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9 SEP 2019

Indonesia’s logistics sector is ready to deliver for investors

In July 2019, Logos broke ground on its latest warehouse development in greater Jakarta. The Logos Cileungsi Distribution Centre will be the Australian developer's second project in Indonesia, and the first to the south of Jakarta. Head of Research at JLL Indonesia James Taylor tells us more.

With $400m in backing from two of Canada's biggest pension funds — the Canada Pension Plan Investment Board and Ivanhoé Cambridge  the group's first foray into the Indonesian market was the purchase in 2017 of a 10.4ha site at Pondok Ungu, in the city of Bekasi east of Jakarta. The developer subsequently purchased a neighbouring site and construction of the 193,000 m2 Logos Metrolink project is now well under way, with the first phase due for completion later this year. In addition to these projects, Logos has also acquired a 23ha site at Deltamas, also in Bekasi.

Back in 2016, I co-wrote a white paper on the logistics sector in Indonesia. At that time, the market was extremely immature. But the potential for growth was obvious, with investors attracted by the country's massive population and growing economy. The lack of high-spec warehouse space meant there was a gap waiting to be filled.

Logos was the first specialist overseas logistics developer to enter the Indonesian market, and they did so without a local partner. Despite perceptions to the contrary, international developers have the same rights in terms of land title as local groups, although new entrants might prefer to partner with a local company in order to benefit from local knowledge or access to land banks.

Some of the market dynamics that I described in 2016 still apply today. The market remains undersupplied, despite a growing supply pipeline, and most existing stock is fully or nearly fully occupied. After large-scale investment in infrastructure and a rapid rise up the World Bank's ease-of-doing-business rankings, Indonesia is also a more attractive investment destination today than it was before Logos entered the market. The obvious question, then, is why aren't more developers, private equity groups, sovereign wealth funds and investment banks flooding into the market?

Skyline, Evening, Sky
Interest in the logistics sector has increased exponentially over the past three years

Some of the challenges that I identified in 2016 also remain valid. There was a massive uptick in land prices between 2010 and 2014, when rental growth was only moderate, and high land prices still make it difficult for investors to make an investment case from a yield perspective. Data availability and a lack of transparency also present a problem for international players, who tend to require a long timeline of data and transactional evidence that simply doesn't exist in Indonesia. We have had to build a database from scratch given the lack of public or private data sources.

Having said that, interest in the logistics sector has increased exponentially over the past three years. Industrial and residential have been the most active sectors for JLL's research team, with first-time market entrants looking at development projects or joint ventures, primarily in greater Jakarta. Groups with experience in Indonesia are more likely to have additional appetite for opportunities across the country. Surabaya is worth a special mention: Indonesia's second city is the gateway to East Java and the eastern islands. The port city has a small but growing market of modern logistics and warehouse space.

Some investors have taken the plunge to deploy capital in Indonesia, while others have held back due to the challenges I have previously mentioned. Interest in the local warehouse market is only likely to increase, though, because Southeast Asia's largest economy, and the world's fourth most populous country, is a market that will ultimately prove too attractive to ignore.

This article originally appeared in Modus Asia-Pacific edition, Q3 2019