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REAL ESTATE: China's Logistics: Rising Demand Amidst Challenges
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altDue to its size and rapidly growing economy, China is of paramount importance to the global logistics industry. Indeed, for many players, it is currently their key market for development and growth. However, the China logistics sector is also relatively immature. Overseas logistics companies were only permitted to set up wholly-owned business entities in China in 2005, four years after China’s accession to membership in the WTO, but many have now expanded their business network across mainland China. Demand for logistics facilities has grown in tandem but the supply of modern logistics space remains limited. Out of China’s total stock of 550 million sq metres of good quality storage space, only 5.8 million sq metres comprises modern logistics facilities1. Storage space per capita in China is a mere 0.38 sq metres and its ratio to external trades is 0.19 sq metres per USD 1,000 of trade in 2010. Even allowing for the less developed nature of the Chinese economy, with most manufacturing goods targeted for exports, the market is undersupplied with quality space at a time when demand is rising.
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Over the next five years, it is forecast that China will be the main driver of the global economy, with its contribution to global growth projected to increase from 30% in 2010 to 35% in 2015. China’s growing clout as not only a producer but as a consumer is altering the manner in which Multi-National Corporations (MNC) are drawing up business plans for the coming five years. Against this altbackdrop, demand for logistics facilities is expected to grow further. However, one major factor inhibiting this growth is the difficulty which specialist industrial developers and owner occupiers are currently encountering, on a nationwide basis, in sourcing land sites for the construction of logistics facilities. As a result, the current supply-demand imbalance is expected to continue in at least the short-term, creating the conditions for logistics assets to appreciate and undergo significant upward rental growth.

The appreciation of logistics rents and the shortage of land for logistics facilities poses a challenge for both the real estate sector and society as a whole, as logistics operators, retailers and manufacturers will factor in higher storage costs in the pricing of goods. The increase in storage costs, which accounts for about one-third of overall logistics costs, or 5.9% of the country’s GDP, will add further pressure to the already high rate of inflation in China.

The Source of Growth in China
Having served as “the world’s factory” for the past 20 years, China is now re-orienting towards becoming, from the perspective of its own residents, the “world’s biggest supermarket.” The country has been stepping up its efforts to re-direct its model of development to make it less reliant on exports and driven more by the consumer spending of a rising middle class.

The prominently announced national goals of supporting urbanisation, reducing income inequality, improving social security and healthcare and also improving infrastructure also broadly supports the objective of ensuring that more of the national income filters down and is spent by ordinary people.
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Apart from stimulating domestic consumption, the huge economic stimulus package of 2009 which was devoted to investment in the form of infrastructure construction, and which has been reflected in the increase in contribution in gross fixed capital formation in the past two years, has also been a key driver of domestic economic growth, accounting for 44% of GDP in 2009. While China will continue to invest in infrastructure, the level of contribution in this sector has already begun to stabilise, due, in part, to the recent implementation of several new rounds of real estate market cooling measures.

altChina is continuing to play a growing role in global trade, and it is projected that it will account for a larger share of global trade than the United States by 2012. Consequently, the country’s key ports are expected to continue to see growth in freight volume. Five of the top 10 ports in the world are located along China’s northern and eastern coast. These ports, comprising Shanghai, Ningbo, Tianjin, Qingdao and Shenzhen, already accounted for over 50% of China’s total freight volume in 2009.

Manufacturing Expansion to the Hinterland
While many manufacturing facilities are located in areas close to these major ports, some manufacturers have already begun to move their operations into China’s inland cities. This locational shift is being motivated by a number of factors, including upward pressure on industrial wages, Guangdong Province’s stricter enforcement of national labour laws, and selective outbreaks of labour unrest. One of the prominent examples is iPhone manufacturer Foxconn’s plan to eventually move all their mass manufacturing to sites outside Shenzhen. The company is building huge plants in Henan and Sichuan, which are the homes of most of the migrant workers now working in the coastal manufacturing bases, to accommodate 200,000 workers.
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Apart from these factors, another reason for the shift towards the hinterland is manufacturers’ growing interest in strengthening the development of their domestic sales network, reducing the need to ship goods through key foreign trade ports, and placing more emphasis on domestic transportation that is targeted specifically at satisfying local consumption needs.

Along with the growth in their domestic retail sales, PRC-based retailers are similarly keen on expanding their national sales network. Local retail chains have experienced exponential growth over the past decade, with the total floor area occupied by retail chain operations in China having risen by 400% to 118 million sq metres from 2003 to the end of 2009. Surprisingly, the pace of retail expansion was apparently totally unaffected by the onset of the global financial crisis, with total floor space occupied growing by 16% in 2009.

The confluence of all of these activities happening across the nation has collectively fed stronger domestic demand for logistics services. However, despite these growing requirements, the development of a modern logistics industry in China is still facing a number of challenges:
• The relatively low penetration of China’s logistics sector by third-party logistics service providers (3PL). The amount spent on 3PL as a proportion of total logistics was only 2.7% in 2009, far lower than the 30% in Western Europe and 20.7% in the US.
• In the retail sector, only 9% use 3PL services, compared with 32% which are self-managed through retailers’ own distribution networks.
• The fragmentation of the logistics market: China’s top 20 operators only account for 6% of total logistics expenditure in the country.
• The general lack of a systematic approach to retail supply chain management, particularly among small and medium enterprises. According to a study conducted by Oriental Logistics, about 70% of small shops do not understand what logistics means to their business.
• China needs to raise the efficiency of its logistics sector as a whole, an improvement which is unlike to occur until the quality of transportation infrastructure in its vast inland areas begins to close the gap with the more developed coast.
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Conclusion: Short to Medium Term Prospects of the China Logistics Sector
The construction of new highway and railway systems will radically alter the landscape of many Chinese cities and stimulate the emergence of new areas as the preferred location for logistics and manufacturing. Specialist developers and investors in logistics facilities will be increasingly focused on urban fringe areas or even in satellite commercial/industrial cities which lie in an orbital relationship around major urban areas, but which are expected to enjoy improved accessibility when future highway projects come on stream.

Export-oriented companies will continue to account for the bulk of demand, particularly in coastal cities and areas near ports. 3PL providers are growing and increasing their penetration across China’s various geographies. Fast moving consumer goods and online shopping operators are expanding as they improve their supply chain management. Demand is consequently expected to outstrip supply across the nation in the coming year. The China logistics sector is expected to mature rapidly in coming years and witness the emergence of a broader but increasingly efficient and competitive landscape.



By CBRE
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