The conventional practice of maintaining warehouses as corporate assets may be a thing of the past as asset prices fall and companies face fierce competition, according to Stuart Gibson, vice president of ProLogis Japan.

He advocates renting warehouses, which would free up financial resources and allow their more effective use.

The Japanese arm of ProLogis, a global distribution-solution firm based in Denver, buys land and builds distribution facilities for long-term lease to corporate customers.

“Owning land and warehouses requires huge capital and blocks the capital,” the 35-year-old Scot said. “By using our real-estate platform, you can redirect capital and improve your own business efficiency. We feel real estate should be owned by a real-estate company.”

Last month, ProLogis Japan started operations in Japan when it signed a contract with DHL Japan Inc. to build an 18,200-sq.-meter distribution facility in Koto Ward, Tokyo. DHL Japan will lease the facility for 20 years.

The presence in the Japanese market of international customers like DHL Japan, which is the Japanese affiliate of the world’s leading air express service DHL Worldwide Express, is one reason why ProLogis entered the country in 1999.

Global players such as DHL Worldwide Express, which already use ProLogis’ services in North America and Europe, would like to have the same in Japan, according to Gibson. ProLogis is currently operating or developing 1,700 distribution facilities worldwide.

The firm has no intention of restricting its customers to large multinationals, however.

Gibson predicts that more and more Japanese firms will approach ProLogis as they try to streamline fixed assets under restructuring efforts.

And if the experience during the U.S. restructuring drive of the 1990s is any indication, then Gibson may well be correct.

In an effort to regain competitiveness and attract investors, U.S. firms moved away from real estate and streamlined their overall assets, Gibson said.

ProLogis, founded in 1991, expanded its operations by taking advantage of that phenomenon, which later spread to Europe.

“It got momentum in the U.S. and in Europe probably 10 years ago. And it is just arriving in Japan,” Gibson said, noting that he expects to see a contract sealed with four Japanese distribution companies within a year.

Gibson said he eventually hopes to see Japanese companies — ranging from distributors to manufacturers — account for about 70 percent of his business.

The current business climate in Japan seems to support his company’s business model, with factors such as the mark-to-market accounting system introduced in fiscal 2000, which reflects the current market value of assets, further encouraging streamlining.

And Japan’s high distribution costs — around 25 percent of the nation’s gross domestic product compared with 9.7 percent in the U.S. and 14.5 percent in Europe — provide ample business opportunities for his company, Gibson said.

ProLogis allows firms to separate the cost of renting warehouses from that of logistic services, which are typically offered in a package deal. This allows more precise scrutiny of distribution costs, he said.

“It is easy to overlook costs when you are dealing with an overall package,” Gibson said, adding that customers cannot easily change their logistics strategy when restrained by long-term warehouse leasing contracts.

Continuous falls in land prices following the burst of the economic bubble in the early 1990s has also helped ProLogis launch operations by reducing operating costs to a reasonable level.

Although land prices may further decline, Gibson said he feels comfortable with current prices, which allow the building of distribution facilities near highway junctions and major population centers.

Despite this, he acknowledges the real-estate market lacks transparency in terms of rent and land value. He believes, however, that this is improving, pointing to a 1999 law revision loosening tenants’ rights, which used to be so strong that they could stay on even beyond contracted periods.

He also welcomes the May introduction of real estate investment trusts, which attract yields through property-related sources such as office building rents.

“We see changes are taking place,” he said. “The regulatory framework has potential to make our business a lot more promising and a lot easier to close transactions.”

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