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This article originally appeared in JOC (recently acquired by IHS) and was written by Greg Knowler.

The head of China Industrial for real estate company Jones Lang LaSalle has dismissed a market perception that rising investment in the logistics property sector over the last few years has created an oversupply bubble in mainland warehousing.

Stuart Ross, head of industrial China for JLL, said reports on the huge amount of warehouse stock had created the impression that supply had overtaken demand, but this was not the case.

“The talk of oversupply is a hot topic at present and needs to be addressed in the context of an evolving demand-side, away from traditional occupiers to newer occupiers in growth industries, and continued government-led urbanisation that further limits land for further development in key markets,” he told JOC.com.

“We’ve come from severe under supply in five years to greater investment in logistics, which has grown the supply side, so when buildings take 3-6 months to fill up and are no longer fully leased on practical completion, investors claim the market is oversupplied. In any other market, this is a sound investment. These factors when not understood in the broader context leads many occupiers and investors to believe there could be an oversupply.”

Ross explained how the China logistics property market has matured in the last few years as developers and investors cottoned on how to secure more land from the China government. With the slowdown in manufacturing, the government has become more willing to offer land for logistics, and developers have been building up their teams to source land and secure it.

“So yes, there is a lot more supply that is available but we are still coming from a very limited base. In many of the newer cities, such as Xian, Wuhan or Changsha, the government is more progressive and open to land being used for logistics, and the developers are marketing their sites as available.

“This is building the perception that there is a great amount of supply. A lot of the big developers that have secured sites have no clear timeline when the buildings will be ready for potential occupiers. So it looks like oversupply, but a lot of it is just development land that is not even under construction.”

Ross said in the past, warehouse premises would be filled very soon after construction, but today, developers were having to build into their business models a longer period of vacancy. So even though they are actually building more, the extra space is sitting around longer.

Another example of the maturity of the market was evident in better planning as companies started to have a better feel for the business with more understanding of growth patterns. That allowed them to plan further in advance and pre-lease much of the development.

One of the great game changers in China’s logistics property market, however, is e-commerce. Ross called this a new demand that was reshaping the market, although the demand from this sector was untracked and untraceable.

“We just leased 540,000 square feet in Jiaxing (Zhejiang Province) that came to us only two months ago, and that took a third of the space in the city out of the market,” he said. “You get these big chunks of enquiry that we don’t know are coming, because even though the Alibabas and JD.coms are building their own warehousing, they can still not construct what they physically need to occupy.”

Ross said the majority of e-commerce companies were not using their cash for property acquisition but rather to grow their business to a break-even or reach profitability.

“Only four of the top 10 e-commerce companies in China are profitable and the other six are still trying to get there. Snd for every one Alibaba, there are 20 other companies that are not in a position to buy but have the leasing demand, so the idea of these e-commerce companies taking demand away from the market is just false.”

Despite its long-standing role as the world’s factory, the total logistics footprint of China is still 12 times less than that of the U.S. This lack of logistics capability comes at a time when retail sales growth has been above 10 percent annually year-over-year since 2004 and China’s middle class is growing by 12.78 percent a year.

The evolving nature of the demand for warehouse space was leading to retailers working through 3PLs looking to consolidate lower quality sites into one, more efficient space.

“We are seeing more larger scale enquiries coming into the market than in the past, and that feeds into the desire of developers and investors that would prefer to deploy more capital, build bigger sheds and have longer-term leases. We regularly receive enquiries for around 300,000 square feet premises. There are more options available for the smaller leases, but for the larger groups it is still a supply-starved market,” he said.

Earlier this week, China’s warehousing market leader Global Logistic Properties signed new lease agreements totaling 1.6 million square feet with leading 3PLs catering to domestic consumption across a variety of industries including e-commerce, home appliances, fast-moving consumer goods and auto parts.

Five of the new leases are signed with repeat customers, that included Best Logistics, Deppon Logistics and Goodaymart, three of GLP’s top 10 largest customers by leased area in China.

“As domestic consumption continues to grow, we are seeing increasing demand for GLP’s modern logistics facilities,” said Kent Yang, president of GLP China.

Stuart Ross

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