Warehouses are used for the storage or deposit of goods before they are shipped elsewhere. When raw materials and/or parts are warehoused, this is part of the production process or in the case of finished goods, of the distribution process, with goods being sent to other parts of the supply chain or to customers. The rental of warehousing space thus forms part of the logistics sector and it has an important role to play in a wide range of business operations, whether those be in manufacturing, commerce, or distribution.
The Thai warehousing sector can be split into two main segments. (i) Traditional warehouses account for 95% of the national supply of warehousing and these typically emphasize the provision of a barebones service, with renters getting access to their warehouse space and basic utilities and amenities such as access to roads, electricity, water, telecommunications, and on-site security. (ii) Modern warehouses offer a much more comprehensive set of services, including access to full logistics operations, technology to improve warehousing efficiency (e.g. systems for collecting, counting and checking stored goods), and automatic packaging and distribution systems (Figure 1). At present, some traditional operations are in the process of upgrading their facilities so that they will be able to offer modern warehousing services, and this would then enable them to generate income from these in addition to the money that they receive from straightforward rentals. By investing in improving energy conservation and their general degree of environmental friendliness, some players are also bringing their warehouse buildings up to recognized international standards such as the Leadership in Energy and Environmental Design (LEED), while in addition, operators are meeting increasing demand from renters for protection from natural disasters, including floods and earthquakes.
Growth in the warehousing sector is dependent on business conditions in manufacturing and commerce, which in turn are strongly influenced by the rate of growth of the economy. The sector displays two important characteristics. (i) Payback period typically average an 8-13-year timeframe. This is because upfront costs, including those for land and construction, tend to be high, while income comes from rent and this accumulates only gradually. Generally, rental rates will vary depending on the size of the rental space, the type of warehouse, its location, and the state of competition in the area. (ii) The location of any particular warehouse plays a major role in determining its commercial success. Warehouses are built in anticipation of future demand since it takes an average of 6-18 months to complete construction, depending on the size of the building, and so an evaluation of a site’s potential is one of factors in deciding likely future demand for rental space, a very significant determiner of income for operators in the long term.
Major factors to consider when renting a warehouse
Customers will consider a variety of factors, including its location, the provision of amenities, utilities and infrastructure, the extent to which the available technology for managing and servicing the warehouse is appropriate for the goods to be stored, and the rental fee. Selecting the right warehouse will help renters manufacture and/or distribute goods more rapidly, reduce time-dependent and transportation costs, and increase business efficiency and competitiveness. For example, (i) warehouses for consumer goods ought to be situated close to markets or to communities, (ii) warehouses for agricultural products should be close to either farms or to food-processing facilities, and (iii) warehouses for industrial raw materials, parts, and finished goods should be near industrial zones or industrial parks to grant the BOI’s privileges.
In terms of types of warehouses, the Department of Business Development (operating under the Ministry of Commerce) specifies three categories. (i) General-purpose warehouses are buildings used for the storage of industrial and commercial goods. (ii) Chilled and frozen warehousing (cold-storage units) provides temperature-controlled spaces for the storage of perishable goods, including agricultural, fisheries, and food-processing goods. Items such as seafood, dairy produce, fresh cut flowers, meat, fruit and vegetables will thus have a longer shelf life if stored in these facilities. (iii) Storage space for cereal crops (silos) are large temperature- and humidity-controlled cylindrical structures used for the bulk storage of cereals and similar crops, including rice, maize, cassava, flour, and rice bran.
Warehouse space is rented or leased according to two general types of rental contracts.
The Investment in warehousing in Thailand has expanded continuously over the past 4-5 years and for 2017 there are 721 businesses registered in the sector (Figure 2). In 2018, overall business situation showed signs of improvement, the demand for rental space inched up following recovery in economic activity but some areas face oversupply. These can be sub-divided as follows.
Investment in new general-purpose warehousing facilities has increased markedly over during 2012-2017 as a result of three factors: (i) The extensive flooding at the end of 2011 resulted in the relocation of production base in the central region, which saw the worst of the flooding, and a subsequent increase in investment in new warehousing, especially in industrial estates in the eastern part of the country. (ii) Investment has also been stimulated by increased regional connectivity as a result of progress on the development of new transportation networks and (iii) a revision of the regulations governing investment privileges offered by the BOI, which has switched from zone-based incentives, in which incentives are special granted on a decentralization basis (Zones 1, 2, and 3), to activity-or merit-based incentives resulting in broader coverage of targeted areas. In addition, the establishment of Eastern Economic Corridor (EEC) and the Special Economic Zones (SEZs) and in other, localized areas has also helped to increase the number of registered operators of general-purpose warehouses from 451 in 2011 to 552 in 2017 (2.9% CAGR) (Figure 3) and the total area of this type of warehousing on the Thai market has increased from 1.72 million sq. m. in 2011 to 4.65 million sq. m. in 2017 (15.2% CAGR).
In 2018, total demand for warehouse space came to 4.1 million sq. m., which represented an increase of 11.8% YoY, an improvement on the 2.3% growth recorded in 2017. This strengthening of demand came from e-commerce operations, which need space to store goods before distribution to consumers, and retailers, import-export businesses, and manufacturers, which warehouse goods before they are sent on to final destinations in Thailand or overseas. At the same time, to meet increasing levels of economic activity and investment, warehouse operators increased the combined area of space that they manage to 4.9 million sq. m., which was also an 11.8% YoY increase (up from 1.8% growth in 2017). The majority of this was modern warehousing that was built as extensions to existing sites and the effect of this increase was to keep the warehouse occupancy rate at 84.2%, a level that was close to that of the previous year[2] (Figure 4).
Much of the 2018 increase in the supply of general purpose warehousing was on the perimeter of the EEC or in surrounding provinces, including Samutprakan, Ayutthaya, Chonburi and Chachoengsao, which are locations that enjoy a number of advantages: these provinces are already home to a large number of industrial estates and distribution centers, are well served by accessible transportation networks, are close to major ports and to Suvarnabhumi Airport, and have access to an inland container depot (ICD). However, general purpose rented warehousing is heavily concentrated in Samutprakan province, which is home to 32.6% of all Thailand’s supply (Figure 5), while Chonburi, Ayutthaya, Chachoengsao and Bangkok each have respectively another 21.0%, 13.1%, 11.4% and 8.2% of the total.
A consideration of the warehouse occupancy rate in a variety of locations shows that this depends on the potential of the area itself, the number of warehouses in the area, the level of competition, and the extent of the area’s transportation links. This will then help to determine rental rates, which also vary from area to area (Figures 6 and 7).
During the past several years, cold storage business continuously slowed down because demand for space for the storage of seafood (fish, shrimp, squid, etc.) has been driven down by i) the falling catch and a decline in the quantity of Thai farmed shrimp following the spread of the Early Mortality Syndromes (EMS) in 2012; ii) some seafood producers have begun to invest in their own (such as seafood industry) to enable to control and scrutinize raw materials, product quality products to meet stricter requirement of trading partners.
The most recent data is for 2017, 138 operators were active in this segment (Figure 8). Conditions for temperature-controlled warehousing used for the storage of fruit have been generally good as a result of favorable weather that has led to larger harvests, but space used for storing seafood has done less well as a consequence of shrimp’s soft prices and low yields (in 2017, the shrimp harvest totaled 350,000 tonnes, compared to 600,000 tonnes in 2011), while in addition, the tightening of the regulations governing the Thai fishing fleet and the use of foreign labor in it has caused a further drop in demand. The forecast for 2018 is for business to continue to slow in step with a fall in demand for space to store chilled and frozen seafood bound for export markets; in 2018, exports of shrimp, fish and cephalopods fell by -22.5% YoY, -2.4% YoY and -9.5% YoY respectively.Between 2012 and 2015, operators of grain silos engaged in a significant build-out of new supply to meet the large increase in demand stemming from the universal rice pledging scheme. This ran in the growing seasons of 2011, 2012 and 2013, and raised the annual total of rice held by the government roughly 5-fold from the normal levels of 5-6 million tonnes. Unfortunately, following the termination of the rice pledging scheme and then from 2014, the steady running down of government rice stocks, demand for space in grain silos contracted again until by 2017, the government had stocks of just 3-5 million tonnes of rice remaining, compared to the holdings of some 18 million tonnes that it had maintained during the period when the scheme was in operation. This has naturally led to sluggish business conditions and in 2017, the number of players within the segment dropped to 31 from the 33 active in 2016 (Figure 8), but in 2018, conditions improved somewhat on better prices and yields of rice and maize. Thus, the index of paddy rice prices rose 15% YoY, the index of paddy rice production rose 1.7% YoY, the index of maize prices rose 28% YoY and the index of maize production rose 9.9% YoY. These increases were supported by an increasing number of government-to-government agreements to purchase rice and this in turn helped to lift demand for storage space.
The forecast for 2019-2021 is for the demand for warehousing to remain broadly stable relative to its state in 2018. This will be in line with the direction of change in investment in industry and demand for logistics services to manage the centralization and distribution of goods. Nevertheless, continuing investment in the expansion of warehouse space to rent in certain areas will likely increase the pre-existing oversupply to the market, and this will then translate into stiffer competition and rental prices that will remain stuck at low levels.
Investment in new supply will mostly be made by large industrial estates and real estate developers, and will typically be general-purpose modern warehousing built to meet additional demand from manufacturing, retail and domestic investment. New warehousing will be found in all regions of the country but will be concentrated in more important locations within the central and eastern regions. Areas that are likely to see solid growth in warehousing in the coming period are described below (Figure 12).
Between 2019 and 2021, despite continuing demand for warehouse space to rent from the agricultural, industrial, retail and service sectors, businesses are forecast to experience depressed conditions. A continuing expansion in supply may trigger a glut of warehousing space in some locations. In this situation, competition on price will intensify and operators will find it very difficult to raise rents.