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DNE: Capturing new economy real estate growth in China

Chinese real estate investment veteran Sun Dongping outlines the strategy through which his new venture, DNE Group, aims to deploy capital at scale in the country’s fast-expanding new economy sectors

This article is sponsored by DNE Group.

In December, Chinese real estate investment managers D&J and New Ease announced a merger to form DNE Group. Both companies were founded by Sun Dongping, who previously co-founded Asian logistics, Warburg Pincus-backed manager before leaving the firm.

The new combined DNE entity brings together New Ease’s expertise in logistics and cold chains with D&J’s specialism in life sciences and modern manufacturing parks. It will also add further verticals in internet data centers and urban redevelopment to create a comprehensive Chinese new economy infrastructure platform under Sun’s leadership as the chairman and chief executive officer.

Sun and Keaton Yu, senior vice-president, capital and fund management, tell PERE how the company will seek to differentiate itself from its competitors and seize opportunities in a market that is both rapidly expanding and highly competitive.

What was the rationale for creating DNE Group?

Sun Dongping

Sun Dongping: D&J was created in 2014, and New Ease in 2018, and they had grown from start-ups to a considerable size and reputation within the market. It made sense once the businesses grew to sufficient scale to merge the platform, creating synergies for both project development and co-ordination of asset management under a common management team. Post-merger, DNE becomes a leading player in the market, covering the full spectrum of the new economy and new infrastructure segments in China.

That creates synergies for our customers and investors; for example, life science firms carrying out research on our business parks can also use our industrial space to manufacture their products, and further downstream they may use our logistics warehouses for their storage and distribution needs. If you can offer a one-stop shop to large-scale domestic and international occupiers, offering all the real estate products they need, that provides a competitive advantage when seeking to attract tenants.

Meanwhile, at the national level, the Chinese government is leading a policy push away from traditional real estate sectors, toward assets that function as infrastructure to support the new economy. It is also attractive for local governments in China to partner with a real estate platform that can create a whole new economy ecosystem for their region, instead of focusing on a single segment. From their perspective, that brings in more investment, more infrastructure and a wider range of skilled employment into their region.

Keaton Yu: The two companies involved in the merger – D&J and New Ease – are relatively young, compared to the other industry players. However, DNE has been the fastest growing platform among our peers, with early-mover advantage across multiple sectors. In logistics, industrial warehouses and life sciences, we are already in the top five, if not the top three, firms in the country. All the segments have operational scale, accentuating the management team’s depth of knowledge and expertise across our product offerings.

Compared to other players, whom traditionally tend to be single segment providers, DNE has the capability to offer an integrated service across all the different segments.

What are the drivers for growth in Chinese new economy sectors?

Keaton Yu

KY: The logistics story is well told: GDP growth, the increase in the middle-income earning population translating into increased consumer spending and the need for more and better goods. We have already seen a transformation in China’s logistics and cold chain space, to upgrade them to international standards over the past decade. In manufacturing, there is a strong policy drive from the government to enhance China’s high-value, high-tech production capabilities to strengthen the economy.

SDP: Covid-19 has also created opportunities for our target market segments. The pandemic has led to a strong emphasis on supply chain resilience. Meanwhile, the higher level of pandemic-related disruption seen in some neighboring economies has encouraged manufacturers to bring their operations back onshore. Even without covid, life sciences were always going to be a strong sector population, with ever-growing spending power and focus on improving health and well-being. We expect this to be one of the fastest-growing segments in the industry. Investors have recognized that, and research funding has reached record levels.

Our involvement in urban redevelopment is driven by the obvious demand to upgrade aging industrial facilities. We are pursuing the repositioning of obsolete factory and manufacturing sites in infill locations in Tier 1 cities.

By converting suitable sites to modern, low-density, well-equipped business parks, DNE has created an attractive portfolio located in key business hubs commanding benefits from a cluster ecosystem effect and strong government support, which are well pursued by customers, particularly those in high-tech and internet industries.

What is the expected growth trajectory for DNE Group?

SDP: In the next two or three years, we aspire for DNE to become one of the largest providers of new economy infrastructure real estate in China. DNE is already the number one independent player in the life sciences and advanced manufacturing segments. We want to capitalize on our market position and grow that business to become the dominant provider in the country. The business is an integrated platform with the ability to secure land, design, construct, manage and lease, with an added layer of fund management capabilities to provide a one-stop shop solution for our tenants and investors.

KY: DNE currently manages 16 funds or platforms for our investors, which include GIC, Allianz and QuadReal. We are looking at raising several new funds in multiple segments, on top of our existing vehicles, starting with our flagship core logistics fund, which will go to market in early 2022. We are also in the process of establishing development vehicles focused on industrial parks on the back of C-REIT progress in China, as well as platforms for life sciences properties.

Like our tenants, who have the ability to use a single provider to service their needs across a number of segments, our investors will be able to do the same; instead of investing with three or four different managers, they can invest with DNE to cover the full new economy infrastructure spectrum.

What challenges and risks do new economy real estate providers and investors face in China?

SDP: China has been successful in controlling the coronavirus pandemic. Nevertheless, we may have to learn to live with further covid and other potential disruption in the future. That will affect our on-the-ground operations. For instance, if one element of a business’s operations, such as logistics, has to close for a period of time, can their manufacturing still operate? We need to work with our occupiers to build resilience into their supply chains.

Meanwhile, a by-product of the comparatively successful management of the pandemic in China is that new economy real estate assets are in high demand and are being pursued by investors around the globe. In the past several years, we have seen the emergence of new investors and operators, which has increased competition. This is where our scale and multi-strategy investment opportunities will differentiate us and highlight our competitive advantages.

Another factor to consider is growth policies in China. The government plays a critical role in economic development; its long-term strategic policy can have wide-ranging effects. In China, we have to understand the government’s view on how the economy and its supporting infrastructure will grow. This is a key pillar in the government’s drive to promote tech-driven and people-orientated sectors such as new economy industries. As with all investments, there are cycles in the return profile, and we believe that our multi-segment scale and expertise mitigates the risk of any individual segment.

Finally, a challenge not only confined to China is the impact of climate change. The Chinese government is moving away from traditional power generation and towards renewable energy. That shift will have a series of long-term impacts. At DNE, we believe in contributing our share of social responsibility and have a series of long-term ESG initiatives in place to drive change. These initiatives include a review of energy usage and emission, as well as targets on reducing the environmental-and climate-related footprint of our operations.

In the near term, the supply of raw materials has been impacted; therefore, we need to be prepared for fluctuations in the prices of steel, concrete and other building materials, and proactively manage them through the development cycle of each project.

Shanghai space race

DNE’s flagship Jinshan Galaxy One scheme at the Shanghai Fenjing Industrial Zone is set to become one of China’s largest modern industrial and logistics developments

DNE Shanghai Jinshan Galaxy One
Landmark goals: Galaxy One will have three-story ramps, modern warehouses and services in the Jinshan District

Over a five-year period, the developer plans to construct 15 million square feet of modern warehouse and industrial space located within one hour’s drive from downtown Shanghai. This represents an investment of around $1 billion in the city’s industrial infrastructure.

“Galaxy One will become the landmark project of the southwest gateway of Shanghai,” says Sun. “It will demonstrate the integration of the Yangtze River Delta with the rest of the city, enhancing the ‘Shanghai Bay Area’ brand.”

 

Catering for China’s life sciences boom

The country’s life sciences sector has seen remarkable growth in recent years

Management consulting firm McKinsey & Co reports that the market value of publicly listed biopharma innovation players from China across the Nasdaq, Hong Kong Stock Exchange and Shanghai Stock Exchange surged from $3 billion in 2016 to more than $380 billion in July 2021, and seven out of the world’s top 10 largest biopharma IPOs from 2018 to 2020 originated from China.

DNE’s predecessor company, D&J, was among the first movers taking advantage of the segment’s rapid growth by developing projects such as Shanghai Jinchuang Plaza. Located in the center of Zhangjiang Hi-Tech Park, one of the most mature R&D business park areas in China, the 1.3 million-square-foot park consists of four research buildings built in two phases between 2010 and 2013. Occupiers are mainly Fortune 500 companies, including Shell, Johnson & Johnson, Formosa, Celanese, Amgen, Sartorius and Broadcom.