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Limited supply of cold storage logistics facilities in APAC will drive rental premiums and spur investments

24/12/2020
The development of a COVID-19 vaccine will increase the demand for temperature-controlled logistics as vaccines need to be kept at low temperatures. There is an increasing expectation by scientists that the COVID-19 vaccine will not be a single shot, but will require annual shots like the flu vaccine to maintain its effectiveness. This will result in a sustained demand for cold storage logistics across the globe.

 

In its latest report APAC Cold Storage Logistics, Cushman & Wakefield discusses how demand for cold store logistics will be impacted in light of global developments around the development of the Covid-19 vaccine and the structural changes in consumer demand through e-commerce platforms as a result of the pandemic.

 

The report notes that global pharma is shifting portfolios and priorities towards biologics – drugs made from living components which have revolutionized treatment for many conditions. This boom in biologics means spending on cold chain transportation and packaging is rising to meet demand. Cold chain logistics involves the utilization of temperature-controlled warehouses for storage and cold insulated transport vehicles for distribution. Transportation modes include refrigerated trucks, refrigerated railcars, refrigerated cargo, and air cargo.

 

About 25 percent of all healthcare products are temperature-sensitive and maintaining a specific temperature range throughout the entire shipping process is essential.

 

Along with pharmaceuticals, e-commerce and grocery shopping are the other two demand drivers.

 

Rental premiums could range between 50 per cent to 100 per cent
 
Cold storage warehouses command significantly higher rents than conventional dry warehouses. Depending on the type of cold storage facility (chilled or freezer) and the country, the rental premium could range from 50% to 100% or even higher.
Christine Li, Head of Research, Singapore and Southeast Asia said, “While the development of cold storage facilities is more expensive due to the installation of insulation and machinery, the rental premium poses a strong incentive for developers to construct cold storage projects instead of conventional warehouses, where feasible. Investors and developers can also consider converting conventional warehouses to cold storage facilities to reap the rental premium.”

Due to the scarcity of cold storage warehouses and the need to retrofit them to their specific requirements, tenants of these facilities tend to take up longer leases. Typical lease terms of cold storage facilities are from 10 to 20 years, significantly longer than leases of conventional dry warehouses of only three years in countries such as Singapore. The leases often provide for periodic rent escalations which may be linked to inflation.
 
In addition, the probability of tenants renewing their lease agreements is higher than for conventional logistics facilities as the tenants have difficulty finding other suitable facilities in the same location.
 
Another advantage is that leases of cold storage facilities are usually triple net leases, where the tenant foots the bill for the property taxes, maintenance fees, and building insurance. This results in light management requirements for the investor.
 
Demand likely to outstrip supply
 
The cold storage capacity in APAC is limited compared to the western countries. The Global Cold Chain Alliance (GCCA) data indicates that cold storage capacity per urban capita in the U.S. was around 0.5 cubic metre in 2018, but stood at just one-tenth of this figure in the Philippines and Indonesia. For Asia Pacific to reach the same cold storage capacity per urban capita as the US, it would require the addition of 411 million cubic metres of new supply - a figure almost double existing stock.

Ms Li added, “Although the sector is currently nascent and is viewed as niche, this is expected to change in the coming years and be transformed into a mainstream sector. Given the scarcity of the choice asset class, demand is likely to outstrip supply given rise to high potential price appreciation. As such investors who enter the market before the sector reaches mainstream status are expected to reap higher capital gains.”
 
Conservative investors who are used to purchasing a stabilised asset can acquire cold storage facilities that are already tenanted with long leases. Investors seeking a higher rate of return can explore development opportunities at both greenfield and brownfield sites to reap development profits. By forming partnerships with established operators and tenants prior to commencing the project, this will reduce the vacancy risk upon completion of the development.

Download the Asia Pacific Cold Storage Logistics report here.

-END-

 

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 53,000 employees in 400 offices and 60 countries. In 2019, the firm had revenue of $8.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

 

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