Industry / Real Estate

Warehouse Real Estate (China)

Group Research / November 16, 2018

Photo Credit - AFP

Overall Outlook

China’s shift to a consumption-driven economy is generating strong demand for modern high-quality logistics properties. The consumer confidence index peaked in late 2017/early 2018 and has stayed at a relatively high level. Driven by this, online retail sales and foreign trade are rebounding, which should support demand for modern logistics properties ahead. On the other hand, new warehouse supply may slow as warehouse fixed asset investment (FAI) further declined by 8% in 9M2018, from a drop of 2% in 2017 after rising 5% in 2016 and 28% in 2015. 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. Inland cities had reversed their downward trend in the latest two quarters, while coastal cities in Yangtze River Delta continue to lead rental upside.
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.

Online retail sales has kept above-expected growth. E-commerce retail sales is accelerating with 29% year-on-year (y-o-y) growth in 9M2018, vs. 31% and 26% expansion in 2017 and 2016 respectively, and iResearch expects a 21.3% CAGR in the next three 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. Therefore, demand for warehouses should remain decent. During the latest Double 11 (Singles’ Day) Shopping Festival, gross merchandise value (GMV) for Alibaba (BABA US)/JD (JD US) grew 27%/26% y-o-y to Rmb213.6bn/Rmb159.8bn respectively, vs. market expectation’s low 20%.

Cold warehouses heat up. China’s manufacturing Purchasing Managers' Index (PMI) has remained above 50 for the last 28 months, indicating an expansion of manufacturing activities. Total monthly export/import activities have maintained their positive y-o-y growth since January 2017 to October 2018, based on the latest available figures. Imports increased by 20% in value terms in 10M2018 while exports grew 13%. Consumption upgrade continues to drive up demand for fresh foods and cross-border goods, and hence, supports demand for cold storage warehouses and bonded warehouses. According to iResearch, both online cross border sales (imports only) and online fresh food sales have registered strong growth over the past several years and are expected to grow >30% in 2018/2019.

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.

Warehouse continue to provide above-average cash flow returns among major asset classes; they also offer higher asset appreciation potential in the mid-to-long term. 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 5-6% 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.

To read the full report click the download link below.

Companies We Cover

Beijing Properties

China Fortune Land

China South City

GLP

Mapletree

Shenzhen Chiwan

Vanke-A

Vanke-H

NOTE: the Companies We Cover are not available within SME and Corporate Banking sections.
To view this content in DBS Treasures, click here

Our In-House Experts

Danielle WANG                  
danielle_wang@hk.dbsvickers.com
+852 2820 4915

Disclaimers and Important Notices

GENERAL DISCLOSURE/DISCLAIMER

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment  banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.
United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.
Dubai This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United States This report was prepared by DBS Bank Ltd.  DBSVUSA did not participate in its preparation.  The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize.  Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd
12 Marina Boulevard, Marina Bay Financial Centre Tower 3
Singapore 018982
Tel. 65-6878 8888
Company Regn. No. 196800306E