Industry / Real Estate

Warehouse Real Estate (China)

Group Research / December 16, 2020

Photo Credit - AFP

Overall Outlook

China’s shift to a consumption-driven economy is generating strong demand for modern high-quality logistics properties. The COVID-19 outbreak will likely see three potential structural trends: (i) Higher penetration of e-commerce, (ii) higher inventories for a resilient supply chain, and (iii) more diversified manufacturing bases. We believe all these will further drive demand for warehouses and we expect capital to keep flowing into this area. Moreover, the sector could potentially benefit from the central government’s intention for new infrastructure construction (新基建) and the upcoming C-REITs.


More warehouse demand ahead. E-commerce retail sales y-o-y growth slowed to 3% in 2M20, as affected by traffic control and shortage of courier. Yet, this has rebounded to 16% in 10M20. Also, over the past “Double-11” online shopping festival, posted a 32% y-o-y sales growth, the highest growth in the past three years. We continue to expect China’s e-commerce to grow at a CAGR of 26% over the next two years, which keeps driving up demand for logistics property. In addition, current prevailing agile/lean supply chains are likely to be reviewed, potentially leading to the re-building of inventory and driving up warehouse demand in the long term. According to Prologis’ estimate, every 1% increase in inventory will lead to additional warehouse demand of 5.3m sm in the US and Prologis is expecting 5-10% increase in inventory in the US post-pandemic.


Demand for cold warehouses heating up. Consumption upgrade continues to drive demand for fresh foods, supporting demand for cold storage warehouses. Online fresh food sales have registered a CAGR of 64% over the past five years and are expected to speed up after COVID-19, as more fresh food sales will likely move from traditional wet market to supermarket, new retail and fresh e-retailer given rising awareness of food safety and hygiene. In addition, some new retail’s business models have turned profitable and they plan to speed up the opening of new outlets. All these will likely drive demand for cold storage warehouses. Meanwhile, cold storage warehouse per capita was still low at 0.12 cubic metres, versus global average of 0.20. We expect investments in cold warehouses or the transformation from general warehouses to cold warehouses to speed up.


Some inland cities to suffer from new supply, depressing rental growth in the near term. We expect rental growth to slow to an avearge of 1% in key cities in 2020. Tier-1 cities and cities in east China will continue to lead rental growth. However, Chengdu, Dalian, Wuhan and Shenyang will likely suffer from new supply, especially those from e-retailers’ self-build warehouses. The migration from 3rd party warehouses to self-built wareshouses in those cities is inevitable and will put pressure on rental rates in the near term.


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, warehouses continue to deliver higher cash flow return, compared to other asset classes. We also expect more appreciation potential for warehouse assets, as the cap rate spread between modern warehouses and premium office is still high in China versus other developed regions. We expect warehouse cap rates to compress further, driving up valuations.


Likely to benefit from upcoming C-REITs. The sector could also benefit from central government’s aim to build a modern logistics network (National Logistics Hub Distribution and Construction Plan) and government’s intention for new infrastructure construction. In addition, the long-awaited China real estate investment trust (C-REIT) is expected to kick off in the near future and warehouse assets are likely in the first batch of C-REITs. In our view, C-REIT could speed up asset turnover for those warehouse developers using their own balance sheets for expansion, such as Vanke, China Logistics Property and China Nanshan. Logistics plays such as and SF Express are also likely to benefit from C-REITs. In addition, C-REITs could also be a perpetual vehicle providing an exit for those operators using private equity (PE) fund-structured expansion, such as GLP, ESR and Goodman.

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