Logistics in China’s Pearl River Delta – it’s all about Tier 2 cities

December 17th, 2014 by Silvia Zeng

The non-bonded logistics market is growing rapidly in the Pearl River Delta (PRD). With warehouse supply rising and improvements in the highway network, Tier II cities adjacent to Guangzhou and Shenzhen are emerging to support regional distribution centres for the PRD.

Previously, most FMCG, e-commerce, electronics, auto, and logistics companies preferred to establish regional distribution centres in Guangzhou, taking advantage of proximity to the region’s largest retail market, key transportation nodes, and the largest amount of high-quality warehouses in the PRD. However, a shortage of government land tender sales for logistics usage has restricted the supply of warehouse space in core locations. Although there will be ample supply in non-core areas in both Guangzhou and Shenzhen, some distribution centres have expanded in core locations of Tier II cities, most of which border Guangzhou or Shenzhen and connect via key expressways running through the PRD. Some notable regional distribution hubs in Tier II cities include Park n Shop and VIP.com in Foshan; JD and yhd.com in Dongguan, the latter three being large Chinese online retailers.

This trend is facilitated by infrastructure improvements across the PRD. Expressway network density has risen by 50% since 2008 and should increase by a further 38% by 2020. We believe key expressway plans will further improve efficiency and connectivity for product delivery from Tier II cities which will offset the higher transportation costs from those distribution hubs outside of Guangzhou. These plans include links such as:

  • Zhaoqing – Guangzhou (Huadu)
  • Guangzhou (Panyu) – Foshan (Gaoming)
  • Shenzhen – Dongguan
  • Many investors have already made a foray into these Tier II city hotspots. In 2008, total GFA of prime non-bonded warehouse facilities in Guangzhou, Shenzhen, Foshan, Dongguan and Huizhou only amounted to 1.1 million sqm. The total stock has increased nearly fourfold to 4.1 million sqm in 2014, and will climb to 8.0 million sqm by 2017. It is also worth noting that 68% of the future supply increment – 2.6 million sqm – will be situated in Tier II cities.

    The picture below maps the existing and upcoming non-bonded warehouse projects developed by GLP, Prologis and Goodman. It shows their developments in Tier II cities and it is clear that there are fewer new projects within Guangzhou and Shenzhen in the pipeline. In my opinion, we should view the supply-demand balance from a regional perspective instead of city by city, with the Tier II cities taking spillover demand from Guangzhou and Shenzhen. We can see that in the considerable leasing demand enjoyed by newly completed projects in Foshan, Dongguan and Huizhou over the last 2 years.

    With online retail set to capture a greater share of retail spending in China, we expect that new and expansion demand from e-commerce companies and 3PLs will be the key demand drivers in the PRD. This is set to buoy demand growth in Tier II cities, because efficient and affordable product delivery will become critical to distribution logistics success.


    Notes: The dots refer to projects developed by GLP, Prologis and Goodman
    Source: JLL

    About the author
    Silvia Zeng is the Associate Director of Research for JLL in Guangzhou, China.

    The Korean logistics market – following in the footsteps of Japan?

    December 15th, 2014 by Yongmin Lee

    The economies and real estate markets of Korea and Japan have many similarities so it’s not too surprising that I occasionally hear the Korean logistics market compared to its Japanese counterpart – only 15 years ago.

    Certainly, the local logistics market has a lot in common with Japan circa 2000:

  • Warehouse space is predominantly outdated and/or functionally obsolete due to one or a combination of location, design, specifications and building size;
  • Domestic conglomerates are the dominant market players but have typically run their own supply and distribution chains; and
  • As a result of the above two factors, the quantity and quality of leasable space is limited.
  • Since 2000, the Japanese logistics market has seen dramatic structural changes especially after the arrival of notable global logistics developers and, as a consequence, the market has evolved into one of the most active logistics investment markets in Asia. So is it possible that the Korean logistics market may follow a similar path to maturity? Well, over the past couple of years some positive signs have certainly emerged:

  • The Korean national government has designated the logistics industry as an economic growth engine with the stated aim of increasing logistics industry revenue by nearly 50% by 2017;
  • The outsourcing of logistics functions is on the rise. Government tax incentives and global competition are encouraging domestic conglomerates to utilise 3PL operators and to improve the efficiency and flexibility of their distribution and supply channels;
  • A forecast uptick in new supply is expected to significantly improve the quality of space available. The government’s ‘Logistics Service Improvement Plan’ released in August this year provides for investment of around KRW 1 trillion in new logistics facility projects. Private developers are also responding to growing tenant and investor demand for modern, hi-tech distribution centres in key locations; and,
  • Lease covenants are improving. As more blue-chip tenants occupy leasable space, the days of one to two year lease terms are disappearing and terms of up to 10 years are becoming more common, particularly for build-to-suit facilities.
  • While the market is still characterised by a lack of transparency and limited transaction volumes, the signs of progress are encouraging. How long the Korean logistics market will take to reach the level of maturity of its Japanese equivalent is of course hard to predict, but the improving fundamentals of the industry are likely to provide a compelling investment story to the increasing number of institutional buyers reviewing the sector in coming years.

    About the author
    Yongmin Lee is the Head of Research for JLL in Korea.

    Who will be the major players in Australia’s investment market over 2015?

    December 10th, 2014 by Jonathon Bayer

    Australian commercial property transaction volumes have once again reached record levels in 2014, the third consecutive year this has been achieved. A significant amount of investor groups, both foreign and local, have competed for assets driven by the hunt for yield and the opportunity for capital growth. As we come to the close of another calendar year, the question people are asking is: What will happen to investment volumes in 2015 and who are the likely buyers and sellers?

    One of the well documented trends is the increasing amount of offshore capital entering the country post the financial crisis. Australia’s economy performed strongly at a time when other major economies were contracting and the commercial property sector looked attractive to offshore investors. Australia’s property yields are high relative to other mature markets, while the deterioration in occupancy rates was less severe than other markets. The Sydney CBD vacancy rate is 10.1% – lower than 40 of 44 CBD office markets in the US. As a result, net investment flows were at unprecedented levels from 2010 onwards.

    Private investors who are typically counter-cyclical were net buyers from 2008 to 2012. A number of private investors acquired prime grade assets on attractive pricing metrics in 2008 and 2009. Average prime grade office capital values have risen by 19.5% since the trough. Some investors are taking the opportunity to realise gains and recycle capital into new opportunities in Australia or within the Asia Pacific region.

    Syndicates over the past two years have turned from net sellers to net buyers. The cost of debt is sub 5.0% for well-rated borrowers and enabled syndicators to manufacture higher equity IRRs.

    So what can we expect the Australian investment landscape to look like over 2015? The first question is where is the product is likely to come from. As mentioned earlier, asset values have risen by 19.5% between 2009 and 2013. A number of privates who purchased at that stage of the cycle will seek to crystalise gains over 2015. Syndicates who structured closed ended funds may be also coming to the end of the investment window and looking to trade out.

    On the other side of the ledger, offshore capital is again likely to be a major play in the investment space over 2015. Sovereign Wealth Funds, pension funds and private equity firms will remain active participants in 2015. A scarcity of core product will result in a number of groups looking to move up the risk curve and access core+ and value-add opportunities.


    Source : JLL Research

    About the author
    Jonathon Bayer is a Senior Research Analyst for JLL, based in Sydney, Australia.

    Modern warehouses to become nerve centres for Indian e-commerce players

    December 9th, 2014 by Suvishesh Valsan

    Retail real estate in India has witnessed interesting transitions over the past decade, from the dominance of unorganised mom-and-pop stores to organised shopping centres, and thereafter, the emergence of large-format, developer-managed shopping malls. More recently, the advent of e-commerce is gradually attracting the fancy of Indian consumers. Estimates from Gartner Inc. suggest revenue from the online retail platform is growing at 60-70% per annum, making India one of the fastest growing e-commerce markets in Asia-Pacific[1]. The trend poses a risk to malls that are old styled, poorly designed and strata sold. Already, vacancy rates in such malls have reached 20%, compared with under 10% in well designed and managed malls.

    The warehousing sector will likely experience a similar impact from the proliferation of e-commerce. Retail accounts for a significant share of the overall warehousing demand in India. E commerce has made significant inroads and the industry will increasingly rely on strong back-end support through logistics and warehouses. Existing warehouses in clusters such as Bhiwandi (near Mumbai) and Bhiwadi (near Delhi) do not have the necessary features for growth alongside e-commerce. According to an E&Y report on warehousing[2], close to 85% of warehouses that exist in India are old in terms of design and structure.

    Constructing a modern warehouse may return investment yields similar to that of an old warehouse, although demand is shifting towards the former. Following the impending introduction of the Goods and Services Tax, which will uniformly tax the interstate movement of goods, modern warehouses will enjoy better economies of scale. Old warehouses may meet with a similar fate as their counterparts in the retail mall space.

    About the author
    Suvishesh Valsan is a Senior Manager, Research for JLL in India, based in Mumbai.


    [1] Gartner Inc. publication -
    http://www.gartner.com/newsroom/id/2876517

    [2] The Indian Warehousing Industry: An Overview – Oct 2013 (Ernst & Young – Confederation of Indian Industry report)

     

    Speculation surrounding the Tianjin Free Trade Zone

    December 8th, 2014 by Chelsea Cai

    Recently, people close to the matter confirmed the submission of Tianjin’s application to the Central Government for a Free Trade Zone (FTZ). This comes one year after the launch of the Shanghai FTZ and has the market excited about what an FTZ might mean for the city and also if Tianjin might follow the Shanghai FTZ model. However, the Shanghai FTZ has had mixed results thus far and is still in the pilot stage. It may be too early to conclude that copying the Shanghai model will lead to successful outcomes in Tianjin.

    The Shanghai FTZ is focused on service sector reforms including trade, investment, finance and government administration. The majority of the reforms in the Shanghai FTZ will first focus on finance, such as policies that have been put forth on interest rate liberalisation and RMB convertibility.

    Tianjin Yujiapu Financial District

    Since the reforms in the Shanghai FTZ have been slow to materialise, Tianjin may instead want to structure its FTZ to focus on enhancing the competitiveness of industries already present or planned for the area. The most recent master plan for the Tianjin FTZ encompasses nearly 65 sq km, including Tianjin Port, Dongjiang Port and Binhai New Area CBD, e.g. Yujiapu Financial District and Xiangluowan Business District. The size of the area and the diversity of the industries contained therein give Tianjin FTZ a good platform to develop in the future. Thus, the local government should utilise the opportunity to promote the businesses and the real estate in these areas.

    The Tianjin government can help local businesses by:

  • Learning from the Shanghai FTZ and adopting the most successful policies;
  • Streamlining processes so as not to delay implementation of reforms, which has been a common complaint in Shanghai;
  • Positioning the FTZ to benefit from the regional growth spurred by the Capital Economic Circle integration plan.
  • At the moment, plans are still unclear, but details regarding the Tianjin FTZ are expected to be released by year-end. More specific rules and policies relating to the area are expected to be phased in over the next one or two years. However, the government has the opportunity to use the FTZ to help improve the local economy and generate more business activity for existing companies.

    For more details read our November issue of Tianjin Property Insight.

    About the author
    Chelsea Cai is a Senior Analyst in JLL’s research team in China, based in Tianjin.

    Indonesia Logistics – a new frontier in the making

    December 4th, 2014 by Vivin Harsanto

    Indonesia is the largest archipelagic country in the world and the fourth most populous nation, with about 250 million people. The Indonesian economy is driven by robust domestic consumption attributed to rapid urbanisation and a growing middle class.

    With a large population base, the demand for consumer products – from basic foodstuffs and personal care to high-tech gadgets and motorcycles – has risen. With this expanding consumer market, a larger volume of goods is being transported throughout the archipelago. Coupled with a greater number of new international brands with production facilities in the Greater Jakarta area, the demand for distribution and logistics services by local and foreign manufacturers, including third-party logistics (3PL) companies, has expanded rapidly.

    As such, there has been considerable interest from local and foreign investors in the logistics market. These include local and regional private equity groups as well as pension and sovereign funds. A number of these investors have enjoyed success, being the first movers in other emerging cities in the Asia Pacific region.

    Most investors and 3PL companies look to acquire land within established industrial estates in the Greater Jakarta area, with a number in Surabaya, Medan and other secondary cities. While land prices within industrial estates have increased significantly over the past few years, estates with good infrastructure, utilities and professional estate management are still preferred.


    Source: JLL

    Despite these exciting changes and the potential in the Indonesia logistics market, some large international owners, operators and developers are still hesitant in their participation, as they feel that the Indonesian market is not mature or sophisticated enough. In my opinion, the opportunities are bountiful. The underlying conditions – 1) the increase in retail and e-commerce and 2) the current imbalance between demand and available supply where major occupiers have been looking at multiple locations – will continue to drive rents up and asset yields down for some time.

    However, with a population this large and geographically dispersed, the weak infrastructure translates into longer distribution times and higher costs. Nonetheless, this is set to change. At the Asia Pacific Economic Cooperation (APEC) convention, recently elected President Jokowi invited foreign investors to support his government’s programme to build and improve the ports and other transportation infrastructure. If the new president is able to deliver on this, this infrastructural issue could be minimised, if not mitigated, eventually providing significant opportunities for logistics operators and developers.

    About the author
    Vivin Harsanto is a National Director for Advisory at JLL in Indonesia.

    Impact of China’s first rate cut in two years

    December 3rd, 2014 by Sherril Sheng

    On 21st November, the People’s Bank of China (PBOC) announced a cut in benchmark lending rates of 40bps (one-year rates from 6% to 5.6%) and the one year deposit rate by 25bps to 2.75% (effective from 22nd November). At the same time they further liberalised deposit rates by increasing the ceiling to 120% of the benchmark, from 110%. This is the first rate cut in China since July 2012. The asymmetric rate cut lowers banks’ margins (which are very high) and reduces the cost of capital for borrowers, but without an increase in lending quotas it does not appear that generating faster GDP growth was a clear motivation for the move.

    So what will the impact of the rate cut be on the housing market and individual homebuyers? The chart below illustrates the impact of the rate cut, combined with the effect on monthly instalment payments of the 30th September increase in the discount for mortgage rates that first time home buyers can enjoy which, in practice, went from 0% to 10%(1).

    It shows that before the rate cut, the 10% mortgage rate discounts offered by some banks after 30th September resulted in a 6.7% monthly savings in instalment payments for homebuyers taking 30-year mortgages, and 5.1% for those taking 20-year mortgages (comparing scenario 2 with scenario 1). After the rate cut, the combined effect of the lower base lending rate and mortgage rate discounts is even more dramatic, which leads to a 10.3% monthly savings in instalment payments for buyers taking 30-year mortgages (comparing scenario 3 with scenario 1). Scenario 4 is the theoretical maximum 30% mortgage rate discount to the new benchmark rate in which homebuyers can see monthly instalments decrease by 22.1%. Although scenario 4 is more in theory, the 10.3% monthly savings in scenario 3 is very much reality and is significant.

    Chart 1: Monthly payment difference before and after the rate cut on November 21

    Assumptions:
    1) The total price of an apartment is RMB 5 million;
    2) The buyer borrows 70% of the total value of the apartment from banks as commercial mortgage loan.
    Source: JLL Analysis

    We’ve seen much news reporting the sluggish sales in the residential market in 2014. However, when comparing China’s commodity housing sales volumes in the past six years (Chart 2), 2014 is far from the worst. In fact, sales volume in 2014 is running ahead of all prior years other than 2013, based on January-October data. With Home Purchased Restrictions loosened in most cities since August and easing in mortgage policies since late September, we see the rate cut leading to further improvement in market sentiment for the remainder of the year. We expect sales volume for the full year of 2014 to be on par with last year.

    Chart 2: Commodity housing sales volume in China (accumulative)

    Source: CEIC

    Note: (1) PBOC announced on 30 September 2014 that mortgage rates can be as low as 30% below the benchmark rate. However, in practice, first-time buyers can now receive a 5-10% mortgage rate discount depending on the bank.

    About the author
    Sherril Sheng is a Senior Manager in JLL’s research team in China, based in Shanghai.

    The Rise of “New Industrial Occupiers” in Sydney

    December 2nd, 2014 by Peter Guevarra

    New Industrial Occupiers is a label that we’ve coined for firms that take up traditional industrial space but are not considered typical industrial space users. Examples of New Industrial Occupiers include showroom / bulky goods retailers, hospitality companies, alternative office boutiques, and recreational firms. New Industrial Occupiers are becoming increasingly prevalent in the older established industrial precinct of South Sydney as the area undergoes gentrification.

    South Sydney is an industrial precinct that was once heavily associated with logistics and manufacturing. However, it is now becoming a recognised residential growth hub, with a high level of residential and mixed-use development. In order to service the expanding residential population, New Industrial Occupiers have moved into the market and are beginning to compete against traditional industrial occupiers for industrial space, albeit with some adaptive re-design. This is driving an up-lift in market pricing, in two ways in particular.

    Firstly, adaptive re-use to cater for New Industrial occupiers has further reduced the traditional industrial stock base, thereby placing upward pressure on rents for the remaining existing traditional stock. Secondly, the alternative uses employed by New Industrial occupiers generally command a higher rental rate per square metre per annum (sqm p.a.).

    Table 1 highlights the rent differential between New Industrial and traditional industrial usage. On a typical lease over a GLA of around 5,000 sqm, traditional industrial occupiers in South Sydney would expect to pay between AUD 130 and 160 per sqm p.a.. This is well below the achievable rents for New Industrial occupiers. To illustrate, firms in the hospitality sector will generally pay an average of between AUD 300 and 400 per sqm p.a.; while showroom users or bulky goods retailers will pay between AUD 200 and 300 per sqm p.a..

    Table 1

    Source: JLL

    Significant value upside is clearly achievable for existing owners through adaptive re-use. However, this adaptive re-use can often incur significant capital expenditure from owners and must be weighed against the risks. Consideration must be given to a site’s suitability to adaptive re-use such as zoning, existing built form, location and street frontage, car parking allowances, site accessibility, existing competition and the effects of clustering. All of these factors will impact the viability of creating a product suitable for New Industrial occupiers.

    Nonetheless, a valid question to ask now is whether the rise of the New Industrial Occupier is unique to South Sydney, or if this trend will occur elsewhere in Sydney, particularly with the rising density around Urban Activation Precincts? Indeed, could New Industrial Occupiers become more of a presence in other industrial precincts globally? While a number of factors are required in order for market conditions to be supportive of New Industrial Occupiers, the rise of New Industrial Occupiers could clearly occur in other markets. This trend will be particularly relevant to older industrial precincts that are undergoing significant gentrification and with an expanding population base.

    About the author
    Peter Guevarra is a Research Manager for JLL, based in Sydney, Australia.

    Hybrid stores to draw Hong Kong shoppers back from the virtual world

    December 1st, 2014 by Cathie Chung

    Alibaba’s “Singles’ Day” online shopping carnival, held on the 11th of November each year, hit a record RMB 35 billion in sales this year, which is equivalent to about a month’s retail sales here in Hong Kong. The company claimed that, outside of mainland China, the promotion was most popular in Hong Kong. The threat of e-commerce only adds to the challenges faced by traditional retailers, who are already dealing with a slowing inbound tourism market and tightening per capita spending of mainland Chinese tourists in Hong Kong.

    In recent years, the Holy Grail for traditional retailers has been finding a means to draw shoppers back from the virtual world. One approach has been merging general retailing with a food and beverage offering to enhance the overall shopping experience. Though this concept is not new to Hong Kong, we have seen a growing number of general retailers open new hybrid stores in recent years; either providing the food and beverage offering by themselves or through a partnership with a more established operator.

    Figure 1: Examples of F&B offered by retailers

    With a local population that loves to dine out together with high levels of business entertainment, the city presents a thriving market at almost every price point. I believe that the trend for retail brands spinning off or merging with food and beverage operators will only gain in popularity. This trend is expected to spread along with the increasing supply of shopping centres outside of core locations, such as Yuen Long and Tseung Kwan O in the New Territories, targeting more towards the local mass-to-mid end market. The increase of the resident population in these areas will steer demand growth and provide opportunities for retailers to bring their creativity into full play in venturing into the food and beverages business.

    About the author
    Cathie Chung is a Local Director, Consulting in JLL Hong Kong.

    Kangbashi “Ghost Town”: Not as empty as one might expect

    November 27th, 2014 by Linda Yu

    Known, if at all, as the most notorious of China’s modern ghost towns, Kangbashi (formally Kangbashi New Area of Inner Mongolia’s Ordos city) is something of a peculiar place and somewhat difficult to describe. But that’s not to say that the young district is still deserving of the infamous status that has stuck with it since being named and shamed five years ago by Aljazeera and subsequently all major international media outlets.

    Nearly 50,000 people now call Kangbashi home, according to the official count released earlier this year. Though the population comprises just 5 percent of the 1 million people Kangbashi was originally said to be planned for, residents here contribute to a regular hub of activity in the centre of town as they go about their daily lives, defying the definition of a true ghost town.

    Perhaps best likened to where a nondescript Chinese city meets Ashgabat, the notably strange capital of Turkmenistan, Kangbashi shares a few oddities with the little-known Central Asian city, including public buildings infused with monumentalist vision and a smattering of statues that are both kitschy and representative of local traditions.

    Guarded by giant fighting horse sculptures, the Ordos government’s new home is not far from Kangbashi’s “high street” made up of a cluster of projects offering mass market-oriented brands. Largely ignoring the low-end fashion on offer here, locals mostly come to eat, not shop. Shopping is generally reserved for Ordos’ more developed Dongsheng district some 25 kilometres away, or increasingly, like elsewhere in China, online.

    Anchored by a McDonald’s that serves as the only obvious international chain around town, Kangbashi Food Plaza offers a surprising amount of F&B options, including Chinese fast-food chain Dicos; it competes with the Golden Arches near the building’s main entrance. Inside, a food court offers tasty cuisines and sugary fruit drinks. It is calm, but happening here. Affordable meals do well to bring modest crowds out, particularly on weekends. The nearby Jin Chen International Shopping Center also draws customers with a Suning store, simple electronics market, and small nail salon.

    Jin Chen International Shopping Center

    Still, relative to the progress of new towns across China, Kangbashi is not extraordinary and continues to exude qualities unmistakably associated with a city in the early stages of development: the (perhaps unsurprisingly) misspelt Ordos Huneng Shoping Mall has very high vacancy; and unlike the curious daytime, night-time in Kangbashi can be rather haunting. Endless rows of visibly vacant apartment towers are disturbingly easy to spot in the town’s would-be flourishing residential neighbourhoods, where a limited number of vehicles sit in unfilled car parks beside massive housing blocks showing few lit windows after dark.

    Widely criticized for the hubristic scale of its development, Kangbashi is often mocked for its master plan which has led to the town’s oversized roads and a ubiquity of barely occupied residential projects. Yet at the core of this so-called ghost town, there is life – and enough to support a viable, if weak, commercial centre. Considering it all, even Kangbashi’s remarkably bizarre existence, it is no longer fair or accurate to call Kangbashi a ghost town.

    About the author
    Based in Beijing, Linda Yu is a Senior Analyst with JLL’s China research team.