Japan Warehouses Draw Investors on Returns Post Quake

When Prologis Inc. built Japan’s first logistics center in 2002 for inventory management, storage and distribution, 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 centers 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 ($26 billion) this year from almost zero in 2002, according to CB Richard Ellis Group Inc.

“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.”

Investment Plans

Global Logistic Properties Ltd. (GLP), the biggest owner of Japanese industrial properties, started exclusive talks in July to buy about 20 properties from LaSalle Investment Management Inc., two people with direct knowledge of the deal said then, outbidding Mitsubishi Corp. (8058) and Blackstone Group LP. Mitsubishi Estate Co., Japan’s largest developer by market value, entered the industrial market for the first time in April with a Tokyo Bay logistics center it’s building with Mitsui & Co., the nation’s second-largest trading house.

Mitsui Fudosan Co., Japan’s biggest developer by sales, said on Sept. 8 it may start investing in storage and distribution centers in the country for the first time.

Sales of industrial properties nearly doubled in the first half of the year to $1.14 billion from the same period last year, while transactions of office buildings fell 15 percent to $7.54 billion, according Real Capital Analytics Inc., a New York-based research firm.

Industrial spaces returned 9.2 percent 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 Ltd.

Becoming Popular

“Logistics properties have become popular,” said Tokyo- based Naoshi Ogikubo, chief executive officer of Diamond Realty Management Inc., 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 centers has been partly helped by a shortage in supply after the collapse of Lehman Brothers Holdings Inc. in September 2008 froze credit markets. The addition of new space fell by about half in 2009 and plunged 74 percent in 2010 in Japan, Los Angeles-based CB Richard Ellis said.

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 Co., a privately held brokerage company. The vacancy rate rose to a peak of 9.2 percent in March after the earthquake hit Japan’s northeastern region.

Vacancy Rates

The vacancy rate for warehouses fell to 7 percent in June from a peak of 20 percent in September 2009, CB Richard Ellis said. For Tokyo’s office buildings 8.7 percent of the space was vacant as of August, according to Miki Shoji.

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

Industrial rents in Tokyo are the most expensive in the world, followed by London and Singapore, according to CB Richard Ellis. Annual average warehouse rental in Tokyo was $22.15 per square foot in the first quarter, it said.

Rents have been more stable for industrial spaces. Average rents for Tokyo distribution centers fell 3 percent to 5,510 yen per tsubo a month in 2010 from 2007, according to CB Richard Ellis, while office rents dropped 20 percent in the period, according to Miki Shoji. One tsubo, a standard measure of property area in Japan, is 3.3 square meters or 35.5 square feet.

The rental return has helped the number of warehouse owners in Japan double in the past five years, according to CB Richard Ellis. Yet, modern logistics facilities account for only 2 percent of total warehouse space in Japan, it said.

Online Shopping

“The rent for warehouse properties is very stable and there is plenty of room for growth in this investment market,” said Tokyo-based Junichi Taguchi, managing director of industrial services at CB Richard Ellis. “We expect to see more new players coming to the market.”

Distribution centers also are benefiting as more people shop on the Internet, driving demand from online retailers and transportation companies that require larger, more modern centers for storing and handling goods.

Total sales of e-commerce in Japan exceeded department store sales for the first time in 2010, surging 16.3 percent to 7.8 trillion yen, according to Japan Department Stores Association and the Ministry of Economy, Trade and Industry. Nationwide department store sales in Japan fell 3.1 percent to 6.29 trillion yen for the same period.

Modern Warehouses

“Modern logistic facilities have really become the store front for e-commerce,” said Jeffrey Schwartz, deputy chairman of Singapore-based Global Logistic.

With that first distribution center in Shinkiba near Tokyo Bay, San-Francisco based Prologis pioneered leasing large facilities to Japanese logistics companies that offer a range of services such as inventory management, storage and distribution of goods. Prior to Prologis, firms traditionally owned their own storage space or leased space from warehouse operators.

Sales of industrial sites, which drew little competition previously, now attract as many as a dozen bidders, Prologis’s Yamada said.

“Even banks approach us to see if there are any lending opportunities,” he said.

The accessibility of trucks at older warehouses in Japan tends to be limited to the ground floor, Yamada said. Elevators are used to carry merchandise, which is less efficient compared with modern facilities where trucks reach every floor via ramps, he said. The design, which cut the time needed to load and unload goods by about 39 percent, is now standard for logistics properties in Japan and is also being used in Singapore and Hong Kong where land is scarce, according to Prologis.

‘Robust Demand’

Prologis, which merged with AMB Property Corp. in June, commanded 20 percent of the warehouse market in Japan in terms of space as of June, while Global Logistic had a 22 percent share, according to CB Richard Ellis data.

Prologis sold its stake in a Japan industrial property fund more than two years ago to Government of Singapore Investment Corp., which in turn listed Global Logistic in October 2010 in a S$3.45 billion ($2.9 billion) share sale in Singapore.

Global Logistic said Sept. 1 it formed a joint venture with the Canada Pension Plan Investment Board to develop and hold storage and distribution centers in greater Tokyo and Osaka areas. The venture will build up to 12 warehouses that may be worth as much as $1.4 billion.

“We see nothing but extremely robust demand from institutional investors,” Schwartz said.

To contact the reporters on this story: Kathleen Chu in Tokyo at Kchu2@bloomberg.net; Katsuyo Kuwako in Tokyo at kkuwako@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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