Goldman Sachs Makes US$120 Mil Pre-IPO Loan to China Logistics Developer

China warehouse marketChina’s least exciting real estate sector is quickly becoming the centre of investor attention, as Goldman Sachs has agreed to provide a US$120 million pre-IPO loan to start-up warehouse developer e-Shang.

The logistics developer and operator, which is based in Shanghai, announced yesterday that the US investment bank would be providing the loan, while private equity firm Warburg Pincus, which co-founded e-Shang, had also committed a third round of funding for the venture, bringing its total investment to over US$200 million.

Ecommerce and Retail Driving Demand for Logistics Space

One of the major factors driving demand for logistics space in China is the country’s booming ecommerce sector. A study this year by McKinsey found that China’s retail ecommerce industry has 120% compound growth since 2003, and online retailer Yihaodian is already the single largest tenant of developer Prologis.

Traditional retail has also been growing at double-digit rates for the past several years, further fueling the demand for warehouses.

Luke Wei, a Managing Director of Goldman Sachs, said, “As China’s economy shifts to a more consumption-based model, we see great potential in the logistics sector. e-Shang is well positioned as a leader in the space and we are pleased to provide this funding to enable the company to capture a significant share of this outsized market opportunity.

E-Shang Moving Rapidly Towards IPO

e-Shang was co-founded by Warburg Pincus and two local entrepreneurs in 2011, and has since grown its portfolio of warehouses to one million square meters of completed and ongoing projects. The company focuses on developing institutional-quality warehouses as well as providing logistics services from prime locations across greater Shanghai, Beijing, Guangzhou as well as a number of second-tier cities.

Joseph Gagnon, Managing Director of Warburg Pincus commented, “We continue to see robust demand from customers for quality logistics facilities, driven by increasing domestic consumption and a shortage of warehousing supply. The new financing from Goldman Sachs and the recent equity commitment from Warburg Pincus provide e-Shang with a strong foundation for future growth as the company targets an IPO in the next few years.”

Warehouses Move to Centre Stage

While the price of housing tends to grab the most headlines, institutional investors having been taking every opportunity this year to buy into China’s rapidly growing logistics real estate market.

When the US state of New Jersey decided to invest in Global Logistic Properties China-focused fund this year, it found that warehouse investments in China provide “development yields can be approximately 8.75% with a projected unlevered Internal Rate of Return of 14% for a 10 year holding period. This compares favorably to other property types (office and residential mostly) in China.

A report published by consultancy Jones Lang LaSalle in September this year found that the growth of China’s e-commerce market “makes the logistics sector the most attractive real estate opportunity in China.”

Global Players Fight for Room in the Logistics Market

While e-Shang and Warburg Pincus have been growing their own warehouse developer in China, other global private equity firms have been taking the more traditional route of buying into established operations.

During August this year, Sam Zell’s Equity International bought a stake in The Redwood Group, an Asian investment fund focusing on warehouse development in China and Japan. That same month, US private equity giant Carlyle Group agreed to invest up to US$400 million in a joint venture with local logistics developer Yupei.

Meanwhile the leading warehouse builder and operator in China, Global Logistic Properties, performed a reverse version of Warburg Pincus starting a warehouse company, when the developer announced in November that it would take advantage of investor demand for a piece of China’s logistics market by starting its own investment fund focused on China logistics real estate opportunities.

In addition to private equity firms, institutional investors have also gotten involved in China’s warehouse sector, with the Canada Pension Plan Investment Board (CPPIB) announcing a US$500 million increase to their Goodman China Logistics Holding partnership with Australia’s Goodman Group in July this year.