Japanese earthquake prompts investment in logistic firms

WHEN Prologis built Japan’s first logistics centre in 2002 — offering inventory management, storage and distribution services — potential clients and lenders told the company to invest in malls or apartments instead.

“Investment in logistics facilities was unheard of in Japan,” said Tokyo-based Miki Yamada, president of Japan operations at Prologis, the world’s biggest warehouse owner. “Everyone said it doesn’t work and no one was interested.”

Now, Japan’s distribution centres are rebounding from record-high vacancies two years ago amid demand for modern storage after the March 11 earthquake and tsunami destroyed industrial spaces, drawing investors looking for returns amid a slump in the office market.

Investment in logistics may surge to more than 2 trillion yen (€19 billion) this year from almost zero in 2002, according to CB Richard Ellis Group.

“The earthquake in March reaffirmed the importance of logistics and supply chain management,” said Yamada.

“As companies continue to seek efficiencies, the demand for modern, efficient distribution facilities will undoubtedly continue to increase moving forward.”

Global Logistic Properties, the biggest owner of Japanese warehouses after Prologis, started talks in July to buy about 20 industrial properties from LaSalle Investment Management, two people with direct knowledge of the deal said at the time, outbidding Mitsubishi and Blackstone Group.

Mitsubishi Estate, Japan’s largest developer by market value, entered the industrial market for the first time in April with a Tokyo Bay logistics centre it is building with Mitsui & Co, the nation’s second-largest trading house.

Sales of industrial properties nearly doubled in the first half of the year, while transactions of office buildings fell 15% according to Real Capital Analytics. Industrial spaces returned 9.2% on average for the year ended April 30, twice that for residential properties, while office buildings offered a loss, according to London-based Investment Property Databank.

“Logistics properties have become popular,” said Tokyo-based Naoshi Ogikubo, chief executive officer of Diamond Realty Management, a unit of Mitsubishi, Japan’s biggest trading house.

“That may lead to a gradual increase in property prices for modern warehouses as the office and retail leasing markets remain tough.”

The higher return of distribution and storage centres has been partly helped by a shortage in supply after the collapse of Lehman Brothers Holdings in September 2008 froze credit markets.

Office rents have declined for three years in Tokyo and stayed at a record low for a seventh month in August, according to Miki Shoji, a privately held brokerage company. The vacancy rate rose to a peak of 9.2% in March after the earthquake hit Japan’s northeastern region.

The shortage of new logistics centres and warehouses may lift effective rents, or the amount tenants pay property owners, by as much as 10% over the next six to 12 months, Yamada of Prologis said.

Industrial rents in Tokyo are the most expensive in the world, according to CB Richard Ellis.

Rents have been more stable for industrial spaces.

“The rent for warehouse properties is very stable and there is plenty of room for growth in this investment market,” said Junichi Taguchi of CB Richard Ellis.

“We expect to see more new players coming to the market.”