There is a long list of investors eager to increase the size of their China warehouse portfolio. In November, Prologis and HIP China Logistics (HIP) increased their committed capital to over USD 1 billion after announcing a joint venture. Carlyle Group announced a similar joint venture in August. As one of the most undersupplied markets in China, Beijing will likely continue to receive close attention from these and other investors. Some companies have stated that they intend to both construct and acquire logistics warehouses to grow the size of their China portfolio. However, there may be a more creative alternative that could appeal to warehouse developers.

The sale of logistics space in Beijing has been quite rare over the past few years as most landlords have been content to hold their properties and collect income from recent rental increases. Meanwhile, the price of developable land within the sixth ring road has increased to the point where it is prohibitive for warehouse use. Moreover, the number of land plots sold outside the sixth ring road has been scarce. As such, most new logistics developments servicing the Beijing market have been located outside of the city’s borders.

While large e-commerce and third-party logistics firms have quickly absorbed these high-quality warehouses, smaller firms cannot afford the increased transportation costs associated with locating outside of Beijing. Other firms must locate in Beijing to remain close to their customers, e.g. to facilitate shorter drive times. Thus many companies have had to settle for low quality warehouses which lack modern building specifications such as fire suppression sprinklers. Plans to redevelop some of these warehouse clusters as commercial areas have been put on hold partly because reducing the overall stock of warehouses could disrupt the distribution of goods within Beijing.

One solution to this problem could be vacant factories. The rising cost of labour and improvements to pollution controls have forced some manufacturers to move out of Beijing proper. Provided logistics development is consistent with town planning intentions in these areas, some vacant factories in more remote locations such as Changping District or Tongzhou District could be sold to warehouse developers. Constructing high-quality warehouses with ancillary office spaces at such sites would stimulate the local economy. Occupiers would register their business in the district and locate some of their business operations on site, creating jobs and generating more taxable income than pure warehouse spaces. Redeveloping factories as warehouses would provide some relief to tenants in this supply constrained market, facilitate the redevelopment of agricultural warehouse clusters and offer investors an additional channel to increase exposure to the Beijing warehouse market.

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