The economies and real estate markets of Korea and Japan have many similarities so it’s not too surprising that I occasionally hear the Korean logistics market compared to its Japanese counterpart – only 15 years ago.

Certainly, the local logistics market has a lot in common with Japan circa 2000:

• Warehouse space is predominantly outdated and/or functionally obsolete due to one or a combination of location, design, specifications and building size;
• Domestic conglomerates are the dominant market players but have typically run their own supply and distribution chains; and
• As a result of the above two factors, the quantity and quality of leasable space is limited.

Since 2000, the Japanese logistics market has seen dramatic structural changes especially after the arrival of notable global logistics developers and, as a consequence, the market has evolved into one of the most active logistics investment markets in Asia. So is it possible that the Korean logistics market may follow a similar path to maturity? Well, over the past couple of years some positive signs have certainly emerged:

• The Korean national government has designated the logistics industry as an economic growth engine with the stated aim of increasing logistics industry revenue by nearly 50% by 2017;
• The outsourcing of logistics functions is on the rise. Government tax incentives and global competition are encouraging domestic conglomerates to utilise 3PL operators and to improve the efficiency and flexibility of their distribution and supply channels;
• A forecast uptick in new supply is expected to significantly improve the quality of space available. The government’s ‘Logistics Service Improvement Plan’ released in August this year provides for investment of around KRW 1 trillion in new logistics facility projects. Private developers are also responding to growing tenant and investor demand for modern, hi-tech distribution centres in key locations; and,
• Lease covenants are improving. As more blue-chip tenants occupy leasable space, the days of one to two year lease terms are disappearing and terms of up to 10 years are becoming more common, particularly for build-to-suit facilities.

While the market is still characterised by a lack of transparency and limited transaction volumes, the signs of progress are encouraging. How long the Korean logistics market will take to reach the level of maturity of its Japanese equivalent is of course hard to predict, but the improving fundamentals of the industry are likely to provide a compelling investment story to the increasing number of institutional buyers reviewing the sector in coming years.

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