Across Asia Pacific, cold is now officially hot. According to real estate investors at least, who have consistently voted with capital allocations into cold storage facilities.
Growing investor interest in cold storage real estate has been brewing for some time. This appetite is part of a larger push into less competitive areas of industrial real estate. Equally influential, the shift in demographic and consumer behaviour is also playing a major role.
Looking wider, we have seen robust demand for high quality industrial and logistics assets in Asia Pacific in recent years. Irrespective of asset type, the driver has frequently resulted from strong domestic consumption.
Coupled with the juggernaut of e-commerce, the associated industry expansion and the ongoing development of modern logistics facilities into an institutional investment product, cold storage has carved out a substantial niche with the promise of sustainable growth for the foreseeable future.
Cold storage is not a fresh concept in Asia Pacific, but the investment opportunity hasn’t been fully realized. Until recently, that is. As a result of the aforementioned factors, the pickup in interest has led to investors seeking investment opportunities along all stages of the supply chain, with temperature-controlled warehouses, or cold storage, rapidly emerging as an area of focus.
Part of this pickup can also be explained by the deeper understanding of these assets by investors. Increasingly, they have been decoupled from other warehouse facilities in industrial and logistical portfolios.
The reason being? Cold storage facilities are far more complex than conventional dry warehouses. Irrespective of location, they must be equipped with various structural and mechanical installations to maintain temperature and humidity within a pre-defined range.
Investors also better understand the operators of cold storage facilities. Based on their operational model and scope of services, cold storage players can be divided into four main types.
Cold Storage and Logistics Specialists handle agricultural produce in cold storage facilities that often come equipped with food processing capabilities. For example, kiwi fruit in New Zealand are collected and shipped from orchards to specialised cold storage companies, where they are then sorted, washed, packaged, labelled and boxed for export. This category also includes cold chain providers for restaurant chains.
End-users and owner-occupiers include leading grocery, FMCG and pharmaceutical companies. These firms frequently opt to manage their cold chain in-house as they have special requirements in terms of layout and equipment.
Third-Party Logistics (3PLs) firms have set up specialised business units catering to rising demand for distribution and delivery service along the cold chain.
Developers and investors are the primary owners of cold storage facilities. Recently, a number of new players have entered the cold storage business, including China Vanke, which purchased
Swire Cold Chain Logistics with a portfolio of seven cold storage warehouses in Chengdu, Guangzhou, Langfeng, Ningbo, Shanghai and Xiamen last year.
Demand for cold storage facilities in Asia Pacific is being powered by several factors.
A mix of consumption and omnichannel distribution
Particularly in Asia, a growing middle-class population is driving the fortunes of cold storage. This is especially true when considering robust demand for high quality groceries sourced from home and abroad continues to swell.
Asia Pacific grocery imports were valued at US$373 billion1 in 2018, with imports of high-value items growing especially rapidly. Imports of berry fruits including strawberries and blackberries to Asia Pacific recorded a CAGR of 7.5% between 2013 to 2018.
As a result, growing consumption is being facilitated by the expansion of omnichannel distribution. However, online grocery shopping is still at a nascent stage, with less than 5% of grocery spending in most Asia Pacific markets occurring online in 2018. This ratio is expected to increase on the back of rapid improvement in delivery speed, especially in Korea and China.
Also working in the market’s favour, is online grocery retailing. Aggregate online grocery sales in Asia Pacific are forecast to surge from US$80.7 billion in 2018 to US$260 billion in 2023.
Food loss and quality concerns
Investors also see the potential of cold storage facilities in maintaining the integrity of food. Cold storage can significantly reduce food loss and wastage during transportation, storage and handling by extending the shelf-life of temperature-sensitive products. For example, post-harvest tomatoes stay fresh for just three days at a temperature of 35 ℃, compared to 14 days at a temperature of 15 ℃2.
Added to the mix, reducing food loss and wastage can play a key role in improving retailers’ bottom-line. Food losses in China amounted to US$15 billion in 2017, primarily due to inadequate cold chain facilities. The total volume of food losses amounted to around 20% of groceries distributed, a ratio three times higher than that in advanced economies3. Proper handling and storage of food products can also reduce the risk of cross-contamination.
Outside of food and groceries, investor interest in cold storage facilities has also been piqued by changes in personal care and health. For example, medical products require stringent control of temperature, humidity and sterility, which rely on cold storage technology.
In 2018, over US$300 billion of biopharma sales across the globe required cold chain storage, a figure projected to grow by more than 8% per year until 2023, double the growth rate of conventional pharmaceuticals.
So wherein lies the opportunity for investors, in number terms? In simple terms, a supply and demand mismatch.
Despite robust leasing demand for cold storage facilities in Asia Pacific, cold storage capacity in the region is limited compared to developed western markets. Global Cold Chain Alliance (GCCA) data indicates that cold storage capacity per urban capita in the U.S. was around 0.5 cubic meter in 2018, but stood at just one-tenth of this figure in the Philippines and Indonesia. For Asia Pacific to reach the same cold storage capacity per urban capita as the U.S., it would require the addition of 411 million cubic meters of new supply – a figure almost double existing stock.
Despite higher CAPEX and OPEX, cold storage facilities nevertheless command higher rental premiums than dry warehouses. In 2016, a core investor acquired a cold storage facility in Melbourne, in which rents for freezer space (-25 degrees) and chilled space (-2 degrees) were 180% and 90% higher, respectively, than rents for dry warehouse space within the same project.
Cold storage occupiers tend to stay in the same facility for lengthy periods and are willing to commit to long lease terms as it can be challenging for them to find other space suited to their requirements. The typical lease term for cold storage averages 10 to 25 years and includes a fixed rental escalation every year or CPI-linked rental increase. This is double the tenure of a typical dry warehouse lease, which usually lasts five years at most.
Viewed holistically, cold storage interest will be tied closely to growing consumption and omnichannel distribution of groceries. A growing awareness of food loss and quality concerns, coupled with surging pharmaceutical usage, will continue to fuel demand for cold storage facilities in the coming years.
While there exist several barriers to investment, such as higher CAPEX and OPEX; the shortage of assets for sale; and requirements for management expertise, investors are advised to engage occupiers at an early stage and adjust their strategies based on risk tolerance when these challenges arise. For those that take the view that a cold Asia Pacific real estate market remains hot, warm returns seem a distinct likelihood.
By Liz Hung, Associate Director, Asia Pacific Research, CBRE