This article first appeared in City & Country, The Edge Malaysia Weekly on May 27, 2024 - June 2, 2024

Despite external headwinds and challenges, leasing activity for prime logistics warehouses — particularly for the Klang Valley, Johor Bahru and Penang — remained resilient in the second half of last year with expected rent growth in 2024, says Knight Frank Malaysia executive director of land and industrial solutions Allan Sim in a statement accompanying the release of Knight Frank’s Asia-Pacific Logistics Markets report for 2H2023.

He attributes this to tight availability of grade A warehouses and strong leasing demand for specific grade A warehouses as well as price resistance from landlords due to higher construction and financing costs.

“The expected global recovery in the semiconductor industry next year will increase the demand for the space, particularly in Penang, Kulim [Kedah], Melaka and Selangor. There are more high-end grade A warehouses scheduled to be completed in 2024 and landlords are increasingly reluctant to compromise on building specifications for lower rental rates,” says Sim.

“[And] as we witness a measured increase in rents, our emphasis remains on fostering innovation and sustainability in logistics spaces to meet the evolving demands of occupiers.” 

Sim also notes that the local market’s response to global economic fluctuations underscores the adaptability and forward-thinking nature of the country’s logistics industry and expects to see more landlords undertake the redevelopment of older factories and warehouses into modern warehouses with higher specifications.

“However, the performance of the rental [rates] will be subject to the performance of foreign direct investment (FDI) and domestic direct investment (DDI) in the coming year. As we navigate the path ahead, the outlook for logistics in Malaysia remains optimistic, bolstered by our resilience and strategic positioning in the Asia-Pacific landscape,” he says.

As for the larger Asia-Pacific region, the report states that the overall prime logistics rents continued their upward trajectory to grow 6.2% year on year (y-o-y) in 2H2023, powered by an acceleration in rental growth in Manila, the Philippines. It, however, shows a slowdown in short-term momentum, with a 1.5% increase in half-yearly rental growth, compared with 4.6% in 1H2023.

In the report, Knight Frank global head of occupier strategy and solutions Tim Armstrong says, “As logistics occupiers continue to dial back on expansionary ambitions, it is becoming apparent that the supply-demand imbalance that had fuelled the region’s steep rental growth is waning. However, the Red Sea conflict is a reminder that global supply chains remain vulnerable to disruptions.

“The region’s ample development pipeline is an opportunity for occupiers to review their logistics footprint. Leasing activity is expected to turn more selective with take-up from occupiers seeking strategically located prime logistics spaces that are automated and compliant with sustainability standards.”

According to the report, the region’s development pipeline will remain significant in 2024, adding 43.7% to existing stock, which will continue to ease tight supply conditions. “The bulk of new supply will be delivered in Chinese mainland markets, where over 17 million sq m completing in Beijing and Shanghai will continue to weigh on market conditions for most of 2024.”

Knight Frank head of research, Asia-Pacific, Christine Li says the impact of the considerable supply of logistics space due to the ample development pipeline and growing sublease availability will be uneven across the region. “Strong pre-commitments in Pacific markets are keeping vacancies tight while Southeast Asia and India will continue to benefit from supply chain diversification.

“In contrast, Chinese mainland markets will likely require some time to absorb a substantial pipeline given the sluggish economy. While [the] appetite for expansion among logistics occupiers has cooled, demand fundamentals in the region remain robust. Global trade and production converge in the region while the need for supply chain resilience will continue to underpin demand.”

In terms of outlook, the report states that occupiers in the region will remain cautious, impacted by a combination of economic uncertainty, inflationary pressures and higher interest rates. “Rents will remain on an uptrend, but with the structural shortage of quality spaces narrowing, growth will moderate sharply to between 1% and 3% [this year], down from the over 6% rise in 2023.”

Of the 17 Asia-Pacific cities tracked by the index, 13 recorded stable or increased rents in 2H2023 compared with 16 in the prior six months.

Average rents across Southeast Asia were mostly on an upward trend in 2H2023. Manila leads the region with 39.3% growth annually and 7.3% from six months ago, fuelled by the rapid expansion of the e-commerce sector. The report, however, notes that the pace of rent growth is anticipated to moderate as conditions normalise.

In Singapore, the recovery in manufacturing output also created conditions for higher rents during the same period. Meanwhile, those in Vietnam’s Ho Chi Minh City increased mainly due to the completion of quality logistics spaces with higher rates.

Rents in Jakarta, Indonesia, reversed a decline due to strong demographics and expanding retail and e-commerce sectors with occupiers choosing to locate closer to the capital city; whereas Bangkok, Jakarta and Kuala Lumpur saw largely stable rental levels as demand and supply remained largely in balance, the report adds.

Though coming off record highs, leasing activity in Australia’s Eastern Seaboard markets eased during the review period. “As a result, the pace of rental growth slowed with all markets recording increases of less than 4% from six months ago,” the report says.

However, it states that annual growth remains high with Sydney and Brisbane recording double-digit increases as incentives remained at historical lows across all capital cities. “While a strong pipeline of about three million sq m is expected to be delivered in 2024 across the east coast, the majority of this new supply has been pre-committed. Rental growth is expected to be sustainable, albeit at a slower pace, with growth expected to revert to an annual pace in the range of 4% to 8% over the next 12 months.”

In Auckland, New Zealand, the frenetic pace is also tapering off as resistance to higher rents develops in the context of weaker sentiment, which will lead to a moderation in rental growth, it adds.

Leasing fundamentals on the Chinese mainland continued to drag against a backdrop of a weak economy and substantial completions in and around Beijing and Shanghai. “Total trade, which slowed significantly in 2023, substantially reduced the demand for logistics warehousing in the Chinese mainland. To expedite the rental process, there has been a considerable reduction in rents,” says the report.

As rents in Beijing and Shanghai softened, pressured by the abundant supply of warehouses and weakening trade, highly favourable rental rates in surrounding cities were also attracting tenants away from Shanghai and Beijing, which further reduced demand. The report says that rents are anticipated to contract in 2024 amid elevated vacancy rates.

Rents for modern logistics spaces in Hong Kong continued to register moderate growth, supported by sizeable leasing deals. “However, with substantial supply from Cainiao Smart Gateway likely to fuel an increase in vacancy rates, rents are likely to come under pressure in 2024.”

In Taiwan, market conditions continue to favour landlords. “The reshoring of technologically critical processes in Taiwan is raising storage demand for raw materials as well as semi-finished products while e-commerce companies are expanding. Robust domestic consumption, which hit a record in 2023, is fuelling demand for logistics spaces from traditional retail and e-commerce players.”

According to the report, the Indian warehousing market continued to reflect the strength of the Indian economy as demand remained steady in the volatile global economic environment, with 0.9 million sq m transacted in Bengaluru, NCR and Mumbai from April to September 2023.

It explains that while e-commerce companies remained focused on curbing costs, demand continued to be driven by the manufacturing and 3PL sectors. “India has benefited from the sustained move towards the decentralisation of manufacturing capacity from China.”

The real estate consultancy expects demand for logistics spaces in the country to remain robust for the rest of the fiscal year, boosted by the government’s focus on “Make in India” and the Production Linked Incentive scheme.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.