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Warehouse Real Estate (China)
China’s shift to a consumption-driven economy is generating strong demand for modern high-quality logistics properties. The consumer confidence index keep trending north and hit highs after personal income tax cut lately. Growth of online retail sales slowed to 23% y-o-y in 4M2019 and foreign trade are seeing negative growth as affected by ongoing trade tension. Yet, we expect warehouse to be more defensive asset class as compared to other asset classes, as the key drivers are rising e-commerce, expanding 3PLs and improving infrastructure. On the other hand, new warehouse supply may slow as warehouse fixed asset investment (FAI) further declined by 1.3% in 2018 and 7.4% in 4M2019. The government’s intention to improve the efficiency of land usage in urban areas of top-tiered cities has led several cities to change local policies on industrial land use rights, which may further lower future industrial land supply, and thus, drive up existing warehouses’ valuations in those cities. Coastal cities continue to enjoy decent rental growth, while inland cities may suffer from a wave of new completions from e-retailers’ self-built warehouses. While China-US trade tension has raised investors’ concerns over bilateral trade and hedging costs for foreign investors, both domestic and foreign investors continued to show a strong appetite for logistics properties. The pick-up in e-commerce growth has triggered industry-chain plays to compete for warehouse assets, leading to further compression in capitalisation (cap) rates.
Growth of online retail sales remained decent, despite slower than that in 2018. E-commerce retail sales decelerated to 23% year-on-year (y-o-y) growth in 4M2019, vs. 27% and 34% expansion in 2018 and 2017 respectively, and iResearch expects a 18.8% CAGR in the next two years. Major e-retailers are actively expanding the categories of consumer goods, especially in fresh food and cross-border merchandise. They have 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 and drive online consumption activities further. According to CBRE, c. 0.83m sm of new warehouses was delivered in key cities in 1Q19. Vacancy remained flat at 6.8% in tier 1 cities and rose by 2.2ppts to 12.4% in key tier 2 cities. Looking ahead, coastal cities will continue to enjoy positive rental revision while Chengdu and Chongqing may suffer from a decrease in rental rate.
Cold warehouses heat up. Consumption upgrade continues to drive up demand for fresh foods and cross-border goods, supports demand for cold storage warehouses. Online fresh food sales have registered strong growth over the past several years and are expected to grow >30% in 2019 and >20% over the next five years. As a result, cold storage warehouses are gaining popularity among investors and developers. JD Logistics announced to further beef up its network for its cold chain logistics. Bright Real Estate (600708.CH) also successfully issued Bright Cold Chain Logistics Property CMBS in early-May.
Change in industrial land-use policy may lower future supply. Shanghai was the first city to lower the terms of industrial land-use rights from 50 years previously to 20 years in 2014. The city also plans to lower the proportion of industrial land from 27% currently to 17% by the end of the 13th Five-Year Plan (2016-2020). We also saw several cities following suit on Shanghai’s practice to lower the terms of industrial land use rights in late 2017 and early 2018, including Beijing, Guangzhou, Xiamen, Suzhou and Chengdu. In early 2018, Beijing also started encouraging the recycling/redevelopment of existing industrial lands for education, senior living and other social service purposes. We expect this to reduce future industrial land supply in those cities.
Structural plays, offering superior risk-return profile. The development cycle of warehouses is much shorter than that of other asset classes such as offices and retail malls, offering more flexibility and defensiveness. In addition, it is possible for a warehouse to achieve a return on invested capital (ROIC) of 6-7% after one year of operation, higher than that of other asset classes. We also expect more appreciation potential for warehouse assets, as industrial land in China is still cheap as compared to other titled lands. In addition, logistics property assets continue to be sought after by domestic PE funds, foreign investors and upstream plays, which will continue to push up valuations and compress yields. Industries leaders are now looking to IPOs in the US and HK and we’re also seeing increased issue of onshore pre-REITs/CMBS for logistics property. In early-April, central government also announced National Logistics Hub Distribution and Construction Plan (2019-2020), indicating to build up the first batch of 15 national hubs.
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