Investors warned ‘easy money’ over in logistics
Print Edition
WHILE the country’s logistics sector will continue to offer exceptional long-term opportunities to investors due to likely constrained land supply, the time of making easy money by building warehouses may have passed, an industry analyst has warned.
“Although it is too soon to call it the end of logistics investment prosperity, investors need to think twice before putting money in warehouses as the oversupply risk will exist in the near-to-medium term,” wrote Jenson Zhang, a Shanghai-based senior analyst at JLL, a leading international real estate services provider.
Thanks to high yields and the imbalance between limited supply and strong demand which has been particularly boosted by the rapid development of e-commerce, China’s logistics sector has emerged as a top target for foreign and domestic capital. Over the past two years, investors have deployed more than 60 billion yuan (US$9.65 billion) into this market. Given that the investment scale of individual assets is too small to meet institutional investors’ requirements, about 80 percent of transactions have taken place instead at the entity level. Investors that lack experience in warehouse development often choose to establish partnerships with developers that are already active in China.
As investors show keen interest in the development of warehouses, it is arousing concerns that the sector could be overheated. Equipped with large amounts of capital from their partners, developers have rushed into cities across China to acquire land and build warehouses.
Notably, cities with convenient location and easy access to land plots have witnessed a surge in warehouse supply in recent years. For example, high-quality warehouse stock in Wuhan, capital of central Hubei Province, surged from 85,000 square meters in 2011 to 692,400 square meters by the first quarter of 2015, with another 900,000 square meters under plan for the next three years.
At the same time, however, the growth of e-commerce demand has slowed as the sector is entering a period of stabilization and expected consolidation. Demand for warehouse space, meanwhile, has decelerated further as major e-commerce players such as JD.com and Alibaba have started building their own warehouses.
As a result, oversupply has emerged as an issue in a number of markets. The vacancy rate in Wuhan, for instance, rose from zero in 2011 to 33 percent in the first quarter of this year and in Chengdu, capital of Sichuan Province, it jumped to 20 percent from a trough of 0.6 percent during the same period of time with nearly doubled stock, according to the article.
Even mature markets can not escape unscathed with oversupply issues being found in certain sub-markets. For example, Shanghai’s overall vacancy rate stood at 16 percent in the first quarter of this year, while the vacancy rate in the city’s Lingang sub-market stood above 40 percent, which is high enough to make developers cautious about pursuing new projects there.
“Elevated vacancy rates and moderating demand have made landlords wary about raising rents in many markets, while projects in popular markets also need a longer time to lease out,” Zhang said.
Cities such as Chengdu, Shenyang and Tianjin have witnessed rent declines.
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