It is the Big Mac of the shed market – a unit identical in shape, feel and function to one in, say, Birmingham, but thousands of miles away – in Mumbai, São Paulo or Bangkok.
As occupiers scout for low-cost manufacturing bases and opportunities to tap into growing consumer markets of China, Singapore and South America, they are increasingly craving the familiar flavour of home – and are turning to developers to provide it.
Links with foreign regimes
It is a golden opportunity for most developers – but a hazardous one. Risks include getting involved with speculative development, moving into a foreign country and, most importantly, linking your company’s fortunes with a country’s economic and political regime.
The need for global distribution networks is undisputed. One legend of the distribution business tells of a large retailer whose goods travel 14,000 miles before they hit the shelves in Asia, despite being manufactured in the region. The retailer shipped its wares from factories in the Far East to a central depot in Western Europe. It then shipped them back for Asian consumers. “It probably lost two-thirds of its profit before it started,” recalls a mildly amused Lisa Fitch, supply chain consultant at NAI Fuller Peiser.
OECD figures show that trade between the then 15 EU member states and the rest of the world increased 22% between 2001 and 2003. According to DTZ’s Motorways of the sea report, £1,790bn of goods were imported into the EU last year from the rest of the world. It predicts that, by the end of the decade, trade between the EU’s 25 members will rise by 38%.
As might be expected, it is the largedevelopers that are making the inroads.US-based developer AMB has a presence in 23 cities, but is targeting another nine, mainly in China, South Korea and Japan. By June this year, 6% of its capital was deployed in international markets, and it aims to treble this in the “intermediate future” via a £1bn development pipeline (see box).
AMB’s senior vice-president of international business, Frank Wade, says he has noticed a significant change in Asia and Japan. “A lot of operators are moving to consolidate their logistics process,” he says. “In South East Asia, we are seeing a lot of smaller units being traded in for larger, more modern units.”
ProLogis is also in the running, with 320m sq ft of space in 76 markets over 17 countries. It serves five global clients, including Exel, Bridgestone and DHL. Poland, the Czech Republic and Hungary remain central to its plans but, in terms of growth, nowhere matches China. In 2004, ProLogis invested £243m in Asia, building 3.9m sq ft. By June this year, that had jumped to an investment of $353m and 4.8m sq ft, as the firm followed its customers. Just 40% of its developments in Japan were prelets, while 50% were in China.
According to Simon Lloyd, director of industrial and logistics at DTZ, for occupiers, the comfort factor is not to be underestimated. “It is the knowledge that, when they order a unit, they get quality control and a product they can trust. Occupiers are looking for a developer they can use as a go-to partner.” Setting up with a Western developer also helps with due diligence and corporate social responsibility.
Where the money’s from
“We all laugh about the stories of suitcases of money and executives flying across borders to exchange currency, but due diligence is a huge problem,” says NAI Fuller Peiser’s Fitch. “Companies are risk averse, and they want tried and trusted suppliers which will bear the risk or at least manage it.”
Pointing to Gazeley, with its Wal-Mart ownership, Fitch says: “That’s a US-owned company, so it needs to know where the money is coming from. In somewhere like Russia, that is easier said than done.” Fitch reckons the risk of a developer losing all of its investment in a project in Russia is as high as 70-80%. Risks in China, she believes, have lessened. It is not just transactions that can prove risky, says Fitch. “The rigmarole of red tape and planning can be a real headache. Joining with locals is one way to remove that headache.”
On this issue, developers are split. AMB’s Wade says it prefers partnerships unless it is sure it can undertake the development itself. “We identify and qualify local partners who are able to operate transparently in accordance with our REIT legislation,” he says. “If there is not a partner, we sometimes create our own, or fund a couple of entrepreneurs.”
ProLogis prefers to go it alone. “China is our only example of partnership,” says Robert Watson, ProLogis president and chief operating officer for North America. “We’ve done a joint venture with governmental entities because they have control over the land, and that does take the uncertainty out of doing business there.” It opts to appoint local staff: “We only have two Americans in Europe, none in Japan and one in China. Our view is of a global customer strategy run as a local business.”
No doubt, partnership removes some of the risk, but it also takes some of the profit – albeit from a very high yield to begin with. Watson agrees, but says: “We don’t do partnerships with private companies. It is hard enough to lead your business with the people you work with 100% of the time, who don’t have other objectives and goals in mind.”
Asia’s consumer market is growing at a phenomenal rate. Around 10m people in China move from rural areas to cities each year, and around 100m – equal to a third of the population of the US – become consumers, inasmuch that they begin to earn more than they need to survive.
Lisa Fitch, supply chain consultant at NAI Fuller Peiser, sees a shift in developers’ strategies. “They are moving from the safer, more coastal areas of China inland,” she says. “We are also starting to see more ‘odd’ places developed. Hungary and Poland are considered safe bets, but now developers are looking at Latvia and Estonia. “
For AMB, the need is immediate. The company’s senior vice-president of international business, Frank Wade, says: “We are looking at where units should be located. When it comes to regional or local distribution serving major metropolitan areas, we don’t need to be near airports.”
ProLogis, however, says that, for now, it will concentrate on the major ports and airports.
Robert Watson, ProLogis’s president and chief operating officer for north America, says that the company will move to the growing population bases, building satellite units over the next five years.
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US developer AMB announced in Q3 a $1bn global development pipeline. It was a bullish statement for a firm that markets its schemes as being tailor-made. Senior vice-president of international business Frank Wade agrees this is an aggressive move, but adds: “Unlike our competitors, we are not typically in the business of going far afield, opening up in new lands and hoping to attract logistics on the back of that.” Its proposed global pipeline includes 39 projects representing 9.7m sq ft worth just over $923m. It has secured funding for more than two-thirds of this. “We are building purely speculative schemes in most cases, even in Japan but, in many cases, they have been leased before they are completed, as was the case in Amsterdam,” says Wade, referring to the company’s Fokker Logistics Centre, adjacent to Schiphol Airport. At the end of Q3, 95% of AMB’s operating portfolio was occupied. It has learned from its experiences. Taking time is lesson number one, says Wade. AMB has also learned about cultural mores in product design and ownership. Some differences, such as climate and attitudes to lease terms, are obvious, but smoking rooms were more of a surprise for the health-conscious San Franscisco-based developer. Referring to schemes in Japan, Wade recalls: “We realised a bit late in the development that we needed more smoking rooms, because the Japanese really enjoy their cigarettes.” The company looks set to continue its bullish strategy, with 23m sq ft of land banked for future development. |
