In JLL’s Shanghai office, each quarter we compile data from twenty logistics hubs around China and run analyses on national trends. One of our most popular results is a national average of warehouse rents, which over the past several quarters has displayed a surprising trend: rental growth is slowing down, from a post-crisis peak of over 10% y-o-y over much of 2011 to nearly flat for much of 2014.

This deceleration seems counterintuitive. After all, this is the property sector which many have highlighted for its fundamental imbalance between supply (restricted by government land policy and other priorities) and demand (elevated by China’s expanding consumer market). Shouldn’t continued landlord pricing power be a given?

China’s slowing economy has made many firms more conservative in taking warehouse space, but that explanation alone is insufficient given that key demand drivers like e-commerce have held up well. Another factor is that our measures of market average are sensitive to changes in the composition of stock, especially the growing supply in lower rent Tier 2 cities relative to the existing concentration of stock in more expensive Tier 1 hubs. But that trend also does not account for all of the recent slowdown in rental growth.

Our data lets us probe the question down to the city and submarket levels, and observe several additional trends.

First, rental growth in Tier 1 markets has slowed due to the influence of satellite cities – markets that lie just beyond the administrative borders of the Tier 1 cities, but have similar access to key highways and a greater supply of more affordable land. Kunshan and Langfang are key satellites of Shanghai and Beijing, respectively. A key attraction for tenants is that satellite cities offer cheaper rents by as much as 25% compared to Tier 1 locations. Tier 1 landlords now compete with satellite cities for a chunk of their business, reducing scope for swift increases in rents.

Meanwhile, several big Tier 2 markets such as Shenyang and Chengdu are in the midst of their first major supply booms, leading to vacant space in the short term and localised discounting that erodes average rental growth at a national level. Local oversupply is possible, but we expect vacancy to fall and rents to pick up as long-term trends like consumption growth and the inland migration of manufacturing continue to drive demand. In general we expect projects in established logistics parks to outperform those in emerging peripheral markets, where land is easier to acquire but demand often takes longer to materialise.

Rental growth at the national level has slowed, but we anticipate it will pick up again as Tier 2 supply waves pass and the stronger Tier 2 markets regain pricing momentum. Our forecast of lower supply in Tier 1 markets (helped by ever tighter land policy) would reduce vacancy and moderately boost rental growth there, while satellite cities are expected to increase in number and continue growing strongly.

Is the bull market in China’s logistics real estate sector over? Not yet.

Source: JLL Research, Logistics Intelligence Service, 3Q14

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