A $135 billion bet on China’s economy sours as warehouses empty

Hong Kong - In many parts of China, the warehouses and industrial parks that used to be a magnet for international investors are grappling with a surprising slowdown in business activity.

Logistics hubs that were built in anticipation of a long-lasting boom in e-commerce, manufacturing and food storage are losing tenants, forcing building owners to slash rents and shorten lease terms.

Shares of real estate investment trusts (Reits) that own China logistics properties have plummeted, and some of their managers expect their rental income to fall further.

Average vacancy rates at logistics properties in east and north China are approaching 20 per cent, the highest in years, according to real estate consultancies.

More warehouses are being built, which is making the problem worse. “We are looking at a supply glut in logistics and industrial properties in China,” said Mr Xavier Lee, an equity analyst at Morningstar who covers the property sector.

The deterioration has been disappointing for property owners that were counting on an economic rebound in China in 2024.

Global institutions have collectively invested over US$100 billion (S$135 billion) in warehouses, industrial buildings, office towers and other Chinese commercial real estate over the past decade, data from MSCI Real Capital Analytics shows. The foreign investors include Singapore’s GIC, CapitaLand Group, Blackstone, Prudential Financial’s PGIM, and many others.

A few institutions are contemplating divestments of their worst-performing assets before rents fall further. Others intend to wait out the downturn and expect to make money in the long run.

“The best locations are still resilient,” said Mr Hank Hsu, CEO and co-founder of Forest Logistics Properties which owns warehouses and distribution centres at major transportation hubs such as Beijing, Shanghai and Wuhan.

Six-year-old Forest Logistics has about US$2.5 billion in assets under management from investors that include private equity firms, insurance companies and pension funds. It counts Chinese e-commerce giant JD.com, courier SF Express, and multinational consumer products makers among its customers.

Mr Hsu said the recent market weakness has not deterred his firm’s expansion plans, with another logistics facility in the southern Greater Bay area to be built in the coming months. “We will keep deploying capital in China in the next one to two years because we consider it a golden opportunity.”

Spending cutbacks

China’s commercial real estate sector was a bright spot through much of the housing downturn that began in 2021. It is now feeling the effects of spending cutbacks by consumers and businesses.

The softening in the logistics and industrial sectors is happening alongside an office property slump that is playing out in major cities, including Beijing and Shanghai. Both slumps are partly the result of overbuilding that was powered by the large sums of money that poured into commercial real estate when interest rates, borrowing and construction costs were low.

Warehouses that were built to house e-commerce fulfilment centres, giant refrigerators for chilled or frozen produce, and spaces for businesses to hold their components and manufactured goods are not being utilised as much as their owners hoped.

China’s domestic e-commerce growth has been sluggish, as shoppers have become thriftier. The country’s online penetration rate for retail sales is already relatively high at 30 per cent.

Heightened geopolitical tensions are prompting companies to shift some of their manufacturing offshore, to cater to end-customers that want to reduce their reliance on China. That and a slowdown in cross-border trade have also reduced businesses’ need for storage facilities in mainland China.

High vacancies

The warehouse vacancy rate in east China – where many logistics properties are clustered – climbed to 19.2 per cent in the first quarter, according to data from Cushman & Wakefield. The overall vacancy rate nationwide was 16.5 per cent, thanks in part to the better performing southern region.

The situation in China contrasts with the Ubited States and other logistics markets in Asia. In the US, vacancies have increased at industrial properties and warehouses in some parts of the country, but they are at mid-single-digit percentage rates that are below historical averages, and rents are still rising. In Asia, logistics assets in South Korea, Japan and Australia are enjoying high occupancies and rent growth.

Of the 20 major Chinese cities that Cushman tracks, 13 saw logistics rents drop in the first quarter from the preceding three months, led by Beijing and Shenzhen, with falls of 4.2 per cent and 3.9 per cent, respectively. An additional 33 million sq m – equivalent to around 4,600 soccer pitches – of new supply is due for completion by end-2026 in the country, the consultancy said.

CapitaLand China Trust, which owns 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 (S$313 million). The logistics portfolio’s overall occupancy rate dropped to 82 per cent at the end of 2023 from 96.4 per cent a year earlier.

The Singapore-listed Reit’s shares have lost 27 per cent in the year to date, versus a 2.7 per cent gain for the benchmark Straits Times Index. “We are actively engaging prospects for our logistics parks to further improve occupancy,” said a spokesperson for CapitaLand China Trust.

Packing up

Industrial parks in China that were designed as science and technology clusters with office buildings and manufacturing facilities are also losing multinational and local companies. The overall vacancy rate at business parks in Beijing was 20.5 per cent in the first quarter, according to Colliers data.

In Guangzhou, the country’s southern manufacturing base, some multinational companies are shutting plants and changing their business strategies after a disappointing post-pandemic recovery. 

Lonza Group, a Swiss healthcare manufacturing company, said earlier in 2024 that it will close a drug manufacturing facility following a strategic review.

The 17,000 sq m 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.

Rental pressure

Firms now have the upper hand when negotiating lease renewals for warehouses and other properties.

“Competition for tenants is pretty intense at the moment,” said Mr Luke Li, managing director at ESR Group, during an online conference about the logistics sector in mid-June.

The Hong Kong-based real estate asset manager owns e-commerce distribution centres, cold chain storage facilities and manufacturing industrial parks in China and other countries. To keep warehouses occupied, landlords have been offering flexible rent terms, better amenities and other sweeteners to tenants, Mr Li added.

ESR’s revenue from the Greater China region fell by 20 per cent in 2023 from the year before, its most recent financial report shows. The firm cited weaker consumer sentiment and lower leasing demand as reasons for the fall.

Mapletree Logistics Trust, another Singapore-listed Reit, has also been having a hard time in China. Rents across its 43 properties there fell 10 per cent in the first three months of 2024, and some tenants have fallen behind on their rent payments. The trust has maintained the occupancy of its China logistics assets at around 93 per cent.

Ms Ng Kiat, the Mapletree Reit’s chief executive, said on an April earnings call that the China environment will remain volatile and uncertain for the next 12 months. The trust is focusing on tenant retention and looking to sell some of its poorest performing China assets, she added. “We are trying to get greater clarity on whether we are seeing the bottom. But I don’t think we are seeing it now. We’ll have to wait for a while,” Ms Ng said.

Rents at logistics properties are not going up even though the buildings are occupied, said Mr Humbert Pang, head of China at Gaw Capital Partners, an alternative-investment firm that owns real estate assets. “I think most of the logistics space owners are having a tough time negotiating with the existing or new tenants,” he added. BLOOMBERG