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

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