An Exciting Business to be In

Global Logistic Properties completed a S$3.9 billion initial public offering in October, one of the largest ever completed in Singapore. Jeffrey H. Schwartz, Chairman of the Executive Committee and Deputy Chairman of the Board, explains the company’s appeal.

The Global Logistic Properties (GLP) IPO was one of the largest and most successful in Singapore’s history. What do you think was the appeal to investors?

I think the appeal was a unique opportunity to invest in a platform that is focused on capturing value and growth through a strong emphasis on increased domestic consumption in China. It is also appealing in that it is both a direct play and a diversified play on that theme. Within our network we serve many of the major distributors and manufacturers that are part of Chinese domestic consumption. The ability we have to scale our business is, I think, a unique opportunity.

Explain the dynamics of the logistics and warehouse property sector. What drives demand and what is the outlook for performance in that sector?

The most direct correlation in our business is domestic consumption in China. In China there are two main drivers. One is fundamental: the growing need for high-quality distribution space. Of the distribution space that exists today, we believe about 90% is totally obsolete. There needs to be an emphasis on efficiency and productivity in the supply chain to support domestic consumption. So if you think of what needs to be done, first you need to get distribution infrastructure to the baseline of where the Chinese economy is today; and when you couple that with double-digit growth and the emphasis on domestic consumption within the next Five Year Plan, there is an incredible opportunity.

So what is your strategy for meeting that opportunity?

Well, we have early-mover advantage; we have been active in this space in China since 2003. We are well positioned in that we have the largest team on the ground and the largest network of facilities. Our land bank allows us to more than double the amount of space we have within our network currently. And we continue to recruit talented individuals. When you combine this with the strong, stable cashflows in the Japanese business, as well as the high profitability of that business, we can serve both shareholders and customers well.

On your Japan business, it’s interesting that you have combined logistics properties in China and Japan, two markets that must differ in terms of development and what they offer. What are the characteristics of the two markets and how do they fit together in your business?

The word ‘synergy’, in my view, is very over-used, but in this case I believe there really is synergy. Most decisions by customers are made at a national or regional level, so having the leading presence we have in both countries is advantageous in serving customers and building relationships. It’s very important to serve those Japanese customers with networks in China: they know us, they trust us and we have worked with them in the past on their distribution needs throughout China, whether it’s Nippon Express, Hitachi Transport or Panasonic.

The Japanese business provides us with very strong cash flow, we have had an average 99.5% occupancy in Japan since we started the business in 2002. We have long leases with strong credit quality. Although it is not a high-growth economy like China, there is great profitability in that business, and plenty of work to be done in the supply chain.

What are your short-term targets, over the next five years?

Our primary objective is to maintain and increase our market share and our leadership position in China and Japan, given the fact that they are two of the largest economies in Asia today. Ming Mei [co-founder and CEO] has done a fabulous job of building the team in China. The strength of our team and our network serves our customer exceptionally well and we want to build on the strong position we already have. We are looking at India; but we have such a strong business today that we don’t need to rush into it. We will also look at Vietnam in the next few years, to see if there are opportunities that make sense for our shareholders and customers.How will you grow there? Organically or through acquisition?

We are pragmatic in our approach. If there are acquisition targets that make sense, we will look at them, but we are not in any rush: we have plenty of growth opportunities in China and Japan, and anything we do outside of those two countries must be accretive. We can look at acquisitions or organic growth.

And in your existing markets of China and Japan, is there any need for acquisition or can you do what you need to do organically?

Again, if there’s an opportunistic acquisition we want to do, we have the balance sheet strength to do it. We have the ability to do things that most people can’t do. If something opportunistic comes along, that makes sense for our platform, our customers and our shareholders, we will be excited about looking into it.

So how would you expect your geographical footprint to look five years from now?

We expect China to be our largest market. Five year from now I don’t foresee any scenario where China would not be the largest market in the business, and it’s hard to imagine Japan not being a very significant part of the business as well. But although China will be our largest and most dynamic location, I would expect over time for us to grow elsewhere in Asia. On a weekly basis, we hear customer demand for India, customers asking about how and when we can serve them.Within China, which specific locations offer the greatest opportunity? For example, how active are you in second or third-tier cities?

We expect tier one to remain our largest markets, and the majority of our investment in China. But on a percentage growth basis, we would expect to see more growth in tier two and potentially tier three. These are major markets by European or North American standards, judged by population. There’s nothing wrong with cities of 3, 5, 8 million people: they are very significant logistics markets, under-served market, where the Chinese government has a very heavy emphasis on job creation and there is a rising middle class of domestic consumers.And are you moving further west into China?

We’ll be working there increasingly. Chengdu and Chongqing are markets we are currently working in. it’s a small percentage of our footprint and network today; we expect it to be a much larger percentage in future.

Your own continuing involvement [Schwartz was former chairman and CEO of ProLogis] was well received by investors contemplating the listing. What appeals to you about this position?This is a business Ming Mei and I started in the fall of 2008 when we formed our partnership with GIC [Government of Singapore Investment Corporation] and acquired the largest Asian logistics platform, which we had built together. It’s something I have been personally involved in on a day-to-day basis since 2002. And I began researching Asia earlier still, in 1997, though pre-Asian crisis I decided it was too early to launch the business. So I have a real passion for it, and I love the Asian cultures; the business is something I feel strongly about and I’m excited about taking it to the next level.

The selling shareholder was GIC, the Singapore sovereign wealth entity. Will GIC be involved in the day-to-day management and operations of the company after the IPO?

Day to day, I don’t expect too much involvement. They are a major investor, they are good friends, and they are one of the most respected real estate investors globally, so we put a lot of stock in their opinions. They are a very smart investor and we continue to talk to them and hear their thoughts on strategy. But I don’t expect they would want to have day-to-day involvement.

It was very important that Dr Seek Ngee Huat [president of GIC Real Estate] agreed to be on the board. He is unique in that he has, across multiple asset classes, a strategic view and a perspective of the real estate markets globally. We are very fortunate to have him on the board and chairing the investment committee.

So in conclusion, what are you hopes for the business?

Ming and I are incredibly glad and excited about the management team we’ve put together across China and Japan. And the opportunities as a public company for logistics properties are nothing short of tremendous. We are well positioned to capture domestic consumption across Asia as well as the supply chain in Japan, and it is going to be an exciting business to be in over the coming decade.