COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
Judy Jang Associate Director | Research | Korea +822 6325 1918 [email protected]
LAST MILE OPPORTUNITY IN KOREA Increasing e-commerce demand requires more logistics centers for last mile delivery COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
Summary & Recommendations 20% annual KRW6 60% ecommerce million increase As the types and penetration of e- growth per pyeong from 2018 commerce diversifies, the use of logistics real estate is changing. Colliers’ expects The Korea Internet and Security Average distribution Logistics center transaction new investment opportunities both in Agency expects 2020 e-commerce center transaction price volumes increased to KRW2.4 volumes in Korea to grow by (USD1,550 per sqmeter) trillion (USD 2 billion) in 2019, logistics centers near major cities and KRW159 trillion YOY more than a 60% increase YOY large suburban logistics centers further from the city center. According to the Korea Internet and Security Agency (KISA), in 2019 domestic e-commerce volumes in Korea were KRW133 trillion (USD107 billion), and KISA is expecting 2020 volumes to top KRW159 trillion > The logistics and distribution market is (USD128 billion), recording 20% annual growth on average. changing to focus on delivering more The e-commerce and logistics sectors are proving resilient considering the Covid-19 pandemic. This sector products but a smaller volume of each. will likely offer major long-term opportunities to investors and landlords as e-commerce adoption is Companies should update their increasing rapidly in the face of quarantines and social distancing. strategy and collaborate with Especially, the recent increase in fresh food delivery contributed to an increase in demand and investment companies specialized in last mile for both cold chain logistics and dry logistics centers. Institutional investors, who have focused on dry logistics infrastructure for these lower logistics centers in the past, are now shifting their interests to cold chain facilities. volume but multi-product transactions. Recently traded logistics centers have seen cap rates was about 5%, due to harsher competition and > Real estate investors should focus their increasing prices for available development sites. interests in fourth-generation logistics As the Covid-19 pandemic subsides, we expect these factors to support each other to increase the volume technology to target B2C tenants, of industrial transaction in H2 2020 and into 2021. diversifying beyond traditional logistics tenants. Institutional Investors’ logistics investments in the Seoul metro area > We expect demand for city center 2,500 logistics infrastructure to continue to grow, however securing appropriate 2,000 licensing is difficult and restricts the supply of new logistics centers in urban 1,500 areas. Investors should focus on 1,000 redevelopment and integration of Billion(KRW) outdated small and medium-sized, 500 logistics facilities. - 2013 2014 2015 2016 2017 2018 2019 Source: Colliers International, RCA 2 COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
SEOUL’S MAJOR LOGISTICS REGIONS Accessibility to expressways has been the key point in locating distribution centers. Distribution centers in metropolitan areas were mostly centered around the first expressway in Korea, the Gyeongbu Expressway. In order to take advantage of increasing deliver volumes, locating distribution centers close to metropolitan areas is essential, and this balance of expressway access and proximity to metropolitan areas to drive distribution center siting in the future.
Percent of logistics transactions by area (2013 – 2019) Rent level If the region is closer to Seoul and expressways, Yongin-Icheon rent for logistics facilities gets higher. Most logistics investments are Gyeonggi-do KRW28,000 per py concentrated in this region. Due to (USD 7.26 sq metre per month the popularity of area, development Incheon KRW30,000 per py led to oversupply. USD 7.78 per sq metre per month Ansan-Pyeongtaek Seoul / KRW40,000 per py This region is the current hot spot Gimpo USD 10.37 per sq metre per month for logistics investment due to low The rents of newly, high-tech logistics centers land costs and a low supply of Il-san tend to increase, while rents of aging facilities logistics centers. tend to decrease, leading polarization of rents Seoul by age of facility and region. Incheon-Bucheon-Gimpo Kimpo Institutional investors’ interest in the Jungbu region is increasing due to a lack of 3% Expressway Incheon Gyeongbu new supply and increased demand. Bucheon Expressway However, its proximity to Seoul Gyeonggido leads to the highest rent among the major logistics clusters. The high Yeongdong land prices caused a shortage of a Ansan Expressway Yongin 13% supply in the past, but there is still constant demand due to its Suwon proximity to Incheon International Icheon Airport. Hwaseong 24% Namyangju-Ansan 21% This area houses only small facilities, West Coast Expressway not large, first class distribution centers. However, this region has Ryeongtaek Anseong started to see attention from institutional investors due to its 10% supply shortage and available land.
Source: Colliers International, RCA, Google Maps 3 COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
Top 10 logistics centers based on gross area TRANSACTION TRENDS Area Rank Property Location (sq m) Owner Increase in transaction volume due to sale of large Hwaseong Dongtan Distribution 1 Hwaseong 487,480 ADF Asset Management distribution center Center (B Block) 2 Yangji Arenas Logistics Center Yongin 349,360 IGIS Asset Management Recently, more tenants are looking for larger facilities to increase the 3 Kendal Bucheon Logistics Center Bucheon 305,595 Kendall Square efficiency of their operations. Traditional retailers (i.e. Shinsegaeand Lotte 4 Sihwa MTV Logistics Center Ansan 235,810 LG Group (Pantos) Group) are increasing the quantity of business they do online. At the same 5 CJ Logistics Konjiam Center Gwangju 221,100 CJ logistics Lotte Global Logistics Osan Logistics time, major logistics companies (i.e. CJ Korea Express and Lotte Logistics) and 6 Osan 200,470 Kendall Square Center major online retailers (i.e. Coupang and Market Kurly) are expanding, leasing 7 Goyang Logistics Park Goyang 199,680 Kendall Square space in mega-sized logistics centers developed by institutional investors. 8 Jinwi Logistics Center Construction Pyeongtaek 149,625 Pacific AMC This is compared to the past, where conservative institutional investors Kendall Anseong Won Grain 9 Anseong 147,710 Kendall Square preferred stable investments that were master-leased by major tenants. Logistics Center Kendall Gimpo Gochon Logistics Gimpo 137,145 Kendall Square 10 Center pyeong Source: Colliers International, Korea Logistics Newspaper > 30,000 In addition, as fresh food delivery volumes are increasing, the investment and (99,000 sq metres) supply of refrigerated distribution centers are increasing. The Lotte Global of institutional investors' investment Logistics Center is the largest refrigerated logistics center in Korea and its volume in large logistics centers acquisition by Kendall Square Asset Management has focused investors’ attention on the to refrigerated distribution center market. Considering the upcoming, mega-sized logistics centers, we expect increasing However, nowadays investors are actively involved in every stage of logistics investment volumes for similar logistics centers. center development and management, from securing tenants at the Top 10 logistics transactions (2018-2019) development stage to managing logistics centers for tenants' needs. Volume Institutional investors have invested in new logistics centers in Yonginand Rank Property Location (KRW Bil.) Buyer / Investor ADF Asset Management, 1 Hwaseong Dongtan Distribution Hwaseong 501 Icheon in the past. However, this focus has shifted to Anseong and the Incheon Center (B Block) GIC region as a shortage of available development land in Yongin and Icheon along 2 Logis Valley Ansan Ansan 374 CBRE Global Investors with declining new supply due to the difficulty of obtaining licenses. 3 Lotte Global Logistics Center Osan 318 Kendall Square 4 Samsung C & T logistics center Seoul 229 Hyundai E&C The transaction of Dongtan Logistics Complex at Dongtan-myeon, Hwaseong-si, 5 Hyundai elevator HQ Icheon 205 SK Hynix Gyeonggi-do set a record price for logistics transactions in the past two years. Dongtan Logistics B Block, which has the largest, stand-alone floor area 6 Yongin Baekam Logistics Center Yongin 155 Mastern AMC (487,480 sqmeters) in Asia, was sold to ADF Asset Management for KRW500 7 Gonjiam Distribution Center Gwangju 154 Deautsche AMC Hwaseong Dongtan Distribution ADF Asset Management, billion (USD420 million). Logis Valley Ansan Logistics Center recorded next 8 Hwaseong 140 Center (A Block) GIC highest sales price, being acquired by CBRE Global Investors. It is a high-tech Anseong Homeplus Logistics 9 Anseong 137 KB REITs facility with a floor area of 23,500 sq meters and a cap rate of 5.7% which is Center high for a logistics facility. 10 Incheon Skybox Incheon 130 IGIS AMC, Blackstone 4 Source: Colliers International, RCA COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
MAJOR INVESTORS IN LOGISTICS CENTERS Korean industrial real estate investment has been led Top 10 Korean logistics center investors (2018-2019) by foreign investors. However, the National Pension Service (NPS), and the Public Officials Benefit Volume Number of Association (POBA) acquired most of the recent Rank Company Name (KRW Bil.) properties logistics centers. 1 ADF AMC 850 5 ADF Asset Management (ADF) has been an active 2 Kendall square 791 8 investor in the logistics market for the past two years. 3 HANA Finance 349 4 ADF is a local asset manager that focuses on managing 4 Mastern AMC 280 4 a logistics real estate blind fundraised from NPS and POBA. According to Maeil Business, ADF manages a 5 IGIS AMC 233 3 total of about KRW2 trillion (USD1.6 billion) worth of 6 World Advisor 230 1 logistics assets. 7 KB Securities 197 2 According to Korea Logistics News (KLN), Kendall 8 Pebblestone AMC 112 2 Square is one of the most active investors and 9 Meritz 100 1 developers. Once their ongoing development projects are complete, Kendall Square will be the number one 10 Mellon AMC 96.2 1 logistics center investor in Korea. Source: Colliers International , RCA. In terms of transaction size, GIC is the most active foreign investor with the acquisition of Dongtan Top 10 foreign logistics center investors (2018-2019) Logistics Complex from ADF’s real estate fund. Volume Number of Nuvin Real Estate made its first investment in Korea by Rank Company Name (KRW Bil.) properties acquiring the Last Mile Logistics Center at Namyangju 1 GIC 641 2 in Gyeonggi-do that was leased primarily to e- 2 CBRE GI 511 4 commerce giant Coupang. 3 DWS 215 2 Along with IGIS Asset Management (IGIS), Blackstone 4 CPPI 156 2 acquired the logistics center at Gyeongin Ara 5 M&G Real Estate 153 1 Waterway in Incheon Terminal for KRW130 billion Lasalle AMC 150 1 (USD109 million). 6 7 Blackstone 130 1 Recently, KKR sold BLK Pyeongtaek Logistics Center to PebblestoneAsset Management. Interest in the 8 Credit Suisse 112 2 Korean logistics market is steadily increasing not only 9 Nuvin Real Estate 42.5 1 from foreign limited partnerships but also from major 10 Maple Tree 37.8 1 global private equity managers. Source: Colliers International , RCA.
5 COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
MAJOR DISTRIBUTION CENTER TRENDS
Last Mile The last mile of delivery has been becoming increasingly important, with delivery companies prioritizing the efficiency of this last mile before products reach consumers. We recommend traditional logistics companies, which have traditionally focused on large volumes of a limited number of products, consider strategic partnership or initiate mergers or acquisitions with startups that are specialized in multi-product online transactions with small volumes to prepare for a new logistics era where management of the last mile is valued more. As the e-commerce market diversifies, usage of logistics real estate also diversifies. The average size of logistics centers in suburbs far from the city is increasing for operational efficiency. On the other hand, there is more flexibility in minimizing the size of last mile distribution centers near the city center depending on types of e- commerce. As retailers' competition in shortening delivery time continues, we forecast that demand for urban logistics real estate for last mile deliveries will increase. We expect that constructing new infrastructure for logistics centers near cities will increase. We recommend real estate investors shift their focus to the fourth generation of logistics technology (Logistics 4.0), which incorporates AI, autonomous delivery robots, warehouse robots, and drone couriers, in order to acquire a diverse pool of tenants (shippers) beyond traditional logistics tenants. Driving this shift is the scenario where distributors with advanced technology and logistics facilities purpose built for last mile take advantage and arise as major tenants in the era of Logistics 4.0 technology. Fulfillment Center Fulfillment refers to the entire process in logistics from receiving goods, storing, ordering, packing, and shipping them. The distribution industry is fully committed to establishing engine-like distribution centers. Nowadays, the industry is focused on acquiring urban distribution centers for fast delivery service in the city center, not just for simple storage. Construction of fulfillment center infrastructure, optimized for B2C service, has emerged as hot spot in the distribution center world for this era where 3PL service is optimized for B2B service. Over the next two to five years, we expect a shift to distribution centers located near or in cities, partly driven by the increase in fresh food delivery.
6 COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
The emergence of listed logistics REITs Amazon's logistics center in Graben, Germany As REITs market in Korea is getting more active, logistics REITs are getting more attentions naturally. Kendall Square Logistics Properties, the one who have made aggressive investments in Korean logistics centers through Kendall Square Asset Management, is preparing to form logistics REITs with ticket size of KRW800 billion (USD671 million) to KRW1 trillion (USD8.3 billion). Moreover, we view rapid expansion of REITs market through the emergence of listed logistics Reits. Increase in offshore logistics center investment Korean institutional investors have increased their investment in logistics assets as harsh competition of acquiring office assets lowered cap rate. As series of competition lowered returns on logistics investment in Korea, Korean investors have started to turn their attentions to offshore logistics investment opportunities. According to the Hyundai Economic Daily, investing in logistics assets that are leased to Amazon has gained world-wide popularity, leading total volume of offshore Amazon logistics facility to grow more than KRW2 trillion (USD 1.6 billion)in 2019. Amazon already has more than 200 distribution centers around the world, and we expect more investors will continue to show their interests to those assets. Source: Reuters
Kendall Square Logistics Facility Korean investor-owned, Amazon-occupied overseas logistics centers (2019)
Company Name Property (City/Country) Volume, KRW (Bil) Samsung Securities Prague, Czech Republic 1,860
IGIS Asset Management Mönchengladbach, Germany 2,600
Barcelona, Spain 5,500
Paris, France 5,500
Bristol, United Kingdom 5,500
Mirae Asset Daewoo Los Angeles, USA 900
Source: ESR.com Source: Colliers International , Hyundai Economic Daily, RCA.
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LOGISTICS CENTER INVESTMENT STRATEGY Expansion of Logistics Blind Fund Integration strategy of small Using a blind fund structure, asset managers can logistics centers expedite the investment process as they can Compared to operating a single, large facility, shorten the time it takes in sourcing and operating several small logistics centers may fundraising for transactions. have lower operating efficiency as it requires In recent years, blind funds that invest at the more manpower and facilities investment. This development stage and yield higher returns have pushes logistics companies to consolidate been more popular than funds that only invest in several small distribution centers into an established assets. For instance, IGIS is developing autonomous, single, large distribution center. a logistics center in Korea with blind funds from As it becomes more difficult to secure sites and offshore institutional investors. obtain licenses for new development, our view Going forward, we expect to see an increase in the is that investors should consider redevelopment use logistics-focused blind fund structures in order and integration of outdated, small and medium to handle increased demand for logistics centers. sized logistics facilities for their future investment. Development after pre-leasing The number of transactions where a buyer acquires first with the intent to develop upon pre- lease is increasing. Asset managers skilled at identifying tenants in the development stage before the acquisition of assets should have an advantage in investing in logistics assets. If integration and redevelopment of outdated logistics centers persist, we forecast that the vacancy rate of those assets may continue to rise. Similar to Seoul’s tenant-oriented office market, where pre-leasing is quite important, we urge logistics landlords to secure tenants in advance of development. With the logistics center technology being specific to each occupier, a build to suit model is increasingly common.
8 COLLIERS RADAR INDUSTRIAL | RESEARCH | SEOUL | 30 MARCH 2020
Logistics center development close to CBD A model that adds α – alpha In addition to large logistics centers adjacent to expressways, to logistics centers investment in small logistics facilities specialized in last mile deliveries is expanding. Over the next five years, we forecast Market beating performance collaboration between large logistics centers and smaller, The future success of logistics center last-mile warehouses will continue. Hence, we believe that development depends upon investors and real estate investors will need to scout investment developers working together in the early opportunities to match the demand flows. stages of a project. Increase in cold chain Developers must add α–alpha, a factor logistics centers that pushes performance beyond the average. This can be done by focusing We expect continuously increasing demand in cold chain increased attention on the needs of logistics centers from both traditional retailers and online tenants. Developers can stuff their fresh-food sellers as they are looking for ways to strengthen facilities with high-tech components, but their fresh food delivery service. As demand in cold each tenant has particular needs along refrigeration warehouse increases due to an increase in with their own technology. revenue from fresh food delivery, we expect a bigger number By partnering with tenants early, of large logistics companies to move their logistics centers developers can be positioned as a critical near Seoul. partner to their tenants’ success. As getting a governmental license for a new logistics center development is increasingly difficult, we view further value will be added to existing assets after re-modeling to provide refrigeration and freezing facilities. Therefore, we recommend investors consider investing in value-added assets that purchase dry logistics assets and redevelop them into cold chain distribution centers.
9 Primary Author: For further information, please contact:
Judy Jang Robert Wilkinson Associate Director | Research | Korea Managing Director | Korea +82 2 6325 1918 +82 2 6325 1901 [email protected] [email protected]
Andrew Haskins Executive Director | Research | Asia +852 2822 0511 [email protected]
Joon Lee Senior Director | CMIS | Korea +82 2 6325 1907 [email protected]
Jay Cho Director | Office Services| Korea +82 2 6325 1905 [email protected]
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