Shuttered shops, empty airports and CBDs that became ghost towns overnight. The last year has been challenging for commercial property owners everywhere. Except for a corner of the sector that has boomed through the pandemic and is likely to continue to do so.

Sheds – better known in real estate speak as industrial or logistics property – have been a key beneficiary of the pandemic-induced behavioural changes among consumers and businesses. I have personal proof of this. Whilst my family enjoyed the services of fine dining restaurants that introduced takeaway and delivery services, my grandmother finally started shopping online.

She wasn’t alone. E-commerce volumes have gone through the roof, taking the stock prices of key e-commerce players like Amazon and JD.com with them.

As a proportion of retail goods sold globally, Prologis Research estimates that e-commerce volumes grew nearly 20% in 2020, up from about 4% in 2011.¹ And Euromonitor forecasts that global e-commerce sales will post a 9.5% compound annual growth rate from 2020-2025.² This trend is unmistakable and, as chart 1 shows, is playing out in Japan, one of the APN Asian REIT Fund’s key investment markets.

Chart 1 – E-commerce market growth³

What are the real estate consequences of this rapid growth in e-commerce? Well, in Japan, there’s accelerating demand for third party logistics (3PL). A declining population and low levels of unemployment have led to a persistent scarcity of labour. To reduce costs and improve efficiency, companies are increasingly outsourcing to 3PL providers, which, in turn, are struggling to keep up with demand (see chart 2).

Also unique to Japan is that over 90% of the total stock is considered ‘old’ or dated. Greater Tokyo and Greater Osaka have only 0.01-0.04sqm of Grade A logistics/warehouse stock per capita. In Australia, Melbourne and Sydney are served by 3.1 and 2.5sqm respectively. ⁴

The facilities that do have modern capabilities are owned largely by Japanese logistics REITs. By way of example, the average age of the circa AU$9 billion portfolio owned by Nippon Prologis, the largest logistics JREIT, is just 7.5 years ⁵.

Chart 2 – 3PL Companies market growth⁶

Tenant demand for modern Japanese logistics and warehouse facilities is growing rapidly, as is supply. And yet, despite the high levels of new space entering the market in recent years⁷, vacancy rates in Greater Tokyo are currently at an all-time low of 0.2%, tightening 1.7% year-on-year.

Rents have risen rapidly as a result, driving the earnings growth and capital values of the logistics JREITs, from which the APN Asian REIT Fund has benefitted.

How much have investors in the fund benefited? As of the end of February, half of our top 10 positions in the Fund were in Asian logistics REITs, a theme that kicked into our portfolio at the beginning of the pandemic and has continued since.

The performance of the top two logistics JREITs tell a compelling story – their average return was 62.3% over the last three years (index return 24.7%) and 4.5% over the last year alone when the index returned -16.3%⁸. When APN talks of active management, taking advantage of trends like this are what we mean.

The pandemic has proven that sheds are no longer the poor cousins of commercial property. Not just for a market like Japan, but everywhere. The strength of the logistics market is no passing fad. The trends behind it were already in train beforehand and the growing forces of urbanisation, digitisation and demographics explain why investment dollars have been pouring into the sector.

In this soon-to-be post-pandemic world, sheds, or logistics/industrial commercial property, will continue to prove their worth as defensive, stable and even mission-critical real estate, which is why the APN Asian REIT Fund is heavily invested in the sector.

This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance click here. To receive further updates and insights from the APN team, sign up for Review, our monthly email newsletter.

1.  https://prologis.getbynder.com/m/25ce45ad24c53689/original/The-Future-of-Logistics-Real-Estate-Demand.pdf

2.  Euromonitor 2020

3.  GLP J Reit 2020

4.  Colliers report “NEW DIRECTIONS IN ASIA PACIFIC LOGISTICS” October 2020

5.  Nippon Prologis REIT, February 2021

6.  Ministry of Internal Affairs and Communications of Japan; Ministry of Land, Infrastructure, Transport and Tourism of Japan; CBRE K.K. (June 2020) and Logi-Biz (September 2020)

7.  Savills, March 2021

8.  All figures in AUD, Bloomberg, at 26 Feb 2021. Index refers to GPR APREA Composite Asia Index in AUD.