Cold storage real estate gathers steam amid the COVID-19 pandemic
Cold storage logistics is an industry that’s gained prominence because of the opportunities in vaccine transport. Money Mind takes a look at how this niche property market is heating up.
SINGAPORE: Cold storage logistics is an industry that has gained prominence because of the opportunities in vaccine transport.
This was once a niche property sector, but with the COVID-19 pandemic accelerating the demand for cold storage facilities, the global cold storage market - which was worth an estimated US$107 billion in 2020 - is expected to grow to more than US$290 billion by 2028, according to a new study conducted by Grand View Research.
The Asia Pacific is a growing part of that market – with anticipated annual growth of more than 10 per cent. But that growth is from a low base, with even the region’s most advanced economies, trailing behind western countries.
In the United States, cold storage space per capita was 0.577 cubic metres in 2020.
In Japan, it was 0.339 cubic metres and in Australia, 0.382.
In comparison, the Philippines and Indonesia have less than 0.04 cubic metres of cold storage space per capita.
The shortcomings of this became clear during the COVID-19 pandemic, when the need to transport vaccine supplies arose.
“The whole cold supply chain is very fragmented, so as soon as we had the pandemic impacting the demand, we saw a squeeze," said Mr Michael Ignatiadis, head of supply chain and logistics solutions, Asia Pacific, at JLL.
"An example is Vietnam. It’s the third-largest seafood exporter in the world. But during COVID-19, orders were suddenly cancelled, so up to 50 per cent of orders were cancelled. That led to a stockpile of products and the cold storage supply was not sufficient to accommodate this surplus.”
TIGHT SUPPLY, HIGHER EXPENSES
Mr Wong Xian Yang is head of research, Singapore, at Cushman and Wakefield. He explained why there is currently a limited supply of cold storage space.
“Most of these cold stores tend to be owned by end users or by third-party logistics players. The properties that are owned by investors, and the institutional grade cold stores are relatively small. Also, the pandemic has affected construction activities, so new supplies are taking a while to come onto the market.”
In Singapore, cold storage warehouses account for just 10 per cent of the stock of Grade A warehouse space, according to Colliers.
But while investors might see opportunities in limited supply and increased demand, industry experts cautioned that there are also risks.
“Capital expenditure is higher, and because of the power consumption, operating expenses are also higher. So it is more risky compared to a conventional warehouse, because if you have a vacancy, cost will be higher than the market average," said Mr Wong.
"But of course with higher risks, there’s higher returns. Rents can be about 50 to 100 per cent higher than a conventional warehouse. And the leases also tend to be longer – about five to 10 years, compared to three years for conventional warehouses."
LONGER LEASE, STABLE INCOME
In a survey of investor intentions, CBRE found that cold storage was ranked as the second-most preferred real estate asset, after data centres.
CBRE said that investors were attracted by the longer leases and hence stable incomes.
Before the pandemic, trends in the food industry were already driving the growth of the cold storage market.
Cushman and Wakefield’s Wong identified three main factors driving the demand for cold storage facilities: Rising food consumption, especially of imported food; changing consumer preferences; and growing accessibility of higher quality fresh and perishable goods.
Growth in the sector is also being driven by the transformation of the retail sector.
Online supermarket shopping has seen robust growth.
The rise of omnichannel distribution – or retail that integrates different methods of shopping – is also driving up demand for cold storage.
Since late 2020, the cold chain has played a vital role in the roll-out of one of the most sought after international commodities – COVID-19 vaccines.
But despite this, experts think that the growth of cold storage facilities will still be driven by long-term trends in the food industry.
"When vaccines are imported, they are quickly distributed out to the population.So in terms of storage, it’s not such a big market," said Mr Wang.
"I think the bulk of demand still comes from the F&B," he said.
The biomedical sector is also expected to contribute to demand long-term.
“What we are seeing is the rise of Asia Pacific life sciences is going to give us the extra boost of super high quality cold storage in the coming years. It’s not only for vaccines, but also for wider medical products. So the pandemic is the catalyst for us to develop more good quality cold storage,” said Mr Henry Chin, head of research, APAC, at CBRE.
Currently, rental prices for cold storage facilities are higher than normal warehouse facilities. Industry watchers believe asking prices can go higher still.
Currently, in Singapore, rents for cold store logistics warehouses range between S$2.50 to S$3.50 per sq ft per month.
"The other asset classes, like hotel and retail, investors are moving out of those. Definitely the yields in logistics are better," said Mr Ignatiadis.
"Now it’s majority might be owner-occupied, but this trend is shifting."