While the travails of struggling developer China Evergrande and fears of contagion stemming from its indebtedness impede investing in China’s real estate market generally, capital continues to be raised for its logistics sector.
In the past two months alone, close to $4 billion has been raised across three China logistics vehicles: GLP collected $1.75 billion in a first close of GLP China Logistics Fund III; LaSalle Investment Management held a $972 million final close on its LaSalle China Logistics Venture fund; and BPEA Real Estate raised $1.2 billion for its China-focused logistics business, Forest Logistics.
These raises add to an already upward trajectory. Chinese industrial fund strategies attracted $5.14 billion in 2020, up from $1.1 billion in 2016, according to PERE data.
The sector’s continued success is due to a widespread belief the asset class sits away from China’s regulatory crosshairs, unlike the residential strategies which have prompted Beijing to intervene. Moreover, the Chinese government has actively encouraged the strengthening of its national logistics system. Last year, the country added 22 cities to an existing list of 23 logistics hubs announced in 2019, according to a CBRE report.
“Investors are showing reasonably strong long-term conviction towards sectors such as logistics and data centers and these are generally in line with the government policy,” says Alfredo Lobo, partner at capital advisory firm Hodes Weill.
He says these sectors fall between real estate and infrastructure classification and, therefore, capture a broader universe of investors.
As elsewhere in the world, China’s logistics sector also benefits from rising demand for e-commerce and warehouses. CBRE notes that Alibaba’s total number of logistics orders on the Double 11 shopping festival in 2020 – an unofficial online shopping event in China – was more than 33 times that of 2012, for instance.
“The fundamentals for the logistics sector are very strong and the sector’s growth has been further accelerated by the pandemic,” a senior executive at an Asia-headquartered logistics specialist says. “On the other hand, traditional asset classes such as retail and hotels are facing more challenges under such circumstances.”
The senior executive expects more investors to re-allocate capital from traditional asset classes to so-called ‘new economy’ asset types. China’s retail and hospitality sectors have seen volumes drop 23.8 percent and 42.3 percent, respectively, from 2016 to 2020, according to Real Capital Analytics. Conversely, buyers acquired $4.1 billion of Chinese logistics properties last year, versus just $978 million in 2016, as per Real Capital Analytics data.
However, China’s burgeoning logistics demand brings challenges as well as opportunities for investors. “Finding a good deal is very difficult because the market has become very competitive. There has been more capital available than good assets available in the market,” says a former head of China at a global real estate firm, who asked not to be named.
Rental levels are being impacted by a glut of supply, too. According to CBRE, nationwide new supply for logistics facilities saw a 32 percent year-on-year increase in 19 cities tracked in 2020. This pushed vacancy levels to 14.8 percent and rents to fall 1.4 percent year-on-year. “The issue is there is more supply coming up across the country while a majority of the demand still lies on the few key cities,” the former China head adds.