China Lockdowns Boost Warehouse Market: LaSalle, SC, C&W and Baker Mac on MTD TV Asia Logistics Forum 2022

 
Despite Chinese cities returning to stringent lockdowns to contain the recent spike in coronavirus cases, a panel of industry experts told MTD TV on Tuesday that they see demand for warehouse space across the mainland continuing to increase thanks to a burgeoning e-commerce sector and changes in manufacturing practices.

LaSalle Investment Management managing director Winnie Yu said the upswing in leasing and surge in investment in China’s logistics sector throughout the two years of the pandemic are key indicators of sustained high demand for warehouse space in the country, known for being the world’s factory.

“Due to the lockdown, some of our sites like a development project in Shanghai currently have some disruption, but other than that, most of the sites and our warehouses in other regions and areas closer to Shanghai are in normal operations right now and are very busy,” Yu said. “Particularly, I am expecting things will get even busier after the lockdown.”

This latest sign of optimism comes on the heels of the Chinese logistics sector outperforming its regional peers during the global health crisis, with the country recording $5.8 billion in trades of incoming-earning warehouses last year to lead the APAC region, based on MSCI-RCA data.

Flexible Warehouses Needed

Not only did the rise of e-commerce spur demand for warehouse space, but it also accelerated an existing shift in consumer behaviour and distribution channels, according to Yu.

The trend has prompted manufacturers and logistics operators to ensure that facilities are flexible and can cope with what Yu described as a shift from “just in time” practices which emphasise minimal inventories, to a “just in case” approach which allows producers and distributors to have ample supplies on hand in case of disruptions.

With the lockdowns and testing keeping more people in their residences, China has seen a rise in the ‘stay-at-home’ economy where more consumers rely on online shopping and retailers need to stockpile more goods, Yu said. “We normally get our deliveries on time within 1-3 days, and now we need to be prepared for ‘just in case’ situations, [which] has resulted in more demand in overall warehouse spaces as companies require additional space to hold inventory.”

The return of stringent lockdowns also failed to prevent investment managers like SC Capital Partners from striking deals.

Speaking at the same forum — which was sponsored by Yardi — SC Capital managing director Michael Lane said his firm has engaged in five transactions despite the ongoing stay-at-home policies, with the Singapore-based fund manager officially exiting three of its assets in China last month and now in the process of negotiating two more sales.

“If the lockdown can ease up, if we can have the best scenario, things rebound quite quickly, then of course I think you’re gonna see a lot of people bringing stuff to the market as there’s a lot of liquidity in the logistics sector,” Lane said.

Lane said cap rates for well-entitled and fully leased warehouses are usually above 5 percent, but he cautioned that yields may experience greater pressure moving forward as more institutional investors turn their focus to the logistics sector due to its resiliency.

“When you get an environment like that, you do get pressure on cap rates,” Lane said. “We don’t see it letting up any time soon, despite the lockdown.”

More REITs, Better Regulatory Environment

The current environment is also primed for more pure-play real estate investment trusts focused on logistics to follow a series of IPOs in China’s REIT market, including SF REIT’s launch last year, according to Jeremy Ong, partner at law firm Baker McKenzie, who spoke during the same panel.

Ong said spinning off a portion of the development arm of conglomerates or logistics firms through a REIT will bode well for the long-term strategy of businesses.

“If the pricing is right, we will see more of these … especially in China, where basically the China REIT regime is really new,” he said. “There’s a lot of push factors in China too. The regulators there are doing their best to really encourage property developers and logistics operators to think about doing a JV in the logistics space. They see this as helping promote a virtuous cycle of investment and fundraising and to sort of allocate capital to the right strategic sectors in the economy, and logistics is one of those sectors.”

In replenishing their land banks, developers are teaming up with e-commerce firms to secure greenfield sites from local governments and pass stringent protocols, according to Joe Xiao, head of logistics business for China at Cushman & Wakefield.

Xiao painted a brighter outlook for logistics investment in China, hinting at “encouraging” news from the government recently about making new greenfield sites available and easing market barriers to pave the way for more projects.

“We anticipate a more streamlined approach to negotiations and a more welcoming stance towards industrial and logistical investment,” he said. “Authorities have recently announced a policy called a ‘unified national market’ which targets to standardise different local market policies and practices across China so as to allow open and fair competition.”

Japan Sheds and More

After concluding the second leg of Asia Logistics Forum 2022, MTD TV will be back on Thursday for a panel discussion focused on the Japanese market featuring Yosuke Fujioka, managing director and head of investments and fund management for the Japan division of GLP; Matthew Zann, head of Asia Pacific for EQT Exeter; Brian Hung, a director with APG Asset Management; and Benjamin Chow, head of real estate research for Asia at MSCI.

Later this month, Mingtiandi will turn to logistics investment in South Korea on Tuesday, 24 May, for a session with speakers from ESR Kendall Square REIT, LaSalle Investment Management, Hines and JLL. A second show that week, on 26 May, will shine a spotlight on emerging markets like India and Vietnam with speakers from CPPIB, Cushman & Wakefield and Vietnam’s BW Industrial.

The series will conclude on Monday, 30 May, with a panel on e-commerce and innovation in the warehouse sector, featuring speakers from ESR, Cushman & Wakefield and more.