Return to search

Ivanhoé Cambridge’s Agethen: When does the China logistics party end?

The real estate company's Asia-Pacific senior vice-president has seen logistics evolve from an opportunistic play to a vital part of portfolios.

George Agethen
George Agethen

As an advisor, GP and now an investor covering China over 15 years, I’ve seen a few highly publicized mistakes made by investors and an even larger number of non-publicized ones that continue to shape attitudes towards this market. It remains a destination where one can find strong arguments to invest in China and an equal number to avoid it completely.

It has been impossible to ignore the risks associated with venturing into the country. I do not recall a year when we have been free from negative news and reporting on a range of issues that clouded our ability to read the tea leaves.

Overheating growth, slowing growth, rising renminbi, falling renminbi, shifting political sands, corruption scandals, aging population, ghost towns, government intervention, excess capacity, equity bubbles, debt bubbles, housing bubbles and, more recently, trade wars and the pandemic. The list goes on.

Yet, as an investment community, we persist. It is a large marketplace with a rising middle class and strong consumer spending, driving what seems like an insatiable thirst for all things real estate.

Speed and scale

Demographics, domestic liquidity and an entrepreneurial spirit mean investment strategies get replicated at a breakneck pace. Ideas can quickly become “hot,” everyone pivots in the same direction, a building boom ensues and suddenly undersupply becomes oversupplied at an alarming speed, premiums disappear, returns fall and, in a worst case, you become obsolete.

China’s physical retail sector from 2008 provides an example. The pitch books then read: “Urbanization, rising middle class and strong consumer spending across China’s Tier 1.5 and 2.0 cities” – hence the need for “modern” retail (and developers calling their designs Retail 2.0, 3.0, etc) – with 20 percent IRR, and capital poured into the sector.

However, by 2012, it became clear a significant shift was happening: there was over-building and it seemed every mall was over 100,000 square meters. Simultaneously, this thing called e-commerce was around 6 percent of retail sales and rising fast at 70 percent growth. In 2013, China overtook the US as the largest online market.

Which brings us to logistics in 2021. It is a similar pitch book for a different sector. There are the same fundamentals but now in a country with greater connectivity and innovation. So, we continue to watch with amazement as e-commerce grows (albeit at a slower rate) as does tenant demand across China’s key logistics hubs.

At the same time, we remain acutely aware of the risks. What if undersupply flips to oversupply in a “real estate minute?” When does the trade war start to impact the real economy? Is there an e-commerce saturation point? Is this the only sector where the tenant is actively innovating to stop using real estate? Is the last mile in China really the last 50 miles? Isn’t China the global leader in drone technology?

These questions are essential to keep us grounded and test our assumptions in China, where speed and scale and delivering outsized returns on the way up can lead to unpleasant surprises on the way down. The party is not yet over, and with a comprehensive approach to investing in China, exciting opportunities wait to be discovered.