30 June 2016

more value-added centre and if the buildings and facilities are ready to be upgraded and transformable, they will have a potential to generate higher yields. > Major Logistics Players

Hannah Jeong Director Valuation and Advisory Services [email protected] Logistics real estate market investment is highly sought by both regional and local investors looking for high-yields. Traditional retailers and manufacturers have been the major demand drivers. However, there is no doubt that the fast-ever-growing E-commerce and 3PLs (Third Party Logistics) companies are also emerging demand drivers. Thanks to advanced mobile commerce and arising internet penetration rate in Asia, E-commerce together with 3PLs businesses will continuously grow. However, due to time constraints on lengthy physical developments of logistics centres, new supply is projected to not be able to catch up with the speed of this fast-growing demand, at least for the next five years. Therefore, the demand will continue to outpace the supply in Asia. In order to capture the rental premium from these two sectors, the investors need to build the logistics centres in a close proximity to the city centres with higher specifications and flexible structures. The logistics centre will evolve from a simple warehouse to a

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Major logistics players in Asia include GLP, Goodman, Prologis, ERW (e-Shang and Redwood) and Mapletree, which have heavy footprints in China, Japan, Hong Kong and Singapore and are emerging in Korea and other Southeast Asian counties. Of course there are locally focused investors and fast-growing international second movers in each country.

> E-Commerce market is far from saturation Retail E-commerce sales share among total retail sales is forecasted to increase significantly, especially in China and India, in five years’ time, according to eMarketer’s data (2014). Even mature markets like Japan are still looking at almost doubling their Ecommerce sales share among total retail sales by 2019. This indicates that logistics market demand from Ecommerce will continue to grow, which requires bigger and larger scale warehouse spaces.

> 3PLs, raising star Third Party Logistics (3PLs) is tightly connected and benefited from the booming E-commerce industry globally. In general, 3PLs require smaller scale logistics warehouses but extensive network coverage for speedy delivery. Proximity to city centres and residential neighbourhoods are the key for logistics centres in order to capture the growing demand from 3PLs. More and more developers build multi-storey logistics centres even for the markets where traditionally served by single storey centres because of increasing industrial land price in Asia, however, multi-storey logistics centres are not the first choice for 3PLs.

> New Landscape E-commerce’s new services such as E-fulfilment, delivery consolidation and reverse logistics will change the overall logistics real estate market landscape, particularly for their location. Focus will be shifted from the traditional logistics centre locations such as major transportation nodes to the city centres. Further, higher specifications including extra added-value spaces for working and packing, extra cooling and heating facilities for staff and higher ceiling height will be required to accommodate rapidly transforming E-commerce tenants.

CIVAS White Paper | June 2016 | Logistics | Colliers International

Contents Logistics, a Highly Sought Investment Market ………………………………….. 4 Who are the Major E-commerce Players by Market Share? ………………..……. 5 3PLs, Growing Demand …………..…. 6 How is E-commerce Changing the Logistics Real Estate Landscape? ……………………………. 7 Final Thoughts ………………………… 8 Asia Logistics Market Snapshot …….. 9

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CIVAS White Paper | June 2016 | Logistics | Colliers International

Logistics, a Highly Sought Investment Market The logistics real estate market has been chased by massive capital around the world, especially in Asia. Given that it is a high yield-generating investment sector with less intensive asset management involvement and that it is also well supported by governments as a core infrastructure of each country, it has continuously received high attention from major investors. Large pension funds such as CCPIB, APG and Ivanhoe Cambridge are major Limited Partners (LPs) for various real estate investment funds focusing on logistics properties ranging from greenfield developments to existing building acquisition and long-term asset management. Chart 1: China Logistics Area Comparison by Key Players 12 9.9

6

4

1.5

2

1.5

1.3

0.9

0.8

0.9

0.5

GLP Stake: 90-95%

GFA (Millions sq m)

8

GLP Stake: 51.3%

GLP Stake: 19.9%

10

0.2

0.2

Beijing Properties

Vailog

Major logistics players in Asia include GLP, Goodman, Prologis, ERW (e-Shang and Redwood) and Mapletree, which have heavy footprints in China, Japan, Hong Kong and Singapore and are emerging in Korea and other Southeast Asian counties. Of course there are locally focused investors and fast-growing international second movers in each country. As shown in Chart 1 and 2, GLP is the market leader in terms of physical asset size for China and Japan, where the highest GDPs are recorded in Asia. Based on our research, Korean logistics warehouses are largely owned and occupied by end users (e.g. Korean major conglomerates and major E-commerce companies such as Coupang) in Korea. International players including GIC, Mapletree and Kendall Square logistics properties also have a presence there. Hong Kong and Singapore are relatively smaller markets in Asia, although both have achieved the highest rents and capital values (see Chapter 9 in page 8). Singapore’s logistics warehouses are largely owned and managed by various REITs, namely, Mapletree Industrial Trust, Mapletree Logistics Trust, AIMS AMP REIT, VIVA Industrial Trust REIT, Cambridge Industrial Trust REIT, AREIT and Soilbuild REIT. In Hong Kong, active investors are real estate investment funds focusing on logistics properties (e.g. Goodman and Mapletree), logistics companies (Kerry Logistics and SF Logistics) and major domestic developers (Sun Hung Kai, Hutchison Group and Kowloon Wharf). Single storey logistics properties (average ceiling height from 9 m to 15 m) are commonly found in China, Japan, Korea and India. On the other hand, multi-storey warehouses are predominated the market in Singapore and Hong Kong due to limited land resources.

0 GLP

Blogis

Goodman

e-Shang

Prologis

Mapletree

Yupei

ACL

Source: GLP (May 2016), Colliers International Remark:*e-Shang share did not include Redwood in this comparison.

Chart 2: Japan Logistics Area Comparison by Key Players

4.5

4.0 4.0 3.5

GFA (Millions sqm)

3.0

2.5 2.5

2.2

2.0 1.5

1.1

1.1

1.0

0.7

0.6

0.6

0.6

0.5

0.5 0.0 GLP

Prologis

Daiwa House

Lasalle

JLF

Nomura RE Mitsubishi SG Realty Goodman Japan

Mapletree

In terms of demand, major tenants that are committed in high-quality logistics properties comprise traditional retailers (automobile, furniture, apparel and other goods), manufacturers, E-commerce and 3PLs (3rd Party Logistics). The market pays attention to E-commerce and 3PLs that have the most active and fastest growing demand for logistics warehouses, especially in China, Japan and Korea. In India, the demand from E-commerce is emerging as well. 3PL includes LTL logistics (Less Than Truckload) and CEP (Courier, Express and Parcel) firms that are tightly related to the growth of E-commerce. Ecommerce retailers carry significantly greater product variety. They require larger spaces on average and strategic locations with good connections to major transportation nodes. 3PLs need more extensive logistics warehouse networks as they need to ensure fast and efficient door-to-door delivery.

Source: GLP (May 2016)

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CIVAS White Paper | June 2016 | Logistics | Colliers International

Chart 3: China E-Commerce (B2C) Players by % Retail Value (2015)

10% 2% 3%

Tmall

7%

JD.Com Xiaomi.com

57% 21%

Who are the Major E-commerce Players by Market Share? Based on various market research results, in terms of B2C (Business to Consumer) market, Tmall.com (Alibaba Group Holding Ltd) dominates the market in China followed by JD.com and Xiaomi.com. By contrast, a large number of different companies take part in Japan and Korea, as shown in Chart 3 to 5.

Gome Online VIP Shops Others

Source: ystats.com (2015) and individual company websites

Chart 4: Japan E-Commerce (B2C) Players by % Retail Value (2015)

Chart 6: Other Asian Countries' Major E-Commerce Players

Flipkart.com

Tmall.hk

Q0010.sg

Amazon.in

Ebay.com.hk

Lazada

Jabong.com

Groupon.hk

Gumtree

Snapdeal.com

Beecrazy

Ebay.com.sg

Zalora.com.hk

Zalora.com

Rakuten Inc

Source: ComScore (for India), Similarweb (HK and Singapore)

Amazon.com Inc

23%

Softbank Corp

39%

Apple Inc Japan Consumers Cooperative Union

19% 2% 2% 7% 3% 5%

Seven & I Holdings Co Ltd Start Today Co Ltd Others

Source: Euromonitor International (2015)

Chart 5: Korea E-Commerce (B2C) Players by % Retail Value (2015)

G Market (eBay Inc)

15% Auction (eBay Inc)

11%

11% 4% 3%4%

In markets like China where the top player has more than 50% of the market share, we believe that it is not likely to be replaced by the second competitor within a short span of time. This is because customer traffic is the most important factor for success in E-commerce and it is difficult to shift customers’ existing behaviour to a new website. Veteran foreign players even ride on top local players’ platforms to survive. For example, Amazon.com Inc has opened a store on Alibaba Group Holding Ltd’s Tmall.com in 2015 as Amazon has struggled to penetrate the China market. The other markets where major players are competing neck to neck will continuously face furious competition for larger market shares. As a result, both local and regional M&A activities will aggressively continue, and new players will be encouraged to enter the market under this environment.

11th Street Lotte imall

52%

For India, Hong Kong and Singapore, both domestic and international E-commerce players have penetrated the market, as shown in Chart 6.

GS SHOP

Regardless of whether the market is dominated by a few main players or the market is fragmented with various players, the E-commerce market pie is far from saturation.

H Mall Others

Source: Euromonitor International (2015)

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CIVAS White Paper | June 2016 | Logistics | Colliers International

“Japan’s logistics market demand from 3PL and E-commerce increased over 125% and 270% from 2006 to 2015 respectively." - GLP (2016 Company announcement)

As shown in Chart 7, retail E-commerce sales share among total retail sales is forecasted to increase significantly, especially in China and India, in five years’ time, according to eMarketer’s data (2014). In particular, India has a great potential to catch up given its large population and strong IT infrastructure. India’s current offline retail structures are aged and out-dated in most of the second tier cities due to lack of shopping centres in the towns. Given that, people would try to buy new trendy goods via E-commerce. Even mature markets like Japan are still looking at almost doubling their E-commerce sales share among total retail sales by 2019. This indicates that logistics market demand from E-commerce will continue to grow, which requires bigger and larger scale warehouse spaces. Prologis, one of the industry leaders, estimates that every dollar of online sales needs three times more distribution-and-warehouse space than one dollar of bricks-and-mortar sales (quoted from the Wall Street Journal, 14 June 2016). Chart 7: Retail E-Commerce Sales % of Total Country Retail Sales

to grow to 55% within five years (Euromonitor International 2015). However, physical developments of new logistics centres require at least two to three years, and possible sites are limited within the cities. As a result, logistics warehouses supply will be behind demand from E-commerce and will remain scarce. Large E-commerce companies are also keen to build their own logistics warehouses. However, renting highquality logistics warehouses or renting built-to-suit (BTS) logistics warehouses would be a more flexible and trouble-free solution for companies instead of going through the various challenges - from obtaining strategically located sites to actual construction. Alibaba Group Holding Ltd obtained a number of vacant sites for their logistics centre developments to accommodate their fast ever growing business demand in China. However, it will not be sufficient. Therefore, Tmall.com will continue to be one of the major E-commerce tenants in China.

3PLs, Growing Demand Chart 8: Asian Countries' Major 3PLs Players

40% 35%

33.6%

30% 25% 20.4% 20% 14.7% 15%

12.8%

12.4% 9.7%

10.3% 8.2%

10% 5.9%

4.8%

5%

6.3% 3.0%3.8%

0.8% 0%

Others 2014

AsiaPacific

World Wide

2019

Source: eMarketer (2014 Actual/ 2019 Estimation)

One of the main drivers for fast-growing E-commerce sales is mobile commerce. Thanks to IT technology, many people carry IT devices such as smartphones and tablets. Moreover, as they are accustomed to using them frequently, mobile commerce increased strongly. For example, in Korea, the share of mobile commerce within Internet retailing reached 45% in 2015, and is expected

6

Best Express

Alps Logistics

ACI Worldwide Express

Allcargo Logistics

Cainiao Network

DHL

CJ Korea Express

SF Express

Fedex

STO Express

Crown Logistics

DHL

Blue Dart Express

DHL

Fedex

DHL

DHL

Expeditors

Kehne+Nagel

Hitachi Transport System

Fedex

DTDC Courier and Cargo

Fedex

Network Courier

TTK Express

JFE Logistics

Hanjin

Fedex

Kerry Logistics

PCA Masters

UC Express

Kintetsu World Express

Hyundai Logistics

First Flight

Panalpina

Schenker

YTO Express

Nippon Express

OCS

Gati

Schenker

TNT Express

Yunda Express

Sagawa Express

Sebang Express

Overnite Express

SF Express

Toll Logistics

UPS

UPS

Yusen

Yusen

ZJS Express

TNT Express

TNT Express

The Professional Courier Network

ZTO Express

Yamato

UPS

TNT Express

Source: china.org.cn (China), Japan Institute of Logistics Systems (Japan), Journal of Korea Port Economic Association, Vol.30, No.03, 2014, 209-230 (Korea), researchandmarkets.com (India), HKTDC (HK), Singapore Economic Development Board (Singapore) Remark: Listed in alphabetical order excluding each country’s Post Office Services.

CIVAS White Paper | June 2016 | Logistics | Colliers International

Third Party Logistics (3PLs) is tightly connected and benefited from the booming E-commerce industry globally. For example, Singapore Post announced that its estimated E-commerce-related revenue increased 18.9% YoY (FY 2013/2014 vs. FY 2014/2015), which was the biggest performance driver given that its overall revenue increased 12% at the same time in 2015. Singapore Post also made a large number of acquisitions to enhance its E-commerce-related logistics service and platform. Although Singapore’s E-commerce market is relatively smaller, it is a great example of how seriously E-commerce can impact the 3PLs industry. 3PLs need to handle significantly increased delivery and warehousing volume, thanks to booming E-commerce. Hence, 3PLs became an important demand driver for the logistics real estate market. For instance, as per GLP’s 2016 announcement, Japan’s logistics market demand from 3PLs and E-commerce increased over 125% and 270% from 2006 to 2015, respectively. In general, 3PLs require smaller scale logistics warehouses but extensive network coverage for speedy delivery. According to comScore, Inc, Asian shoppers are avid technology users and the least patient, with 48% expecting next-day shipping to be offered by retailers, the highest in any market globally. Same-day shipping or next-day shipping is a common practice in Asia. Therefore, 3PL companies spin a web extensively in order to get closer to their customers. Proximity to city centres and residential neighbourhoods are the key for logistics warehouses in order to capture the growing demand from 3PLs. 3PLs requires frequent truck traffic in and out as well as efficient loading/uploading system. Therefore 3PLs prefer a single storey logistics centre type for their sole use in order to prevent traffic congestion. More and more developers build multi-storey logistics warehouses even for the markets where traditionally served by single storey centres because of increasing industrial land price in Asia, however, multi-storey logistics centres are not the first choice for 3PLs.

How will E-commerce change the Logistics Real Estate Landscape? Traditionally, logistics warehouses are located near major transportation nodes including airports and seaports. Highway accessibility is one of the top priorities for traditional logistics warehouses. However, the following services from E-commerce will gradually change the warehouse building standard and add different location criteria.

> E-Fulfilment Service Due to emerging demand from Ecommerce, developers' and investors’ checklist for new logistics centres has been changed to generate higher rental income. One of the new forms is E-fulfilment centre driven by Ecommerce. In the US, where large E-commerce giants started their business, E-fulfilment service provided by logistics companies is quite mature. Once Asia's Ecommerce market becomes more mature, E-fulfilment service providers will be developed as well. As E-commerce merchants need convenience, visibility and speed to accommodate fast-changing customer appetite, E-fulfilment logistics centres need (1) to be located close to the city centres, (2) to provide extra added-value spaces for working and packing and (3) to have higher specifications such as extra cooling and heating facilities for staff and higher ceiling height. These requirements are particularly driven from Efulfilment centres (a new service type from Ecommerce), where a vendor sends all its products to an E-fulfilment centre. The centre then takes care of everything from getting online orders, packing, labelling and on-time delivery service. This is a labour-intensive service that requires even larger logistics space than that of general logistics business. Logistics investors should take into account this new format in the near future when the overall Asia E-commerce market becomes more mature.

> Consolidation Service Further, large Internet platform B2C companies need to provide extra consolidation delivery service if customers order from different vendors that are registered on the same website. Customers want to receive one consolidated package in order to save on delivery cost, and this requires another central hub logistics distribution centre for consolidation.

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CIVAS White Paper | June 2016 | Logistics | Colliers International

> Reverse Logistics Many E-commerce logistics facilities accept returns, and floor space must be allocated for returns processing and restocking activities. China newly implemented a return policy via Internet purchase without giving any reason effective March 2014. When the E-commerce market becomes more mature in Asia, this reverse logistics will be a compulsory requirement. This will require additional strategic logistics centres.

Final Thoughts Due to uncertainties in the global economy and the slowdown in China and India, overall trading and retail businesses in Asia are currently experiencing a downturn, making investors concerned about the demand side of the logistics real estate sector. Although there is certain downsizing of traditional retailers’ businesses, thriving E-commerce and proliferous 3PLs are making up the shortfall and supporting the logistics real estate market in Asia.

As the Asian E-commerce market becomes more mature, E-commerce together with 3PLs are changing the overall logistics real estate landscape and investors need to pay attention to their requirements in order to capture this rapid growing demand with rental premium. E-commerce companies generally carry a wide variety of products which require larger scale logistics warehouses. Prologis, one of the industry leaders, estimates that every dollar of online sales needs three times more distribution-and-warehouse space than one dollar of bricks-and-mortar sales (quoted from the Wall Street Journal, 14 June 2016). Therefore, larger floor plates are important for E-commerce tenants. In terms of location, traditionally logistics warehouses were located near major transportation nodes. However, new centres need to be either inside or near to city centres. Even though logistics rents in the city centres are at least 20% more expensive compared to the suburban areas, proximity to city centres are the key for 3PLs as Asian customers expect same day or next day delivery. New services such as E-fulfilment, delivery consolidation and reverse logistics will also need to be as close to the city as possible.

Apart from China where Tmall.com (under Alibaba Group Holdings Ltd) largely dominates the market, various local and international E-commerce companies face fierce competition in other Asian countries such as Japan, Korea, India, Hong Kong and Singapore. Healthy competition has continued to encourage more Ecommerce entrants in the market. Regardless of whether the market is dominated by a few main players or fragmented with various players, the E-commerce market is far from saturation. Retail sales via E-commerce in China and India are forecasted to triple or quadruple in the next five years. Established markets like Japan and Korea will still see significant share increases over the next years. As a consequence of growing E-commerce, a large number of new local 3PLs have setup and global 3PLs are aggressively increasing their footprints. However, due to time constraints on lengthy physical developments of logistics warehouses, new supply is projected to not be able to catch up with the speed of this fast-growing demand, at least for the next five years. Although major E-commerce companies target to build their own logistics warehouses, we expect that they will not be able to solely absorb their massive trading volume in-house and E-commerce will remain as the major demand for the logistics real estate sector.

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Investors also need to consider more flexible building structures with higher specifications to accommodate fast transformation of the E-commerce industry in the long term. For example, a higher ceiling height will be able to add a mezzanine floor for packing and labelling if the traditional warehouse needs to cater for E-fulfilment service. The logistics centre will evolve from a simple warehouse to a more value-added centre and if the buildings and facilities are ready to be upgraded and transformable, they will have a potential to generate higher yields with rental premium.

CIVAS White Paper | June 2016 | Logistics | Colliers International

Asia Logistics Market Snapshot

Chart 10: Logistics Performance Index Score (2014) 4.5

4.12

4.01

4.00

3.92

3.91

4

3.83

3.67

3.53

3.5

3.08

3 2.5 2 1.5 1 0.5 0 Germany

United Singapore Kingdom

Worldwide Ranking 1

Chart 9: Market Snapshot

4

5

United States

Japan

Hong Kong

Korea, Republic of

China

9

10

15

21

28

India

54

Source: Worldbank Remark: Index score from 5 (highest) to 0 (lowest) based on six areas including customs, infrastructure, intentional shipments, logistics competence, tracking & tracing and timeliness. The LPI is based on a worldwide survey of operators on the ground (global freight forwarders and express carriers), providing feedback on the logistics “friendliness” of the countries in which they operate and those they trade with.

Chart 11: Population (2015)

Total Population (millions)

1,500

1,371.9

1,314.1

1,300 1,100 900 700 500 300 126.9 50.7

100

7.3

5.5

-100

From

To

Beijing, China

Single Storey

5.6

6.5

5.00%

6.50%

Up

770

1,135

Shanghai, China

Single Storey

4.3

6.6

5.50%

7.00%

Up

650

955

Hong Kong, China

High rise

13.9

19.4

4.50%

5.25%

Down

3,470

4,850

Singapore

High rise

15.0

19.8

5.75%

7.00%

Down

5,848

6,877

Gyunggi Province, Korea

Single Storey

6.1

11.7

7.00%

8.50%

Stable

919

1,126

Greater Tokyo, Japan

Single Storey

6.8

12.2

4.50%

5.50%

Stable

1,340

2,240

Mumbai Metropolitan Region, India

Single Storey

1.5

2.4

8.00%

12.00%

Stable

56

149

Delhi NCR, India

Single Storey

1.6

8.1

6.00%

10.00%

Stable

91

181

Bangalore, India

Single Storey

1.6

3.6

6.00%

10.00%

Up

37

186

Type

Net Yield

Rent Trends

Source: IMF

Chart 12: GDP per Capita (2015) 90,000

85,198

80,000 70,000 56,428

60,000 50,000 38,216

40,000

36,601

30,000 20,000

Source: Colliers International Valuation and Advisory Remark: Currency conversion as at date of 1 April 2016 (Bloomberg)

9

Unit Capital Value (US$ / sqm) From To

GDP per Capita (USD)

Face Unit Rent (US$ / sqm) From To

City, Country

10,000 -

Source: Worldbank

CIVAS White Paper | June 2016 | Logistics | Colliers International

13,801 6,266

Primary Author:

554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112

$2.5 billion in annual revenue

2 billion square feet under management

Hannah Jeong Director | Hong Kong +852 2822 0589 [email protected] Contributors: David Faulkner Executive Director | Asia +852 2822 0525 [email protected]

Amit Oberoi National Director | India +91 124 456 7571 [email protected]

Vincent Cheung Executive Director | Asia +852 2822 0527 [email protected]

Yoshinori Nagai Senior Manger | Japan +81 3 5563 2180 [email protected]

Flora He Senior Director | China +86 10 8518 9605 [email protected]

Jasmine Kim Managing Director | Korea +82 2 3775 7350 [email protected]

Seow-Leng Goh Executive Director | Singapore +65 6531 8561 [email protected]

16,000 professionals and staff

About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is an industry leading global real estate services company with more than 16,000 skilled professionals operating in 66 countries. With an enterprising culture and significant employee ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice that help clients accelerate their success. Colliers has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals’ Global Outsourcing for 11 consecutive years, more than any other real estate services firm.

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Copyright © 2016 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.