The CBRE Asia Pacific Logistic Rental Index increased by 0.75% q-o-q in Q3 2012 compared to 1.8% q-o-q the previous quarter. Although the Index continued to record growth despite the generally softer industrial data across the region, it is clear that rent prices in many cities in Asia are now approaching their peak after enjoying the upward cycle for almost two years. 

The lack of supply in several markets – particularly in China – further inhibited leasing transactions. Weaker industrial production and declining exports also negatively impacted upon occupier demand for factory space. Demand for industrial and logistics space looks set to weaken further in the months ahead as occupiers turn more cautious in the face of the deteriorating regional economic environment. Retailers, which have been one of the main drivers of demand for logistics space during 2012- particularly in Asia, are expected to become less aggressive in taking up new space as retail sales and consumer confidence around the region are anticipated to decline further. 

 

The ongoing lack of high quality prime logistic stock in many key markets means that occupier demand for this asset class will remain healthy, especially from Third Party Logistics (TPL) firms and transport and logistics companies. Rental prices are expected to remain flat in the short term. A major rental correction is unlikely unless there is either a sudden spike of new supply or a prolonged global recession. 

 

Concern over the economic slowdown in China and its possible impact on the rest of the Asia Pacific region continued to grow during the period, with China’s GDP growth expected to average around 7%-8% in 2012- its second lowest figure for a decade. Some positive signs are evident in certain indicators and have led some commentators to conclude that China may be close to turning the corner – but it is too early to tell at present.

 

Most production-oriented economies, including China, Japan, Malaysia, and Philippines, have been negatively affected by the deteriorating global trade cycle. Reduced new export orders have hit manufacturing output and in turn have weakened demand for industrial space.

 

Rentals in Guangzhou rebounded slightly after experiencing a minor correction in Q2 2012 thanks to the completion of a new high quality distribution centre that was able to command higher prices. Leasing demand for logistics and warehouse space weakened slightly across the region in Q3 2012 as occupiers, particularly those in Australia, turned more cautious and took longer to complete leasing decisions amid the weaker regional economic outlook. At the same time, the lack of supply in several markets – particularly in China – further inhibited leasing transactions. New completions during Q3 2012 included the 20,000 sq. m ProLogis Guangzhou Development Zone Distribution Centre Phase II; the partial completion of a new 257,000 sq. m DHL / Agasia development in Chengdu and the ProLogis Park Zama 2 building in Greater Tokyo. 

 

Forthcoming supply diverges across the region. Shanghai, Beijing, Guangzhou and Tokyo have several large projects in the pipeline, whilst Shenzhen, Singapore and markets in the Pacific region are expected to see the completion of a few smaller to medium sized scheme. 

 

Weaker industrial production and declining exports negatively impacted occupier demand for factory space in Q3 2012, particularly in export-sensitive markets such as Shenzhen, Guangzhou and Manila. Rental growth slowed and even declined in several cities in China. A number of such companies which had previously set up plants in China were looking to shift production to Southeast Asia due to the current political tensions. Other foreign manufacturers in China are also reducing the scale of their operations and moving to other regional markets with lower labour costs.

Rentals for logistics space in Beijing recorded a minor uptick of 1.0% q-o-q in Q3 2012 as the lack of prime space continued to drive up costs, although the rate of growth has slowed since the beginning of the year. Demand was led by TPL firms and new supply coming onto the market has been quickly absorbed. Rental growth for logistic facilities is expected to ease in forthcoming quarters due to the lack of leasing deals.

 

In Shanghai the supply of prime factory space available for lease remained tight and the consequent lack of leasing transactions ensured factory rents remained stable, although the period did see a number of MNCs release industrial space as they scaled back production. Rents for logistics space continued to record growth, edging up by 0.3% q-o-q, thanks to steady demand from TPL companies. A significant volume of new logistical space, including several projects developed by GLP, is expected to be completed over the next two years and should adequately meet demand. 

 

Logistics rents in Guangzhou recorded growth of 1.0% q-o-q as high quality warehouses raised their asking rents. The limited choice of high quality warehouse space in the market means that the demand is unlikely to be sufficiently catered for and rents are expected to continue to rise. Nansha is expected to emerge as a hotspot for industrial development thanks to a new preferential government policy. 

 

Logistics space in Tianjin remained the subject of strong demand and rents increased by 2.1% q-o-q. E-commerce firms, retailers and TPL companies accounted for the bulk of enquiries. The supply of modern logistic facilities will remain tight with the majority of new completions set to be built-to-suit projects meaning that the leasing market will see strong competition for prime space in forthcoming quarters.