Article

China’s logistics infrastructure developing in unexpected ways

China’s shift from being export-led economy to focus on domestic consumption with an explosive adoption of e-commerce is a catalyst for new logistics investment opportunities.

May 18, 2019

The focus on domestic retail consumption and the online shopping habits of the expanding middle class are driving change and industrial real estate investment.

Behind the headlines, however, the specific ways the sector is developing are less obvious, and create opportunities for investors willing to dig into the details to shape their investment strategies.

One trend to watch is the way demand for warehouses in tier-one and tier-two cities is being fulfilled. As cities such as Beijing, Shanghai, Guangzhou and Shenzhen continue to climb the value chain, the infrastructure to serve their rising logistics needs is increasingly located outside the main city centers. In the face of the increased demand, existing supply is now used up, and it’s difficult to secure old assets to convert or get new land. Land is allocated by the government for research and development and other higher-value purposes than storage or distribution centers.

As a result, developers are shifting their attention to sites just outside the top tier cities. For example, the expressways connecting Shanghai and nearby cities provides easy access to urban areas and enables construction of regional distribution centers. These satellite facilities can serve the needs of multiple cities, such as the subcities of Suzhou including Changshu, Kunshan and Taicang, which serve distribution needs both in metro Suzhou and nearby Shanghai.  

In addition, the top tier markets of Guangzhou and Shenzhen in south China are increasingly served by logistics facilities in nearby Dongguan, Foshan, and Huizhou, key satellite cities that also are emerging as major retail markets in their own right.

“This decentralization trend creates opportunities for investors to buy satellite sites or work with developers to finance new facilities,” says Warner Brown, Director in JLL’s research team in Shanghai.

Another trend for investors to capitalize on is the need to balance out the coverage of China’s logistics network. The current concentration in the Pearl River Delta (PRD) and Yangtze River Delta (YRD) regions means central and western China are underserved. Rising urban populations nationwide, and the One Belt, One Road initiative are driving demand for facilities to meet domestic distribution and international trade needs. For example, the railway lines to Europe originate in China’s western cities, where trade-focused bonded logistics zones sit at the heart of large-scale industrial real estate complexes.

As domestic consumption – especially via e-commerce – and international shipments grow in the central and western regions of China, there will be increasing need for modern logistics infrastructure, connected with the rest of the country and the world.

For institutional and private equity investors, the key to profiting from logistics infrastructure is to work with specialists who have the connections with local developers, and have the capability to handle negotiations for sites and facilities investments.

“Land allocation in China is strictly regulated, with high competition for sites for logistics use. Local knowledge and an understanding of the local government’s growth strategies and priorities is essential,” says Brown.

 
How is e-commerce transforming logistics?
 

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