Chapter 5

Logistics

Greater China Real Estate Market Outlook 2020

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DEMAND POISED TO REBOUND

SHORT-TERM PRESSURE MOUNTS

2019 IN RETROSPECT

2019 was an challenging year for occupiers and landlords. Starting in late 2018, multiple cities saw weaker demand growth and increasing vacancy. The relocation of several major e-commerce platforms to self-owned warehouses further exacerbated the situation. Net absorption fell to a level last seen in 2014 while the vacancy rate increased from a historical low of 9% in 2018 to 12.6%.

Market performance diverged among different city tiers and regions in 2019. In contrast to the national trend, new supply in tier I cities remained extremely tight, accounting for 7% of total supply. Vacancy in tier I cities continued to compress, falling to 5.7%. In tier II cities, supply increased by 60% y-o-y, prompting the vacancy rate to jump from 10% to nearly 16% in 2019. Cities such as Chengdu, Chongqing, Tianjin and Wuhan felt the strongest impact from the wave of new supply.

SUPPLY EXPECTED TO CONTINUE TO OUTPACE DEMAND

CBRE expects new supply to continue to outpace net absorption in 2020. Approximately 10-15% of new supply scheduled to be completed in late-2019 has been delayed until H1 2020, pushing up total supply for this year even further. The nationwide vacancy rate may increase to above 15% against this backdrop. Landlords have already started to explore ways to adapt to anticipated high vacancy, including by offering more flexible lease terms.

The coronavirus outbreak could create headwinds for Class A warehouse demand in H1 2020. With multiple cities taking measures to limit inter/intra-city transportation, the logistics sector has been hit hard, especially in Hubei. There may be disruption to supply chains given Wuhan’s status as a strategic transportation and manufacturing hub. Broader consumption will also suffer, albeit to a lesser extent thanks to the rise of online retail and food delivery services.

NEW DEMAND ENGINES SET TO EMERGE

STRUCTURUAL SHIFT DRIVES LONG TERM DEMAND GROWTH

CBRE believes the softer market sentiment observed in 2019 was cyclical and temporary, and demand will recover as soon as the coronavirus outbreak is under control. With the e-commerce relocation trend beginning to stabilise, demand will gradually catch up with supply. Structural trends such as supply chain modernisation, logistics service outsourcing, increasing e-commerce penetration, the growing popularity of Class A warehouses will drive demand for modern logistics facilities in the long term.

In terms of sectors, demand from 3PL firms, new e-commerce platforms, and retailers (especially those from fresh food and pharmaceutical companies) will increase. In addition, several new growth engines have recently emerged and will drive further demand in the year ahead.

THE RISE OF B2B PROCUREMENT E-COMMERCE PLATFORMS

The shortage of medical supplies witnessed during the coronavirus outbreak has caused considerable concern. The lack of transparency and efficiency in procurement and delivery reflects weaknesses in enterprise procurement systems.

Aware of the digital potential of the market, investors and entrepreneurs have started to turn to the enterprise procurement (or B2B) e-commerce market for growth. An increasing number of e-commerce platforms focusing on small-to-medium enterprises (or SME) procurement have emerged to cater to enterprise procurement. These platforms provide industrial products, office supplies and stationery, and catering and food services.

Several e-procurement platforms have become popular among investors and have already raised multiple rounds of investment to expand their logistics networks. CBRE expects such platforms to become more active in leasing Class A warehouses in China in 2020.

Figure 23-24

FREIGHT DELIVERY SEGMENT TO SCALE UP

INDUSTRIAL CONSOLIDATION GENERATES UPGRADING DEMAND

Although China’s logistics market has seen rapid growth over the past 10 years, it continues to suffer from poor efficiency, high fragmentation and low profit margins. There is an urgent need for the industry to upgrade to modern logistics standards and undergo consolidation in order to achieve economies of scale. Of the different segments of the market, the express delivery industry is the most mature and has a high concentration rate of top players.

Leading companies such as SF Express have already established comprehensive distribution networks and are striving to enhance operational efficiency through means such as automation, AI and robotics. The freight delivery (including less-than-truckload and full-truckload delivery) segment is a much larger yet more fragmented market but one which also holds great potential for consolidation and warehouse upgrading.

CBRE expects new market leaders to emerge in this segment and drive future growth for China’s Class A warehouse property market.

E-COMMERCE PLATFORMS EXPAND TO LOWER TIER CITIES

LARGE END-USERS TAKE CONTROL OF OWN SUPPLY CHAINS

Since 2017, an increasing number of self-built warehouses have been completed by major end-users such as Cainiao, JD, and Suning. The aim of this strategy is to enhance customer experience through faster delivery and higher efficiency. To achieve these objectives, warehouse networks, including business information derived from logistics activities, have taken on strategic importance. As the owners or operators of these facilities, such companies are more willing to invest in smart hardware such as robots, automated stacking systems, mechanical arms and AGVs connected by IoT and software including AI-enabled systems.

SELF-BUILT SUPPLY EXPECTED TO DECLINE IN MAJOR CITIES

CBRE expects approximately 4.65 million sq. m of self-built supply to enter the market in 2020. Around 1.6 million sq. m. of this space will be located in the 16 major cities tracked by CBRE and over 3 million sq. m. will be in other cities.

The combined effect of tight land supply and end-users finishing setting up distribution centres means that self-built supply will begin to decline in the 16 major cities from 2020. The negative impact of relocation to self-built warehouses will therefore be alleviated from this year.

However, in other cities, supply will continue to increase as end-users, especially e-commerce giants, explore lower tier cities in search of growth. CBRE’s analysis show that large players are rapidly constructing distribution centres in Central and West China, including in cities such as Zhengzhou, Changsha and Chengdu. These locations are expected to rapidly emerge as regional logistics hubs for leading e-commerce platforms.

SOLID RENTAL GROWTH EXPECTED IN TIER 1 MARKETS

SLOWER BUT MORE SUSTAINABLE RENTAL GROWTH

CBRE expects overall rental growth to be stable in 2020 although performance will vary across different markets.

Tier 1 cities and tier II cities in Eastern China, which continue to see a lack of new supply, will enjoy healthy rental growth, albeit at a slower rate of around 1.5-3%.

Cities with weak demand and/or large supply pipelines including Wuhan, Shenyang, Dalian, Chengdu and Chongqing are expected to see rents experience downward pressure, albeit to a varying degree. However, CBRE expects market sentiment in tier II cities to recover starting from 2021 as both speculative and self-built new supply begins to decrease. Occupiers and landlords are advised to consider potential shifts in market sentiment when conducting lease negotiations.