James Maydew, AMP Capital’s Global Head of Listed Real Estate, leverages his global view to bring a regular insight to property value trends from around the world.
The rise of e-commerce has enabled Amazon to become the global giant that continues to grow, a trend that’s having a huge impact on the global logistics real estate markets.
Sure, investors could gain exposure to the e-commerce secular growth trend buying shares in Amazon, but investing in well-managed businesses which operate logistics facilities is another way investors can realise immediate earnings stream offering the same kind of growth potential.
Resent research conducted by investment bank, Jefferies, indicates the online retailing behemoth has now established in-excess of 400 logistics facilities covering 105 million square feet and is adding a further one million square feet of logistics space EACH week.
The company’s growth trajectory won’t stop there; Amazon’s real estate footprint will expand over the next 18 months by 36 per cent in the US and by 23 per cent internationally – a growth rate in logistics capability never before seen.
In order to provide fast and efficient coverage to all 382 metropolitan areas in the US with a population over 50,000 – approximately 87 per cent of the population – Amazon needs to more than double its present logistics capacity to some 280 million square feet. Jefferies research concludes this is possible over a four to five-year time horizon at a cost of some US$7-10 billion.
So, perhaps unsurprisingly, this is extremely positive for logistics landlords and developers, especially in markets such as Sydney, Los Angeles and London.
These world cities have seen the supply of well-located industrial floor space shrink dramatically over time as it converts to higher margin uses such as residential. This continues to push logistics rents, occupancy and capital values higher as Amazon and others in e-commerce continue on their quest to grow scale.
"The rise in valuations of logistic centres has led US industrial property values to increase by more than 200 per cent increases since 2009, as we’ve watched capitalisation rates fall during this period from 9.4 per cent to 5.3 per cent."
On-line shopping now accounts for over 40 per cent of non-food transactions in the US and almost 50 per cent in the UK which saw 16 per cent year-on-year growth in 2016 – and an incredible 47 per cent growth in online sales via mobile.
The so called “Amazon effect” is yet to fully take hold in Australia, but it’s coming.
Globally, this pattern gives us confidence that we’re seeing a long-term mega-trend that will endure and present opportunities for the long-term investor to capture earnings growth in logistics real estate companies.
This demand for logistics capacity is driven by the Amazon’s focus on growing scale since it sold its first book in July 1995. This is essential for a business such as Amazon as it concentrates on maximising revenue rather than margins.
Amazon’s approach and impact on real estate is being extended to Whole Foods, the upmarket grocery chain that it recently acquired and is now seeking to integrate. Through extending its network of distribution centres it is expected to develop a supply chain that will deliver the efficiencies of significantly increased scale within a 3-5 year time period.
The company faces challenges as it seeks to minimise delivery times and to recruit staff in a time of near-full employment, even amongst the lower skilled. This is leading it to open facilities in areas close to population centres and major highways at greater cost compared to earlier facilities in more remote rural areas.
Amazon’s growth shows no sign of abating; the NASDAQ-listed company continues to grow revenues by some 20 per cent annually, as 55 per cent of US customers begin their product search on Amazon according to data released by BloomReach.
Moreover its share of gross global e-commerce sales is still “only” 6.4 per cent, which itself continues to grow rapidly.
This validates expansion plans for its logistics network, but comes as a boon for landlords as other e-commerce retailers try to grow their slice of the retail pie. Meanwhile traditional retailers also fight back through improving the efficiency of their supply chain management by demanding new, highly efficient distribution facilities.
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) (AMP Capital) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investments decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.