june 2014ASIA PACIFICA Cushman & Wakefield Research Publication

SUPPLY CRUNCH AMID HOT DEMAND

JAPAN LOGISTICS

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SUMMARYIn response to rapidly expanding demand for high-specification and large-sized logistics facilities from occupiers such as online retailers Amazon and Rakuten, there has been a notable rise in investments in such modernized logistics facilities in the Tokyo Metropolitan Area (Tokyo, Kanagawa, Saitama and Chiba prefecture) in the last decade. However, the total supply of such facilities remains inadequate.

Given Tokyo’s importance to the Japanese economy, the paucity of supply may impede the healthy growth of a modernized logistics industry, and in turn, impact the online retail business and hold back household consumption growth. Considering current measures to boost domestic demand, the removal of such bottlenecks is crucial for supporting GDP growth. It is expected that the growth of modernized facilities in Tokyo’s logistics market will further accelerate, driven by government efforts to step up the construction of new logistics facilities.

JAPAN LOGISTICSREPORT

CUSHMAN & WAKEFIELD 3

LOGISTICS IN THE SPOTLIGHTInvestors are attracted by high-specification and large-sized facilities, primarily due to a more stable income stream derived from long-term fixed leases, typically 10 years or more. Secondly, logistics facilities offer a higher investment yield as compared with the office and retail sectors (Chart 1). Thirdly, there is a socially and economically robust demand for the sector that sustains the supply chain and enables the efficient operation of tenants’ businesses, such as online shopping. Lastly, such specialized facilities with business continuity plans (BCP) and disaster recovery solutions are in high demand. Notably, the BCP feature has been a key consideration for securing tenants since the 2011 Great East Japan Earthquake.

In the investment market, the logistics facilities sector began to gradually draw the attention of property investors in Japan even before the first fund specializing in logistics facilities was listed – as a J-REIT – in 2007 (Chart 2). There were 14 logistics facilities in J-REITs in 2005 and 17 in 2006. Notwithstanding the long-term weakness in overall property investments prior to the implementation of Abenomics, J-REITs have witnessed a slow recovery since the Global Financial Crisis (GFC) in 2008 (Chart 3). In addition, several REITs’ IPOs with logistics assets were launched, including Daiwa House REIT Investment Corp in November 2012, Global Logistic Properties J-REIT in December 2012,

0

2%

4%

6%

8%Logistics Retail Office

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

4Q08

3Q08

2Q08

1Q08

4Q07

3Q07

2Q07

1Q 07

CHART 1 - YIELDS ACROSS SECTORS

Source: Real Capital Analytics, Cushman & Wakefield Research

CHART 5 - ONLINE SALES AS % OF TOTAL RETAIL SALES (2012)

0

3%

6%

9%

12%

15%

Switz

erlan

d

Japan

Slova

kia

Chi

na

Net

herla

nds

Swed

en

Polan

d

Malt

a

Gua

m

Fran

ce

Ger

man

y

Cze

ch R

epub

lic

Nor

way

USA

Den

mar

k

Irelan

d

Surin

ame

Finl

and

UK

Sout

h Ko

rea

Source: Cushman & Wakefield Global Perspective on Retail: Online Retailing

CHART 2 - NUMBER OF LOGISTICS FACILITIES IN J-REITS

0

40

80

120

2012FY

2011FY

2010FY

2009FY

2008FY

2007FY

2006FY

2005FY

2004FY

2003FY

2002FY

2001FY

Source: Real Capital Analytics, Cushman & Wakefield Research

Source: Tokyo Stock Exchange, Cushman & Wakefield Research

CHART 3 - J-REITS INDEX

3,000

2,500

2,000

1,500

1,000

500

4 AP

R 03

4 AP

R 04

4 AP

R 05

4 AP

R 06

4 AP

R 07

4 AP

R 08

4 AP

R 09

4 AP

R 10

4 AP

R 11

4 AP

R 12

4 AP

R 13

4 AP

R 14

0

CHART 4

Nippon Prologis REIT in February 2013, followed by Nomura Real Estate Master Fund in June 2013.

However, the supply of logistics facilities of over 16,500 square meters (sq.m.) which is regarded as an investment-grade and called class A by a leading J-REIT remains grossly inadequate. Only 44% of the total number of facilities in the Tokyo Metropolitan Area was built less than 25 years ago, with only 11% considered large-sized, or over10,000 sq.m. In Tokyo City, despite the large number of logistics facilities, most of them are smaller-sized and more outdated than those in the rest of the Tokyo Metropolitan Area; this is largely attributed to the overall

inefficient use of land in Tokyo City, especially in harbor areas where logistics facilities must be highly developed.

DEMAND FOR LOGISTICS FACILITIESTenants, such as online retailers and third-party logistics (3PL) companies, increasingly need to occupy high-specification and large-sized facilities that support their distribution strategies, leveraging on technology to reduce costs. Such logistics allow deliveries on the same day, which are crucial in today’s retail environment.

GROWTH OF E-COMMERCEThe market size of electronic commerce (e-commerce) has grown substantially, with the ratio of e-commerce as a percentage of total retail and service sales increasing steadily (Chart 4). However, online sales as a percentage of total retail sales account for only less than 4% in Japan and still lag behind other developed nations (Chart 5), implying significant growth potential.

The continued expansion in the range of goods available online has contributed largely to the growth of the e-commerce market (Chart 6). Furthermore, the convenience of online shopping such as short delivery times, combined with discounted prices and even free delivery, has helped to further online sales. At the same time, earlier concerns about transaction methods, as well as the security of customer information and delivery, appear to have diminished as evidenced by increasing online sales across ages (Chart 7). The e-commerce purchase amount rises from the age of 30 to 39 in line with the increase in the ratio of e-commerce users. Thereafter, the ratio of e-commerce users decreases as a result of declining familiarity with PCs. However, the e-commerce purchase amount climbs again from the age of 60. This increase is sustained by the current strong purchasing power of people aged 60 and over.

THE FIRST J-REITS FUND SPECIALIZING IN

LOGISITICS IN 2007

CHART 4 - MARKET SIZE & RATIO OF E-COMMERCE

0

2

4

6

8

10

0

1.5%

2.0%

2.5%

3.0%

3.5%Ratio of EC (Right Scale)Market Size of Electric Commerce (JPY Trillion)

201220112010200920082007Source: Ministry of Economy, Trade and Industry Japan, Cushman & Wakefield Research

Great East Japan Earthquake

Change of Regime to Liberal Democratic Party

4

JAPAN LOGISTICSREPORT

CUSHMAN & WAKEFIELD 5CUSHMAN & WAKEFIELD 5

Upward trend of online sales is anticipated to

continue, helped by the biggest population size

of the so-called baby boomers aged 60 to 69

and the anticipated higher ratio of e-commerce

users among them than aged 70 and over.

Upward trend of online sales is anticipated to

continue, helped by the biggest population size

of the so-called baby boomers aged 60 to 69

and the anticipated higher ratio of e-commerce

users among them than aged 70 and over.

Upward trend of online sales is anticipated to continue, helped by the biggest population size of the so-called baby boomers aged 60 to 69 and the anticipated higher ratio of e-commerce users among them than aged 70 and over.

We expect the upward trend of online sales to accelerate in tandem with the robust recovery of consumer spending in Japan. Specifically, we expect e-commerce to play a crucial role in boosting household consumption and hence, Japanese GDP growth in the future.

SURGE IN THIRD-PARTY LOGISTICS (3PL) COMPANIES In the traditional flow of goods, the first party is the manufacturer, the second is the retailer, and the third is the middleman who handles logistics. 3PL companies provide clients (typically manufacturers) with optimal logistics solutions, leveraging technology, to increase the efficiency of the delivery of goods and thus, aid in sustaining higher sales and profits. More specifically, 3PL firms use the “just-in-time” manufacturing system, pioneered by Toyota

Source: Amazon, Cushman & Wakefield Research

CHART 6 - RANGE OF PRODUCTS

2000

NO

. OF

CAT

EGO

RY

0

1

2

3

4

5

6

7

8

9

10 Digital

Car parts,Office stationary

CosmeticFood & beverage

Luxury, Fashion, Children

Healthcare

Sports,Outdoor

Toy

Appliance

Book, CD

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Amazon, Cushman & Wakefield Research

CHART 7 - E-COMMERCE PURCHASE AMOUNT BY AGE

0

20,000

40,000

60,000

80,000

100,000

120,000

0

20%

40%

60%

80%

Annual Purchase Amount with EC per Capita (JPY)10 Years Forecast of the ratioRatio of EC Users

80 a

nd o

ver

70 th

roug

h 79

60 th

roug

h 69

50 th

roug

h 59

40 th

roug

h 49

30 th

roug

h 39

20 th

roug

h 29

15 th

roug

h 19

Source: Monthly Logistics Business, Cushman & Wakefield Research

CHART 8 - 3PL MARKET SIZE

0

500

1,000

1,500

2,000

20122011201020092008200720062005

JPY

BILL

ION

Motor Corporation, that revolutionized supply chain management by delivering car parts from factories to assembly lines directly, bypassing the warehouses where parts used to wait for delivery.

Amid an increasingly competitive global marketplace, a growing number of manufacturers outsource their logistics to 3PL companies (transportation, warehousing, etc.) so that they can concentrate resources on their core businesses (to produce competitive goods). In some cases, manufacturers lacked the resources to run their logistics operations

efficiently. As such, the 3PL market has nearly doubled since 2005 (Chart 8).

OTHER DEMAND DRIVERSWith a growing need to optimize their logistics processes, distributor Takuhai Company seeks a better allocation and consolidation of their operations. Takuhai Giant “Yamato Holdings” launched “Value Networking,” which is aimed at increasing logistics efficiency, backed by super large-sized logistics bases built in 2013, including “Okinawa International Logistics Hub,” “Haneda Chrono Gate,” “Atsugi Gate

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Way,” and supporting bases in Asian countries at a total investment volume of JPY200 billion. “Value Networking” enables next-day delivery of perishable foods from Japan to other Asian countries, which are considering taking part in the Trans-Pacific Partnership. Another distribution giant, Sagawa, decided to consolidate some of its bases to a newly built facility to reduce delivery times; the site is the second largest logistics facility in the harbor area of Koto Ward and is quite near Tokyo’s CBD.

SUPPLY OF LOGISTICS FACILITIESInvestment-grade or class A facilities include those with gross floor areas of over 16,500 sq.m. and which are within close proximity to high-density populations and a highway interchange, harbor or airport. Ironically, in the Tokyo

Metropolitan Area, which is the biggest urban area in Japan, facilities that fall far below class A are the most common. In 2014, the majority of the facilities in the area have gross floor areas below 10,000 sq.m., and only 11% of current logistics properties are considered large, with gross floor areas of over 10,000 sq.m. (Chart 9). Additionally, more than half of the facilities were built over 25 years ago (Chart 10).

The current situation in Tokyo City is worse than the Tokyo Metropolitan Area. In Tokyo City, only 9% of current logistics properties are considered large, with gross floor areas of over 10,000 sq.m. (Chart 11). Historically, small warehouses used to be built to accommodate imported raw materials, from which goods were processed into final products. Nowadays, however, the final products are increasingly imported from overseas production bases

because Japanese manufacturers have relocated overseas, seeking cheaper labor and production costs. Goods in warehouses get bulky relative to their unit weight, and as a result, the final products are imported and stocked. Small warehouses are therefore unlikely to work efficiently and economically because of functional mismatching between goods and facilities.

Additionally, almost two thirds of the facilities were built over 25 years ago (Chart12). Although Tokyo City’s area is an important gateway, the majority of logistics facilities is outdated and fully depreciated and would fail to meet modern demand for highly sophisticated sorting and cargo-handling systems. Also, considering that the lifespan of an average temperature-controlled warehouse is 21 years, over 60% of such warehouses in Tokyo City’s harbor

CHART 9 - NUMBER OF LOGISTICS FACILITIES IN TOKYO METROPOLITAN AREA BY SIZE

Unknown Over 10,000sq.m. Below10,000sq.m.

CHART 11 - NUMBER OF LOGISTICS FACILITIES IN TOKYO CITY AREA BY SIZE

Unknown Over 10,000sq.m. Below10,000sq.m.

CHART 10 - NUMBER OF LOGISTICS FACILITIES IN TOKYO METROPOLITAN AREA BY AGE

Unknown Below 25 years Over 25 years

CHART 12 - NUMBER OF LOGISTICS FACILITIES IN TOKYO CITY BY AGE

Unknown Below 25 years Over 25 years

Estimated the numbers of facilities with gross floor areas of over 1,000 sq.m. by Cushman & Wakefield Research, sourcing from MLIT (Building Construction Start) and Tokyo Urban Area Traffic Planning Council

Estimated the numbers of facilities with gross floor areas of over 1,000 sq.m. by Cushman & Wakefield Research, sourcing from MLIT (Building Construction Start) and Tokyo Urban Area Traffic Planning Council

11%44%

9%37%

JAPAN LOGISTICSREPORT

CUSHMAN & WAKEFIELD 988

area are aged 30 years and over according to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT). Such warehouses must be updated to remain functional in terms of sustaining the food supply chain as well as to act as quarantine facilities.

However, for the last decade, the real estate industry, including fund companies, has helped to drive the construction of large-sized developments, as witnessed by the strong correlation between total construction volume (black line, Chart 13) and real estate’s percentage of the total (red bar). Between 2003 and 2013, construction increased except for a brief slump in 2009 due to the GFC.

As the real estate sector, especially fund companies, valued the strategic location of the Tokyo Metropolitan Area, the total volume of construction increased between 2003 and 2007 (Chart 14) as the real estate market expanded (Chart 13). In tandem with this trend, the size per unit has also increased; the average size over the five years doubled.

However, the total volume of construction in Tokyo City has trended downwards, and size per unit has not seen a rising trend yet, although it saw temporary increases during the “bubble economy” in the early 1990s and “mini fund bubble” in 2007 (Chart 15). This decline of construction is largely attributed to the shortage of available and large development sites, rather than lackluster demand.

WIDENING GAP BETWEEN DeMAnD AnD SuPPLY In response to the rapidly growing demand for high-specification and large-sized logistics facilities (due to the continual expansion of the online shopping market), 3PL companies, Takuhai companies, and the real estate industry have been pivotal to driving up the total volume of construction with large-sized developments in the Tokyo Metropolitan Area over the last decade. However, the total supply of such facilities remains insufficient to meet the growing demand. Given the Tokyo Metropolitan Area’s importance as the biggest consuming area with population concentration in Japan, this gap between demand and supply may impede the growth of the modernized logistics industry, and thus, slow growth in household consumption.

PROSPECTIVE SUPPLIERS AND POTENTIAL GOVERNMENT RELIEF MEASURESThe real estate sector, including developers and recent IPOs in J-REITs, is expected to play a key role in bringing high-specification and large-sized logistics facilities into the market. In fact, several developer giants are increasingly focusing on the development of logistics facilities. They regard the logistics sector as a growth market and incorporate it into their corporate strategies, along with the office and residential sectors. Nomura Holdings has resumed the development of logistics facilities, which was previously stalled due

to the GFC, with an annual investment volume of JPY20-30 billion, while Mitsubishi Estate has doubled the pace of its development activities. Mitsui Fudosan announced in January 2013 its plan to invest JPY200 billion until 2017, of which 50% has already been invested, and the company is considering expanding the budget for the plan. Another giant, Daiwa House Industry Company, will invest JPY200 billion in logistics facilities over the next five years, taking advantage of the increase in the number of vacant sites in Tokyo Metropolitan suburbs caused by the relocation of factories.

However, because sourcing for larger-sized sites and consolidation of smaller-sized sites in the right locations are highly difficult and remain a key point of successful development, new relief measures and the expansion of existing relief measures are needed so that developers can efficiently and effectively develop logistics facilities without unnecessary financial burdens. In order to overcome these financial difficulties, a new relief measure package for the redevelopment of logistics was launched last summer by the government, which subsidizes consortiums of site-intensive and larger-sized redevelopments for logistics facilities in key harbors. Subsidy recipients can be existing warehouse firms and developers. The government aims at increasing the global competitiveness of the logistics industry in key harbors where logistics must be highly advanced, while

CHART 13 - TRENDS IN CONSTRUCTION BY CLIENT TYPES IN JAPAN

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000100%

80%

60%

40%

20%

0%

Other Manufacturing Wholesale & Retailing Transport Real Estate

2013

JPY

MIL

LIO

N

2012201120102009200820072006200520042003

Total (Right scale)

Source: MLIT, Cushman & Wakefield Research

CHART 15 - TREND IN CONSTRUCTION IN TOKYO CITY

Source: MLIT, Cushman & Wakefield Research

0

500

1,000

1,500

2,000

0

200,000

400,000

600,000

SQU

ARE

MET

ER

NO

. & S

QU

ARE

MET

ER800,000

1,000,000

1,200,000Gross Floor Area Per Unit (Right scale)Total Gross Floor Area of Warehouse Construction StartsNo. of Warehouse Construction Starts in Tokyo City (Right scale)

2013201120092007200520032001199919971995199319911989

CHART 14 - TRENDS IN CONSTRUCTION IN TOKYO METROPOLITAN AREA

0

1,000

2,000

3,000

4,000

5,000

6,000

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

Source: MLIT, Cushman & Wakefield Research

2013201120092007200520032001199919971995199319911989

SQU

ARE

MET

ER

NO

. & S

QU

ARE

MET

ER

Gross Floor Area Per Unit (Right scale)

Total Gross Floor Area of Warehouse Construction Starts

No. of Warehouse Construction Starts inTokyo Metropolitan Area (Right scale)

The decline of construction is largely attributed to the shortage of available and large development sites, rather than lackluster demand.

The decline of construction is largely attributed to the shortage of available and large development sites, rather than lackluster demand.

10

JAPAN LOGISTICSREPORT

CUSHMAN & WAKEFIELD 11CUSHMAN & WAKEFIELD 11

strengthening disaster prevention measures against tsunamis and liquefaction of harbors.

Also, the government has expanded the scope of existing relief measures by relaxing the required condition of re-zoning of streets associated with the redevelopment. The government has started accepting applications from candidates for redevelopments. When they are approved, the government pays a maximum of 50% of the construction cost of common areas, including the ramp way, slope, elevators in the logistics facility, exterior car passage, etc. It also pays for a part of the planning cost, including the coordination cost from the consolidation of smaller-sized sites owned by existing warehouse firms. The government plans to

subsidize about 30 redevelopments in the coming years, with the total amount of the subsidy estimated at JPY2-3 billion annually. Based on this estimate, subsidies for individual redevelopments are likely to be significant in size, and will help reduce total development costs.

MACRO ECONOMIC IMPACTHistorically, it has been broadly suggested across developed countries that expansion of domestic demand is a core driver of stable GDP growth. In fact, Japanese household consumption, as an indicator of domestic demand, has increased robustly and progressively despite occasional dips during the GFC in 2008 and the earthquake in 2011, and it has exceeded the level achieved before the GFC.

Source: Cabinet Office, Government of Japan, Cushman & Wakefield Research

CHART 16 - HOUSEHOLD CONSUMPTION VS. GDP

Ratio of Household Consumption to GDP GDP(Expenditure Approach) Household Consumption

JPY

BILL

ION

100,000

200,000

300,000

400,000

500,000

600,000

50%51%52%53%54%

56%57%58%59%60%

55%

1Q 1

3

1Q 1

2

1Q 1

1

1Q 1

0

1Q 0

9

1Q 0

8

1Q 0

7

1Q 0

6

1Q 0

5

1Q 0

4

1Q 0

3

1Q 0

2

1Q 0

1

1Q 0

0

1Q 9

9

1Q 9

8

1Q 9

7

1Q 9

6

1Q 9

5

1Q 9

4

CHART 17 - ACROSS-THE-BOARD WAGE INCREASE IN 2014

0

500

1,000

1,500

2,000

2,500

3,000

3,500

MIT

SUBI

SHI

NEC

FUJIT

SU

TOSH

IBA

HIT

ACH

I

PAN

ASO

NIC

SUZU

KI

FUJI

HEA

VY

Automotive

MIT

SUBI

SHI

DAI

HAT

SU

MAZ

DA

HO

ND

A

NIS

SAN

TOYO

TA

Electrical industry

Source: FC2, Cushman & Wakefield Research

JPY

PER

MO

NTH

Source: Japan Center for Economic Research, Cushman & Wakefield Research

CHART 18 - UNEMPLOYMENT RATE FORECAST

0

1%

2%

3%

4%

2021

-202

5

2016

-202

0

2011

-201

5

Consequently, the household consumption ratio to GDP has been just over 58% for the recent couple of years which is the highest in the last twenty years (Chart 16). This trend of increasing purchasing power is anticipated to continue, sustained by across-the-board wage increases initiated by large-sized companies this spring, including automotive and electrical industries (Chart 17). The wage increases are expected to filter into medium– and small–sized companies, resulting in more and more employees with increased purchasing power. The mid-term declining trend of unemployment rates (Chart 18), implying a rising proportion of people earning salaries, will contribute to increasing purchasing power as well.

CONCLUSIONGiven Tokyo’s importance to the Japanese economy, the paucity of supply of logistics facilities may impede the healthy growth of a modernized logistics industry, and in turn, impact the online retail business and hold back household consumption growth. It is believed that, across developed countries, expansion of domestic demand, especially household consumption, is a core driver of stable GDP growth. Accordingly, land use should more closely fit a domestic demand-driven economy (such as logistics facilities for non-manufacturing), than an economy dependent on external demand (such as factories for manufacturing). However, changes in land use are slow; in fact, there are still many vacant sites in key suburban areas in Tokyo City which used to be factory sites before they relocated overseas, seeking cheaper cost of production. This issue of land use is expected to be resolved through the collaboration of the public and private sectors, in line with Prime Minister Abe’s “third arrow” of structural reform, motivated by the Tokyo 2020 Olympics which can be the catalyst behind Tokyo’s regeneration.

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This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Published by Corporate Communications.

©2014 Cushman & Wakefield, Inc. All rights reserved.

SIGRID ZIALCITAManaging Director, Research,Asia Pacific+(65) 6535 3232sigrid.zialcita@ap.cushwake.com

KEISUKE YANAGIMACHIHead of Research, Japan+(81 3)3596 7098keisuke.yanagimachi@ap.cushwake.com

YOSHIYUKI TANAKARepresentative Director &President of Investment Advisors K.K. Japan+(81 3)3596 7031yoshiyuki.tanaka@ap.cushwake.com

For more information about C&W Research, contact: For more information about C&W Capital Markets, please contact:

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