Logistics and Industrial Market InsightsSeptember 8, 2021 / By
Broadening demand supports occupancy
Occupier demand continues to expand in Asia Pacific, with strong demand-side drivers supporting increasing enquiry and take-up activity across all major markets. At over 3 million square metres, net absorption remained at an historically elevated level in the third quarter, while year-to-date net absorption of 8.2 million square metres means 2021 is on track to be a record-breaking year. E-Commerce firms and 3PL operators remain the key industries propelling growth, although demand is broadening to other sectors as economies begin to recover – for example, activity from the FMCG and Manufacturing sectors picked up in 3Q21.
New supply growth has moderated in recent quarters, with COVID-19-related lockdown measures putting a hold on many projects. This is particularly evident in Australia, where the government has implemented some of the strictest lockdown measures globally. This has led to the shutdown of many construction sites, pushing some project completion dates into subsequent quarters and contributing to upward pressure on rents (Melbourne rents rose by 6.8% q-o-q in Q3). Conversely, Tokyo is in the middle of a robust supply cycle with six major projects completing in the quarter, causing vacancy to rise. Overall, vacancy across the major markets remained stable at 4.8%.
Rental growth accelerating
Positive market sentiment and strong tailwinds supported rental growth across most markets in Asia Pacific during the quarter. The pace of growth continues to increase, with the 2.8% y-o-y rise faster than the 1.7% growth recorded in the previous quarter. However, the pace of growth differs, with larger, more mature markets showing stronger growth. Average rents across the larger markets rose by 3.2% in the same period, reflective of a more competitive leasing environment and a lower vacancy profile.
Positive market sentiment and strong tailwinds supported rental growth in Beijing, Hong Kong, and Singapore. Rental growth was particularly strong in Australia, where Melbourne (West) rents rose by 11.8% y-o-y and Sydney (Outer Central West) by 4.8% y-o-y. Rising supply caused vacancy to rise sharply in Tokyo. While this kept rents relatively stable, market sentiment remains very positive.
Record transactional activity
2021 will be a record year for logistics transaction activity. Volumes in the first three quarters of the year have already surpassed last year’s record volumes, reaching about USD 33 billion so far this year. Ongoing structural changes to asset allocations, and operations of logistics real estate and supply chain networks have converged to accelerate investment into the sector.
This has translated to strong capital value growth. Capital values rose across Greater China, rising modestly in Beijing, and Shanghai over the quarter, and increasing at a more robust pace in Hong Kong.
Similarly, capital values in Tokyo continued on an upward trajectory, underpinned by strong underlying market fundamentals. Capital values also rose in Singapore’s logistics market. Capital values only began increasing in the previous quarter after more than two years of remaining flat. Sydney and Melbourne values rose the sharpest across the region, supported by both yield compression and strong rental growth.
Rapidly expanding universe for occupiers and investors
Strong underlying market fundamentals and ongoing, positive structural changes to drivers of logistics demand underpins a strong outlook for the sector. Rental growth is anticipated to accelerate further as broader macroeconomic conditions improve.
A strong supply cycle will add to the growing investable universe in the region, providing more investable stock across many geographies. The total new completions figure is expected to exceed 17.7 million sqm this year, up from the 13.2 million sqm in 2020.
The strong future pipeline will likely lead to greater levels of occupied stock and support further investment activity. Values are expected to rise further, with strong growth forecast across most geographies. Short-term yield compression will continue in some markets, but likely to a lesser extent than what has been recorded in recent quarters.
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