The market for real estate investment trusts (REITs) got underway in Japan in 2001. Mitsui & Co. entered the space in May 2005, with the IPO of Japan Logistics Fund, Inc. (JLF), which is managed by Mitsui subsidiary, Mitsui & Co. Logistics Partners Ltd (MLP).
Among the various categories of REIT—office, commercial, residential, hospitality—Mitsui decided to launch Japan’s first dedicated logistics REIT. Why? There were two compelling reasons. Firstly, for as long as Mitsui has existed, the company has been involved in logistics, giving it a discerning eye for property and a keen sense of tenants’ evolving needs. Combining the logistics division’s expertise in the flow of goods with the Financial Business Division’s expertise in the flow of money should, the company believed, create a compelling proposition.
Secondly, the timing was propitious. Not only was Japan’s ageing stock of warehouses, many of which had been built in the high-growth 1960s and 1970s, in need of renewal, but the rise of the Internet was transforming the whole warehousing and logistics sector. The new wave of online retailers and fast-fashion companies, who typically make multiple small shipments in a single day, were looking for a whole new level of functionality, while more and more companies were also choosing to outsource their logistics to third-party specialists.
They all wanted warehouses with excellent road access that were close to the cities where not only their customers but their own employees (shelf pickers etc.) lived; they needed warehouses that offered not just storage, but space for things like high-grade offices, staff eating facilities and even photo studios for fashion shoots.
Developing such high-spec warehouses was not going to come cheap, but a fund would have the financial muscle to develop properties beyond the capacity of individual companies.
As Japan’s first and only dedicated logistics REIT, JLF needed to win over the Japanese investment community. Investors tended to associate property plays with glamorous office buildings in the city center, not with warehouses in the suburbs. Countering that skepticism was not hard: Firstly, logistics offers a steady and long-term income stream of the kind beloved by Japanese investors. While a hospitality REIT derives its revenues from hotel rooms rented by the night, logistics REITs derive theirs from warehouses typically let for 10 or even 20 years. Secondly, no matter how goods reach the end consumer—direct from the Internet, via a store or through some “clicks and bricks” combination of the two—they all pass through a warehouse at some point. Warehouses and distribution centers are an integral part of all our lives.
Investors clearly saw the appeal. The May 2005 IPO of JLF was 50 times oversubscribed and the fund easily raised its target of 30 billion yen, in equity issuance, with no debt financing. This provided the fund with a massive war chest which it put to immediate use acquiring prime sites. At the time, these could still be purchased at relatively low prices since warehousing had yet to establish itself as a recognized asset class in Japan.