Knight Frank Thailand Releases Logistics Property Market H1 2019

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Logistics and transportation of Container Cargo ship and Cargo plane with working crane bridge in shipyard at sunrise, logistic import export and transport industry background

Mr. Marcus Burtenshaw, Executive Director, Head of Occupier Services & Commercial Agency, Knight Frank Thailand said that “In 2019, we have seen growing demand from a variety of sources, especially from consumer goods and e-commerce. As Thailand’s middle class grows, so does their spending. This growth in consumer spending has continued almost unabated for the past 25 years, and is expected to climb from THB 1.4tn in 2018 to over THB 1.5tn in 2019. Retailers and their distributors are turning to increasingly sophisticated distribution facilities to keep pace.”

Logistics Property Market Indicators

Economic Overview

The Thai economy was relatively weak throughout the first half of 2019, expanding at the slowest pace over the past 5 years. GDP in Q2 2019 grew by 2.3% Y-o-Y, down from the 2.8% expansion recorded in the first quarter.

The economic slowdown was driven by declines in both domestic demand and external factors. In Q2 2019, private and government final consumption expenditure increased by 4.4% and 1.1%, respectively. In contrast, private and government final consumption expenditure in Q4 2018 increased by 5.3% and 1.4%, respectively. H1 2019 exports declined by 7.9% H-o-H from the 3.6% growth achieved in H2 2018. Imports also declined by 11.1%, down from the 8.5% increase recorded in the latter half of 2018. Export competitiveness has been dampened as a result of the USSino trade dispute, and the strengthening of the Thai baht against the US dollar at a faster rate than its trade competitors in Asia.

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Meanwhile, the total number of containers passing through Laem Chabang port was at 3,957,518 TEUs, representing a 0.3% growth Y-o-Y. In comparison, the number of containers passing through the port increased by 3.4% in H2 2018.

Supply

According to Knight Frank Thailand Research, In H1 2019, the total warehouse supply in Thailand increased by 43,500 square metres to a total of 5,220,016 square metres. This represents an increase of 2.4% Y-o-Y. The amount of new supply added to the market has been on a downward trajectory since H1 2016. New supply launches were limited as a result of the relatively high vacancy level of existing warehouses in some regions, coupled with economic slowdown during the past year.

Figure 1

Thailand Warehouse Supply

Supply Distribution

Warehouses in Thailand are heavily concentrated in 3 main regions. These are the Bangkok metropolitan, Eastern Seaboard and central regions. The area with the largest market share is the Bangkok metropolitan region at 41% or 2,128,088 square metres. Warehouse supply in this area increased by 1.2% H-o-H as it continues to be a highly desirable location for tenants. More specifically, Samut Prakan province marks an important link between Bangkok, Suvarnabhumi Airport and the Eastern Economic Corridor (EEC) region. The central region, which currently holds 16% of market share, achieved the highest supply growth rate this half, increasing by 2.3% H-o-H and 5.9% Y-o-Y. The total supply in the Eastern Seaboard did not change significantly in this  half , despite its importance as a manufacturing and distribution hub, as well as its special designation as the EEC to help transform Thailand into a powerhouse for industrial production. This is partly the result of supply influx in prior years that still exceeds market demand, as indicated by the region’s relatively low occupancy rate in comparison to Bangkok and the central region.

Figure 2

Thailand Warehouse Distribution by Zone

Figure 3

Thailand Warehouse Supply – Demand Dynamics

Demand

During H1 2019, positive net absorption increased the total occupied space by 68,026 square metres to a total of 4,486,787 square metres. This represents an increase of 1.5% H–o–H and 6.1% Y–o–Y. Positive net absorption indicates that there is a relatively healthy level of demand for warehousing

space in the market. E-commerce businesses have become a prominent driver of warehousing demand. Recently, the E-commerce market has grown at an impressive rate, and is anticipated to continue doing so in the upcoming years. This will be a positive growth factor for the logistics property market.

However, net absorption has been declining over the past few years. The current level of absorption at 68,026 square metres is far below the 5-year average of 204,479 square metres per half-year. This can partly be attributed to weakened global and domestic economic conditions. In addition, demand is shifting towards built-to-suit warehouses as tenant requirements are becoming specific and operational efficiency is valued over pure rental cost savings. Built-to-suit warehouses enable developers to mitigate occupancy risk because the lease agreement is signed prior to the construction of the project, and tenants are likely to renew the lease term as there are limited alternatives elsewhere. At present however, there are very few players with the expertise, flexibility and track record to provide this service, so the current market supply is mainly ready-built. This could shift overtime as more successful built-to-suit projects are completed and future tenants increase their demand for such services.

The market occupancy rate increased to 86.0% from 85.4% in H1 2019. The rate has been increasing since H2 2015, which reflects the rise in demand for warehousing space over the past few years. The Bangkok metro remained the strongest market despite the 0.6% decline in occupancy to 89.2%. Although Bangkok and Samut Prakan are logistically desirable areas, Nonthaburi and Samut Sakhon are considerably less attractive as they are not well connected to manufacturing or distribution hubs. On a positive note, the Eastern Seaboard showed signs of robust demand as the occupancy rate increased to 81.5%. Although this is still lower than the other regions, the occupancy rate has increased by 2.2% H–o–H and 8.4% Y–o–Y, by far the highest growth rate among all zones.

Figure 4

Thailand Warehouse Supply, Demand & Occupancy Rate

Table 1

Thailand Warehouse Occupancy Rate by Zone

Rental Rates

Mean asking rents for warehousing space remained relatively stable, having declined minimally this year. The market asking rent decreased to 153 baht per square metre per month. This represents a slight decrease of 0.3% H–o–H and 0.5% Y–o–Y. The greatest rental decrease occurred in the central region, where the average asking rent fell by 1.9% H–o–H to 141 baht. Although rents in the Bangkok metropolitan region and central region have both been declining slightly over the past few years, rents in the Eastern Seaboard have on this rise. The average asking rent in the region increased by 0.5%      H–o–H and 1.3% Y–o–Y to 159 baht. This has now exceeded the rate commanded in the Bangkok metropolitan region at 157 baht. The rental rise experienced by the Eastern Seaboard could be a result of consistently high demand coupled with limited new supply in the region raising market power for landlords.

Rents in the Bangkok metropolitan region ranged from 110 baht per square metre per month to 180 baht. As mentioned, Samut Sakhon and Nonthaburi receive limited demand relative to Bangkok and Samut Prakarn, resulting in a rental spread. There is also a large spread in Eastern Seaboard rents, going from 100 baht to 200 baht at the high end. Merely residing in an EEC-designated province does not make warehouses desirable to tenants. Warehouses that are well connected to main roads, industrial land and major transport infrastructure, such as the Laem Chabang port, can command much higher rents than those that are not.

Figure 5

Thailand Warehouse Average Asking Rent by Zone

Outlook

Supply and demand for warehouses may drop in the short term. Several developers and tenants may delay project launches and further investment as they adjust to the economic slowdown. Warehouse asking rents are likely to decline further as landlords compete to attract hesitant potential tenants.

In the medium to long term, strong economic fundamentals, sustained public spending on infrastructure and incentives offered by the Board of Investment will make Thailand even more attractive to international investors, especially those looking to relocate their manufacturing bases from China. The area of focus will likely be the Eastern Seaboard, which has shown signs of resilience in both rents and occupancy this half, despite the weakened business environment. E-commerce should continue to drive growth in the logistics property market countrywide.

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