(Bloomberg) — In many parts of China, the warehouses and industrial estates that used to be a draw for international investors are now experiencing a surprising decline in business activity.
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Logistics hubs built in anticipation of a prolonged boom in e-commerce, manufacturing and food storage are losing tenants, forcing building owners to cut rents and shorten lease terms. Shares of real estate investment trusts that own commercial real estate in China have tumbled, and some managers expect their rental income to fall further.
According to real estate consultancy firms, the average vacancy rate for logistics properties in eastern and northern China is approaching 20%, the highest in years. More warehouses are being built, which only makes the problem worse. “We are looking at a supply glut in logistics and industrial real estate in China,” said Xavier Lee, an equity analyst at Morningstar who covers the real estate sector.
The deterioration was disappointing for property owners who were counting on an economic recovery in China this year. Global institutions have collectively invested more than $100 billion in warehouses, industrial buildings, office towers and other Chinese commercial real estate over the past decade, according to data from MSCI Real Capital Analytics. The foreign investors include Blackstone Inc., Prudential Financial Inc.’s PGIM, Singapore’s GIC Pte. and CapitaLand Group, among many others.
Some institutions are considering divestments of their worst performing assets before rental prices fall further. Others plan to wait out the recession and expect to make money in the long run.
“The best locations are still resilient,” said Hank Hsu, CEO and co-founder of Forest Logistics Properties, which owns warehouses and distribution centers at major transportation hubs in Beijing, Shanghai, Wuhan and other Chinese cities.
Six-year-old Forest Logistics has about $2.5 billion in assets under management from investors including private equity firms, insurance companies and pension funds. It counts Chinese e-commerce giant JD.com Inc., courier SF Express and multinational consumer products companies among its clients.
Hsu said recent market weakness has not deterred his company’s expansion plans and that it plans to build another logistics facility in the southern Greater Bay area in the coming months. “We will continue to deploy capital in China over the next one to two years as we view this as a golden opportunity,” he added.
Cuts
China’s commercial real estate sector has been a bright spot during much of the country’s housing crisis that began in 2021. The sector is now feeling the consequences of cutbacks by consumers and companies.
The softening in the logistics and industrial sectors comes alongside an office real estate crisis playing out in major cities such as Beijing and Shanghai. Both crises are also partly the result of overbuilding, which was driven by the large sums of money poured into commercial real estate when interest rates, loans and construction costs were low.
Warehouses built to house e-commerce fulfillment centers, giant refrigerators for refrigerated or frozen products, and spaces for companies to store their components and manufactured goods are not being used as often as their owners had hoped. Domestic e-commerce growth in China has been sluggish as shoppers have become more frugal. The country’s online penetration rate for retail sales is already relatively high at 30%.
Increased geopolitical tensions are pushing companies to shift some of their production abroad to accommodate end customers looking to reduce their dependence on China. That and a slowdown in cross-border trade have also reduced companies’ need for warehousing facilities in mainland China.
High vacancies
According to data from Cushman & Wakefield, the warehouse vacancy rate in eastern China – where many logistics properties are clustered – rose to 19.2% in the first quarter. The national vacancy rate was 16.5%, partly thanks to the better-performing South region.
The situation in China contrasts with the US and other logistics markets in Asia. In the US, vacancy rates in industrial properties and warehouses have increased in some parts of the country, but are at rates below historical averages, and rents are still rising. In Asia, logistics properties in South Korea, Japan and Australia have high occupancy rates and rental growth.
Of the 20 major Chinese cities Cushman tracks, 13 saw logistics rents decline in the first quarter compared to the previous three months, led by Beijing and Shenzhen, with declines of 4.2% and 3.9% respectively. An additional 33 million square meters – equivalent to around 4,600 football pitches – of new supply is planned for the country by the end of 2026, the consultancy said.
CapitaLand China Trust, which owns shopping malls, business parks and other properties, acquired four logistics parks in Shanghai, Wuhan and other cities in late 2021 for a total of 1.68 billion yuan ($231 million). The total occupancy rate of the logistics portfolio fell from 96.4% a year earlier to 82% at the end of 2023.
Shares of the Singapore-listed REIT are down 27% this year, compared with a 2.7% gain for the benchmark Straits Times Index. “We are actively approaching potential customers for our logistics parks to further improve occupancy rates,” said a spokesperson for CapitaLand China Trust.
Packing up
Industrial parks in China that are designed as science and technology clusters with office buildings and manufacturing facilities are also losing multinational and local companies. According to data from Colliers, the overall vacancy rate in industrial estates in Beijing reached 20.5% in the first quarter.
In Guangzhou, the country’s southern manufacturing base, some multinational companies are closing factories and changing their business strategies after a disappointing post-pandemic recovery.
Lonza Group AG, a Swiss healthcare manufacturing company, said earlier this year it will close a drug factory following a strategic review. The 17,000 square meter factory started production just three years ago in the China-Singapore Guangzhou Knowledge City, a high-tech business park jointly backed by the city’s local government and CapitaLand, owned by Temasek Holdings Pte. Lonza still has production facilities in Suzhou and Nansha, and a commercial sales organization in China.
A Chinese real estate investment trust that owns industrial properties recently saw the occupancy rate of one of its buildings in a Shanghai technology park drop by almost half when a tenant – a subsidiary of smartphone giant Oppo – gave up 19,314 square meters (207,890 square feet) of space before the end of the rental agreement. The mobile phone manufacturer decided last year to close its chip development department Zeku.
Rent pressure
Companies now have the upper hand in negotiating lease extensions for warehouses and other properties.
“The competition for tenants is quite fierce at the moment,” said Luke Li, managing director at ESR Group Ltd., during an online logistics industry conference in mid-June. The Hong Kong-based real estate manager owns e-commerce distribution centers, cold chain storage facilities and manufacturing industrial parks in China and other countries. To keep the warehouses occupied, landlords are offering flexible lease terms, better amenities and other sweets to tenants, Li added.
ESR saw its Greater China region revenues fall 20% in 2023 from the previous year, according to its most recent financial report. The company cited weakened consumer confidence and leasing demand as reasons for the decline.
Mapletree Logistics Trust, another Singapore-listed REIT, is also struggling in China. Rents at the country’s 43 properties fell 10% in the first three months of 2024, and some tenants have fallen behind on their rent payments. The trust has maintained the occupancy rate of its logistics assets in China at approximately 93%.
Mapletree REIT CEO Ng Kiat said during an earnings call in April that China’s environment will remain volatile and uncertain over the next 12 months. The trust is focused on retaining tenants and is looking to sell some of the worst-performing Chinese assets, she added. “We are trying to get more clarity about whether we see the bottom. But I don’t think we see it now. We will have to wait a while,” Ng said. Mapletree declined to comment.
“Everyone is cutting costs,” said Humbert Pang, head of China at Gaw Capital Partners, an alternative investment firm that owns real estate assets. Pang said at the same conference as Li that rental prices of logistics properties do not increase even if the buildings are occupied. “I think most logistics space owners are finding it difficult to negotiate with the existing or new tenants,” he added.
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