Reuters Edge

China: A must-have for industrial property investors

BEIJING (Reuters) - Efforts to cool China’s real estate market have failed to deter global industrial property investors, who continue to flock to the world’s fourth-biggest economy amid a logistics boom and strong retail demand.

“It’s becoming difficult for everybody to buy land,” said Trent Iliffe, regional director in charge of industrial property for Jones Lang LaSalle in Shanghai.

“But for global investors, they have to have portfolios in China,” Iliffe said in a phone interview.

Beijing has acted firmly over the past two years to curb real estate investment out of concern that rising inflation could trigger social unrest.

The ruling Communist Party is also worried that turning too much arable land over to industrial use could jeopardize China’s ability to grow enough grain to feed its 1.3 billion population.

The authorities have doubled the price of industrial land and launched a series of inspections, which will run through to early next year, to check whether local officials approved land deals in line with central government regulations.

As a result, yields have dropped.

In Shanghai, they have fallen to 8-9 percent from 10-12 percent two years ago as average land prices in the city have risen 50 percent to about $45 per square meter, said Tony Su, DTZ’s associate director of industrial property.

However, analysts note yields were still higher than in other global centers -- and there is greater scope in China for rents to appreciate.

They expect investors to keep expanding their portfolios, especially as forecasters predict the economy can keep up its momentum after four years of double-digit growth.

Apart from China’s coastal conurbations, inland cities from Chongqing and Chengdu to Wuhan are now on investors’ radar, though the move west is slowed by the difficulty of finding and retaining qualified executives, they said.


Global industrial property investors, such as ProLogis PLD.N, AMB Property Corp. AMB.N, MapleTree MAPL.SI and Macquarie Goodman MGQ.AX, have earmarked $5-6 billion for Shanghai and other cities along the Yangtze River Delta this year, said DTZ's Su.

Guy Jaquier, president for Europe and Asia of AMB, forecast growing demand for modern logistics facilities as manufacturers move up the value chain and Beijing deregulates the market.

As basic manufacturers move inland, producers of higher-value goods fill the vacancies in eastern cities, said Andrew Hatherley, executive director of industrial and logistics services with CB Richard Ellis.

China gradually relaxed restrictions on its logistics sector after joining the World Trade Organization in 2001. Now, foreign companies such as UPS UPS.N, FedEx FDX.N and Deutsche Post's DPWGn.DE DHL are allowed to wholly own express delivery operations in China.

Chinese industrial property firms are typically arms of local government and, lacking expertise, tend to team up with foreign players.

“I see the logistics business in China having a 10-year growth run at least,” Jaquier said.

Foreign delivery firms are racing to meet growing demand not only for international services but also for domestic express deliveries between major cities of the vast country.

This is spurring strong demand for industrial property.

DHL leased distribution space of more than 1 million square feet at an AMB logistics centre in Shanghai in March, just two months after it leased 200,000 sq ft at a ProLogis park near the Yangshan deepwater port complex outside the city.

Underlying the expansion is strong growth in retail sales on the back of rising incomes.

Credit Suisse projects China will be the biggest consumer market after the United States by 2015 with domestic consumption hitting $8.8 trillion by 2020.

Global retail chain operators from Wal-Mart WMT.N to Carrefour CARR.PA are setting up more stores in China to ride the retail wave. Furniture giant IKEA opened a store in Beijing last year that is its second largest worldwide.

Domestic rivals, including GOME, a Best Buy BBY.N-like electronics chain, are also expanding furiously to try to keep their lead in the market.

“Industrial (property) still provides very good returns, though maybe not as good as it was two or three years ago,” said Hatherley.