From local friend to domestic foe

Yesterday’s joint announcement by private equity firm Carlyle, investment advisor Townsend and developer Shanghai Yupei concerning their $400 million Chinese logistics strategic partnership represents the latest jostle for position in what is still an early stage in a race for market share.

Having not yet closed its China-biased, third Asia opportunity fund, Carlyle is investing about $50 million from its balance sheet in the partnership with Townsend’s $150 million extracted from its pool of discretionary accounts. Yupei, a developer of growing repute since its founding in 2002, is ponying up the other $200 million. Their combined resources will shift the ownership of five warehouses that Yupei has already developed and a further 12 warehouses considered “a strong pipeline” over the next two years. 

Their investment plans will barely even touch the needle for a market which Jones Lang LaSalle says has no more than 150 million square feet of institutional quality logistics real estate, comparable to Boston in the US or the Netherlands in Europe. 

But where this deal is more significant is in the part of the announcement that is conspicuous by its absence: the part about the half-share ownership in Yupei by Global Logistic Properties (GLP), the largest owner of logistics property in China and one of the heaviest hitters in the asset class worldwide.

It is perhaps of no surprise there wasn't any mention of the tie-up between global juggernaut GLP and the Shanghai minnow as it is in the process of being dissolved, PERE understands. GLP paid Equity International $53.6 million in 2011 for a 49 percent stake in Yupei with a view to greater exposure to its properties. Yupei has since plotted its growth trajectory and one-time bed-fellows turned competitors. Their short marriage required a divorce and it is understood that Yupei is in the midst of buying GLP out.

In so doing, and in finding more passive partners in Carlyle and Townsend, Yupei has effectively sent a warning shot to GLP and international peers like ProLogis and Goodman that here is one domestic logistics developer bent on churning out institutional grade logistics real estate without outside operational help. 

GLP’s major stakeholder GIC enjoys exposure to 37 markets in China, 167 million square feet of gross floor area and a further 128 million square meters of land. Smaller is Abu Dhabi Investment Council’s exposure to ProLogis’ Chinese footprint or Canada Pension Plan Investment Board’s to Goodman’s. But comparing these long-term institutional investors with Carlyle and Townsend and their new friends at Yupei would be unfair. The total gross floor area on Yupei’s books is little more than 7.5 million square feet and its strategy is designed to offer quicker returns.

Indeed, for Carlyle and Townsend, their investment is far more opportunistic and carries greater risk. Yupei’s smaller and domestic-orientated tenant roster is one such risk. Global occupiers, for instance, are more likely to follow global logistics developers into emerging markets for now.

But they may well have secured an advantage when it comes to securing land for development, arguably the hardest challenge for any logistics developer in China. Despite central government urgency to better facilitate the country’s exploding e-commerce, there is general reluctance among China’s local governments, many of which are highly dependent on land sale receipts, to sell land for an altogether cheaper (and less glamorous) use than residential, retail or office development. One source has suggested Yupei’s Chinese origins will be favored over its international competition when central force better moves local hands.

Of course the proof of the pudding is in the eating and an investment in Yupei is tantamount to investing with a start-up currently making early inroads in a grossly undersupplied market. But in the dissolving of its relationship with GLP, Carlyle and Townsend are backing (opportunistically) a domestic player with aspirations not to be consumed by its bigger competition but to face it head on.