Investment and Implications of Logistics Real Estate

Interest in logistics real estate is rising among the related industries. This report attempts, using a recent survey, to introduce types of assets preferred by investors and investments in logistics real estate by made in the forms of real estate investment trusts (REITs) and real estate funds (REFs), two representative real estate investment products. Also, based on characteristics found in the transactions of logistics real estate, it will propose aspects that investors should consider.

Investors’ Interest In Logistics Real Estate Continues
General real estate service company, Genstar conducted a survey, after the announcement of the Brexit was made, of 102 commercial real estate investment experts. Our survey found that the preferred types of investment in 2H 2016 were logistics (30.4%) > rental housing (22.6%) and office (22.6%) > retail (21.6%) > hotel (2.9%). A heightened interest was found for logistics real estate more than rental housing that is gaining quite an interest or office buildings that generated stable rental incomes. This reflects local investment is becoming more in line with the business strategy employed by global investors who spread out investment risks and secure stable investment returns through investment portfolio diversification. Preferred investment values were in the range of KRW 50~100 billion (31.4%), 100 ~200 billion (30.4%), 30~50 billion (21.6%). And the respondents chose indirect investment (54.9%) in the forms of REFs or REITs for local and international asset. Taken these together, indirect investment, whether be REFs or REITs, will lead the real estate market in the future.


Source: 2H 2016 Office Market Projections, Genstar (July 2016)
Target Asset: Retail / Logistics Center / Rental Housing / Office / Hotel
Investment Size: KRW 100 ~ 200 billion / Higher than KRW 200 billion / Less than KRW 30 billion / KRW 30 to 50 billion / KRW 50 to 100 billion
Investment Method: local+Direct / Local + Indirect / Global + Direct / Global + Indirect

Indirect Investment Also For Logistics Real Estate?
The current interest in logistics real estate can be construed as investors’ understanding that logistics real estate is considered as an alternative product that can helps diversity investment portfolio and secure investment returns. Sale price of office buildings is continuously rising while vacancy is also rising. They together negatively affect investment returns and investors look to logistics real estate as an alternative, breeding more interest in the real estate asset type.
Real estate investment is divided into direct and indirect investment. Most well-known schemes of indirect investment are REITs and REFs. REITs was introduced to the nation, when the Act on the Real Estate Investment Company was legislated in 2001, as a measure to support companies with liquidity issues in the Asian Financial Crisis since 1997 in selling their real estate holdings. With the legislation, ordinary people were given a chance to make indirect real estate investment with only a small sum of fund they could afford. According to Korea Association of REITs, 125 REITs or KRW 1,200 billion raised were approved by Dec 2015. Of the 125, eleven REITs have logistics real estate as underlying assets, which are valued in approx. KRW 736.2 billion. Based on the asset size, logistics real estate represents only 4.2%, but they grew by about 29 times since 2011. One can expect that the current proportion will grow further. 


Number of Local REITs Approved
Source: Korea REITs Association, Genstar (quoted in Dec 2015)
REITs All / Logistics REITs / Logistics REITs Ratio 

Since introduced in 2004, as per the Indirect Investment Asset Management Business Act enacted in 2003, REFs witness a continuous expansion of the funds raised. According to Korea Financial Investment Association, the number of active REFs is 716 as in Dec 2015 and the size of funds entrusted was KRW 3,590 billion. Of the 716, 37 funds were closed with logistics real estate as underlying assets, valued KRW 158.5 billion, which is 35 times bigger than logistics funds closed in 2004. Logistics real estate will become a pillar for REFs along with REITs.
Also, with the revision of the Financial Investment Services and Capital Markets Act in July 2015, establishing a private fund manager has become relatively easier and the Financial Services Commission is proceeding with deregulation on REFs. Together, indirect investment into logistics real estate will continue to grow.

 Accumulated Funds Raised in Local REFs
Source: Financial Services Commission, Genstar (quoted in Dec 2015)
REFs / Logistics Fund / Logistics Fund Ratio
Unit: KRW 1 billion 

Logistics Real Estate Policy Trend
As part of the effort to promote investment in logistics real estate, the Ministry of Land and Transportation signed an MOU, in Aug 2015 with Korea Association of REITs and Korea Integrated Logistics Association, for cooperative business between logistics business and REITs. When demand is skyrocketing for logistics facilities to keep up with the growing e-commerce, this MOU seeks to take advantage of REITs that pulls funds from the mass and invest in real estate and to promote investment in logistics real estate from institutional investors such as pension funds and individual investors. Also, a plan was drafted in Feb 2016 to enhance the industrial competitiveness of REITs: substantial change of listing requirements, relaxing of equity distribution requirement and streamlining of decision making process, injection of institutional fund into and taxation support for public REITs, registration to approve private REITs, allowing subsidiary companies and currency hedging, relaxing of investment restriction by AMCs, information disclosure requirement. This plan will serve as an important element in securing more diversification in the investment targets that are currently exposed so much to office and in widening investment opportunities in logistics real estate.
Such policy promotion in logistics real estate investment is anticipated to have a positive impact on the development of the logistics industry as a whole. Meanwhile, more people are growing worried about oversupply that is created by excessive competition among real estate investors and by excessive participation of distribution companies, shippers and construction companies who are trying to take advantage of a variety of deregulations. This, in turn, can be interpreted as growing demand lesser asymmetry of market information and more transparency in the market as a whole.

Investment In Logistics Real Estate?
A look into logistics real estate transactions made in the last ten years should show a few implications for investors.
First, sale price of logistics real estate invested by international investors are valued higher. This can be interpreted that international investors with a variety of logistics real estate investment know-how seek out logistics centers that can fetch relatively higher investment value and maintain the prices. They also invest in logistics real estate that they structure to produce appropriate, stable income sources via master lease, sale & lease back, line of lessee (ship) in place, so that their investments can fetch more favorable terms at the time of sales.
Second finding is that indirect investment tends to claim higher price than does direct investment. This may be a natural outcome for indirect investment; with large funds pulled from multiple investors at the disposal, it is capable of more aggressive investment and active investment in large scale logistics real estate that can only be bought with large funds.
Lastly, the larger logistics real estate it is, the more investors prefer. This reflects investors’ preference of the economy of scale. The most coveted investment type of a logistics center is one that is suitable to attract prime lessees (shippers): one secures a large site area (a site over 30,000) with land transport accessibility, convenient shipment storage & release and amenable large scale loading.
Logistics real estate will only gain more prominence and investment, thanks to the expanding e-commerce, the diversifying distribution channels, ever growing trading volume activated by the Free Trade Agreements and the Government’s policy support of the service industries. Investment in logistics real estate should employ more convergent approaches with longer term considerations.
Brexit is a commonly used term for the United Kingdom’s withdrawal from the European Union. 


 

Genstar

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