4 reasons why APAC logistics yields will compress by a further 50-100bps
The continued increase in asset allocation is expected to put upward pressure on capital values.
In the last four years, logistics yields have compressed by 60-220 bps in Asia Pacific cities, according to JLL. In particular, Seoul and Sydney yields have compressed 120 bps over the last three years. While this decline was sharp, yields are still expected to compress further by 50-100 bps on average due to 4 main reasons.
JLL enumerates the 4 factors below:
1. Continued increase in asset allocation and funds flow into the sector
This is likely to put upward pressure on capital values. In the last three quarters, logistics assets marketed by JLL have attracted strong bids, with the upper quartile bids reaching 5-9% above asking prices. In comparison, retail assets attracted upper quartile bids reaching 0.5% above asking prices.
2. Still wide logistics yield spread over office assets
Spreads are still wide and should narrow over time as rental growth expectations over the next five years for office assets of 0-2% annually in 2021-2025 are no higher than for logistics given the current demand-supply dynamics in most Asia Pacific cities. Currently, logistics yields in Seoul, Tokyo, Shanghai and Beijing range between 3.5%- 6.5% and still 90-180 bps above office yields.
3. Attractive yield spread over cost of debt
Wide spreads to costs of debt provide compelling cash on cash yields, allowing funds and listed REITs to fund additional acquisitions easily. For instance, in late 2020, Japan’s LaSalle Logiport REIT raised USD 456 million for acquisition of four assets. In 1Q21, Mapletree Logistics Trust acquired five assets in Korea for USD 250 million reflecting a 4.5% NOI yield, funded using debt costing of 2.3%.
4. Yield spread globally
Asia Pacific logistics yields of 3.9%-6.7% are higher than yields of 3.35%- 4.5% in Europe and 3.8%-4.8% in the United States. Given the strong tailwinds of growing urbanisation, consumption and e-commerce adoption in Asia Pacific, global investors would find Asia logistics assets compelling and provide the additional push to bring yields in Asia down by 50-100 bps over the next few years.