Cover Story: E-commerce to drive industrial property market

This article first appeared in City & Country, The Edge Malaysia Weekly, on February 24, 2020 - March 01, 2020.

Attendees photograph a screen displaying sales figures during Alibaba Group Holding Ltd's annual November 11 Singles' Day online shopping event in Hangzhou, China, on Nov 11, 2019. Alibaba logged more than RMB268 billion of purchases during its Singles' Day bonanza, exceeding 2018's record haul after a 24-hour shopping marathon. Photo by Bloomberg

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The industrial property market remains a bright spot in an otherwise sluggish market. According to CBRE|WTW managing director Foo Gee Jen, the overall property market saw a slight improvement in 2019, but market sentiment is still skewed towards the downside.

“The industrial sector has typically been underrated in our market, but it is perhaps the silver lining. At this point in time, the right industrial property could be yielding as high as 7% to 9% compared with the other asset classes, where a yield of 5% to 6.5% is expected,” says Foo.

The performance of the industrial property segment is driven by improvements in the industrial market.

“This is fuelled by the influx of foreign direct investment (FDI), partly owing to the trade war between the US and China, and improvements in e-commerce, to name a few [factors],” says CCO & Associates (KL) Sdn Bhd director Chan Wai Seen.

Chan notes that Budget 2020 has introduced various incentives to attract FDI and promote SME (small and medium enterprise) developments in the country. He believes these measures will continue to increase demand for the industrial property market.

“Large FDIs will not only create demand for industrial properties but also promote growth in the supplementary industries. The chain effect will increase demand for industrial properties, including smaller industrial properties,” says Chan.

JLL Malaysia country head Y Y Lau says the industrial market has been stable, with industrial sub-sectors generally recording steady growth in manufacturing sales overall. She notes that the Malaysian Investment Development Authority (Mida) reported that in November 2019, the sub-sector of food, beverage and tobacco recorded the highest growth of 8.9% year on year, and similarly, the Industrial Production Index (IPI) recorded positive growth in all the sub-sectors.

“The stable market is also evident, with numerous investors and developers approaching JLL Malaysia throughout 2019 to assist them in making the best business decisions amid the opportunities and risks. In addition, Napic (the National Property Information Centre) also reported an increase in industrial property transactions (up to 3Q2019) compared with the same period in 2018,” says Lau.

For the first nine months of 2019, the number of projects approved and the investment value for electrical and electronics (E&E) products have doubled compared with the whole of 2018, while other sectors are also seeing growth in approved project value.

“Thus, going forward, we can expect the market to be resilient. Oil & gas, for example, in the face of global price volatility, are likely to remain buoyant as we continue to see activities, including a major investment in Sabah with over US$2.3 billion in December last year.

“In the F&B sector, we are seeing a major investment in Melaka with the proposal of a halal gelatin park. Perlis and Selangor are also expecting significant investments from Fraser & Neave Holding Bhd. No doubt, in 2020, we can look forward to more positive news in this sector, which has traditionally been recession-proof,” says Lau.

She adds that the government has also introduced several initiatives, including the special border economic zone in Kedah, the development of Carey Island, the Pan-Borneo Highway and the East-Coast Rail Line (ECRL).

“These potential catalysts can also be the demand drivers, in addition to the sunrise industries,” says Lau.

Foo agrees, noting that the conventional industrial demand drivers such as foreign investments and manufacturing activities by and large remain healthy for Malaysia.

“Looking ahead, E&E manufacturing shall remain a tangible segment as Malaysia pursues high value-addition economic activity. Meanwhile, logistics and warehousing are growing in importance in line with Malaysia’s strategic step-up to be a regional distribution hub as well as the rapid growth of e-commerce,”says Foo.

The continuing growth of e-commerce

JLL Malaysia’s Lau says e-commerce has continued to gain higher market share in many countries globally, including Southeast Asia, and based on a recent study by Google and Singapore’s Temasek Holdings, the internet economy in Southeast Asia is projected to be worth more than US$240 billion by 2025.

“We can definitely foresee the impact of e-commerce on the industrial market more so than its brick-and-mortar counterpart. In fact, the growth in e-commerce has already resulted in the increasing number of logistics developments throughout the Klang Valley. JLL, through our Real Estate Intelligence Services (REÍS), estimates a CAGR (compound annual growth rate) of 24% within 10 years, increasing the logistics space from around two million sq ft to 15 million sq ft,” says Lau.

She believes with ample land for development in the Klang Valley, logistics and distribution hubs can further grow beyond the 15 million sq ft space projected.

“JLL’s REÍS — particularly in the segment of warehouse and distribution hubs — sees a very high average occupancy rate for the prominent industrial developments that we monitor. In addition, the Department of Statistics Malaysia reported a steady overall increase in courier licences issued and the number of parcels handled. We partially attribute this growth to the rise of e-commerce,” says Lau.

According to Knight Frank Real Estate Highlights 2H2019, the Logistics and Trade Facilitation Masterplan (2015-2020), which is in its second phase of implementation, will enhance Malaysia’s position as a regional player. Notable projects and initiatives include the proposed Pulau Carey Port Industrial City, the ECRL, the Digital Free Trade Zone and the regional e-commerce and logistics hub at KLIA Aeropolis.

“The logistics industry plays a pivotal role in supporting the manufacturing sector’s supply chain by facilitating the flows of goods. Underpinned by increasing global e-commerce trade and consumer spending, logistics services are poised for growth, and this will translate into higher demand for logistics and warehousing space,” says Knight Frank.

CBRE|WTW’s Foo says the primary impact from the growth of e-commerce will be higher demand for warehousing spaces in areas close to seaports and airports.

“We will also see industrial hot spots closer to the city centre. This is already observable and especially true for industrial developments with warehousing and logistics orientation. At present, e-commerce emphasises fast-moving items. As such, proximity to the city centre means proximity to end-consumers. It is key to efficiency for last-mile delivery players,” says Foo.

He also expects the market to consolidate, noting that at present, the supply chain in Malaysia is segmented.

“Demand for storage space is categorised by cargo handlers, warehouse operators, distributors, 3PLs [third-party logistics] and so forth. Each has distinct industrial space demand in different ­areas. Should e-commerce continue to expand, there could be mergers and acquisitions taking place in the supply chain once the market is sizeable enough for players to achieve economies of scale by providing port-to-door services,” says Foo.

According to Knight Frank, in 2018, Malaysia ­recorded e-commerce sales of about RM12.53 billion. China E-Business Research Centre and Statista and Transport Intelligence foresee e-commerce sales CAGR of 13.9% between 2018 and 2023.

CBRE|WTW Real Estate Outlook 2020 reports that the total volume of air cargo handled from 1Q2019 to 3Q2019 was 517,000 tonnes, down from the 540,000 tonnes in the same period in 2018.

“Despite the decrease year on year, the air freight volume is expected to increase as e-commerce expands. Sales growth from e-commerce platforms resulted from increasing usage, creating opportunities for logistics and distribution activities,” says CBRE|WTW.

Knight Frank reports that the total existing supply of industrial space designated for logistics and warehousing use in the Klang Valley was about 41 million sq ft as at 2018.

“More than half of the space is found in the localities of Shah Alam/Bukit Jelutong and Port Klang/Bukit Raja. The strategic location of these areas, surrounded by mature neighbourhoods, with well-connected infrastructure and their proximity to Port Klang, are key factors,” says Knight Frank.

A few notable existing mega logistics/warehouse facilities that are at least 500,000 sq ft in Shah Alam/Bukit Jelutong are Mapletree Logistics Hubs Shah Alam in Section 22, Shah Alam; Mapletree Shah Alam Logistics Park in Section 23, Shah Alam; CEVA Logistics Central Distribution Centre in Bukit Jelutong; PKT One Logistics Hub in Section 32, Shah Alam; and DHL Malaysia Integrated Logistics Centre in Section 23, Shah Alam. In Bukit Raja, the giant facility is Aloha Galaxy’s National Distribution Warehouse.

“Collectively, these mega facilities in Shah Alam/Bukit Jelutong and Port Klang/Bukit Raja account for about 6.6 million sq ft of logistics/warehousing space,” says Knight Frank.

It also reports that the completion of Galaxy Logistics Hub in Kuala Selangor, CJ Century’s headquarters in Bukit Raja, AREA Logistics @ Ampang and Nippon Express’ warehouse in Section 22, Shah Alam,add 3.9 million sq ft of space to the cumulative stock.

Knight Frank expects to see more than four million sq ft of warehousing space coming onstream by 2020 and beyond. Among the notable facilities under construction are a flatted warehouse at Hap Seng Industrial Hub @ Shah Alam; D Project Malaysia I in Shah Alam; Ikea Distribution Centre in Pulau Indah; KLIA Aeropolis Digital Free Trade Zone in Sepang; EMHub in Kota Damansara; and Axis Mega Distribution Centre (Phase 2) in Sijangkang.

“As for demand, it is noted that substantial existing logistics/warehouse space is owned by investors/real estate investment trusts (REITs), with the majority of these assets tenanted by logistics companies. Moving forward, the exponential growth in Malaysia’s e-commerce sector is likely to provide a strong tailwind for the business of logistics companies, which will, in turn, increase the demand for logistics/warehouse space,” says Knight Frank.

Room for improvement

Lau believes increasing demand from consumers will push the industrial sector to further improve its last-mile delivery services.

“On top of the mushrooming of distribution centres, quality infrastructure suitable for logistics operations is also being built, and more modern methods continue to be explored, including delivery by drones, as previously seen tested in Cyberjaya,” says Lau.

JLL Research notes that there is room for improvements in terms of efficiency of industrial development concept, location and operations in relation to modern requirements, including those from the e-commerce sector.

“Infrastructure is improving and we have room to grow. In 2H2019, JLL Research conducted surveys and interviews among industrial players and we gathered market insights indicating, among others, that while there are still persistent infrastructural challenges in selected areas, developments such as the West Coast Expressway (WCE) tremendously improve their freight operations, while the ECRL will further improve connectivity to the east coast,” says Lau.

A crucial element aside from infrastructure is internet services, on which e-commerce relies heavily.

“At the time of writing, Malaysia ranked 37th in internet speed, based on Ookla’s speedtest, 11 rungs below its ranking last year. The government’s latest plan to roll out 5G can hopefully be a stimulus to propel our internet coverage and services nationwide,” says Lau.

CBRE|WTW’s Foo agrees on the importance of internet services to the growth of e-commerce, noting that there is a need to continuously improve network coverage and Malaysians’ technology literacy, as they indicate the potential customer base for e-commerce.

“Security is also important. Both consumers and businesses need the assurance of secure online payment systems in Malaysia. Furthermore, our current online banking is not available 24/7; no online transactions can be done after midnight. This can be enhanced.

“There should also be government initiatives to support start-ups and the entrepreneurship ecosystem in Malaysia to inspire more innovative platforms/models of e-commerce to really achieve shared economy and prosperity,” says Foo.

Lau says some people may think that a few industry operators in Malaysia are sluggish in future-proofing for the industrial revolution 4.0 and may not be able to satisfy future demand for e-commerce.

“To solve the problem for property developers and other clients, we continue to stress and propose development elements that can ensure their industrial projects are future-proof and able to anticipate future trends, including e-commerce.

“What we have observed in this pursuit is that a few industrial projects are relatively future-proof in terms of development and operation, but most are far from it. Industry players also have work to do as we envision same-day, last-mile delivery, autonomous robot warehouse handlers and courier service by drone,” says Lau.

Another issue is real estate. Foo says while the demand for storage space is there, empty land for expansion in areas close to a port is scarce.

“Port Klang is an example. Therefore, infrastructure development needs to be continued to boost connectivity to ports and unlock new land with industrial potential. The WCE is a good case in point,” says Foo.

From a macro point of view, there needs to be a conducive ecosystem to lift e-commerce in Malaysia, instead of just building more industrial properties.

“Aside from from the oft-mentioned enhancement of online banking, improving network coverage and technology literacy and government initiatives, port capacity and efficiency, such as custom clearance process, are key determinants in Malaysia’s competitiveness in logistics. Not to mention the timeliness of last-mile delivery, which banks on supply chain management and connectivity,” says Foo.

The road ahead 

JLL Malaysia observes that mature industrial areas such as Shah Alam have continued to attract manufacturers and logistics players, owing to their proximity to the city centre.

“There are opportunities for investors in industrial areas located near airports in major locations, especially in Selangor, Melaka, Penang and Johor. They are highly sought after, particularly among maintenance, ­repair and overhaul companies and air cargo logistics companies,” says Lau.

Foo advises investors to stick to good locations with adequate access. “The industrial hot spots will still be around Shah Alam and Klang and it may be worthwhile to look along the WCE route as well. While investment in industrial property tends to require large capital outlay, retail investors could still look at industrial units such as terraced factory instead of land,” he says.

Lau says generally, industrial properties with good accessibility to highways stand out. “At the same time, requirements from manufacturers and logistics players are getting more specific and of higher specifications. They include facilities with high floor-loading capacity and generous ceiling height,” says Lau.

Looking ahead, JLL Malaysia believes the opportunities lie within the technology sector. Instead of emerging as a new sector, it foresees technology leveraging Malaysia’s existing strong manufacturing foundation and slowly be incorporated into the sector. Examples of high-tech manufacturing sub-sectors with high potential in 2020 include the electronics, medical devices, machinery and equipment, and aerospace components industries.

“Distribution hubs and last-mile logistics servicing the e-commerce sector are also worth looking into. For the past few years, mega distribution hubs have started to make their presence known in Malaysia. We expect the trend to continue. In fact, there are several investors/investment funds looking into investing in this sector,” says Lau.