A new report by DWS has looked at the record wave of domestic and foreign investment into Chinese real estate, and the severe shortage of modern logistics facilities in the country.

DWS says that the Chinese market is currently dominated by older warehouses. At the same time, demand for prime logistics space in the country is surging, on the back of rising consumption, a growing middle-income urban population, strong ecommerce adoption, national-level logistics infrastructural upgrades as well as emerging uses for differentiated facilities such as cold chain logistics and automated warehouses.

Notwithstanding the positive outlook for nation-wide logistics demand, market fundamentals vary widely by geographical location. Metropolitan regions such as Yangtze River Delta, Jing-Jin-Ji and the Greater Bay Area, serve a deeper and more affluent consumer base, hence it is attracting strong competition from occupiers for a limited supply of prime warehouses. This has supported stronger rental growth and higher occupancy levels relative to other cities, particularly those in the west and northeast regions where demand growth is still catching up with excess speculative supply. 

Driven by high GDP growth and surging disposable incomes, private consumption accounted for almost half of China’s GDP growth from 2015 to 2019. DWS has outlined what it expects to be the major drivers that underpin the positive logistics demand outlook in China, which could just as easily be applied to countries in the EU and the UK.

Rising middle-income population and urbanisation
Over the past decade or so, rising urbanisation and strong gains in real income have remained critical in driving the rapid growth in China’s middle-income population. Going forward, China’s latest five-year plan outlines a key long-term target of raising the urbanization rate from the current 60% to 75% by 2035. These same factors are expected to continue to drive the middle-income segment from an estimated 254m households in 2020 to 383m by 2030. This increase of 130m households alone exceeds the entire middle-income segment in the US.

Since the onset of the pandemic, retail sales have now rebounded back into positive territory since the second half of 2020. Long-term the Chinese central government remains committed in its plans to steer the economy away from the investment/export-led growth model towards domestic consumption – which is currently at 39% of total GDP.

Ecommerce
The rapid development of China’s ecommerce retail market has been well observed. Based on data from eMarketer, ecommerce sales in China quadrupled between 2015 to 2020, while the addition of 300m online consumers drove the proportion of digital buyers (internet users who purchased online at least once during the year) up from 35% to 65% in the same period. China currently constitutes the largest ecommerce market in the world with online sales totalling $2.2trn in 2020, accounting for over half of global ecommerce sales. It is also projected to continue growing at 12% per annum over the next 3-4 years. The ecommerce penetration rate in China, currently over 30%, is also one of the highest globally.

Alibaba’s ‘Singles Day’ sale is a testament to China’s strong ecommerce appetite. The world’s largest online shopping event, which already far outpaces Black Friday and Cyber Monday in the US, saw record sales of $74bn in November 2020 – almost double the previous year’s figure.

A multitude of drivers underpin this trend: 

Rising smartphone adoption: Consumers, particularly those in lower-tier cities, connect online primarily through smartphones instead of personal computers. Mobile ecommerce accounted for 82% of China's ecommerce sales in 2020. This is much higher than in other countries like the US (40%), Japan (46%) and Australia (41%). A major ‘Mcommerce’ driver is the “Super Apps” such as WeChat, which combines messaging, social media, entertainment, payments and shopping into one single app.

Improving customer experience: At the same time, the logistics operating model is changing rapidly to cater to growing Chinese consumers' expectations of higher quality online-to-offline shopping experiences and faster delivery times. Some examples include Alibaba’s Freshippo, which in 2016 launched a new retail concept of fresh produce delivery within 30 minutes of online orders, while major competitor JD.com provides delivery within 24-hours for at least 90% of its orders. This spurred demand for last-mile delivery with urban logistics using smaller warehouses in downtown areas. 

Cold Chain Logistics: Underpinned by rising incomes and higher consumer expectations towards product freshness and quality, the fresh food ecommerce market developed rapidly at a 37% compound annual growth rate (CAGR) from 2015 to 2019, reaching a market size of $45bn, yet fresh grocery ecommerce penetration remains relatively small at just 5.6%. 

Investor demand
Investment demand for warehouses in China has picked up significantly in recent years, as evidenced by the record high logistics transaction volume totalling $7bn in 2020. While domestic investors continue to dominate transactions, there has been a noticeable upswing in participation from cross-border investors including asset managers, private equity funds, sovereign wealth funds as well as foreign REITs. 

In June this year, nine Chinese companies were approved by the Chinese authorities to list a real estate investment trust (REIT) on China’s stock exchanges. They are the first batch of ‘C-REITs’ to come to the market under a pilot scheme, nearly a decade after China first mooted the idea of listed real estate investment trusts.