Compared with other property types, the logistics market in China has not received as much attention until recent years. The question is, however, will this upstart follow the tracks of retail and office to enter the stage of oversupply?

Thanks to high yields and the imbalance between limited supply and demand (which is boosted by e-commerce), the logistics sector has emerged as a top target for foreign and domestic capital. Over the past two years, investors have deployed more than RMB 60 billion into this market. Given that the investment scale of individual assets is too small to meet institutional investors’ requirements, about 80% of transactions have taken place instead at the entity level. Investors that lack experience in warehouse development often choose to establish partnerships with developers that are already active in China.

The table below shows a selection of major entity-level transactions (JVs) since 2013:

Source: JLL, various websites

Investors’ keen interest propelled the development of the warehouse market, but it has also aroused concerns that the sector could be overheating. Equipped with large amounts of capital from their partners, developers have rushed into cities across China to acquire land and to build warehouses.

Cities with good location and easy access to land have witnessed supply waves in recent years. For example, total high-quality stock in Wuhan increased more than eightfold, from 85,000 sqm in 2011 to 692,400 sqm 1Q15, with more than 900,000 sqm of supply planned for the next three years. Meanwhile, the growth of e-commerce demand has slowed as the sector enters a period of stabilisation and expected consolidation. Demand for warehouse space has decelerated further as big players such as JD.com and Alibaba have started building their own warehouses.

As a result, oversupply has become an issue in a number of markets: the vacancy rate in Wuhan rose from zero in 2011 to 33% in 1Q15. In Chengdu, the vacancy rate soared to 20% in 1Q15 from a trough of 0.6% in 2011, as stock nearly doubled during the same period. Even mature markets are faced with oversupply issues in certain sub-markets. For example, Shanghai’s overall vacancy rate stood at 16% in 1Q15, while the vacancy rate in the city’s Lingang sub-market was over 40%, high enough to make developers cautious about pursuing new projects there.

Elevated vacancy rates and moderating demand have made landlords wary about raising rents in many markets. Cities such as Chengdu, Shenyang and Tianjin have witnessed rent declines recently as landlords offer lower-than-average rents for completions in emerging areas. Projects in popular markets also need a longer time to lease out; as such, landlords have to give some concessions to attract tenants.

Generally speaking, the logistics land supply in China is likely to be constrained, which will make the logistics sector continue to offer exceptional long-term opportunities. However, the time of making easy money by building warehouses may have passed, and the oversupply risk will exist in the near-to-medium term. Although it is too soon to call it the end of logistics investment prosperity, investors need to think twice before putting money in warehouses.

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