October 25, 2016

Since 2013, both foreign and domestic investors have rushed to plough around US$10 billion into China logistics real estate projects, lured by high rental yields and the promise of long-term demand from an ecommerce sector that grew 33 percent in 2015.

However, as more capital has poured in, many investors are finding that not every market in China needs more warehouse space and, while demand remains high, tenants often have very specific logistics requirements and high standards for their industry partners.

Even in top tier markets such as Shanghai, vacancy levels which once stayed in single-digit territory reached 14.1 percent in the second quarter of this year, according to JLL research, as developers brought more projects onto the market.

Not all locations are equal, in Shanghai for example, choosing the right site is vital as districts with similar amounts of stock have significantly varying vacancy rates. For example, Lingang is coping with 28.7 percent vacancy rate while Songjiang sits at 0.0 percent.

This rise in vacancy is providing more bargaining power to tenants, who are becoming more specific about their logistics facilities as their operations grow and the number of choices available to them expands.

“Companies are moving out of older warehouses because they are inefficient,” notes Stuart Ross, Head of Industrial for China at JLL.

“Tenants are increasingly more particular about where they are located and the quality of their facilities.”

Getting it right

While the logistics boom has attracted more funding to the sector, developers still face the issue of accessing land in suitable locations and understanding the right facilities for specific tenant requirements.

“Knowing the market and the customers in that market can future-proof your building,” says Ross. “The regions of Jiangsu, Suzhou and Wuxi all house heavy manufacturers, so there is likely to be more demand for facilities with a heavier floor loading. If you aren’t working with a team that understands the market, it can be easy to build a facility that is harder to lease out.”

Some of the more experienced players in the market have already undertaken build-to-suit projects for their clients in China and, as a result, have a better understanding of their businesses, including what’ required for an efficient distribution centre for ecommerce, different types of manufacturers and chain retailers.

While investing in China’s logistics real estate market is becoming increasingly challenging, the long term returns are still inviting and there are opportunities for market entrants who are willing to look carefully at what they bring to the market.

“If you don’t have a development team, then don’t build,” recommends Ross, “And if you don’t have an asset management team, then it would be a good idea to hire out the leasing. If you don’t have access to a team on the ground in China, look for stabilized assets that are available to buy,” he adds.

With China’s ecommerce market expected to reach a value of US$1.1 trillion per year by 2020, the real estate needed to support it will continue to provide solid returns for successful players. The investors that achieve those returns, however, are likely to be the ones that take the time to understand their audience before investing.


Stuart Ross

Head of Industrial, Southeast Asia, JLL

Never miss an update from The Investor.

Subscribe Now!