This article is sponsored by DNE Group
Logistics real estate has proven to be resilient to the effects of covid restrictions imposed on the Chinese market. Nevertheless, operators, developers and investors would have breathed a collective sigh of relief in December 2022 when the rules were rolled back en masse.
Looking ahead, markets are expected to open back up, recover and grow to normalized levels and improve the sector’s prospects, says Sun Dongping, founder and CEO of DNE Group, one of the largest Chinese new economy real estate platforms, formed by the merger of New Ease and D&J China.
However, the capabilities to secure the best space in different regions, build to the specifications and cater for evolving demands required by tenants remain fundamental. Meanwhile, the launch of C-REITs creates multi-dimensional opportunities for both investors and managers in the sector, adds Keaton Yu, DNE’s senior vice-president of capital and fund management.
How has China’s logistics market been affected by covid restrictions and how quickly will it bounce back from the recent relaxation of those restrictions?
Sun Dongping: It has been a tale of polarization. On the one hand, Tier 1 or 1.5 cities held up incredibly well and it was rewarding to see our portfolios continue to perform; on the other hand, some cities were facing a double whammy of covid and consumption headwinds.
Apart from covid itself, we have also seen the challenges of geopolitical changes and rising US interest rates, but internal consumption remains the main driver in logistics. As a result, we have seen a very fast and rapid reinvigoration of the market since the reopening and loosening of covid controls.
There is a lot of confidence in the prospects for the economy with people traveling once more and leasing activities picking up across China. And that has really only been happening over the last few weeks of 2022. The statements from government have been very clear: there are no longer any covid restrictions, with lockdowns, confinement and the rest all gone.
Following a strong post-covid recovery, however, it is going to be another year or two before the economy gets back to full speed.
What are the best locations for investing in logistics and cold chain real estate in China?
SDP: Logistics real estate has a strong correlation to population density and consumer spending power. China has several major population regions with greater GDP and spending power than the average. Those regional cities form economic, financial, technology and manufacturing hub zones.
Broadly, location is straightforward as there are four geographic hubs: the Yangtze River Delta region, comprising Shanghai and cities such as Hangzhou, Wuxi and Suzhou; the Greater Bay Area, consisting of Shenzhen, Guangzhou, Hong Kong and others; the Greater Beijing Area, also including cities such as Tianjin; and Mid-Western China, comprising cities such as Wuhan and Zhengzhou.
What are the best locations within these areas and what strategies are required to find and deliver the best sites?
SDP: It is a city-by-city case. In larger cities such as Shanghai, there are different logistics hubs serving different markets. Nonetheless, the best location is always the most sought-after one in each city.
Meanwhile, the government plays a critical role in land sourcing. At the national level, the Chinese government is leading a policy push away from traditional real estate sectors, towards assets that function as infrastructure to support the new economy. It is 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.
As a leading player covering the full spectrum of the new economy segments in China, we 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. From local governments’ perspective, that brings in more investment, more infrastructure and a wider range of skilled employment into their region.
China details roadmap for the C-REIT
In October, DNE Group launched the DNE REIT, one of China’s first real estate investment trusts for industrial workshop properties
DNE chairman and CEO Sun Dongping says the launch of the DNE REIT represents an important mark of confidence in DNE and unlocks new opportunities.
“It took two years to gain the approval and the bar is set extremely high,” he says. The due diligence carried out on a prospective REIT operator is exhaustive, but approval signals that a company is well thought of and endorsed by the regulators. “That is a key competitive differential and translates into better returns for our investors,” says Sun.
REITs can now be an exit for private holders of Chinese new economy and new infrastructure real estate assets. Previously, Sun says, transferring to a different fund or a joint venture platform was the most common channel, but a clear public channel for disposal will obviously be beneficial for asset owners and developers.
“The development of REITs in China is expected to lower the cost of capital and encourage a longer-term attitude towards real estate investment and management, increasing security and professionalism,” Sun explains.
How are warehouses themselves changing and developing in China?
SDP: Chinese logistics real estate has been evolving and upgrading over the past five to 10 years. About 10 years ago, developers began working to a commoditized international specification, which was user friendly for different operators. In the past three to five years we have seen an increase in efficiency and utilization and facilities needing to be suitable for robotics and automation.
“There is more curiosity around energy saving from tenants every year, so we have been rolling out measures such as installing solar PV panels across our portfolio”
We are also seeing a move towards multi-story warehousing in China, particularly in Tier 1 cities. It is somewhat different to Japan and Hong Kong as we are talking about three or four floors but over very large floorplates, so you might have 500,000 to 800,000 square meters on a single site.
How important is sustainability to investors and tenants in the Chinese logistics sector?
Keaton Yu: Over the past three to five years, our clients have become more and more aware of the importance of environmental sustainability. There is more curiosity around energy saving from tenants every year, so we have been rolling out measures such as installing solar PV panels across our portfolio, which can power the building infrastructure including forklifts, machinery and other equipment. The other initiative we are working on concerns rainwater collection and water recycling schemes.
How is the market for cold chain logistics real estate developing in China?
SDP: Cold chain logistics will be a major market in China. There are a few main drivers: the large population base and increasing consumer expenditure, as well as upgrading lifestyle requirements – people want fresher food. And, very importantly, there is an increasing emphasis from government on food safety and cold chain is central to that. We will therefore see an increase in cold chain facilities as well as cold chain logistics and transportation.
We also think there will be an increase in food production, manufacturing and central kitchen facilities in Chinese cities. We have invested in cold chain and linked facilities and plan to do so in a more strategic way in the future.
Logistics has been a favored sector for investors and China a key market. Does this remain the case? Is the type of investor and what they demand changing?
KY: We currently manage 21 funds and platforms for our investors and have raised $3.9 billion in the last five years. In 2022, we raised $2.6 billion across various strategies and new economy real estate asset classes, including logistics, business parks and industrial workshops.
“The development of REITs in China is expected to lower the cost of capital and encourage a longer-term attitude towards real estate investment and management”
In the past year or two we have seen an overall mitigation in foreign investors’ appetite due to covid controls combined with global challenges.
New investment in China from overseas in 2022 was lower than previous years. However, investors who have previously committed and are familiar with the sector are continuing to invest.
The overwhelming pick-up over the last two years has come from RMB investors, particularly Chinese insurance companies. They have been not only active but very selective when scrutinizing each segment.
Like our tenants, who have the ability to use a single provider to service their needs across a number of segments, RMB investors will be able to do the same. Instead of investing with three or four different managers, they invest with us to cover the full new economy infrastructure spectrum.
What is the outlook for Chinese logistics assets in terms of performance?
KY: As the market fully opens up after covid, we expect consumer expenditure to greatly increase towards pre-covid levels and we expect to see logistics rental escalations of around 4 percent in Tier 1 markets.
On the cap rate side, we see the growing public REITs logistics market putting compression pressure on private market cap rates. Logistics sector C-REITs are trading at an implied trading yield of around 3.5 percent.
We also think that the more stable interest rate environment in China and the cost of land will have impact on performance for logistics developers, which is why the capability of the operator and quality of assets are so important.