Demand for sheds in India and Southeast Asia’s developing economies will continue to see strong secular growth on the back of diversifying global supply chains, lower labor costs, and government efforts to promote manufacturing and infrastructure, senior executives from ESR, Mapletree and BW Industrial told Mingtiandi’s 2024 APAC Logistics Forum on Tuesday. Watch the full recording>>
With manufacturers seeing cost savings of as much as 30 percent by shifting production to emerging markets like India, Vietnam and Thailand, industrial property investors are positioned to capture higher yields as occupiers adopt the so-called “China Plus One” supply chain diversification strategy, according to Jai Mirpuri, head of Southeast Asia for HKEX-listed ESR; Souvik Mukherjee, head of logistics development for India at Mapletree Investments; and Fion Ng, chief operating officer of Vietnam’s BW Industrial.
“One of the things that we saw even before the geopolitical tensions that we see today is the rising labor costs in China,” said Mirpuri. “And when you add tariff impacts from the last two to three years, we’ve actually had customers tell us that the cost savings from just moving out of China and into Southeast Asia can save them almost 30 percent on total all-in manufacturing costs…so I think the one theme that runs across all of Southeast Asia is that we do expect it to be our pillar of growth for the next decade.”
The emerging markets-focused session, which was sponsored by Yardi, also revealed growing demand for logistics space from manufacturers in the electronics, electric vehicle, renewable energy, and semiconductor ecosystems, with government policies to support these industries playing a major role in driving leasing demand.
India Rising
With grade-A warehouse rents having grown at an annual average of 6 percent nationwide between 2021 and 2023, according to JLL, India has emerged as one of the primary beneficiaries of global supply chain diversification efforts, with supportive government policies having incentivised semiconductor majors including TSMC, Foxconn and Micron to set up production bases.
“We do see India having picked up significant momentum over the past two to three years in terms of becoming a key beneficiary of the China Plus One trend with favourable policy initiatives to facilitate manufacturing and engineering players setting up their bases here, “ said Mukherjee, who oversees Indian logistics projects for the Singaporean developer and property investor. “India was a little bit of a slow starter…but now there is significant momentum in that this is how the country wants to grow and position itself in the coming five to ten years.”
The country has also seen increased leasing activity by players in the automotive and electric vehicle sectors, as well as Chinese solar panel and renewable energy manufacturers, with occupiers in these industries offsetting slower demand by e-commerce players, which have been rationalising warehouse space amid moderating online retail growth post-pandemic.
The influx of foreign high-tech manufacturers in India, along with a growing domestic consumer base and infrastructure upgrades, are generating attractive returns for logistics development projects, according to Mukherjee.
“We have seen that rental reversions have been very positive, and on the development side, the yield has improved,” said Mukherjee. “With construction costs having now stabilised a bit and rental growth have started picking up quite significantly, especially in certain micro-markets, that has helped in terms of the development yield and generating returns to institutional investors.”
Proximity to China
Situated near southern China’s manufacturing hub in Guangdong province, Vietnam has also benefited from supply chains diversifying away from its northern neighbour, with the country seeing manufacturers in industries like renewable energy, automotive, and medical devices taking up logistics space alongside electronics suppliers.
“Vietnam is definitely a beneficiary of China Plus One, where manufacturing and processing FDI, in particular, has increased 11.9 percent in the first five months of this year compared to the same period last year,” said Ng. “As a result, the impact we see is two-pronged: one, an immediate sharp rise in demand for ready-built factory space, especially since China borders opened in March 2023. Two, we see a broadening range of industries, apart from electronics, coming from China looking to set up alternative manufacturing bases in Vietnam, so this bodes well for future logistics growth and warehouse space demand.”
Warburg Pincus-backed BW Industrial, which bills itself as Vietnam’s leading logistics and industrial developer with $2 billion in gross assets under management, leased a record 500,000 square metres of new factory space in 2023 amid the heightened demand, with leasing volume in the first five months of this year having increased 30 percent year-on-year, according to Ng.
Ng noted key regional demand differences in Vietnam, with prime, supply-constrained locations near city centres seeing over 90 percent occupancy and positive rental reversion, compared to lower occupancy in more distant areas. The executive also pointed to northern Vietnam’s advantages over the southern region, including a more developed infrastructure network, closer proximity to China, and lower land prices.
“We see a bifurcation of demand,” said Ng. “In prime tier one locations within an hour from the city centre, which also means highly limited new supply of land available, we see space continue to be well sought after. In such locations, overall occupancy of stabilised stock remains above 90 percent and transactions are still taking place, leading to the increase in rents.”
Manufacturing Boom
With demand for sheds from e-commerce players having also moderated in other Southeast Asia markets following a burst of leasing during the pandemic, countries like Thailand are similarly seeing manufacturers picking up the slack, with Mirpuri pointing to ESR’s Southeast Asian portfolio, including Thailand, as operating at near full occupancy.
“A lot of the projects that are getting us those higher rents and filling up our spaces are more industrial, light industrial, manufacturing, assembly, last mile, finishing of goods,” said Mirpuri. “In 2020 and 2021, e-commerce players expanded very quickly given what they were seeing at that time, so they’ve slowed down and are trying to rationalise their costs and space. But industrial has picked up and really filled up everything that we have. So across almost all our markets in Southeast Asia, we have very, very little vacancy.”
Occupiers are selecting markets in Southeast Asia based on each country’s advantages, according to Mirpuri, citing electric vehicle battery manufacturing and natural resources in Indonesia, availability of engineers and automotive supply chains in Thailand, and the existence of free trade zones in both countries. The executive also flagged increasing consolidation in the Philippines.
Mingtiandi’s APAC logistics forum concludes on Thursday with a session dedicated to Australian opportunities, with speakers including Simon Sayers, head of development for ESR Australia; George Anastasiou, head of real estate for Australia with DWS; Nicholas Bradley, joint managing director at Hale Capital Partners and Benjamin Chow, head of real estate research for Asia at MSCI Real Assets.
Leave a Reply