Is Industrial the new Retail?

With bricks and mortar retail suffering under the weight of the pandemic, the sector has increasingly moved “online” with a resultant boom in e-commerce. In turn this has driven demand in the industrial sector for warehousing, logistics and supply chain solutions.   

The industrial sector has shown both its defensive and growth qualities, which has piqued investor interest, driving both record investment volumes and sharp yield tightening. Occupier demand has also increased, especially for assets in close proximity to high quality infrastructure, or that can fulfil last mile delivery commitments to meet soaring e-commerce activity. 

In simple terms, rolling annual investment volume for industrial assets in Asia Pacific exceeded investment volume for retail assets for the first time in Q2 2020. Since then, industrial investment has soared such that as at Q3 2021 rolling annual industrial investment volume had reached USD46.8bn compared to USD39.3bn for retail. In line with this, top-quartile transaction industrial capitalisation rates are at record lows of 4.2%, down from 4.9% a year earlier  

However, the sector is not without its own headwinds.  The pandemic, as well as other exogenous factors such as natural disasters and portside strikes, have also caused problems for supply chains. The fragility of just-in-time inventory has been brutally revealed with corporates now opting to hold more safety stock, which has driven further demand for warehousing space. Over the longer term, many companies will seek to redesign their supply chains, not only in response to the acute issues experienced over the past 18 months but also considering longer term, structural changes that were already underway prior to the pandemic. In turn this will shift demand for industrial space across the region as each company seeks to create the optimum combination of efficiency and responsiveness to meet their customers’ needs.  

The geographical connectivity of South East Asia immediately places these markets at an advantage, supported by their low-cost base and increasing maturity. Some manufacturers have already begun expanding their operations in these markets to help diversify production. More advanced markets will likely benefit from reshoring of key, “mission critical”, elements of the supply chain. Securing last mile sites will become increasingly competitive across the entire region as digital penetration and e-commerce continue to grow.  

On a broader front, the growth in intraregional trade in Asia, due to consumers across Asia consuming more of the goods manufactured in Asia, will drive new investment opportunities in manufacturing and logistics infrastructure.  Priorities when configuring supply chain networks will be speed to market and proximity to consumers, and modernisation of industrial and logistics infrastructure will be critical to take advantage of the growth in intraregional trade.