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September 8, 2016

A lack of tradable assets has long been a major barrier to investment activity in China’s burgeoning logistics property market. Most developers have been reluctant to sell assets over the past few years, as they have focused on building and expanding nation-wide networks to serve the country’s burgeoning e-commerce market. As such, China’s logistics market has been dominated by entity-level transactions since 2013, with investors pouring around US$10 billion into logistics developments in China to help grow their presence.

In mid-2015, however, Australian developer, Goodman, placed a portfolio of four China properties onto the market, and sold three of them within just a few months. Interpreted as a ‘test’ of the investment market, Goodman’s move made ripples and a number of other major developers have since sent out teasers to place part of their assets onto the market. These activities have led some observers to believe that China’s logistics market is on sale, and even provoked concerns that foreign developers are leaving China.

So, are they correct?

Not really. Despite a slowdown in rental growth in recent quarters, logistics warehouses remain the most sought-after asset class in China. An analysis of the developers’ sales sheds light on their motives for divesting some assets, tending to market single assets or small portfolios, and usually in lower tier cities. Meanwhile, they hold onto projects in premium locations (such as Shanghai and Beijing) because supply is extremely constrained in these places. The properties that are put on the market are considered ‘replaceable’ assets, and selling them will provide the developers with abundant capital for future developments in China.

Developers’ capital partners may be another factor in the sales. In order to persuade investors to provide further capital injections, developers need to present actual transactions with extraordinary returns. In addition, feedback from potential buyers provides a good guide for investors and developers when adjusting their development plans.

Moreover, developers have been selectively marketing their assets to potential buyers, often choosing to sell properties to smaller players or even newcomers instead of direct competitors, indicating that they are neither have plans to leave China nor are in any rush to get the assets off their hands. On the contrary, they all have plans for future developments in an attempt to expand their market share in China.

Far from signaling that developers are retreating from China, the recent transactions in fact point toward the opposite. If anything, they show that China’s logistics market is reaching a new stage of maturity with increasing investment activity.

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Jenson Zhang

China Logistics Research, JLL

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