Investors eye Chinese industrial real estate

Eric Chen
[email protected]

There has been rapid growth of investment in logistics (warehousing) and industrial real estate. With successively-released reform schemes of land system and local implementing rules, both central and local authorities are boosting the establishment of the economic and intensive land use system and strictly controlling the management and grant of industrial land. The promulgation of these policies will undoubtedly set guidelines for and have a nationwide impact on investors.

Exploring the potential of industrial real estate

With continuous economic boosts and an increasingly prudent policy environment in China, foreign investors have begun to explore more in-depth sectors of real estate. Meanwhile, the focus of foreign investment in real estate has delicately moved from the commercial to industrial sector in first and second-tier cities. Stable return rates from investing in industrial real estate bring about structural changes in foreign investment and gradually put the sector under the spotlight.

The method of foreign investment in domestic industrial real estate has long been direct acquisition, while, now, the trend is self-development and construction. For instance, the international logistics giant Global Logistics Properties has constructed and developed multiple large-scale logistics parks in the Yangtze River Delta area for operation and management and is expanding to other cities. Foreign developers, mostly multinational industrial real estate tycoons, usually possess diversified clientele resources (especially as large-scale international corporations) and rich experience in corporate operation and management. They also have strong competitive capital operation capabilities, which provides them with multiple international financing channels.

Policy and investment trends

Scale and level of industrial land

Both central and local authorities are speeding up the pace of reform of the industrial land grant system, promulgating policies of economic and intensive utilisation of land, downsizing the granting scale of industrial land, adjusting and upgrading the level of industry in existing industrial land for maximum utilisation, reducing the granting term of land and gradually implementing a more flexible system of the granting scale.

The shortage in supply of industrial land will have a significant impact on the market, to which investors need to pay close attention. The rules on the turning of land in the Shanghai Free Trade Zone will soon be released, according to which a land use right owner may at his own discretion convert the industrial land into comprehensive land to include industrial, commercial and office properties. Once the land is converted into commercial land, the owner may benefit from leasing the offices to be built there.

Second and third-tier cities

Legislators have been releasing policies to reduce the granting of industrial land one after another in Beijing, Shanghai, Guangzhou and other first-tier cities, in order to limit – and even suspend – the overall supply of industrial land to maintain current land reserves. This has resulted in a price increase of industrial land in these cities, intensity of the granting scale of industrial land and difficulty for investors to acquire land. By contrast, some second and third-tier cities are more appealing to investors in terms of their lower development costs, more competitive land prices with respect to resources, a more flexible investment environment and more preferential policies.

At the same time, the nationwide industrial transfer and formation of economic headquarters in developed areas mean that hot spots for investment will expand and more cities will benefit from such opportunities. The distribution areas for industrial real estate development will gradually extend from first-tier coastal cities to second and third-tier inland cities. Southwestern and northwestern areas of mainland China have vast potential and will attract a great deal of investors for a fierce competition for industrial real estate projects. Additionally, newly-enacted policies in some first-tier cities indicate that the authorities intend to move a number of small and medium-sized manufacturing enterprises out of the cities for the primary purpose of vitalising the existing industrial real estate and to leave more space to develop a high-end tertiary industry, making the second and third-tier cities the main battlefield for investors in the future.