A lack of tradable assets has long been a major barrier to investment activity in China’s burgeoning logistics property market. Most developers have been reluctant to sell properties over the past few years, as they have focused on building up nation-wide networks serving the country’s exponentially growing e-commerce market. As such, since 2013 investment into China’s logistics market has been dominated by entity-level transactions, with investors poring over USD 12 billion to help logistics developers in China grow their presence.
In mid-2015, however, Australian developer Goodman placed a portfolio of four China properties onto the market, and easily sold three of them within a few months. Goodman’s move made ripples as it was interpreted as a ‘test’ of the investment market – a number of major developers have since sent out teasers to place part of their assets onto the market as well. Such activities have given some observers the impression that China’s logistics market is on sale, and even provoked concerns that foreign developers are leaving China.
Are they?
Not really. Despite a slowdown in rental growth in recent quarters, logistics warehouses remain the most sought-after asset class in China. An analysis of the developers’ sales sheds light on their motives for divesting some assets.
We noticed that the developers tend to market single assets or small portfolios, and usually in lower tier cities. Meanwhile, they hold onto projects in premium locations (such as Shanghai and Beijing) because supply will be extremely constrained in these places. The properties put up for sale are considered ‘replaceable’ assets, and selling them will provide the developers with abundant capital for future developments in China.
Developers’ capital partners may be another factor in the sales. In order to persuade investors to provide further capital injections, developers need to present actual transactions with extraordinary returns. In addition, feedback from potential buyers can be a good guidance for investors and developers when adjusting their development plans.
Moreover, developers have been selectively marketing their assets to potential buyers. They often choose to sell properties to smaller players or even newcomers instead of direct competitors, indicating that they are neither leaving China nor in a hurry to get the assets off their hands. On the contrary, they all have plans for future developments in order to expand their market share in China.
Far from signaling that developers are retreating from China, the recent transactions in fact point toward the opposite. If anything, they show that China’s logistics market is reaching a new stage of maturity with increasing investment activity.
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