Pan-Asia logistics real estate platform ESR poised for growth

As Japanese consumers embrace online shopping with increasing fervor, pan-Asia logistics real estate platform ESR is poised for exponential growth.

In March, the company broke ground in Amagasaki, on the outskirts of Osaka, for what will become Japan’s largest distribution center, in December 2019. At 388,000-square-meter, the six-story, double-ramp warehouse will cost 121.4 billion yen and employ 3,000 people. And, far from basking in the achievement, ESR has obtained land to build an even bigger facility near Haneda International Airport. The Higashi Ogishima project will feature two 10-story facilities exceeding 550,000 square meters in total.

Japan Today met Stuart Gibson, ESR’s co-founder and chief executive officer, at the groundbreaking ceremony in Osaka. With 24 years of experience in real estate in Asia, the Scottish entrepreneur shared his insights on the industry.

What excites you about the Amagasaki project?

This project marks an important milestone as it will be the largest project of its kind in Japan and the largest single asset that ESR as a group has ever developed. The Amagasaki Distribution Centre is strategically located in a key distribution market of Osaka Bay—between Osaka and Kobe on the highway and near the ports and airports. To put the scale of this development into perspective, you could fit 54 Wembley football pitches or the floor area of eight Tokyo Domes on the floor space that we are creating.

We have been privileged to have the support of the Amagasaki government, community leaders and residents. The facility will incorporate ESR’s trademark features, including free children’s day care centers called Barnklübbs (Swedish for children’s clubs), über-hip relaxation lounges and multiple retail outlets for our customers. The installation of photo voltaic panels on the roof is expected to generate over 6 MW of solar energy for the building and community.

Why provide free day care?

The first thing that customers say is “where can I get workers for my distribution facility”? It’s hard to get workers in Japan. Male employment is at full capacity and, whilst automation and robotics may well be part of the long-term solution, AI and automation is still at a nascent stage in the Japanese logistics industry.

One solution is to enable stay-at-home mums to rejoin the workforce. In Japan there is a shortage of private day care centers and that’s what drove the idea of providing Barnklübbs, where mums can leave their kids while they work their shifts. By the end of the year, six Barnklübbs will be open in our facilities across Japan, caring for 350 kids.

Two and a half years ago, people in the industry said a children’s day care center at our large facilities was a waste of money; now everyone is saying we are a pioneer. Not really—it just makes perfect sense and is great for our CSR credentials, though that was a consequential benefit and not the driver. We promote family-friendly practices. Childcare is both a parental and employer concern and one that is a priority for ESR.

How has the approach to distribution facilities changed in Japan?

When I came here, in 1999, Japanese people had a very emotional attachment to their real estate and the distribution center market was probably 90% owner-operated. Companies had been borrowing on the value of their land since the 1970s; the first piece of land I bought here had 27 mortgages on its title history. But then there was the real estate implosion and the ensuing credit crunch and suddenly the lending market dried up. Many hoped the good times would come again but they never really did—witness the anemic growth in GDP that the Japanese economy has produced over the past 30 years.

In 2000, we started offering to buy companies’ facilities and lease them back to them and talking to companies that needed new facilities. The Japanese model of logistics companies borrowing from the bank, buying land, building a warehouse and then operating it is largely gone. If you are a logistics company, you shouldn’t be investing profits in real estate as it dilutes return on investment and is not your core strength. We have a great opportunity in Japan now because Japanese companies see that. In America, the ratio of logistics owner-operators is probably 15-20%. In Japan, today, it is probably still around 80%.

How does your specialty differ from other real estate?

During the global financial crisis, rent for other asset classes such as office buildings and residential apartments across Japan went down 45-50% on average compared to 10% for logistics assets rents. Office buildings are very tied to the vicissitude of capital markets whereas logistics facilities perform more like infrastructure than pure real estate.

The items that go through our warehouses are everything from high value electronics to everyday general merchandising products or consumables, so even in an economic downturn, people need them. Our facilities, therefore, attract high demand even in times of economic uncertainty. As an asset class, this type of real estate is very stable. On the flip side, if the economy is surging ahead and office rents go up 10%-15% in a year, distribution facility rates will likely only go up by around 2%.

What opportunities do you see in the market?

The rapid development of ecommerce and the transformation of the retail sector in Asia is a massive driver for our business. In Japan, 60% of our customers are third-party logistics firms such as DHL, Fedex, DB Schenker and Nippon Express and 40% are e-commerce firms, such as Amazon and Askul, but Japan is a huge way behind the rest of the world for its percentage of online sales as a portion of overall retail sales. In the UK, 12% of overall retail sales is online. In the U.S., that figure is 10% and, in Japan, 6%. ESR’s strategic strength in modern warehousing will continue to benefit from the transformation of the value chain on the back of the new economy, meaning we’ve got a long runway ahead of us.

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