Understanding the logistics real estate investment

Heighten Interest in Logistics Center Investment

Of late, rate of returns from operational real estate is regaining interest. Against this market sentiment, logistics real estate is rising as a ‘blue chip’ in the real estate investment market. In fact, logistics real estate has been and will continue to grow in the real estate market.

The transaction market of logistics real estate has been controlled in the form of a black market or by locational network agencies. Many companies have experienced difficulties when they approached transactions of logistics real estate, just as they do for other types of commercial real estate.

High drive is not hard to find among institutional investors such as financial institutions, real estate fund managers, REITs to compete to invest in large funds in logistics real estate, but in reality, even selection of investable logistics is challenging and when called upon actual investment, surprisingly they turn out to be much more passive than they initially planned.

Then why do they turn passive despite their high interest? First reason would be their lack of understanding in the operation of logistic centers and in related industries. Many instances can be found where investors ignore or do not give proper attention to the risk involving the operational side of logistics centers, investors jump in simply for the expected returns.
 
Second, most local investment companies have not invested in logistics real estate. They apply the usual standards they would do for other commercial real estate (office, retail) to logistics real estate and end up setting up credit verification standards for lessors and lessees that prove to be unrealistic to meet. This kind of wrong-headed approach becomes an impediment to the companies to find suitable target real estates.

When I talk with investment companies who are planning to invest in logistics real estate, they share the challenge they face in their search for new investment opportunities that their investors only prefer logistics real estate that guarantees credits of owners/lessees and mainly master lease structures.
 
Yet, international investment companies are one step ahead in apply more realistic investment criteria and leading project financing for logistic center development and enjoy investments that generate continuous returns after acquisitions. So far, successful logistic real estate investment are limited to a handful of international investors who came in when interest was low in the local logistics real estate and selected prime logistics centers.

Things to Consider Before Making Investment Decisions on Logistics Real Estate

For real estate investment, investment companies employ the existing investment analysis schemes. For logistics real estate investment, you can estimate investment value by referring to the related industrial trends. For instance, competition to cut distribution time that has been going on from last year among parcel delivery service providers, a hot issue in the distribution industry, has led companies involved to completion to secure distribution hubs; as a result, most logistics real estate investments are either made in the forms of logistics center site acquisitions and new logistics center constructions.

Also, related industries who are eyeing for differentiated distribution and customer service are pacing to secure suitable real estate, a factor that is determined to accelerate the development of logistic real estate business.
 
Not only the parcel delivery service business, those companies in automobile, bio & pharmaceutical, industrial products, foods are trying to keep presence in locations that are adjacent or access to deliver their products on the same day or make two deliveries in one day. This locational need is incentivizing related companies to re-organize or expand their logistics centers or tenants to move to a more advantageous location. Also, logistics centers are divided into transport centers (TCs), distribution centers (DCs) and complex centers (CCs). Investors are advised to consider that these types of logistics centers determine tenants/lessees.

It may be difficult to exactly understand tenant companies’ locational plans, using this data, issues and new trends, but you should be able to estimate candidate areas to which these companies will relocate or expand. If you narrow down your target tenants, you may get a more accurate estimate.
 
Operation managers can help establish a direction in attracting tenant companies, especially when a tenant inevitably leaves during the operation of a concerned logistics center or when an owner tries to find a new tenant at the expiry of a previous contract.

In their feasibility analysis, investment companies tend to rely solely on operational returns, owner’s and lessee’s credit, market rents of a concerned submarket or overall market analysis data. You will enjoy less exits of tenants or faster relief of vacancy, if you invest or operate a target center after you use such data as architectural structures that are projected to be preferred by the related industries, preferred locations (areas), cost reduction effect, accessibility to transportation networks and quality human resources, as well as the usual feasibility analysis schemes such as the size of the investment target or the lessee’s creditworthiness.

If you turn a blind eye to this analysis in pursuit of short term operation or investment returns as has been so far, you may run a higher investment risk. So far, no accurate investment criteria specifically for logistics real estate, I would expect more, successful investments.

Advice on Planning for Investment

One must not invest or develop logistics real estate in a blind pursuit of returns or motivated by one’s financial backing. Logistics real estate (logistics centers), unlike office or residential, is a product of organic factors and sensitive to variables of related industries. For instance, a change in a shipper’s service system creates changes in preferred areas and facility standards.
Creditworthiness of an actual user or lessee (shipper) is important in determining the value of investment or acquisition, but locational preference, building age, facility structure (architectural design) and development (expansion) prospect of the target submarket are also important factors that must be given due attention to.
In running logistics real estate that one invests in, develops or acquires, operational risk goes down when one keeps two to three or multiple users (lessees) than relies only on a single master lease.
One must study as much as one can in establish a definitive plan for the application scope of compensation insurance for domestic & international real estate and countermeasure against accidents and incidents. Acts on safe facilities is getting more stringent. Considering actual cases and the national trends, the responsibility is not only on the operators (PM, FM service providers) but on actual owners.

Even if one may find it difficult to find a real estate agent who is able to analyze real estate big data as there are only a few real estate agents in the local marketplace that are capable, one is recommended to make an effort to seek such consulting firm or professional agency to their diagnosis or professional advice. 

Moon Shik Choi / Manager, Genstar Marketing Division
MA Global Real Estate, Sangmyung University / Certified Asset Manager / Advanced Logistics EXpert Course (ALEX)

Genstar

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