Logistics REITs turn around as interest rate uncertainty recedes and demand remains strong
The winds are changing for logistics facility REITs, which have lagged behind in the real estate investment trust (REIT) market. Considered a growth stock, it sold off during the global interest rate rise phase starting in 2022. The current pause in the increase in the long-term rate has led to renewed growth expectations. There have been signs of a reversal with the initial public offering (IPO) activity.
The Tokyo Stock Exchange REIT Index, which shows overall price movements, rose 2.4% from August 21, when it hit a recent low, to August 31. Among logistics facilities, Mitsui Fudosan Logistics Park Inc. and Nippon Prologis REIT rose 4.9% and 4.5%, respectively, over the same period, outperforming the Tokyo Stock Exchange REIT Index. This is stronger than the “office” (up 2.9%) in the index by use.
Since March 2022, when the Fed (Federal Reserve) turned the interest rate upward, logistics facilities have sold off in REIT markets in various countries, and the same has been true in the Tokyo market.
Yosuke Ohata, senior analyst at Mizuho Securities, noted, “It has strong growth expectations against the backdrop of the expansion of e-commerce (EC), and is the equivalent of a ‘growth stock’ in the stock market.”
“Selling of valuation revisions spread” (Yosuke Ohata), as the increase in the long-term rate reduces the present value calculated from future profit projections.
The yield on newly-issued 10-yr JGBs, which serves as an indicator of the domestic longterm rate, is currently in the mid 0.6% range. The increase in the US long-term rate also paused. As excessive interest rate concerns have calmed down, buying has begun to occur to reassess the logistics facility system.
Fundamentals (basic economic conditions) are not bad. The overall vacancy rate for large multi-tenant logistics facilities in the Tokyo metropolitan area during the April-June 2023 period was 8.2%, according to a report by leading real estate services provider CBRE (Tokyo). This is 3.8 points higher than the same period last year, but unchanged from the previous quarter.
“New demand is stronger than expected, especially from logistics companies expanding their floor space” (Chinatsu Hani, senior director of the company), although vacancy rates will remain high due to a large new supply. Pessimism is low as new supply is expected to be absorbed in stages.
Similarly, in offices, where vacancy rates remain high, new demand growth has been lackluster, although demand for relocations to buildings with better conditions has emerged. In addition to the “secondary vacancies” that will become apparent as tenant companies relocate, a large supply is also expected in 2025.
As if in response to the pickup in the market environment for logistics facilities, IPOs have also begun to take off. Tokyo Realty Investment Management, the asset management company of the Tokyo Tatemono Group, announced in August that it is preparing to establish a new REIT that will primarily target logistics facilities. The company emphasizes that “Demand for logistics facilities is strong, and medium- to long-term growth expectations are constant.”
The market expects greater competition among REITs. Yasuyuki Kuroki, chief fund manager at Mitsubishi UFJ Kokusai Asset Management, says, “We’re looking forward to seeing how they differentiate themselves.”
Kazushi Takeuchi, senior analyst at UBS Securities, notes, “The key is to provide functions that are currently lacking.” Examples include high-functional types such as refrigerated and frozen warehouses, and relay hubs that meet the needs of dispersed customers.
The relay hub model will help address the “2024 problem,” which is expected to lead to a shortage of truck drivers due to stricter overtime regulations. One driver tended to work long hours when transporting to distant locations, but the person could do it in a short time up to the relay hub.
If the attractiveness of the properties held can be increased through competition, it is likely that there will be a further return of investment money to logistics facility REITs.