The ESR Group, a major Chinese group of logistics operators, has recently applied for main board listing in Hong Kong. Singaporean investors may already be familiar with the group, as they also act as the manager of the Singapore-listed ESR REIT. The Singapore market has several industrial and logistics REITs and, formerly, one logistics developer, and thus, local investors may already be familiar with the asset type.
However, for Hong Kong investors, the potential listing will introduce a new form of commercial real estate for consideration. In addition, in the first quarter of 2019, the total return of Link REIT has lagged behind that of Champion REIT which is an office REIT, and Fortune REIT which is a retail REIT with a dual listing in Singapore. The fact that new and existing real estate investments are drawing market attention may expand the investment choices in North Asia, and this may herald a new era of commercial real estate investment.
Logistics properties serve multiple investors. Traditionally, third party logistics operators (often shorthanded as 3PLs) are the major customers. For example, a western retailer may have ordered products from multiple factories in China, and it would be inefficient for each factory to send their products directly via sea. Moreover, if the goods are shipped directly, any defective items will have to be shipped back to the factory, doubling the shipping cost.
Thus, it is often more efficient for a 3PL to collect the shipments from various factories in a centralised location. The 3PL can then inspect the goods on behalf of the end client and then group the items into a single large shipment across the sea. Through this operation, goods are often only stored at the central location for days, making the speed of entering and exiting the central location crucial for operational excellence.
Logistics operators can also help in the import leg. For example, major retail brands often have little on-the-ground presence in smaller or developing economies. It may be more cost efficient to contract a logistics operator to take the delivery to the target market. From there, the logistics operator can clear customs on behalf of the retail brand.
Often the packaging of the goods will need to be updated. For example, local laws may require pre-packaged food products to list nutrition value and ingredient information in the local language. This requires the local operator to relabel the packages. After repackaging, the logistics operator will then distribute the goods to the local retail outlets. Certain food items, for instance chocolate or frozen meat products, will have specific delivery guidelines to maintain the safety and quality of the items. Similar to the export leg, import operations often heavily emphasize on the speed of delivery.
Modern web retailers also require similar operations with additional needs. The 3PLs mentioned above operate at the business-to-business level, and goods delivered are often still in wholesale quality. Web retailers, however, serves individual customers directly, and individual customers will order in retail quantities. In other words, a $ 100 delivery to a supermarket may be a pellet of potato chips, which will be a hundred packs of the same item. But a $ 100 delivery to a web retailing customer may have dozens of different items that supplies the home for a single week.
Thus, web retailers will also need logistics space to pack the orders. Major operators, such as Amazon or Hong Kong’s HKTVmall, have automated the packing process by installing robot packers. The robots are often a large investment, and thus, only justified in warehousing spaces.
The real estate sector developed the modern logistics centers to serve the needs of the exporters, the importers and the web retailers. Compared to its predecessors, logistics centers are located at or near major transportation hubs. Access ramps and efficient layout ensures that trucks can move in and out of the center with ease.
The available assets are often much larger. We have visited logistics parks with over a million square feet of space scattered in a dozen or so buildings. The space also often has high ceiling heights and few internal columns to allow the efficient deployment of automation.
Outside of Singapore and Hong Kong, logistics properties have also grown into a mature sector in many developed countries. Thus, we believe that this sector is part of the natural evolution of the economy, and can be seen as a long term investment option.