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China Logistics Projects Achieving 7% Development Yields as Costs Fall 40%: MTD TV

June 12, 2024
in Technology
China Logistics Projects Achieving 7% Development Yields as Costs Fall 40%: MTD TV
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Land and construction prices in China are dropping at the same time that the evolution of the country’s e-commerce market is continuing to drive demand for warehouse space and a developing REIT sector is attracting more capital, according to senior executives from Forest Logistics Properties, ESR China, Gaw Capital and international law firm Stephenson Harwood.

China’s property slump has lowered development costs by as much as 40 percent, enabling investors to achieve development yields of 7 percent on a net operating income basis, Hank Hsu, co-founder and CEO of Forest Logistics Properties said in a panel discussion on Wednesday.

“I think it’s the golden time of development opportunities here,” said Hsu, who oversees the Shanghai-based logistics developer, operator and investment manager. “Land prices have come down 15 percent to 20 percent. Construction costs have come down another 20 percent due to less residential construction jobs for contractors. So our development costs have come down by 35 percent to 40 percent…we have more negotiating power with the government, and the construction costs account for 65 percent to 70 percent of the overall project cost.”

The panel discussion on logistics investment in mainland China, which was sponsored by Yardi, also included Luke Li, managing director of ESR China; Humbert Pang, managing principal and head of China for Gaw Capital; and Janice Yau Garton, a partner at Stephenson Harwood. The session, which was part of Mingtiandi’s 2024 APAC Logistics Forum, comes as China’s logistics sector is seeing growing interest from domestic institutional investors as the country’s pilot REIT (C-REIT) programme provides a new avenue of liquidity for eventual exits.

Southern China Boom

Despite moderating domestic consumption and slower expansion of online shopping, demand for warehouse space in mainland China has received a boost from the growth of cross-border e-commerce platforms like Shein and Temu, as well as from high-tech manufacturers such as electric vehicle makers.

“There will be more demand from e-commerce platforms that are able to offer product at a more competitive price to consumers, as well as some of the new formats of online sales, such as livestreaming retailers,” said Li, who oversees HKEX-listed ESR’s 40 million square metres of industrial properties in mainland China. “Besides e-commerce, we are seeing some new demand drivers, such as high end manufacturers, EV car parts and services, as well as renewable energy manufacturers. And of course, the biggest bright spot since last year is cross-border e-commerce.”

The “big four” cross-border e-commerce players – Shein, Temu, AliExpress and TikTok – will require 7 million square metres of space this year, according to Hsu, whose firm has developed or acquired 2.5 million square metres of logistics assets across China and has $2 billion in mainland assets under management.

Rental growth has remained stable in southern China, with cities like Guangzhou, Dongguan and Shenzhen serving as supply chain hubs for e-commerce players and high-tech manufacturers, while other regions continue to face headwinds as tenants seek cost savings amid China’s economic slowdown.

“There’s a lot of pressure and headwinds on rental growth prospects, even in tier 1 cities,” said Pang. “Of course, there are very good areas like southern China, where a handful of tenants are doing extremely well in cross-border trade. They are still paying good rent and they’re still in demand. But other than that, most of the logistics space owners are having a tough time negotiating with existing or new tenants.”

Despite challenging rental growth in areas outside of southern China, the panelists pointed to improving yields and supply dynamics in cities like Chengdu, Changsha, Wuhan and Suzhou as justifying continued investment.

Hsu’s projects in Chengdu and Changsha are currently 95 percent occupied, while Li sees a window of opportunity to acquire desirable land plots in Suzhou, with the local government willing to offer land for logistics and high end manufacturing at attractive prices amid the downturn.

C-REIT Gamechanger

With mainland China’s logistics assets standing out as a rare bright spot amid the country’s property slump, the sector’s stable returns and attractive yields have attracted increased investment from local insurers and other domestic institutions.

“The logistics market was an alternative investment for so many years, and now it’s very mainstream,” said Garton. “So it has really continued to perform, and is one of the few asset classes that has done really well over the last five years or so. So I haven’t seen a lot of distress in big box warehousing, cold storage, or logistics in general. I haven’t seen that amongst my clients so far.”

The sector’s appeal has also been boosted by China’s pilot REIT programme, which provides investors with a new avenue to monetise their investments. Since the debut of China’s first REITs in 2021, which included logistics trusts, mainland authorities have been promoting what are now known as C-REITs as a way to deepen the country’s property markets and create alternative financing channels for developers and fund managers.

Mainland-listed REITs are currently trading at 5 percent yields compared to 7 percent to 10 percent for their Hong Kong-listed counterparts, which provides owners of logistics assets a desirable channel to exit their position, according to Pang.

That view was echoed by Li, with ESR’s C-REIT – the AVIC ESR Warehouse Logistics Closed Infrastructure Securities Investment Fund – expected to complete preparations for a mainland listing this year.

“C-REITs are certainly a gamechanger for China’s logistics real estate sector,” said Li. “We are seeing insurers and local investors setting up pre-REIT funds and private REITs with the aim to exit to C-REITs. So, I think C-REITs complete the ecosystem of the local capital market for logistics assets. We have seen a higher level of interest from a lot of domestic insurers and many of them are actively evaluating opportunities. By and large, logistics is probably the most preferred asset type on investors’ minds for the past four years.”

More to Come

Mingtiandi’s APAC logistics forum continues on Thursday, 13 June with a look at the Japan and Korea markets featuring speakers from ESR, Seoul-based start-up Qube Industrial and the Netherlands’ APG Asset Management.

On Tuesday, 18 June the event series continues with a panel focused on logistics opportunities in Southeast Asia and India, featuring Jai Mirpuri, head of Southeast Asia for ESR; Souvik Mukherjee, head of logistics development for India with Mapletree Investments, and Fion Ng, chief operating officer with Vietnam’s BW Industrial.

The final session in the series on 20 June takes a look at Australian opportunities with Simon Sayers, head of development for ESR Australia; George Anastasiou, head of real estate for Australia with DWS; Nicholas Bradley, joint managing director at Hale Capital Partners and Benjamin Chow, head of real estate research for Asia at MSCI Real Assets.

>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : MingTiandi – https://www.mingtiandi.com/real-estate/events/china-logistics-projects-achieving-7-development-yields-as-costs-fall-40-mtd-tv/

Tags: ChinaLogisticstechnology
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