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Investing in Japan’s logistics facilities

February 13, 2017 / By

Logistics facilities have grown quickly to meet growing demands from an expanding E-commerce market, and as organisations review their logistics workflow processes.

In recent years, the stock of logistics real estate has been increasing rapidly. With this expansion of stock, the transaction volume of logistics facilities has also been on an upward trend. As a result, total investment in logistics facilities in 2016 was JPY 850 billion, a significant increase of 111 per cent from the previous year.

70 per cent of this investment amount involved acquisitions of logistic facilities by major domestic developers and their affiliates. The remainder of the investment amount came from real estate companies who do not develop the logistics facilities themselves, institutional investors and corporates.

Chart1_13Feb2017Source: JLL

Investment opportunities have been increasing
Global Logistics Properties is one of the largest developers in Japan, who established GLP J-REIT in 2011, and many other developers have followed suit, with major developers now having J-REIT and private funds as affiliated companies. These companies typically hold developed properties before selling them, making it difficult for investors (who do not conduct development activities) to enter the market.

52 per cent of the total investment amount from the fourth quarter of 2016 involved non- major developers and their affiliates, highlighting a new trend for non-major developers to invest in logistics facilities.

Examples of acquisitions from players other than major developers in the fourth quarter of 2016 are as follows:

Chart2_13Feb2017Source: JLL

Increased logistics facilities stock – a good time to enter the market
With the expansion of logistics facilities stock, developers are increasingly considering the sale of logistics facilities (owned for the purpose of securing funds) to tackle new development projects, and relinquishing property that do not meet J-REIT’s entry criterion.

Additionally, with the rapid increase in investment demand for logistics facilities, sales of logistic facilities to third parties – typically resulting in favorable outcomes from related J-REITs – will continue to increase in the future.

Stable return on investment from logistics facilities
The attractiveness of investing in logistics facilities in Japan could be potentially due to the stability of rents and the magnitude of the investment amount. Following the global financial crisis in 2008, office rents in the city centre dropped about 40-50 per cent after the financial crisis, and declined only by 20 per cent for logistics facilities. This means that investment efficiency is high because it is possible to invest large funds at once because of the magnitude of the investment amount. The e-commerce growth in Japan is expected to continue driving strong leasing demand for logistics facilities.

Focusing on the cap rate, the logistics facility is in the 4 per cent range compared to prime office and retail properties in the city centre, which is at the low level of 2-3 per cent on the yield based on net operating income, securing a yield difference of about 100 to 150 bps. It is expected that the future cap rate will decrease through increased demand. This presents multiple opportunities for investors to look at investing in domestic logistics facilities for stable return on investment.

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