value. 

³ “Post COVID-19 forecasts: Global Contract Logistics growth 2020-2024,” Transport Intelligence, December 2020.

⁴ Based on occupied warehouse space using data from Oxford Economics, JLL and J.P. Morgan Asset Management – Real Estate Asia Pacific’s analysis. Growth estimate for January 1, 2014 to March 30, 2020.

⁵ Google Trends, Temasek Research, Bain & Co., “e-Conomy SEA 2020: at full velocity: Resilient and racing ahead,” November 10, 2020.

⁶ “Inside Australian Online Shopping 2020 eCommerce Industry Report,” Australia Post, August 2020.

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