Over the last four years, institutional investors have earmarked more than US$10 billion to China’s logistics sector, as both local and international funds look to cash in on growing spending by China’s middle class.
China’s shopping culture has been developing for years but what was once an elite phenomenon isolated to a few coastal hubs is moving into dozens of smaller cities beyond the big four of Shanghai, Beijing, Guangzhou and Shenzhen.
Tens of millions of Chinese are entering the middle class in lower-tier cities, where logistics land is more available than in the country’s traditional first-tier hubs. According to research by JLL, China had 76 cities where annual retail sales exceeded RMB 100 billion (US$14.5 billion) in 2015, rising from just three in 2000.
As the demand grows in both size and geographical reach, logistics property developers are targeting opportunities in China’s smaller cities.
“The Tier 1.5 to Tier 2 cities are now really the focus of the majority of the logistics supply. Land for logistics development in Shanghai, Beijing, Guangzhou is just no longer available.” says Stuart Ross, Head of Industrial for JLL China.
Behind the demand boom for modern logistics is a surging e-commerce growth and broader expansion of retail spending, particularly in lower-tier cities across the country. Online shopping accounted for 12.7 percent of total retail consumption in 2015, up from just 1.1 percent in 2008, and is expected to top 20 percent within three years, according to the JLL research.
In a study of China’s growing consumer base, consulting group McKinsey projected that in 80 “developing cities” the share of relatively well-off citizens, earning US$16,000 to US$34,000 per year, will balloon from five percent in 2010 to 67 percent in 2020 as large numbers of people move up into the middle class. In the 369 “emerging cities” studied, that proportion will hit 43 percent by the same year.
And, this newly-minted middle class is not afraid to spend. Investment bank Morgan Stanley has projected that China’s annual consumption will rise from US$4.4 trillion last year to US$9.7 trillion in 2030. Third- and fourth-tier cities are expected to contribute nearly two-thirds of that increase, while second-tier cities will account for 21 percent.
The need for warehouses
China’s logistics infrastructure is straining to meet the challenges of shipping gadgets, garments and groceries to this rising cohort of consumers outside the first-tier cities.
“There’s still a massive undersupply of institutional-grade or investment-grade stock,” says Ross, adding that the country still has only 0.4 square metres of modern logistics space per person, compared to 2.5 square metres per capita in the Unites States.
The rising economic clout of lower-tier cities has boosted demand for regional distribution hubs that serve satellite cities outside the major urban centres and developers are swooping in to build large-scale facilities in these former hinterlands. In the Yangtze River Delta area, for example, the focus of logistics growth has migrated from Shanghai and the small cities on its periphery, to the neighbouring provinces that host their own manufacturing and consumer engines, such as Nanjing and Suzhou.
While the growth of the lower-tier markets is pulling modern warehouse developers away from the first-tier cities, they are also being pushed away from top urban centres by a dearth of opportunities; municipal governments often prefer to grant land for commercial or industrial rather than logistics due to the higher tax revenues.
This ‘perfect storm’ around demand and supply is ensuring that, for the best returns, emerging cities will continue to lead the way in China’s logistics market.
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Head of Industrial, JLL China