Logistics Property In China

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1 Logistics Property In China Trends of

2 Introduction In March 2013, Colliers looked at the fundamentals of China s logistics property market, its increasing attraction from investors, the reasons for its growth and the challenges that it presents for both developers and investors. In many ways, the fundamentals and challenges remain the same. But three clear stories emerged from China s logistics property market over the course of 2013 and early 2014: China s launch of a pilot Free Trade Zone in Shanghai; the blurring distinction between e-commerce and just commerce ; and the influx of funds and other investors. All three of these stories made headline news in 2013, shining the spotlight on China s logistics property sector. 2 Logistics Property in China March 2014 Colliers International

3 The Fundamentals Domestic consumption and existing inefficiency are the fundamentals of growth in China s logistics industry, and the related property market. The government s will to transform its economy into one led by domestic consumption, and its recognition that the logistics sectors will have to modernize in order for that to happen, are unchanged. In the first instance, the macroeconomic numbers are optimistic. Retail sales for 2013 rose at an average of 13.1% y-o-y nationwide and growth in a wide variety of industries automotive, home furnishings and other FMCG categories reflected positive consumer sentiment. The Challenges Access to land remains the biggest impediment to growth in China s logistics property market. Local governments are reluctant to allocate land for logistics use, which creates relatively few jobs and generates relatively little tax revenue compared to sectors such as manufacturing or retail. Methods for acquiring land, leasing models, exit strategies and government regulations continued to evolve, often on a regional basis. Rising land prices, which are increasing faster than rent in many markets, have made developers keenly aware of finding efficiencies in order to achieve their expected returns. Figure 1: China Retail Sales ( ) RMB Trillion 30% 25% 20% 15% 10% 5% % Retail Sales Change y-o-y Source: National Bureau of Statistics of China, 2014 Colliers International March 2014 Logistics Property in China 3

4 Shanghai Free Trade Zone Shanghai officially launched the China (Shanghai) Pilot Free Trade Zone at the end of September 2013, bringing together its four bonded areas under one administration. The new zone exists primarily on paper, and is meant to be a testing ground for national policy reform, as well as a boost to Shanghai s economy. By early 2014, regulatory details were still disappointingly vague for many companies hoping to take advantage of promises of change in RMB convertibility and the opening of several industry sectors previously closed to foreign investors. The Effect On Shanghai Without these details, it was not possible to predict specific effects on the real estate market in the Free Trade Zone. That said, through Colliers meeting with government officials and analysis of market trends in the existing zones, it s reasonable to expect two possible effects: an increase in the value of industrial assets in Waigaiqiao, as service industries create new demand and current stock is below-requirement; and increased demand for property in the Lingang area, serving the off-shore Yangshan port, as certain companies relocate from Waigaiqiao. Waigaoqiao will likely see the largest impact from the Free Trade Zone policies, given its relative maturity, proximity to downtown, transport network and existing amenities. Market conditions in Waigaoqiao are currently characterized by an extremely limited stock of available land. The few sites available are expensive. Simultaneously, as micro-electronics manufacturers have vacated formerly high-quality facilities, as their businesses have consolidated and/or relocated to cities such as Chengdu and Suzhou. Domestic and international investors have purchased several of these facilities and repurposed them as storage for highvalue commodities. This is in accordance with the growth (30-40% in 2012) of imports of items such as auto parts, medicine, and medical devices. Data centres and the back office departments of financial companies have also been attracted to these facilities. In the past two years, Waigaoqiao has experienced more than 600,000 sqm of real estate transactions. However, while this is a large headline number, it represents a fraction of Waigaoqiao s total stock, and many other buildings, constructed in earlier periods of growth, lack basic specifications that would make them suitable for repositioning. As Waigaoqiao upgrades to accommodate the service sector, Lingang stands to benefit. Land prices in Waigaoqiao have already eclipsed levels that most logistics companies can absorb, and prices are expected to rise. In Lingang, by contrast, average land prices are approximately 63% of those of at Waigaoqiao. While these prices may still be expensive in absolute terms, they are potentially more attractive to thirdparty logistics companies (3PLs), commodity traders, and the auto industry, who all require greater cost efficiencies than Waigaoqiao will offer. Figure 2: Selected Transactions in Shanghai Free Trade Zone Tenant Landlord Property Type Leasing Area (sqm) Transaction Date International Machinery Manufacturer GLP Logistics Park Waigaoqiao Warehouse 3,500 2Q13 International Trade Company Waigaoqiao FTZ Warehouse 3,100 3Q13 International Trade Company Goodman Logistics Park Waigaoqiao Warehouse 4,000 3Q13 International l Express Company Lingang Haibo Logistics Park Warehouse 23,000 3Q13 International Metal Manufacturer Waigaoqiao FTZ Workshop 2,200 4Q13 International Precise Instrument Manufacturer Waigaoqiao FTZ Workshop 2,500 4Q13 Source: Colliers International Research, Shanghai, Logistics Property in China March 2014 Colliers International

5 A National Roll-Out The launch of Shanghai s Free Trade Zone has been held up as a symbol for national reforms. It is still too early to say whether this will be borne out by concrete action, but the government s public commitment to the zone at the highest levels, from Beijing on down, has led many to believe that these reforms will spread from Pudong, through Shanghai and out to the rest of the country, likely through the approval of zones in other parts of China. Speculation about other zones heated up in January 2014, when an official news agency reported that the State Council approved 12 additional regional free trade zones. While an official from the Ministry of Commerce later contradicted this, saying only that other unnamed provinces and cities have submitted applications, there does appear to be momentum. Guangdong and Tianjin are widely expected to be the next candidates for approval. Figure 3: Average Land Price in Lingang and Waigaoqiao 1 RMB per mu 2,000,000 1,500,000 1,000, , Lingang Waigaoqiao Source: Colliers International Research, Shanghai, 2014 What To Look For In 2014 In Shanghai, it will be important for the authorities to keep the momentum surrounding the Free Trade Zone going, after the big buzz it generated in This will require further policy announcements, clarification of current policy and actionable rules. The entrance of the London Metal Exchange or a similar platform would have a significant effect on warehouse prices. At the same time, Waigaoqiao will need to begin making capital improvements and begin repositioning. In short, the hardware is there but the software needs to be developed in Mu, a Chinese unit of land area approximately equal to 667 sqm Colliers International March 2014 Logistics Property in China 5

6 E-Commerce Becomes Commerce E-commerce is just commerce. So said Jeffrey Schwartz, the chairman and executive director of Global Logistic Properties, in a November 2013 earnings call. This became increasingly true in 2013, as online shopping matured from a new phenomenon into an indispensable part of many retailers sales strategies, and became ever more familiar to consumers in China as just shopping. This was also the year that China s online retail market eclipsed the United States for the first time, with sales climbing 40% from 2012 to an estimated USD 300 billion, and the Alibaba Group, which includes Taobao and Tmall, becoming bigger than Facebook in terms of revenue and net income. Figure 4: China Online Retail Sales ( ) RMB Billion 2,000 1,600 1, Online Retail Sales Change y-o-y Source: Media Sources, Colliers International Research, Shanghai, % 140% 120% 100% 80% 60% 40% 20% 0% In a fall 2013 report, Bain & Company predicted that online sales in China will reach RMB 3.3 trillion by Boston Consulting Group has predicted USD 1 trillion by This was reflected in the performance of many e-commerce firms for Sales of Yihaodian.com, a subsidiary of Walmart China, spiked 77% year to USD 1.89 billion, and Jingdong.com (360Buy) became profitable for the first time since its launch in 2004, posting revenue in excess of RMB 100 billion. At the same time, the Chinese postal bureau announced that parcel delivery was up more than 60% y-o-y in the first three quarters of 2013; that figure did not include an estimated 171 million parcels from Taobao and Tmall on November 11 alone, in its largest annual sale. in 2009 signed a space for 3,000 sqm in one warehouse. Today, we have developed a build-to-suit facility for that same client of approximately 135,000 sqm. This reflects two trends: an increase in demand from e-commerce firms and a general shift from speculative development to build-to-suit. At GLP, the percentage of total area leased by e-commerce firms has gone from 4% in 2010 to 22% in 2013, even as the company s portfolio in China has tripled. At the same time, it has developed BTS projects for clients including Amazon, Vipshop and Best Logistics. The profile of the average tenant changed in 2013 as well. In 2012, demand was very strong among storefront retailers such as H&M, Burberry and Decathlon, as well as logistics companies that served them, such as DB Schenker, DHL and CEVA. In 2013, the demand came not from storefront retailers but from e-commerce companies. Along with this change came a rise in third-party logistics companies that serve the e-commerce market, such as Deppon. Within this sector, 2013 also saw consolidation, as large-scale companies such as 360Buy, Taobao, Yihaodian and Amazon ramped up their activity, putting significant pressure on smaller companies that can t achieve the same economies of scale, or may not have sophisticated warehousing technology. The Alibaba And Tencent Question One of the most interesting trends to watch in 2014 will be the effect of Alibaba and Tencent entering the logistics market. These companies have both announced major investments in the logistics sector in the last year: Alibaba, the parent company of Taobao, announcing an investment of RMB 100 billion to build a national logistics network, and Tencent, primarily a technology and software company, buying a HKD 1.5 billion stake in a logistics operator. Neither the motivating factors for these investments nor their effect on the logistics market was immediately clear in How these investments affect the logistics market and what role Alibaba and Tencent will play going forward will be an interesting and important question in This translated into ever more demand for high-quality logistics facilities that are located close enough to major markets to enable same-day delivery. As Schwartz said in the same call, Space that would have been leased in retail now becomes logistics space. Jeffrey Shen, the CEO of e-shang (clients include Amazon and Yihaodian), gave an example of the type of growth they are witnessing. As he told The Wall Street Journal in May 2013, A major e-commerce client back 6 Logistics Property in China March 2014 Colliers International

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8 Investors Flood In Investment and interest in logistics took off in 2013, with several deals making headlines over the course of the year, from all types of investors. Philip Pearce, the managing director of the Goodman Group China, told the The Wall Street Journal that the activity in China is consistent with the global trend of renewed interest in the logistics asset class. Peter Garrison, Director, Industrial Investment and Advisory, Colliers International Shanghai, pointed to CBRE Global Investors sale of a warehouse portfolio for an estimated total consideration in excess of USD240 million in August as part of a general economic trend. The portfolio was originally owned by a state-owned enterprise, then sold to foreign investors and managed for several years, and eventually sold back to another state-owned enterprise. It s an asset class state-owned companies didn t really consider before but are getting into. They are not the only ones. Carlyle, primarily known for private equity, office towers and retail developments, entered the logistics market in 2013 as well, announcing that it would commit equity of USD 400 million (in partnership with The Townsend Group) in a joint-venture with Shanghai Yupei Group Co. Ltd., a Chinese logistics warehouse developer, to invest in acquiring and developing 17 assets in logistics hubs throughout China. This was followed in November by two more major announcements, with Prologis saying that it had formed a second joint venture in China with HIP China Logistics Investments to create/expand investment capacity to USD 1 billion, and Global Logistics Properties announcing that it had closed a USD 3 billion fund to develop modern logistics facilities in China. Six institutional investors joined the fund, including three national pension and sovereign wealth funds. Finally, in December, Kerry Logistics announced that it had raised HKD 2.2 billion from its initial public offering on the Hong Kong Stock Exchange, and received strong demand from institutional investors within Asia, as well as the US and Europe, who sought to increase their exposure in this rapidly developing property sector. Figure 5: Average Gross Yields of Property Markets in Beijing, % 9.0% 8.0% 7.0% 6.0% 5.0% Office Retail Logistics Source: Colliers International Research and Industrial Services, Shanghai, 2014 Figure 6: Average Gross Yields of Property Markets in Shanghai, % 9.0% 8.0% 7.0% 6.0% 5.0% Office Retail Logistics Source: Colliers International Research and Industrial Services, Shanghai, 2014 Only The Beginning Both Jeremy Chapman, Senior Director, Industrial Investment and Advisory, Colliers Internationl Shanghai, and Peter Garrison expect 2013 to be just the beginning. They noted a tremendous spike in interest in 2013 from sovereign wealth funds, private equity, insurance companies, investment banks and developers of other asset classes, both domestic and foreign. As these investors move forward, there will be a further spike in the number of completed deals in 2014 and beyond. While tax and land issues will still be an issue, firms with the right knowledge will be able to creatively face these challenges to find success in China s logistics property market. 8 Logistics Property in China March 2014 Colliers International

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10 COLLIERS INTERNATIONAL Research, China The mission of the Colliers International Research, China Division is to provide unbiased real estate market data, information, analysis and advice, helping Colliers clients gain insight into China s real estate markets. The Research, China division at Colliers International provides both multinational and local corporations with a full spectrum of research and advisory services, addressing specific needs and analysing various aspects of the real estate market in the China region. With our dedication and skill in providing recommendations on the best property solutions for our clients under realistic market conditions, the Research, China Division can add maximum value to real estate decisions. MARKET INTELLIGENCE The experienced team provides in-depth property market research, including development feasibility studies and market analysis. The scope of study ranges from socioeconomic and demographic analysis, and general property market overviews to detailed analyses of market variables by property sector at the sub-market level. With our knowledge of and experience in the market, we provide strategic, forward-thinking recommendations to our clients, differentiating Colliers International from its peers. STRATEGIC FOCUS Research covers an examination of capital market conditions, business cycles, physical locations, economics and so forth, applying analytical methodologies to quantify risks and/or benefits. The team also reviews input from front-line operators, ensuring added credibility. OUR COMPETITIVE EDGE The global network of Colliers International enables us to offer consistent, high-quality professional services at an international level. Our competitive edge is a combination of global vision and local expertise, as well as prudent research attitudes, extensive experience and sensitivity to our clients needs, all of which are critical to achieving realistic and innovative solutions. Service Industrial Hospitality & Leisure Office Others Retail Residential Socioeconomic Analysis Demographic Analysis Property Supply and Demand Analysis Development Feasibility Study Project Market Positioning Financial Modelling Site and Property Evaluation Investment Strategy Advisory Sensitivity and Risk Analysis Due Diligence 10 Logistics Property in China March 2014 Colliers International

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12 482 offices in 62 countries on 6 continents United States: 140 Canada: 42 Latin America: 20 Asia Pacific: 195 EMEA: 85 $2 billion in annual revenue 1.12 billion square feet under management 13,500 professionals and staff Lina Wong MRICS, CCIM Managing Director East and Southwest China Investment Services China lina.wong@colliers.com Carlby Xie MSc, MRICS Director Research China carlby.xie@colliers.com Jeremy Chapman Senior Director Industrial Services jeremy.chapman@colliers.com Betty Wong Executive Director Investment Services East and Southwest China betty.wong@colliers.com Colliers International Shanghai 16F Hong Kong New World Tower 300 Huai Hai Zhong Road PRC TEL About Colliers International Colliers International is a global leader in commercial real estate services, with over 13,500 professionals operating out of more than 482 offices in 62 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com Copyright 2014 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. 12 Logistics Property in China March 2014 Colliers International