Logistics in Southeast Asia: what's behind the boom?
Developing markets in Southeast Asia are attracting industrial property investors to new growth opportunities.
Within the Asia Pacific industrial sector the more mature markets such as Australia and Japan have traditionally been the greatest beneficiaries of direct investment. In recent years these headline markets have been joined by China, where an unparalleled logistics investment opportunity has been created by the country's economic pivot towards domestic consumption and an explosion in e-commerce activity.
Now though, investors seeking new growth opportunities and geographic diversification in their industrial portfolio are looking to new destinations – specifically to Southeast Asia's relatively untapped developing markets, as reported by JLL's The Investor.
Developing markets in this investment target group include Malaysia, Vietnam and Indonesia, as well as the Philippines and Thailand. What are the key drivers of investor interest behind this boom?
It's all about the (macro) economy
"Strong growth in domestic demand in these markets is the foundation for the expansion in the modern logistics sector," reports Peter Guevarra, our research director for Asia Pacific at JLL. "And this is especially the case when considering the needs of e-commerce," he says.
The development of the Southeast Asia logistics sector is a direct reflection of the region's positive macroeconomic fundamentals: fast-growing economies, strong population growth, increasing urbanization rates, and a burgeoning middle class. All of these factors are driving retail expansion to meet increased demand from more consumers with greater disposable income.
E-commerce is huge
Internet penetration rates in developing Asia are on a strong upward trajectory, rapidly shifting consumers online and fuelling adoption of e-commerce – the greatest single factor driving investment in the logistics sector. As a bloc, Southeast Asia reached 370 million internet users (that's more than the entire population of the U.S) in 2018, with double-digit growth for digital activities in most countries of the region.(1) And the region's digital economy is forecast to hit US$240 billion by 2025.(2) This evolution of the retail environment is driving large logistics developers to expand their operations in developing markets.
Facilities are gearing up
Currently, much of the industrial stock in developing markets is relatively unsophisticated and of low specification, reflecting the maturity of these markets. However, this is changing, as operators in these markets rise up the value chain to provide more efficient logistics facilities that utilise more automation and robotics. Occupiers and developers are also placing greater emphasis on worker benefits and convenience, causing a shift of demand from traditional bare-bones factories and industrial parks to modern, eco-friendly facilities.
In Vietnam, for example, we anticipate that the profile of the industrial offering will steadily become more sophisticated, as occupier requirements develop and industrial market demand moves to higher specifications needs.
In Malaysia, the state of Johor has pioneered an evolution to modern and contemporary industrial buildings that are gated or guarded, and mixed-use parks enabling an integration of live, work and play elements. Developers are also increasingly offering built-to-suit options, which enhance the operational and space efficiency for the occupiers and allow for longer leases that provide income stability for investors and owners.
The new factory of the world
The migration of manufacturing from previously dominant locales such as China to developing markets in Southeast Asia is accelerating. The region is a growing manufacturing hub for multinationals, resulting in increased demand for warehouse and logistics facilities. As an example, Vietnam has boosted its appeal to foreign manufacturers and supporting supply chains thanks to a combination of tax incentives and low labour costs. In turn, this will generate further potential growth in its industrial sector, and specifically in logistics services.
Investors are seeking higher growth prospects
Developing markets promise higher long-term growth prospects to investors compared to more mature markets. Growth in real gross domestic product (GDP) in Emerging Asia was at 6.6% in 2018, despite trade policy uncertainties, and is forecasted to grow at an average of 6.1% during the 2019-2023 period, founded on strong momentum in private consumption. (3) This domestic growth is the foundation for the expansion of the opportunity in the logistics sector.
As well, Asia markets have made gains in improving their transparency and opening up to Foreign Direct Investment (FDI) – resulting in more investors with broader strategies operating with greater confidence, and increased capital inflows. Examples include India, where the Modi administration has passed a raft of supportive legislation, Vietnam, and Malaysia, where FDI into the manufacturing sector recorded an increase of 250% in the first nine months of 2018.
What else should prospective investors bear in mind?
As often in developing markets, greater growth opportunities and higher returns may also be accompanied by complexity and risk. Peter Guevarra considers that the biggest hurdle to investment in logistics in Southeast Asia developing markets is a shortage of suitable infrastructure. And this can be particularly acute in specific markets such as Indonesia where reliable road and power access is not guaranteed. Moreover, where logistics space is available locally there may be little modern stock. "Investors need to prepare for the fact that they may need to develop new stock themselves," he says.
Additional complexities faced by real estate investors in developing markets may include political, execution and liquidity risks. Investors are advised to choose the right partner to mitigate potential risks and navigate the path ahead.
Read JLL’s Logistics: Beyond warehousing to find out why industrial and logistics are the next big thing in Asia Pacific. The whitepaper features in-depth, market-by-market analysis.
- ASEAN UP, Southeast Asia digital, social and mobile 2019, 31 Jul 2019
- ADWEEK, Why 2018 Was the ‘Year of Ecommerce’ in Southeast Asia, 3 Dec 2018
- OECD, Economic Outlook for Southeast Asia, China and India 2019, 20 Dec 2018