Industry Outlook Warehouse Real Estate (China)

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1 Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 18 May 217 Overall Outlook China s shift to consumption-driven economy is generating strong demand for modern high-quality logistics properties Online retail sales have sped up lately and China warehouse index continued to head north Rental of logistics properties diverged in 1Q17, with east China gaining 14%-26% q-o-q while Chongqing/Chengdu saw some price correction Looking ahead, rental is likely to edge up in key cities in the coming six months with Beijing, Shanghai and Shenzhen continuing to lead the rental growth due to limited supply as well as potential demolition of ageing warehouses New warehouse supply from 217 onwards may slow down as FAI warehouse investment slowed down further to 3% in 1Q17 from 5%/28% in 216/215 As capital continued to look for warehouses assets in tier 1 cities, cap rate compression is likely to continue, though at a slower pace Demand for high-quality warehouse from e-commerce is rising fast to drive the sector s growth E-commerce retail sales have sped up with 32% y-o-y growth registered in 1Q17, outpacing the 28% in 1Q16 and iresearch s full-year projection of 254% for 217 Major e-retailers are actively expanding the categories of consumer goods, especially in fresh food and cross-border merchandises They had further penetrated into rural areas and are exploring more opportunities there In addition, major e-retailers are also expanding their consumer finance business, which could facilitate further online consumption activities Therefore, demand for warehouse remains decent Cold storage warehouse and bonded warehouse will likely see better prospects to cater to the rapid growth of cold chain logistics and cross-border consumption Consumption upgrade led to more demand for imported goods, leading to more demand for bonded warehouse ahead China s manufacturing Purchasing Managers' Index (PMI) has been recovering since hitting 49 in Feb 216, the lowest level since 21 PMI came in at 512 in April 217 compared with 518/516 in March/Feburary, indicating manufacturing activities expansion Exports and imports activities picked up strongly lately, mainly led by imports Imports increased by 23% in value terms in 1Q17 while exports grew 4% More domestic funds are entering into warehouse sector lately According to the China Warehousing Industry Bluebook 216, total warehouse space in operation reached 955m square metres (sm), up 5% from end-214 Modern warehouse space grew to 36m sm by end-215, making up 32% of total warehouse space Larger players had achieved an average growth of c3% in 215, with the top 1 players holding a total of 253m sm Domestic players Vanke, Ping An, Yupei, and Cainiao are expanding at breakneck speed as well, while the dominant player, GLP, is planning to slow down its investment in China However, due to the limited industrial land supply, existing larger land owners GLP, Blogis, Goodman, Eshang and Yupei are still the leaders in offering new supply Haier and China Merchants Securities had established a JV fund (with a scale of Rmb1bn) for logistics-related acquisitions/investments Yupei is also planning to set up a fund with Sino-Ocean to invest in logistics properties Page 1

2 E 218E Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jan-1 Aug-1 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16 Jan-17 Purchasing managers index PMI hovered around 51% 2 Logistics property demand from manufacturing remains tepid Source: CEIC, DBS Vickers Total value of import and export y-o-y growth 3% 2% 1% % -1% -2% -3% 1 Imports in March rebounded to +12% y-o-y growth, bringing y-o-y growth for 1Q17 to +4% 2 Exports have maintained positive y-o-y growth for the past five months; with +23% y-o-y growth in 1Q17 Source: CEIC, DBS Vickers Online retail sales RMB trn % 8 7% 7 6% 6 5% 5 4% 4 3% 3 2% 2 1 1% 1 Online retail sales growth slowed down from 33% y-o-y in 215 to 26% in Yet, y-o-y growth picked up to 32% in 1Q17, vs 28% in 1Q16 and iresearch s fullyear forecast of 254% % GMV of China Online Retail Sales (LHS) Growth rate (RHS) Source: iresearch; CEIC; DBS Vickers Page 2

3 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Logistics prosperity index: Business expectation % Logistics prosperity index (LPI) has maintained above 5 for the past 14 months 2 LPI business expectation continued heading north, which could imply more demand for warehouse ahead Source: China Federation of Logistics & Purchasing (CFLP), CEIC, DBS Vickers China warehouse index % China warehouse index has also stayed above 5 for the past 14 months 2 The index edged up to 551 in April 217, which is the highest level since end Source: China Federation of Logistics & Purchasing (CFLP), DBS Vickers Page 3

4 1H1 2H1 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 Key Industry Trends Land supply Though the downtrend in industrial land supply persisted since 212, such supply gained 9% y-o-y in 2H16, which was mainly due to rising supply in Shanghai, Guangzhou, Shenzhen and Chongqing Nanjing did not supply any industrial land in 2H16 Apart from Nanjing, Beijing s industrial land supply remained the lowest among other cities The land supply for warehouses could be much lower as big cities have significantly cut supply for warehouse use Beijing has stopped warehouse land supply for the last two years The falling supply for industrial land will likely lead to undersupply of warehouses in 2-3 years' time Land supply for 14 major cities, semi-annual 21 to 2H15 mn sm Shanghai, Guangzhou, Shenzhen unexpectedly raised industrial land supply, partly due to betterthan-before plot ratio for those industrial lands 2 Chongqing and Wuhan s supply remained the highest among other cities 3 Nanjing suspended industrial land supply in 2H16 Source: DBS Vickers; E-house Investment slowed down as foreign investors turned more cautious after RMB depreciation The e-commerce boom had led warehouse construction to grow rapidly from Major investors such as Blackstone, Warburg Pincus, APG, Brookfield, Temasek and PGGM had poured money into China s logistics real estate sector during that period However, RMB depreciation makes the rental yield in China warehouse sector less attractive to foreign investors In late 215, GLP announced its decision to cut its investment plan in China FAI in warehouse sector decelerated to 5% y-o-y in 216 and further down to 2% in 1Q17 Domestic players to continue the race Yupei raised HK$18bn through its HK IPO in July 216 Vanke has acquired c2m sm land reserved for warehouse usage in since mid-215 and management indicated that the company has also secured c8m sm warehouse projects in the pipeline In early this month, it was reported that Haier and China Merchants Securities had established a JV fund (with a scale of Rmb1bn) for logistics-related acquisitions/investments Yupei is also planning to set up a fund with Sino-Ocean to invest in logistics properties Bids for GLP likely to close According to Bloomberg, GLP is giving its bidders at least a couple more weeks to submit a binding bid, upon requests from the bidders From the article, there is another interested party named - private equity firm RRJ Capital and Seatown Holdings (a unit of Temasek) RRJ-Seatown consortium had previously invested US$25mn into China Logistics Property Holdings in 215 This makes the reported the number of interested parties increased to 4 Blackstone, Warburg Pincus consortium, Chinese parties comprising management-backed Hillhouse and Hopu, and RRJ-Seatown consortium Page 4

5 Qingdao Shenyang Beijing Tianjin Dalian Shanghai Nanjing Hangzhou Ningbo Guangzhou Shenzhen Chengdu Chongqing Wuhan Fixed asset investment in warehouse sector, 212 to 216 Rmb bn 8, 4% 7, 35% 6, 3% 5, 25% 4, 2% 3, 15% 2, 1% 1, 5% % Investment in warehouse Y-o-Y growth 1 Fixed asset investment in warehouse sector decelerated to 5% y-o-y in 216 and further down to 2% in 1Q17 Source: CEIC As expected, Yangtze River Delta led rental growth in 1Q17, while central area suffered from supply In the 14 cities we track, warehouse rentals have grown at a CAGR of between 1% and 15% over the past five years with Dalian, Tianjin and Chengdu s CAGR at the lower end of 1-2% and Nanjing and Hangzhou the highest at CAGRs of 15% and 1% respectively In 1Q17, cities in Yangtze River Delta region saw 14-26% q-o-q growth in rental, based on CBRE data Chengdu, Chongqing and Wuhan recorded minor q-o-q declines Rental in other cities was relatively flattish Looking ahead, tier 1 cities likely to lead the rental growth Along with potential low new completions and low vacancy rates, Shanghai, Beijing and Shenzhen is expected to see stronger rental growth, while most cities will likely see -1% rental growth Western China cities like Chengdu and Chongqing will likely see further rental decline due to high vacancy rates and high potential supply in the coming months Rental growth in selected cities, 1Q16 to 1Q17 RMB/sm/month % 2% 1% % % 6% 8% 7% 7% 3% 7% -7% -2% -2% 1% 8% 6% 4% 2% % -2% -4% -6% -8% 1 Rents have seen decent growth in Yangtze River Delta region and Pearl River Delta region over the past year 2 Key cities in Yangtze River Delta region recorded a 6-8% y-o-y growth in rental rate Rents (LHS) y-o-y, change 3 Chengdu suffered the biggest loss, followed by Chongqing and Wuhan Source: CBRE; DBS Vickers Page 5

6 Shanghai Beijing Shenzhen Nanjing Hangzhou Ningbo Tianjin Dalian Shenyang Qingdao Guangzhou Wuhan Chengdu Chongqing Rental growth estimate for the coming six months % Beijing, Shanghai and Shenzhen continuing to lead the rental growth due to limited supply as well as potential demolition of ageing warehouses 2 Chongqing and Chengdu will likely see further rental decline -3 Source: CBRE; DBS Vickers Asset value and cap rate - Falling land supply and strong acquisition interest led to strong growth in land prices and in turn increasing asset values along with cap rate compression While developers have a keen interest in acquiring land for warehouse development, the local governments low incentives to supply industrial land has led to higher land prices over the past years As a result, we expect capital appreciation to grow faster than rental growth over the next few years Hence, we also expect cap rate compression to continue Cold chain logistics are also growing more and more rapidly According to China Warehousing Industry Bluebook 216, the cold chain warehouse capacity grew by 12% in 215 to 27m tonnes The growth rate in 215 was lower than 214 s 15%, but higher than 7%/1% in 212/213 respectively While cold chain warehouse space per capita grew rapidly from 53 litres in 211 to 78 litres in 215, the number is still substantially lower than the 372 litres in the US, implying strong growth potential China citizens increase awareness of food safety and recent media reporting on China s vaccine scandal is likely to draw people s attention to cold chain storage and transportation Cold chain warehouse per capita Liter Cold chain warehouse space per capita in US was 463x that in China in 215, narrowing from 685x in Cold chain warehouse space per capita in SH was 138x national level in 215, narrowing from 246x in 211 China Shanghai US Source: China Warehouse Industry Bluebook 215 Page 6

7 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Feb-94 Sep-98 May-3 Dec-7 Aug-12 Apr-17 Regulations & Risks Policy: In 214, the Ministry of Commerce and State Council introduced a tax deduction for warehouse projects and Mid-to-Long Term Development Plan for the Logistics Industry which targets to reduce logistics cost and improve logistical efficiency in China Other supporting policies like cross-border e-commerce; one belt, one road ; and the China-initiated Asia Infrastructure Investment Bank will help boost demand for warehouses as well We believe policies towards the e-commerce and warehouse sector will continue to be supportive at the macro level Rmb exchange rate uncertainty remains an overhang RMB has been in a depreciation trend since late 214 Trump s win in the President Election has added uncertainty to the trend Consequently, foreign players will find it harder to form their China strategy Further yuan depreciation is expected 1USD=RMB RMB is expected to depreciate against USD Source: Thomson Reuters, DBS Bank Economy growth stabilised China s real GDP growth stabilised at 67% in the past three quarters China has been pushing out various measures to stimulate the economy, including loosening the credit environment, tax reduction, supply-side reform, etc China s economy restructuring, especially shifting to a consumption-driven economy, will likely benefit China s retail sector and in drive the modern logistics sector in the long run China GDP growth % GDP growth stabilised during the past three quarters Source: NBS Page 7

8 Appendix Warehouse rental and vacancy at different cities, 215 General warehouse Morden tiered warehouse Traditional flat warehouse ( 立體倉庫 ) ( 平面倉庫 ) Frozen warehouse ( 冷凍倉庫 ) Cold chain warehouse Cold store ( 冷藏倉庫 ) Rental (Rmb/sm/day) Vacancy (%) Rental (Rmb/sm/day) Vacancy (%) Rental (Rmb/ton/day) Vacancy (%) Rental (Rmb/ton/day) Vacancy (%) Beijing 11 1% % % Tianjin 11 11% 7 18% 23 22% 23 25% Shenyang % % 283 5% Dalian % 33 25% 33 3 Qingdao 95 16% 5 15% 14 8% 17 65% Ji'nan 95 5% 58 7% % % Shanghai % 33 15% 33 22% Nanjing 91 8% 57 95% 15 15% 15 1 Ningbo 1 12% 7 15% Hangzhou 1 17% Xiamen 11 3% % 25 15% Guangzhou 16 35% 88 5% % Shenzhen 13 8% % 53 56% Zhengzhou 9 8% 7 6% % % Wuhan 97 5% 75 12% 333 5% 34 11% Chongqing 1 67% 8 9% % Chengdu 95 12% % Nanning na na 8 11% 312 6% % Xi'an 9 15% % Lanzhou na na 73 5% % Urumqi na na 7 25% % Harbin % 2 15% 2 15% Changchun Hohhot % 39 12% 39 25% Baotou na na 4 13% 37 15% 36 3 Shijiazhuang 7 8% 5 4% Tangshan % Taiyuan Hefei 8 3% 45 5% Fuzhou na na 75 8% 36 14% 36 15% Nanchang % Changsha 85 5% 6 5% % Kunming % 25 5% 25 5% Guiyang 8 6 3% % Haikou na na Xi'ning na na 68 63% Yinchuan 7 12% 4 153% % 2 165% Lasa na na % 39 25% Simple AVG % % % Source: CAWS, DBS Vickers Page 8

9 Beijing rental rate and y-o-y growth Shanghai rental rate and y-o-y growth % 3% 25% 2% 15% 1% 5% % 6% 4% 2% -2% Shenzhen rental rate and y-o-y growth Guangzhou rental rate and y-o-y growth % 8% 7% 6% 5% 4% 3% 2% 1% % 8% 7% 6% 5% 4% 3% 2% 1% Qingdao rental rate and y-o-y growth Shenyang rental rate and y-o-y growth 167 8% 234 3% % 4% 2% -2% % 2% 15% 1% 5% 165-4% 222-5% Source: CBRE, DBS Vickers Page 9

10 Tianjin rental rate and y-o-y growth Dalian rental rate and y-o-y growth % 4% 4% 3% 3% 2% 2% 1% 1% % 14% 12% 1% 8% 6% 4% 2% Nanjing rental rate and y-o-y growth Hangzhou rental rate and y-o-y growth 28 12% 28 12% % 6% 4% 2% % 6% 4% 2% Chengdu rental rate and y-o-y growth Chongqing rental rate and y-o-y growth % 1% -1% -2% -3% -4% -5% -6% -7% % 3% 2% 1% -1% -2% -3% Source: CBRE, DBS Vickers Page 1

11 Wuhan rental rate and y-o-y growth % 2% 1% -1% -2% -3% -4% Source: CBRE, DBS Vickers Top 1 logistics developers, 215 Rank Company GFA (m sm) 1 GLP Goodman 2 3 E-shang/Redwood 19 4 Blogis 17 5 Prologis (AMB) 13 6 Yupei 13 7 Mapletree 8 8 Vipshop 8 9 Boxway 8 1 Cainiao 6 Source: CAWS, GLP, company websites, DBS Vickers We Cover Beijing Properties China Fortune Land China South City GLP Mapletree Shenzhen Chiwan Our In-house Expert Danielle WANG danielle_wang@hkdbsvickerscom Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS interest in the companies mentioned in the respective reports Page 11

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