Room for Growth in Storage Space Seen by Private Equity as China E-commerce Booms

There were more modern warehouses in Boston than in the whole of the world’s most populous country when U.S. private equity heavyweight Warburg Pincus started looking at China’s logistics sector in late 2009.

But a parallel binge in investment in warehouses and logistics businesses in the China started after demand soared from appliance makers, express delivery firms and e-commerce companies such as Alibaba Group Holding Ltd and JD.com Inc due to the Chinese consumers embarking on an online shopping spree.

Real estate consultancy Jones Lang LaSalle says that more than  have been splashed by deep-pocket investors including Carlyle Group LP, Canada Pension Plan Investment Board (CPPIB) and Warburg Pincus.

“The thinking was even if it didn’t necessarily scale to the size we were anticipating, we had a good sense that while Boston is a pretty decent size city in the U.S., China should have far more modern warehousing space over the longer term,” said Jeffrey Perlman, who heads Southeast Asia at Warburg Pincus and also focuses on real estate investments across Asia Pacific.

“We were taking that directional bet that, with this transformative shift from a manufacturing-based economy to a service-, consumption-based economy, ultimately you need to store the goods somewhere,” Perlman said.

Consumer and internet consultancy iResearch estimates that online shopping revenues have soared and are expected to double to 7.5 trillion yuan ($1.13 trillion) in 2018 from last year, although China’s economy expanded in the second quarter at the slowest pace since the global financial crisis of 2008-09.

According to iResearch and China’s National Statistics Bureau, online retail is forecast to reach 17 percent in 2018 as a percentage of total retail in China has grown steadily to 12.6 percent.

With consumers with rising incomes use smartphones to order everything from appliances and clothes to flowers and pizza, the fast adoption of online shopping in China is underscored by the fact that by comparison, U.S. e-commerce sales accounted for 8.1 percent of total sales in the second quarter of 2016.

India is also attracting investment in warehouses driven by a burgeoning middle class and has seen a similar trend.

“These changes are structural changes. Certainly competition has been increasing. What we know, what we see is no secret, the world sees it as well. Other investors, other managers, can see that in this sector there will be sustained growth,” said Jimmy Phua, head of real estate Asia at CPPIB.

Led by an increase in so-called storage spending that includes warehousing, processing and packaging of goods, China’s logistics market reached 1 trillion yuan in 2015.

Including a $1 billion investment unveiled late in 2015 in a venture with Goodman Group, CPPIB has committed $2.6 billion to China’s logistics market.

With Thomson Reuters publication IFR saying Warburg Pincus-backed e-Shang could raise $1 billion in a 2016 initial public offering (IPO), the company has grown into one of the largest logistics providers for e-commerce companies including JD.com.

Analysts and investors said that while increased competition from new players has made it harder to secure land in top-tier cities such as Beijing and Shanghai, the surge in investments has created an oversupply of warehouses and pressured rents.

While the oversupply of logistics space will likely be limited to lower-tier cities, investors expect the impact on rents will be less severe for large, more modern warehouses that have been the focus of private equity firms.

Warehousing space will grow 10 percent a year through 2020, forecasts real estate consultant DTZ Cushman & Wakefield.

(Adapted from CNBC)

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Categories: Economy & Finance

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