Republished from Law A La Mode 

By: Janice Yau Garton and Carly Roberts 

There is little doubt that the continuing shift towards online retailing will have tremendous implications for the Asian real estate market. Over the coming years, physical retailers will have to change the way they use their space, shopping centers will undergo a transformation, and logistics real estate will see a boom, particularly in China.

This year, the Asia-Pacific region is set to overtake North America as the world’s largest e-commerce market, and China is predicted to become the second-largest business-to-consumer e-commerce market by 2017 (with the US remaining the largest). Between 2009 and 2012, e-commerce grew by an annual average of 70 percent in China.

Customers are looking to online retailers for lower prices, wider ranges and more convenience. In Asia in particular, access to the Internet has improved markedly in recent years, and Internet users located in Asia now account for almost 50 percent of all Internet users worldwide.

Changing Spaces

Online retailers are eating into the market share of traditional bricks-and-mortar (B&M) retailers, forcing smart B&M retailers to consider ways to use online platforms to maximize their margins. Some B&M retailers have closed unnecessary physical branches; others have become more discerning about the location of their shops; others still have developed new sales channels.

Tesco is on the forefront of these new sales channels, having developed a virtual store concept described by senior Tesco figures as a blend of “clicks and bricks”. These virtual stores, designed for time-poor and tech-savvy customers, feature large billboards covered with pictures of Tesco’s products laid out as they would be in a traditional store. Next to each pictured product is a QR code, which customers scan with their smartphone. The products are then delivered to the customer at home later. Tesco’s flagship virtual store is located in Seolleung underground station in Seoul, where busy commuters can do their shopping as they wait for their train to arrive, and arrange for delivery to occur when they get home; Tesco also trialled a second virtual store in Gatwick Airport, where departing passengers could scan their groceries while waiting for their plane and arrange for delivery to take place when they arrived home from their trip.

Transforming Shopping Centers

B&M retailers are being forced to think more carefully about store locations in order to ensure they maximize their returns. Leading B&M retailers are looking for shopping centers that have high productivity, growth potential, efficient layouts, positive competitive dynamics and high shopper traffic. Some shopping centers now feature many “product showroom”-type stores, where customers test products before purchasing them online.

Shopping center landlords are also considering these new buying patterns and shying away from prospective tenants in the hardest-hit sectors (such as music, books and video). Instead, they are favoring retailers in the more resilient sectors. They are also increasing their customer engagement and lifestyle offerings, with entertainment and food and beverage operators beginning to feature more prominently in shopping center portfolios. On top of all this, landlords are investing more in convenience solutions, such as valet parking services and smartphone apps designed to guide customers around their shopping centers. As online retailing continues to grow and challenge B&M retail, the ownership and management of retail spaces such as shopping centers can only become more specialized.

Logistics Real Estate

Online shoppers are increasingly demanding better service in the form of more reliable and faster shipping. The efficiency of the warehouse has a direct impact on shipping processes, and this is the only point of differentiation for many online retailers. To ensure their competitiveness, many online retailers are expanding their warehousing capacity and improving warehousing processes. This has drawn the attention of many savvy real estate investors, particularly in China.

The Chinese warehousing situation is a unique one. The increasing demand for warehouse space has made logistics real estate one of the only sectors in Chinese real estate where demand is outstripping supply. However, unlike modern warehouses in the US and Europe, China’s warehouses are ageing and lack the automation and state-of-the-art technology necessary to keep up with the demands of the thriving online retail market. Singapore-listed Global Logistic Properties, the largest logistics specialist in Asia and largest logistics enterprise in both China and Japan, predicts that up to US$2.5 trillion may be required to be injected into warehouse development over the next 15 years. Real estate heavyweights have indicated their interest: Dutch pension manager APG Asset Management has partnered with Shanghai-based developer e-Shang, investing up to US$650 million; and other major players such as Blackstone Group, Carlyle Group, China Vanke and Heitman have all indicated their intention to make a move into the logistics real estate market.

A new class of purpose-built logistics real estate is emerging as the trend towards online shopping continues. The change in the logistics real estate environment has been largely reactionary so far, as e-commerce logistics models play catch up with the rapid boom in online retailing and changing consumer preferences. Forecasts for logistics real estate over the next few years indicate a growing demand for six types of e-commerce logistics facilities:

■ Mega e-fulfilment centers – where merchandise is stocked and picked at item level

■ Parcel sortation hubs – where parcels are sorted before being sent to local parcel delivery centers

■ Local parcel delivery centers – where parcels are then delivered to their final destinations

■ Local urban logistics depots – which service major cities to facilitate fast order fulfilment

■ Return processing centers – where returned items are processed and

■ Online food e-fulfilment centers – where online food orders are fulfilled

Due to the specific requirements of these types of logistics properties, the Asian logistics real estate market may follow the trend in the US, where in 2013 half of all construction commenced with pre-leases already in place. The shape of the logistics real estate market in Asia will continue to evolve, but one thing is certain: logistics properties will need to both improve and increase in order to keep up with online shoppers’ increasing demands for fast and reliable shipping.