There is three times more grade-A logistics space in Los Angeles than there is in the whole of China. Helen Roxburgh reports on a market with massive growth potential
There are not many parts of the Chinese property market that can be described as ‘undersupplied’. But in recent years, global investors have been turning their attention – and capital – towards China’s warehouse and logistics sector for precisely that reason. The logistics industry is experiencing the perfect balance of fundamentals for real estate investment – extremely low supply, and soaring levels of demand.
Fuelled by the needs of retailers and the demands of third-party logistics (3PL) companies, an organised logistics sector is rapidly expanding in China from a previously low base. Logistics has often been an afterthought in China, and only really began to emerge as a sector after China joined the World Trade Organisation in 2001.
Selling land for warehousing has been typically seen as a poor option for local governments, who preferred the tax and employment returns offered by commercial uses like offices or shopping malls. This means the industry was hugely undersupplied and unprepared for the country’s e-commerce explosion, the strong increase in domestic consumption, and the changing demand of Chinese consumers.
“There’s only about 35m sqm of grade-A logistics space in China, about one-third of what we find in Los Angeles,” says Ben Cornish, China president at Prologis. “And that’s in a country almost the same size as the US, with the second largest economy in the world. We see decades of build-out coming.”
While Prologis originally entered China in 2003 to provide space for international clients exporting goods from China, 90% of its buildings are now geared towards domestic consumption.
The government has focused heavily on increasing domestic consumption as part of its strategy to grow the Chinese economy. While the logistics industry in China was originally just focused on transporting goods out of the country, these changing consumer patterns mean there is a huge need for organised, sophisticated networks, not just to store goods, but to transport them quickly around the country.
“Chinese main logistics markets average 0.7sqm per consumer household, about a 13th of that for major US markets, which indicates how underdeveloped Chinese main logistics markets are relative to global benchmarks,” says Cornish.
With so much opportunity in the market, it’s not surprising to see large numbers of investors circling the market, and some significant deals. According to JLL, in the past two and a half years, $7.2bn has been invested in logistics development in China, and a lot more capital is looking to come into the sector.
Attractive yields have also drawn investors. Chinese grade-A logistics can command yields of 7% and above; commercial real estate yields are now nearer the 4-5% bracket. Costs of development are also far lower than offices, and it’s typically only about 12 months to bring that asset to market. Warehouses are seen as easier to run than other commercial assets, and many investors are wary of China’s volatile residential market. For many, logistics is a primary choice of investment in the country’ real estate market.
Notable investors include the Singapore-listed Global Logistic Properties (GLP), which raised $3.7bn in July for a Chinese logistics fund. GLP said its CLF II vehicle has been backed by seven global institutions, including national pension and sovereign wealth funds.
Increasingly, investors have been safeguarding their investment by backing existing local logistics players.
In June, US private equity group Carlyle Group led an investment of $120m into a Chinese logistics company, together with Goldman Sachs and China Renaissance. The trio invested into Shanghai ANE Logistics, which delivers small orders nationwide through a network of 5,000 franchised stores.
“China’s economic restructuring and e-commerce development bring about significant growth and consolidation opportunities in the country’s less-than-truckload logistics industry,” said Carlyle Group managing director Eric Zhang of the investment.
Also in June, private equity group RRJ Capital invested an additional $250m in Shanghai-based China Logistics Property Holding, following on from a $250m investment last April. The company envisions the expansion of its portfolio into logistics parks with modern warehouses, e-commerce distribution centres, and temperature-controlled logistics storage bases in transportation hubs across China.
“The fundamentals of the logistics market in China are strong, demand is still rising and it is still undersupplied”
“Over the past several years, we haven’t seen many straight asset investments,” says Joe Zhou, head of China research at JLL. “What we are seeing instead is more equity investments in on-the-ground developers. Investors will continue to find those who are already active and help them to build up a large portfolio. It’s more a matter of how to find the right partner.”
In this vein, LOGOS China Investments announced in June that Ivanhoé Cambridge and CBRE Global Investment Partners had invested in its LOGOS China Logistics Club. The investment vehicle was formed to own and develop modern logistics properties in large Chinese cities, allowing it to make investments up to $400m.
Working with an established player was key for the two investors. “Our investment with LOGOS China supports our plan to grow our exposure to opportunities in the logistics sector in key markets such as Shanghai and Guangzhou,” said Ivanhoé Cambridge’s Rita-Rose Gagné, executive vice-president of growth markets, at the time of announcing the deal. “The LOGOS venture is well positioned to acquire and develop logistics assets in our preferred sub-markets across key Chinese cities,” says Adrian Baker, managing director for CBRE Global Investment Partners Asia Pacific.
Despite these strong fundamentals, some areas are even facing localised oversupply. In parts of the east side of Shanghai there are vacancy rates of up to 30%, according to JLL, whereas areas like Minhang on the west remain under-served. Government policies to move industrial land out of city centres is further complicating development.
It would be mistake for investors to view this as an easy market. China in general has experienced turbulence this year too, with an extremely volatile stock market, slowing growth figures, a currency devaluation and falling levels of manufacturing.
But for most investors in logistics, the fundamentals of the market mean they are not deterred by these shifting sands. The e-commerce market in China is set to double in the next five years, building the need for further supporting networks and warehousing. Developers like Prologis say they have witnessed stable customer demand, with low correlation between GDP growth and occupancy at their buildings.
“Commercial real estate in China is expensive, and the yields are low,” concludes Zhou. “There is huge oversupply in tier-two and tier-three cities. But the fundamentals of the logistics market in China are strong, demand is still rising, and it is still undersupplied. This sector will continue to attract investors.”