Demand: China policy risk looming large, which could extend the broader supply chain disruptions toward 2023
Japan’s economic outlook has been downgraded due to upside inflation surprises, weak currencies, and the escalation of sanctions against Russia, leading to the Real GDP growth of 1.8% for 2022 and 1.2% for 2023. Although the current wave of infections is projected to be contained by Q3 2022, China’s lockdowns and restrictions are likely to extend the period of global supply chain bottlenecks until after 2023. The impact of higher inflation becomes evident in higher cargo price, up 5.3% y-o-y１, mostly through international ocean freight, up 67% y-o-y, and air freight, up 85% y-o-y. A combination of weak currency and rising oil price also led to the import increase of 24.1% y-o-y, offsetting the export increase of 8.8% y-o-y 2. For the fiscal year ending March 2023, corporate earnings should similarly suffer, with their ordinary profits estimated to fall by 20% y-o-y3. Looking ahead, we remain cautious on the overall logistics volume staying near flat with increasing consumer demand being offset by weak corporate demand at least until H1 2023. That said, Japan’s low modern logistics stock per capita should still drive the future LMT demand as more consumers are shifting to online retail for broader product categories.
Supply： Nagoya’s low modern warehouse stock per capita should mitigate the long-term supply concerns
Nagoya’s modern logistics stock per capita remains very low, less than half of that in Tokyo and Osaka, limiting the city’s potential to attract tenants requiring digital infrastructure. Assuming the LMT as modern warehouse stock, Nagoya’s modern stock remains less than 6% of total warehouse stock against Tokyo (15%) and Osaka (8.6%). Nagoya finally saw an unpreceded supply totaling over 312,000 sq.m, equivalent to 87% of existing submarket stock during H1 2022. With the full opening of Shin-Meishin Expressway connecting Nagoya and Kobe, the city is set to see an increasing delivery of 8 buildings, totaling to approximately 524,000 sq.m over the next two years. The impact of lump-up supply may result in temporary uptick in vacancy peaking around 15% over the next two years, however it is likely to be absorbed by the city’s missing tenant base of major EC operators beyond 2024. Elsewhere, Amazon has announced the opening of 18 delivery stations to total their delivery stations to 45 locations nationwide. An increasing number of delivery stations will be required for same day delivery given storage facility other than fulfillment center already represents around 45% of total warehouse stock in Amazon U.S. Vacancy rates remain low across locations; the Greater Tokyo Area saw vacancy doubling toward 4% with the Greater Osaka Area tracking around 2.1%.
Pricing: Japan’s industrial spreads remain wide to other global cities
Japan’s industrial spreads relative to 10-year government bond remain unchanged. This contrasts with other advanced economies which saw significant tightening over the past year such as Singapore (506 bps/ 368 bps), Australia (388 bps/ 98 bps), South Korea (257 bps/ 89 bps), and Hong Kong (228 bps/ 37 bps) 4. The U.S cities saw further tightening led by coastal cities albeit their risk spread as pricing proxy may appear misleading under volatile interest rate environment. Looking ahead, we expect further industrial spreads tightening for Japan as the country continues to modernize the overall logistics infrastructure similar to its peers in advanced countries.
1 Corporate Service Price Index, BOJ External Link
2 Ministry of Economy, Trade and Industry
3 Financial Statement Statistics of Corporations, MoF
4 RCA/MSCI as of 8 August 2022
5 C&W quarterly survey target is based on Large Multi-tenant Logistics Facilities at around GFA 15,000 tsubo.