China’s logistics network continues to be marked by geographic imbalance, predominantly concentrated in the Yangtze River Delta (YRD) and Pearl River Delta (PRD) regions. GLP, China’s largest logistics developer, has a stock of logistics properties in the Greater Shanghai area[1] that is nearly double the presence of its stock elsewhere in central China cities[2] combined.  Yet the location of China’s modern warehouse stock is increasingly out of step with the spread of middle class consumers and online shoppers – groups whose cravings for goods help drive demand for distribution facilities.

For example, the cities of Suzhou (in the heart of the YRD) and Changsha (capital of central Hunan province) have similar per capita levels of income, but in 2017 Changsha had less than one-fifth of Suzhou’s Grade A warehouse stock.

Relative neglect by developers notwithstanding, Changsha’s logistics market fundamentals are strong, with vacancy falling from 20% to less than 5% even as stock doubled over 2017. The story is similar in Shandong province’s capital of Ji’nan, where rents grew 15-20% over 2017 and are expected to rise by double-digits again in 2018.

What factors explain strong market performances in China’s central cities?

1. Location is the key

Central cities occupy key nodes in China’s logistics network, connecting developed coastal areas with  inland ones. The northern provincial capital of Zhengzhou presents itself as the “central city of the nation, international integrated transportation hub and logistics center”[3]. Attracted by its hub role, retailers and e-commerce giants (including Alibaba, JD.com, and VIPshop) have established distribution centers in Zhengzhou’s airport area. In addition, major central cities also serve as the main transportation centers of their own provinces, meaning that outside packages first are transferred to these cities before delivery to the provinces’ lower-tier markets. Supporting province-level distribution demand creates significant requirements for inter-city storage.

2. Consumption upgrade + Urban renewal

Rising consumer demand in Tier 2 and lower-tier cities has been translated into the impressive market performances described above. Along with it, urban renewal in respective cities also reduces the existing non-Grade A stock and makes the imbalance even worse: Ji’nan’s unprecedented rental growth last year resulted from a combination of natural increase demand as well as demolition of old, illegal facilities that had been used for warehouses, which reduced stock.

What are we expecting in the future?

Looking forward, central Cities will face oversupply in the short term as well as expansion and tightening of logistics land policies in the long term. Short-term oversupply will result from developers’ rising enthusiasm for these promising markets. In the longer term, we expect to see supply spill over into adjacent satellite cities, similar what we have observed in the YRD and PRD areas. There already are early signs of such satellite city networks forming in Ezhou and Xiaogan (near Wuhan) and Xinzheng and Xingyang (near Zhengzhou).  Future value appreciation of existing properties due to tightening policy might be opportunistic for investors.

[1] Shanghai, Suzhou and Wuxi assets combined, https://www.glprop.com.cn/our-network/network-detail.html
[2] Wuhan, Changsha, Zhengzhou, Ji’nan assets combined, https://www.glprop.com.cn/our-network/network-detail.html
[3] Master Plan of Zhengzhou City, 2010-2020, edited in 2017

Note: this blog is completed with support from Celia Chen, Qingdao Strategy Consulting, Lynnea Liu, Wuhan Research and Sonya Song, Shanghai Industrial.

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