Toronto-based Canada Pension Plan Investment Board has upsized its latest equity commitment to the Goodman China Logistics Partnership (GCLP) with the Sydney-based Goodman Group, as the JV looks to develop multi-storey warehouses in response to increasing land prices in China.
Last week, CPPIB announced $1.4 billion in fresh equity commitment to GCLP while Goodman committed an additional $350 million. Following this latest round of capital injection, the total investment capacity of GCLP is around $5 billion.
The JV, launched in 2009, has CPPIB taking a lion’s share of the stake (80 percent) while Goodman owns the remainder. The previous upsize was done in December 2015, with CPPIB committing $1 billion and Goodman committing $250 million.
“In the Chinese market, land prices have increased significantly compared to when we started in 2009. Partly related to that development and the scarcity of land, we have started to develop multi-story warehouses. Combined, those factors require more capital to be invested, which we have taken into account with this upsize,” said Jimmy Phua, managing director and head of real estate investments in Asia, at CPPIB.
Indeed, in Shanghai for instance, industrial land prices reached 235.41 yuan ($34.56; €29.57) per square foot, in March 2018, the highest price seen since 2008, according to data from China’s Ministry of Natural Resources. In Beijing, an all-time high was also seen in the same month, with prices touching 255.11 yuan per square foot, as seen in the chart below.
Phua still sees a solid investment thesis for the partnership’s development-led strategy centered on major gateway cities in China, with growth in the sector stemming from the rise of consumption, e-commerce, and the middle-income segment.
“Goodman has also been successful in securing a pipeline of projects. When we look at the capital requirement for each project, the pipeline in place, and the market development, we believe that it is the right time to upsize to more significant amount than before, so we do not need to keep coming back to revisit the same issues,” Phua added.
GCLP’s portfolio consists of 33 logistics assets with a total of 26.9 million square feet. Close to 99 percent of the assets are fully occupied. Meanwhile, the JV has also exited some stabilized assets. PERE understands that nine assets were sold in total in two separate deals in 2016 and 2017 respectively.
“We sold the assets to tighten our strategy but also achieved the price that we wanted. In the past, people saw logistics as an alternative sector. Now, more and more, it has become mainstream, so there are many investors prepared to buy good quality, income-producing logistics. For the two sales, there were enough bids to select from,” Phua said.
In Shanghai, rents for modern warehouses were up 3.4 percent in second quarter of 2018 versus the same period last year, the fastest rate in four years, according to real estate services firm JLL.
Phua declined to comment on specific returns but said the performance of the joint venture is in line with the firm’s expectations, despite the fact that that returns have reduced due to increasing supply of logistics assets in the market.
With this upsize, CPPIB’s total investment commitments specifically for logistics, that may or may not be eventually be fully invested, has reached C$9 billion ($6.95 billion; €5.95 billion) in Asia, excluding India.
“As of now, logistics is a major part of our Asia-Pacific allocation and is a bit larger share than globally, since we made an early entry in [Asian] markets starting in 2009. However, if logistics becomes the biggest real estate type in our regional portfolio, it will be because of market opportunities rather than an intentional priority,” Phua said.
As of 31 March 2018, CPPIB’s real estate equity AUM in Asia, across all asset classes, was C$13.3 billion out of a global real estate AUM of C$46.1 billion.