Logos and ARA explain strategy, say they are a perfect fit

Two of Logos’ founders, John Marsh and Stephen Hawkins, were former Goodman Group executives. “Logos is looking to actively grow its AUM,” says Hawkins in a recent interview. “We will work in our established markets and we will continue with investors to raise more funds.”

The ARA transaction works for both companies, says Chia Nam Toon, assistant group CEO of ARA Asset Management. For ARA and Chia, Logos is the missing piece of the jigsaw. “Having Logos within the stable means we have completed the value chain from development to the REIT,” Chia says.

Chia was formerly CEO of Ascendas REIT’s manager. When Ascendas REIT was first listed, its manager was jointly held by Ascendas and Goodman which is where Chia and Hawkins met. Subsequently Chia branched out to ARA, and Hawkins to Logos.

Being part of Ascendas-Goodman, Hawkins has a long history of industrial property management in Singapore. “I came to Singapore to work with Ascendas 20 years ago when industrial property wasn’t the favourite sector,” he recalls.

ARA Asset Management is a platform that essentially manages property funds and REITs following a collaboration with what is now called CK Asset Holdings, formerly Cheung Kong Holdings. CK Asset is a sponsor for ARA Asset Management’s first REIT IPO, Fortune REIT — which owns suburban shopping centres in Hong Kong — in 2003. ARA also closed the Al Islami Far Eastern Real Estate Fund in 2004, and listed Suntec REIT in December that year. Its initial properties were Suntec City Mall and Suntec’s office towers.

ARA’s big break came when it closed its ARA Asian Dragon Fund Series with Calpers (California Public Employees Retirement Scheme) as a major investor.

All the while, though, ARA did not have a development arm. In 2010, ARA listed Cache Logistics Trust (Cache) in a joint venture between ARA (60%) and CWT. In June 2018, ARA acquired full control of Cache’s manager. Cache owns logistics properties.

“Since Logos is going to be the logistics division within ARA, we transferred our holdings in Cache and its manager [to] that division to streamline our operations,” Chia says.

The case for warehouses

According to Hawkins, urbanisation and a new middle class in Asia and Southeast Asia have given rise to ecommerce. Moreover, with better infrastructure — such as 4G and 5G internet speeds, roads and rail — goods move faster, including last-mile deliveries for e-commerce.

“Industrial real estate is about working out how to connect products to people in the supply chain. Logistics is part of that chain and there’s more and more demand from investors to get access to this investment product,” Hawkins says.

Logos started out with one or two investors, when the company built a warehouse in Australia for a specific client. Logos then set up funds — Hawkins refers to these as clubs — in different countries. Investors could either invest in developed countries like Australia which is very transparent but more stable, or countries with more growth.

Over the years, Logos expanded into Indonesia, Singapore, China and India. “I’ve grown up with the fact that Singapore has ramp-up facilities where consultants and developers know the specifications and it’s easy to build a quality facility here. But mistakes have been made in the UK, and in Indonesia as well, where they don’t build ramps large enough for a truck with a tail,” Hawkins explains. So by bringing Indonesian customers to Singapore and Australia, Logos is able to demonstrate stateof- the-art industrial properties to them.

“We can bring our partners to Singapore to see how nice some of the industrial facilities can be — and they’re impressed with quality; we had a couple of Indonesian clients to Australia to look at our Asahi Drinks facility and Hilton Foods facility,” Hawkins adds.

Rise of the robots

Some 20 years ago, a warehouse was just four walls, a roof and a flat floor. Now it has become more sophisticated. Land-scarce Singapore has developed ramp-up warehouses. In China — with its homegrown ecommerce giants such as Alibaba Group Holding and JD.com — warehouses are built with automated storage and retrieval systems (ASRS) and staffed with robots.

“We have a couple of facilities [in China] where our 3PLs have automated the warehouse. It’s a sorting facility, and these robots sort things out... retrieve and [pack] products into small parcels,” Hawkins describes.

Much of what goes into a warehouse or its specifications depends on the tenant’s needs — where the customers want to be, what country and what street. Then attributes like accessibility features, doors, and docking bays are added.

“About a third or half of our team focuses on tenants. Tenants are important because they pay the income and Logos is purpose-built to talk to customers about their needs,” Hawkins says. “We can go to more established countries, for example Singapore, Australia and China, but we can [also] create the same product for the same customers in ‘more difficult’ countries, say India, where customers want larger facilities or more consolidated facilities.”

Additionally, in countries like Indonesia, the demand for fresh food and distribution implies a shift to more cold storage.

Impact of Covid-19

Both Chia and Hawkins acknowledge there has been a slowdown due to the coronavirus but say it is too soon to gauge the impact on their properties in Singapore and the region.

“In Singapore, distribution is compartmentalised into two parts: one is internal domestic consumption and the second part is for redistribution, where we take parts in and move parts out,” Chia says. For the second part, volume has dropped, he adds.

Hawkins reckons that even though logistics is a less people-oriented business, Logos will be affected. “We’re conscious of the health of our workers, and supply chains were stopped. Singapore is coping with the border [shutdown] with Malaysia and it will impact us. Some of our customers are into food production and supplying supermarkets. E-commerce is a very strong proportion of our tenants and they’ve experienced lots of growth; that goes for China, Singapore and Indonesia,” Hawkins says.

Of course, Covid-19 has had an impact on Logos’ business in China where the developer has 10 different projects. In Wuhan, all activity was at a standstill for January and February. Although Logos properties are in places like Zhejiang province, workers have also been affected.

“We employ a lot of people for Logos [in China] and a lot didn’t turn up for work — after Lunar New Year, they couldn’t come back because the government extended the holiday period. China has passed that stage because they’ve got the disease under control. In Shanghai and Beijing, it is relatively back to normal and logistic players are starting to work out how to get products and containers out of China,” Hawkins elaborates.

Challenging times

Logos’ strategy is to get a tenant for a warehouse, then get investors into a fund for that particular building or group of buildings to create a development fund. Some of its capital partners include Ivanhoe Cambridge, Canadian Pension Plan Investment Board (CPPIB), and PFA Pension (a Danish pension fund).

“In Southeast Asia, we want to keep servicing our customers, and providing products for our investors. [ARA] is a perfect fit. Logos didn’t have a listed REIT and we didn’t have a final product or a core fund in Singapore,” Hawkins says.

However, with Covid-19, logistics assets face challenges albeit not to the extent of retail and hospitality. “In terms of investment activity, logistics will also see a halt during this period. Operationally, the logistics sector is also challenged because of the break in supply chain links around the world, and lower demand, although long-term fundamentals remain strong,” says Brenda Ong, head of logistics and industrials, Singapore, at Cushman & Wakefield.

Moreover, Cache has lost 46% in value this year because of the indiscriminate sell-down in S-REITs, so acquisitions are unlikely. In FY2019, Cache announced a distribution per unit (DPU) of 5.523 cents, down 6.4% y-o-y.

There is still an oversupply of warehouses in Singapore this year. Based on JTC’s latest industrial data, around 336,000 sq m of new warehouse space will be completed in 2020 versus 300,000 sq m in 2019 and a 10-year average of 400,000 sq m. “Supply will taper off sharply in 2021. About 20% of Cache’s leases are due for renewal in 2020 for which we expect flattish to slightly negative rent reversions, with some transition vacancies expected in some of its assets,” notes RHB Securities in a recent update.

Before the outbreak of Covid-19, Cache faced an uphill battle to grow its DPU. Perhaps with Logos’ pipeline, a sponsor prepared to backstop and fund acquisitions after the pandemic fades, and with a lower cost of equity, Cache could face a turnaround next year.