Philippine logistics demand could grow by 56% in the next five years and by up to 125% in the next 10 years if the market can adapt to evolving demand especially for better quality facilities, according to research by JLL Philippines.
JLL Philippines’ latest report, The Evolution of Philippine Logistics: A Case for Better Quality Logistics, said Philippine logistics “remained resilient during the pandemic despite headwinds in the early outbreak to date.”
It has become an emerging sector as the COVID-19 crisis propels the rise in particular of cold storage demand and the growth of e-commerce, presenting opportunities for the industry, said the real estate and investment management service firm.
The report further sees the logistics sector as “the evolving asset class in the Philippines,” with many eyeing increased exposure in the sector, particularly in cold storage.
More publicly refrigerated facilities are being required amid a “potential outward shift on demand for food logistics due to e-commerce grocery as an integral part of the ‘next normal,” said the report.
The Cold Chain Association of the Philippines (CCAP) projects a shortage in cold storage supply with the delay in the construction of pipeline projects amid the pandemic, JLL said.
CCAP expects the cold chain industry to grow by 9% annually, underpinned by increasing population and sales of frozen produce from supermarkets and e-commerce platforms.
Moreover, there are not enough facilities to cater to increasing local production and imports, primarily of perishable goods. According to management consulting services We Are Social and social media management platform Hootsuite, e-commerce spending on food and personal care in the last three years grew 29% per annum, the fastest among all spending categories,
The Department of Agriculture is also calling for more cold storage facilities through partnerships with CCAP in a bid to reduce post-harvest losses and improve farming income.
In healthcare, demand for cold storage is seen in the clinical trial of drugs, vaccines, and distribution of healthcare products.
Growing internet usage
Meanwhile, the Philippines is one of the heavy users of the internet in Southeast Asia, with around 73 million users spending an average of nine hours daily, according to Hootsuite. Of this number, 97% of users spend five hours a day using their mobile devices.
Philippine retail sales have been growing at a rate of 5.8% per annum since 2000. With retail operations disrupted by the COVID-19 pandemic, a lower growth of 5.7% for end-2020 is projected as the local market still relies heavily on physical spending for retail items.
This means the subscriber base in e-commerce platforms is expected to grow and continue online transactions, warranting e-commerce players to locate in larger distribution centers to better manage and monitor operations, the report continued.
And due to disruptions in the supply chain, companies, including country administrators, are also likely to re-evaluate their logistics networks to mitigate any risk from future calamities. This is expected to lead to the strengthening of local supply chain and increased redundancy in sources of raw materials, focused on strategic expansions of logistics facilities.
Moreover, limited movement of the population due to local quarantine rules pushed up the use of e-commerce platforms. Manpower was also immediately expanded to address the spike in demand for deliveries of various goods, including food, medicine, and groceries, among others.
Because of the accelerated adaptation to e-commerce platforms, strengthening supply chain risk management, and expansion of last-mile fleet, the report forecasts the logistics sector to grow by 56% in the next five years and a triple-digit increase of 125% in the next 10 years.
However, this outlook requires that “a sustained improvement in e-commerce platform should take place along with the growing trade balance with other countries and favourable manufacturing sector,” according to JLL Philippines head of research and consultancy Janlo de los Reyes in a separate statement.
Logistics space developers and operators should “adapt with the evolving demand brought by technology innovations and thus, build modern facilities to achieve the projections,” de los Reyes added.
As of the first quarter of 2020, logistics stock in the Philippines stood at 1.7 million square meters, with about 424,000 square meters of upcoming supply scheduled for completion through 2021. Dry storage makes up two-thirds of the existing supply, while cold storage and cold and dry storage contribute 21% and 12%, respectively.
“While there is a positive demand for logistics space in the country as reflected in the uptick in transaction activity in recent years, there is an increasing demand for better quality facilities, mostly from e-commerce firms and third-party logistics (3PLs) requiring high-specification warehouses that utilize technology and digital tools as part of their operations,” JLL Philippines’ director for industrial and logistics Tom Over said.
“The logistics sector is currently seen as the evolving asset class in the Philippines, with a number of established developers looking to increase their exposure in the sector. Focus on efficiency, specification, sustainability, and amenities puts the market at a turning point for growth and improvement in quality,” Over added.
Demand for logistics space in the Philippines has been generally positive, but addressing the increasing demand for better quality facilities from new entrants in the logistics industry could translate to approximately 160,000 square meters per annum of new demand in the next 10 years, according to JLL’s report.
A lower take-up, however, is anticipated by end-2020 reflective of the impact of the COVID-19 pandemic.
“Nevertheless, a possible rebound may take place in 2021 given the pipeline build-up due to deferred transactions. The overall growth in logistics take-up is anticipated to outpace the current pipeline of identified stock, suggesting a possible supply gap in the market in the coming years,” the report said.
Key pillars that should be addressed to meet the demand for better quality logistics facilities include efficiency, consolidation, decentralization, workforce, and sustainability.
As the majority of total logistics costs arise on transport element, increasing the efficiency of operations across the real estate can reduce lag or waiting times for loading/unloading.
To further optimize costs, logistics operators require larger, more voluminous warehouse space in a single site, instead of multiple smaller facilities across geographies.
Beyond Metro Manila
Key logistics, fast-moving consumer goods and e-commerce players are looking for opportunities outside Metro Manila due to rising land values and rental values brought by continued urbanization. While CALABARZON is observed to be the dominant area for logistics activities, JLL projects that growth direction is going towards Central Luzon. Meanwhile, Davao Region is seen to rise to a double-digit rate from below a percent record at present.
For the workforce, large distribution centers employ a supply chain team to organize and manage the operations and therefore modern facilities require fully fitted and integrated two-story offices. JLL said operators need to create comfortable workplaces to attract talent.
Lastly, logistics developers are continuing to reduce carbon footprint and reduce energy costs for the occupiers. – Roumina Pablo