08/27/2012 | By Lorna Pappas
The prolonged slowdown in international trade clearly presents a major hurdle for industrial REITs. After a significant deceleration in 2011, worldwide trade growth is expected to slow again in 2012, according to the World Trade Organization. This past April, WTO economists reported a 13.8 percent increase in trade during 2010, while 2011 saw only a 5.0 percent jump. Growth is projected to slow even further in 2012 to 3.7 percent, with the downturn attributed to slow economic growth in developed economies, global economic shocks and the European sovereign debt crisis.
Within such global economic slowdowns, the industrial sector traditionally is hurt by declines in retail sales and, thus, the reduced demand for storage and distribution facilities, notes Jason Lail, manager of real estate research for SNL Financial. So it should come as no shock that during the first quarter of 2012, average occupancy in the global industrial REIT space had dropped to 97.0 percent from the 97.6 percent level recorded at the end of 2010, according to SNL data. Looking ahead, based on a pool of 15 industrial REITs, SNL expects median earnings per share (EPS) for all global REITs to hold steady, with a slight decline of 0.11 percent.
However, several positive developments also are taking place: The global population is growing and, in some markets, there's an undersupply of Class-A logistics facilities, prompting solid business fundamentals for international industrial REITs. At the same time, tenants recognizing opportunities in a depressed market are pursuing new industrial space, the absence of which is helping to drive build-to-suit construction in select markets. What's more, new developments can be designed for maximum efficiencies for serving today's technically advanced clientele, making new construction more desirable than re-tooling older facilities.
As tenants look to expand and upgrade, global REITs have an opportunity to extend their existing tenant relationships.
"Industrial REITs' relationships with Fortune 1000 tenants in one region can be leveraged in other markets worldwide," notes Paul Adornato, managing director and senior REIT analyst for BMO Capital Markets. For example, "Global players incorporate consistent leases, real estate best practices and state-of-the-art features in properties around the world," he says.
Asian Market Domination
The sector's positive developments are strong in Asia, a region growing faster than the Americas or Europe, reports Susan Persin, managing director of Trepp REITCafe. In response, Prologis Inc. (NYSE: PLD) ― the world's largest global industrial REIT player, with a market cap north of $15 billion and 584 million square feet of projects in 22 countries ― has taken a keen interest in that area. Asia is home to just 4 percent of Prologis' properties, but half of the company's 12.6-million-square-foot development portfolio, she says.
Gary Anderson, Prologis' CEO for Europe and Asia, says there is significant demand to upgrade and diversify industrial facilities, particularly in Japan, resulting in strong leasing and build-to-suit activity. For example, the firm recently opened a 1-million-square-foot facility in Tokyo that was fully leased even before its groundbreaking.
"Similarly, in China, a growing middle class and a lack of high-quality supply make our developments very attractive to global customers," he says. Hamid Moghadam, Prologis' chairman and co-CEO, has previously speculated that the company's business in China will eventually overtake all of Europe, with a shift away from an export-oriented economy to one focused on domestic consumption, boding well for logistics demand.
The demand for industrial space in Asia convinced Global Logistic Properties (SGX: GLPL.SI) to headquarter its operations in Singapore and focus exclusively on the Asian market.
Led by former Prologis CEO Jeffrey Schwartz, Global Logistic has grown to become Asia's largest provider of modern logistics facilities. The company owns a total of 435 properties in 162 logistics parks in 33 major cities in China and Japan. As of July, Global Logistic's market cap was approaching $9.7 billion.
Schwartz, the firm's deputy chairman, cites domestic consumption as one driver of growth in the company's operations in China. He points out that domestic consumption and retail sales in China are growing at double-digit rates, with retail doubling every year since 2005. Global Logistic's occupancy in China currently exceeds 90 percent, and Schwartz maintains that 75 percent of China's warehouses do not meet modern logistic requirements and are facing demolition. In comparison, the current supply of logistics facilities in the U.S. is 14 times that of China's.
In addition, China has the world's second-largest population of online shoppers, at 145 million people, a number expected to grow exponentially, Schwartz says. "China's online shopper population is on track to double in the next three years," he says. That would surpass the massive number of online shoppers in the U.S.
Schwartz attributes Global Logistic's revenue growth of 19 percent for the 2012 fiscal year to its presence in China.
So, what's the outlook for international industrial sector players?
Even in the fallout from the global economic slowdown, Anderson says Prologis hasn't changed its basic business model. Instead, it has simply sharpened its focus: "We're building more prudently and are very selective with our acquisitions."
Despite fears over the European economy, Prologis announced plans in June for two expansions in Germany that increased its portfolio in the country to more than 18.4 million square feet. It also announced a move into Brazil, host of the 2014 World Cup and 2016 Summer Olympics. The firm is gearing up to meet the growing market demand for industrial space expected in Brazil, a country significantly underserved by modern logistics facilities, Anderson says.
Global Logistic is looking ahead to "continuing our focus on only the most attractive markets in the world," Schwartz says, "and building upon our leading positions in them."
One thing looks certain: As world economies continue to globalize ― with supply chains getting longer and products requiring more complex sourcing ― companies around the world will continue to need flexible, modern and well-located logistics facilities and distribution space.