Logistics warehouse space in mainland China is projected to reach a record high in 2018. But, despite the extra space, continued demand and supply contraints will ensure that rental values remain buoyant.
Both institutional Grade-A bonded – space located in China’s Free Trade Zones (FTZ), where goods are stored without payment of duty – and non-bonded logistics real estate may reach about 44 million square meters in 2018, according to the latest research from JLL. Rents for both types of space have been steadily rising since the introduction of FTZ status in 2014.
The most prominent additions of bonded space in the next two years are projected to be in the southern cities of Shenzhen, Shanghai and Guangzhou. In primary hubs, non-bonded logistics stock growth over the next three years will mainly be in Shanghai and Tianjin as well as secondary hubs such as Wuhan, Chongqing and Chengdu.
Despite this increase in supply, robust leasing demand is expected to support rental values, according to JLL China’s Head of Industrial Stuart Ross, with vacancies likely to rise as supply picks up again in 2018, but unlikely to get over 10 percent.
In recent years, China’s retail sales have been growing at a faster pace than GDP as the middle class expands rapidly. In 2015, online sales volume reached US$666 billion, accounting for 43 percent of the global market with this ratio expected to climb to close to 60 percent by 2020.
Local distribution drives investments
The country’s unabated appetite for retailing has forced China’s logistics sector to shift its focus from exports to local distribution. In 2016, local businesses spent 11.1 trillion RMB on logistics; 54 percent on transportation and 33 percent on storage. E-commerce giants such as JD.com and Cainiao have been actively leasing space while building their facilities across China.
Separately, revenue of third-party logistics (3PL) operators have jumped threefold from 2007, reaching US$159 billion in 2015, and becoming one of the major drivers of demand for high-quality warehouse space in the country.
Many have strategically planned their expansion around the expressways in Shanghai, says Ross, and there has been a gradual convergence of rental rates between satellite cities and those in secondary hubs, indicating that the latter have attracted some cost-sensitive tenants.
The high demand for space has not gone unnoticed by investors – in the last four years, US$21.2 billion worth of assets have been transacted, with GLP’s sale of its warehouse portfolio for US$11.6 billion in July last year the largest deal.
Other prominent transactions include property logistics company LOGOS’s $830 million logistics venture with Denmark’s PFA Pension and Canada’s Ivanhoe Cambridge. The venture will focus on building high-quality logistics facilities in the north, south, east, and mid-west regions, expanding LOGOS’ business beyond Greater Shanghai.
Compressed market yields
Amid the strong asset demand, market yields have continued to compress, says Ross, with more to come, “as more domestic investors enter the logistics space given the strong fundamentals and relatively high yields compared with other asset classes.” Based on JLL’s estimates, recent market transactions have seen NOI (Net Operating Income)-based yields at 5.5-6.0 percent in Tier 1 cities and 6.0-6.5 percent in Tier 2 cities.
A recent example of a local firm seeking to take advantage of the market saw Alibaba’s courier aggregator, Cainiao Network Technology, partner with China Life to set up a logistics warehousing fund with a scale of RMB 8.5 billion. The fund will improve Cainiao’s existing transport nodes and invest in smart technologies – a necessary move for a retail giant like Alibaba.
Looking forward, Ross believes that e-commerce giants and 3PL companies will continue to drive demand for industrial space, particularly as investors continue to partner with local developers to enter the market. “A positive sign that the logistics investment market is maturing is that portfolio sales have emerged as developers make strategic adjustments,” he says.
Amid the rapid pace of development, Chinese developers, such as Yupei Group, have also accelerated their IPO plans. Yupei was listed as CNLP (China Logistics Property Holdings) on the Hong Kong Stock Exchange in July after raising HK$3.25 billion with Anbang and Sino-Ocean as cornerstone investors.
While logistics capacity across China has undoubtedly increased significantly in the last few years, and high supply will cause vacancies in some markets, Grade A stock remains limited compared with the United States.
Ross believes the continual “upgrade from legacy facilities” will help drive the industry forward and sate demand.
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