|The Road Ahead for China Industrial Property|
To get a read on China’s Industrial property sector, Russel Beron looked at recent trends and spoke with Sally Lin, Country Director of sustainable warehouse developer, Gazeley China and Michael Cole, Managing Director of RightSite.asia, an online portal focused on China’s industrial property scene.
Despite the ongoing European debt crisis, decelerating manufacturing and rising labour and commodity costs, China’s industrial property sector appears to be on firm ground. Rents are increasing steadily and demand is outpacing supply, mostly due to limited supply of high grade property along with high prices and a shortage of land for development in prime locations. At the same time industrial property investment yields remain in the solid range of 9 percent, making the sector attractive for investors.
The major driver for property demand is Chinese consumers, who are propelling retail sales at double digit growth rates. This represents a growth in both physical stores, as foreign retailers clamor to establish their brands, and in ecommerce as online sales continue to grow.
Taobao, Dangdang, Tencent Holdings, Wal-Mart Stores Inc. and 360buy are key players in China’s fierce ecommerce space. China’s online and offline retailers, competing in a climate of high logistics costs, need distribution hubs in key locations which can cut costs and add value to their operations.
Sally Lin, Gazeley China: “It depends on the location - in general demand is soaring, especially in first tier cities such as Shanghai, Beijing and Guangzhou, which is occurring against limited supply. For companies looking for an affordable top grade warehouse in Shanghai, it’s very challenging due to scarce land resources and high land prices. For example, in Shanghai land is currently selling for over 1 million RMB per mu. However, in second tier cities demand is also strong and a large amount of supply is becoming available. The combination of increased land availability at lower prices and government support arising from attracting FDI is creating new levels of growth in these locations.
Michael Cole, RightSite.asia: “For logistics space, the demand from traditional and online retailers continues to grow at more than 15 percent annually, and this trend should continue as I don't see any drop off in shopping as the major pastime for China's increasingly wealthy urban dwellers. While I remain hopeful that local governments will see the value of setting aside more land to support logistics development, I don't see any dramatic increases of supply in the logistics market. For manufacturing sites, I expect that demand should pick up again in the second half of 2012 from the current low levels as Europe sorts out its current economic issues.
What kind of property is most desirable?
Sally Lin: Gazeley China: Most companies are looking for property which has a good balance between efficiency, quality and value for money. Logistics costs in China are relatively high, so many companies look to offset this by optimizing their warehouse operations. Adopting a local standard warehouse might be cheaper in the short term, but this can often be inefficient in terms of material handling capability and ultimately results in higher operating costs. Having a higher quality space, designed for efficient operations and integrated with practical sustainability features such as natural lighting, water harvesting and efficient lighting provides for efficient facilities with reduced operational costs.
Michael Cole, RightSite.asia: “The market is still facing a severe shortage of logistics space to support retail distribution and ecommerce. China's retail sector continued its double digit growth in 2011, with sales increasing 17 percent during the year. At the same time, most local governments resist making land available for warehousing because of what they perceive as a lack of added value. On RightSite we saw average logistics rents increasing more than 15 percent during 2011 for sites in or near first-tier cities.”
What locations are companies looking at?
Sally Lin: Gazeley China: “The major locations are still Shanghai, Beijing, Guangzhou, Shenzhen and Tianjin, but companies are aware of the limited availability and high land prices. So increasingly I observe companies looking to balance land costs with transportation costs and expanding their location options to within one hour’s proximity of major cities; such as Donguan for Shenzhen, or Kunshan for Shanghai. Demand from ecommerce companies looking to establish regional distribution centres is soaring. With limited options in first tier cities that can meet their requirements, these companies are looking at second and third tier cities in recognition of the large amount of property coming on stream..
Michael Cole: RightSite.asia: “For logistics space, companies are primarily looking at sites near the urban centres, with Kunshan developing into a note-worthy distribution hub near Shanghai. However, there is also increasing demand to support retail in emerging cities such as Chengdu, Changsha and Hangzhou. For manufacturing, more companies are migrating their production inland to escape rising costs in the first-tier cities and closer to growing markets in central and western China. Many Shanghai-based companies have shifted shifting production to Changzhou in Jiangsu, as well as to cities in Anhui such as Hefei and Wuhu.
Where do you see prices in the sector going?
Sally Lin: Gazeley China: I think it is interesting to consider two factors in regards to prices - land cost and rental rates. These two factors are not increasing at the same rate. Taking Qingpu(a district of Shanghai), as an example you can see that the land price has increased from 400,000 RMB per mu in 2008 to one million now. In the same period, rental rates have increased from 0.90 RMB per sqm/day, to around 1.1 RMB per sqm/day. In Chengdu, land prices have increased from 120,000 RMB per mu to 400,000 RMB per mu now whilst rental rates have increased from around 0.70 RMB to 0.85 RMB. The discrepancy is likely to continue, which means developers have to be creative by finding property in the right locations and building highly efficient warehouse to meet our customer’s requirements.
Michael Cole: RightSite.asia: For distribution space, based on the demand we are seeing on RightSite for new warehouses near urban areas I would expect rents to increase another 15 percent on average during 2012 compared to 2011. For manufacturing, demand for new space has slackened, so now would be a good time to negotiate for a production site with some local governments.
Is there any impact to the property market due to a drop in manufacturing and exports?
Sally Lin: Gazeley China: We don’t see much impact from shifting low value manufacturing in the near term since most major manufacturers still have a strong presence in China. The impact might be felt further down the road as more supply comes on stream.
Michael Cole: RightSite.asia: Industrial developers in China are definitely concerned as FDI from Europe dropped more than 42 percent in January compared to 2011. Demand from North American investors is also soft at this point. However, the impact is confined to the manufacturing market, and has not had a negative effect on logistics space.
Are there any particular trends you are seeing in the market?
Sally Lin: Gazeley China: We are seeing a number of retailers looking to establish in cities such as Wuhan and cities in North-East China such as Shenyang, locations where consumption is rising. Another trend we are seeing is for European companies to relocate their distribution centre from Europe to coastal cities in China. From there, they can either ship direct to their customers or ship to smaller DC’s in Europe, which reduces their costs. We are also seeing 3PL’s relocating their DC’s into a central DC to optimize their operations.
Michael Cole: RightSite.asia: The most interesting trend is the movement toward investing in high tech and other service sector industries. While overall FDI into China has dropped in the last few months, investment into Shanghai - which is in many ways China's most expensive city - has actually gone up as foreign firms pumped US$1.3 billion in the service sector during January. At the same time, Shanghai's manufacturing sector dropped 19.5 compared to 2011.