Local knowledge cultivates global success

3 February 2025

Macquarie Asset Management’s James Kemp and Brendan Jones explore the opportunities for enhanced returns in the logistics sector.

During a period of heightened market volatility, local knowledge becomes even more critical, contend James Kemp, Head of Asia-Pacific Real Estate, and Brendan Jones, Head of EMEA Real Estate, with Macquarie Asset Management (MAM). Together with its specialist platforms – currently, Logistics Property Co. in the US, Unified Industrial in Asia and PLP in the UK and previously, Goodman Group (then called Macquarie Goodman) and LOGOS – Macquarie Asset Management has invested more than €13 billion in the logistics real estate sector worldwide over the past 28 years. Kemp and Jones share some tips for identifying local pockets of value. 

How has heightened macroeconomic volatility and geopolitical risk impacted logistics?

James Kemp (JK): On the demand side, we have seen both nearshoring and reshoring, with an increased focus on building resilience and capacity in supply chains. That has created opportunities in some submarkets. For example, the reshoring of semiconductor production to Fukuoka in Japan has boosted demand in a market that has historically lagged Tokyo and Osaka. In addition, whilst customers are cost-conscious, some are looking to consolidate into fewer, larger facilities to drive efficiency.

However, on the supply side, rising construction costs have led to a slowdown in delivery, which has intensified the structural undersupply of modern space in some submarkets, driving rental growth. Increasingly, we believe real estate investors need to break down countries or regions into submarkets to understand the very local factors around supply and demand that enable them to add value.

Brendan Jones (BJ): Wars in Ukraine and the Middle East have created a sense of heightened geopolitical risk in Europe. That has led some real estate investors to focus more on Western Europe and the UK because those markets are perceived as more stable. Construction price inflation, driven by dramatic increases in the cost of labor and materials, combined with capital market dislocation has also led to more emphasis on acquiring and improving existing assets so that they meet modern tenant requirements than on new development.

What changes have been observed in the sector’s demand drivers and tenant base?

JK: Demand drivers vary widely according to the market. In Japan, recent legislation limiting how long truck drivers can drive in one stint means they can no longer travel from Tokyo to Osaka without a stopover. That has led to the emergence of new hubs between the two cities. In those locations, occupiers have been increasingly willing to make pre-commitments in what has historically been a market driven by speculative development.

In Australia, the pre-commitment market for big boxes around the peripheries of Sydney and Melbourne has slowed. In these markets, tenant demand remains strong for urban infill sites. Brisbane will host the Olympic Games in 2032, which is generating a lot of construction activity. That has led to higher building costs and limited the scope for logistics development. This is generating strong demand for the value-add repositioning of existing facilities.

BJ: The UK has a high e-commerce penetration rate, which only increased through covid. Since then, we have seen some pullback, which has brought demand back into line with long-term trends. The market for large distribution centers has slowed, and the most active market is now mid-sized warehouses and small urban logistics hubs. As seen in other markets globally, reshoring and nearshoring of manufacturing is driving a lot of demand in both the UK and continental Europe, as businesses seek to diversify their supply chain to deal with geopolitical factors. The other theme we’ve seen across Europe is that a lack of consumer and business confidence has led occupiers to leave it until later to make decisions on their space requirements.

How has the tighter financing environment affected logistics markets?

BJ: The UK and US markets were quickest to react to the tighter financing environment, as is typically the case in a downturn. We saw an initial 150 to 200 basis point impact on cap rates followed by a period of stabilization over the past 12 to 18 months. With central banks starting to ease monetary policy, we have even seen US and UK yields starting to come in over the last six months. Continental Europe has been slower to react, but over the last 12 months we have seen evidence of a similar cap rate expansion, which is helping to close the bid-ask spread and generate more investment activity in the second half of 2024.

We have not yet seen a lot of traditional core buyers in the market. Most standing assets are being acquired by private equity capital targeting value-add returns, which is taking a robust view on long-term cap rates and rental growth trends.

JK: In general, cap rates in APAC markets were slower to react to increasing interest rates. Pricing has now adjusted. We have not seen the repricing of land to offset higher construction costs, so development activity has slowed.

Now that cap rates have stabilized, the typical buyer is a private equity firm with a long-term conviction about the sector and a belief that the cap rate adjustment has overshot. Japan has been the outlier through the cycle due to its differentiated monetary policy. Even with the rise in interest rates from the BOJ earlier this year, we haven’t seen a slowdown from domestic capital continuing to buy core product, and no price adjustment. Coming through periods of repricing we typically see liquidity first return to developed markets. Managers are generally finding it more difficult to raise capital to deploy in emerging APAC markets.

Is growing obsolescence in older stock creating opportunities?

BJ: The drivers for refurbishing older buildings are twofold. First, we think a lot of real estate investors are focused on a core-plus or value-add risk profile, which favors retrofits and refurbishment. Construction prices for new development remain high, and if you can buy standing assets at cap rates which are 200 basis points higher than they were two years ago, and you are comfortable that the demand-supply dynamic will drive long-term rental growth, then that is where we believe you see the best risk-adjusted returns.

The second factor, particularly in Europe, is the focus on sustainability. Tenants want space that meets their long-term sustainability targets, and many real estate investors are concerned to both limit their embodied carbon emissions and future proof their assets. There is also a heightened focus from local planning authorities on limiting knock-down strategies, in favor of a retrofit approach.

JK: While modern stock commands a higher rent, we think real estate investors need to offset that advantage against high construction prices and the time it takes to bring a development project to market. In Australia, we are starting to see real estate investors underwriting brownfield redevelopment opportunities as value-add opportunities on the basis that the redevelopment equation does not quite work yet, while tenants who have limited choice and need a facility today are willing to compromise their requirements at lower rent. Whereas in Japan, a lot of the existing stock is very old and obsolescent, and there is a bigger structural undersupply of modern space, so the rent differential is more pronounced and is more likely to justify redevelopment.

How does investing through operating companies help generate value in the current environment?

JK: We believe it is vital to have local teams that understand tenant requirements, that know how to source land off market, and can navigate the planning framework. We think that is a huge differentiator of value because all of the factors we have spoken about come down to making the right decisions at a submarket level to drive real estate returns.

MAM primarily focuses on an opco-propco strategy. This involves the acquisition or establishment of an opco with a sole focus on the sector specific real estate capabilities of the founders and management team. These opcos are typically in start-up phase or have been operating as private developers prior to acquisition. Initially the capabilities of the opco can be used to deploy into their real estate pipeline. At the same time, we seek to provide institutional input and guide the opco in its build out of all the systems, processes and personnel needed to enable that business to attract institutional capital. Our experience in identifying and creating successful opcos can mean a shorter time to institutionalize these businesses. We’ve found that MAM’s involvement with these opcos gives institutional investors confidence regarding their real estate value-add capabilities as well as their ability to manage institutional capital.

BJ: These teams are experts in their field. They have local relationships and a track record of developing and delivering real estate in their market. A big part of what we bring to the table is the ability to identify those groups at an earlier stage, when others might overlook them.

What will be the key opportunities for investors in logistics real estate in the coming years?

JK: In Japan, we believe real estate investors need to secure access to land at the right price to create value through development at today’s construction prices. That means most land purchases must be off market through a local network. In Australia, we believe the two most successful strategies will be infill development in Sydney and value-add repositioning in Brisbane. But again, we think it is crucial to unlock those opportunities off market to differentiate returns.

BJ: From a macroeconomic perspective, we think the UK offers better prospects for growth than many continental European countries. With construction prices stabilizing and continued rent growth, we expect to see some good development opportunities starting to emerge. In continental Europe, developers with attractive land banks and strong teams are struggling to execute developments due to a lack of programmatic capital. We believe there is a potential opportunity to identify those businesses and provide them with the capital and strategic support required to develop out their land bank and deliver attractive risk-adjusted opportunistic returns.

There is also a growing opportunity to acquire and improve ageing and obsolete stock across continental Europe. Rebased entry pricing and strong rent growth for high quality product allows real estate investors to generate opportunistic returns on a core-plus risk profile.