When we talk about industries that are recession-proof, few would guess logistics. During the 2020 pandemic-induced recession, the growth of e-commerce spurred strong demand for logistics space by third-party logistics (3PL) service providers.
The demand for logistics space in Japan, which has the fourth-largest ecommerce market, is expected to grow further in the coming years as consumers embrace online shopping. Furthermore, similar growth is expected in other Southeast Asian countries, where ecommerce is in its nascent stage.
Investors looking to have exposure to this growing sector can consider the Daiwa House Logistics Trust (“DHLT”). DHLT (SGX: DHLU) was listed on SGX’s mainboard on 26 November 2021. Though it is an Asia-focused logistics REIT, its current portfolio consists of 14 high-quality modern properties, all located in Japan. These properties address the structural shortage of modern and mid-to-large scale logistics facilities in Japan.
DHLT’s portfolio consists of an enviable mix of high-quality tenants, many of whom are either listed on the Tokyo Stock Exchange (TSE) or associated entities related to TSE-listed companies. Amongst this pool of tenants, a large majority is made up of 3PL and e-commerce sectors. Investors could be drawn to the fact that none of their tenants had requested rental relief or abatements throughout the COVID-19 period. This exemplifies the resilience of DHLT’s portfolio.
The DHLT is backed by the Sponsor, Daiwa House Industry Co. Ltd, one of the largest construction and real estate development companies in Japan. It is also listed on the Tokyo Stock Exchange (TSE) with a market capitalisation of over $20 billion.
DHLT has the right of first refusal (ROFR) over its Sponsor’s pipeline of logistics and industrial assets in Japan and Southeast Asian countries like Indonesia, Vietnam and Malaysia. Based on DHLT’s IPO prospectus, it can potentially acquire another 28 properties and grow its total portfolio to 42 properties.
Investors seeking stable income through REIT investing can consider these 5 things about Daiwa House Logistics Trust (DHLT).
#1 What Is DHLT’s View Of Japan’s Logistics And Industrial Sector In The Year Ahead?
While supply in logistics space in Japan has grown in recent years, supply-demand balance continues to remain tight, resulting in generally low vacancy rates. In the near future, a large supply of logistics properties is expected in certain markets, particularly in Greater Tokyo, which may lead to higher vacancy and moderation of rental rates growth. However, we believe that demand for logistics space will remain robust with the continued expansion of Japan’s e-commerce market and structural change in purchasing habits.
Of the current 14 properties in DHLT’s portfolio, six are located in Greater Tokyo. However, five of these properties are built-to-suit (BTS) facilities which are single-tenanted and have an average WALE of approximately 10 years. Therefore, we believe that the near-term impact from increased supply in Greater Tokyo is expected to be limited.
#2 Having A “Moat” Or A Competitive Advantage Is Something Many Investors Look For In Companies They Invest In. Can You Share How DHLT Has A Strong Advantage?
The key competitive advantages for DHLT are its high-quality portfolio and the support from its Sponsor, Daiwa House Industry Co., Ltd (“Sponsor”).
The well-diversified portfolio of 14 high quality properties were carefully selected to provide DHLT with stable and sustainable income. Key criteria that were considered included quality of properties, location, occupancy rate, weighted average lease expiry (“WALE”) and tenant profile.
In Japan, where there is structural shortage of modern and mid-to-large scale logistics facilities in general, the 14 properties were all built with modern specifications, with an overall age of less than 5 years. Portfolio occupancy rate was high at 96.3% and the portfolio has an overall long WALE (by occupied NLA) of 7.0 years as at 31 December 2021, with well staggered lease expiry. The portfolio also boasts a high-quality tenant profile where majority of the tenants are TSE-listed, entities related to TSE-listed companies, or reputable multinational companies.
In Daiwa House Industry Co., Ltd, DHLT has a well-established developer Sponsor which is one of the largest real estate players in Japan, with a strong track record in development and management of logistics properties.
Operationally, DHLT can leverage on Sponsor’s property management capabilities to optimise value of the properties and source for new tenants through its extensive network. The comprehensive logistics solution provided to by the Sponsor can also help to retain or attract tenants.
On future growth of DHLT, the Sponsor has granted a right of first refusal to DLHT over its income-producing logistics and industrial real estate assets located in Asia. This will help to support DHLT’s continuous growth by providing DHLT with access to high quality properties developed by the Sponsor. As a developer, the pipeline of potential assets from Sponsor can potentially continue to grow.
#3 DHLT Has C.15% Of Its Portfolio In Leasehold Land Interests Of 40 Years Or Less, Is This A Risk Factor?
Of the 14 properties within the portfolio, only four properties have land leases with expiry less than 40 years and the shortest land lease has more than 10 years to its expiry. The other eight properties are freehold or have land leases longer than 40 years. We have the option to approach landowner of such leasehold lands to negotiate extensions or acquire the land when the remaining term is shorter than 10 years.
Through active asset management, we may seek to divest properties with short land leases if extensions of lease terms or acquisitions of land are not feasible. We may also be able to reduce the proportion of properties with short land leases through acquisitions of properties with freehold land or longer land leases as DHLT looks to grow its portfolio.
Furthermore, we believe that leasehold properties offer higher yields and a more attractive returns profile as they are likely to have lower purchase price than comparable freehold properties.
#4 Are There Environmental Risks Given That The IPO Portfolio Is In Japan? How Will DHLT Deal With Natural Disasters Such As Earthquakes In Japan?
All properties in the current portfolio are developed by the Sponsor, which is a well-established and experienced developer in Japan. When selecting project sites, the Sponsor conducts due diligence over the land, including analysing risks of natural disasters. The properties are also designed to withstand earthquakes and heavy storms and were built in accordance with earthquake resistance building codes.
Earthquake insurance in Japan is generally costly with limited coverage, and we would consider obtaining earthquake insurance for a property with probable maximum loss (PML) exceeding 15.0%, which is generally in line with the market practice in Japan. PML measures the probable maximum loss that would be incurred from a major earthquake. For the current portfolio of DHLT, the overall PML is only 1.6% with no individual property having PML in excess of 15.0%.
#5 With Sustainability And ESG Increasingly A Key Focus, How Is DHLT Incorporating Sustainability Into Its Business Model?
We share the Sponsor’s fundamental approach to ESG and follow these sustainability considerations as guidance in respect of our real estate investment and management responsibilities:
i. prevention of global warming;
ii. harmony with the environment;
iii. conservation of natural resources (reducing waste, protecting water resources);
iv. prevention of chemical pollution; v. establishment of an internal framework and initiatives for employees;
vi. building of trust relationships with external stakeholders;
vii. promotion of communication through information disclosure; and
viii. compliance with laws and regulations, and risk management.
Aligned with the above, 13 out of the 14 properties in the portfolio are certified green by the Development Bank of Japan Green Building Certification Programme, the leading programme in Japan which evaluates and measures the environmental and social awareness characteristics of real estate properties. 10 of our properties have solar panels installed with an aggregate capacity of 13.5 MWp, and energy-efficient LED lights are installed in all but one property.
We will also continue to work closely with the local asset manager, property manager, tenants, and contractors to maintain the level of safety, efficiency, and worker-friendly conditions at our logistics properties.
Editor’s Note: Some answers for this article were extracted from the SGX 10 in 10 series published on 22 March 2022 and have been republished with permission. You can read more on Daiwa House Logistics Trust on the SGX website.
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