China’s economy continues to struggle, with the real estate market crisis unresolved and consumers tightening their wallets. Logistics warehouses and industrial parks, once attractive to international investors, are facing increasing vacancy rates and sluggish activities, a sign of the economy’s weakness.
According to Bloomberg’s report on June 25th, there are fewer and fewer tenants in logistics centers, forcing landlords to reduce rents and shorten lease terms. Real estate investment trusts holding Chinese commercial properties have seen their stock prices plummet, with some fund managers expecting further declines in rental income.
Real estate consulting firms indicate that the average vacancy rate for logistics properties in the East and North China regions is close to 20%, the highest level in years. With more warehouses under construction, the problem is becoming more severe. Xavier Lee, a stock analyst at Morningstar, stated, “We are facing an oversupply issue in the Chinese logistics and industrial real estate sector.”
As shoppers become more frugal, domestic e-commerce growth has been slow. According to data provider Syntun, during this year’s 618 e-commerce shopping festival, the total Gross Merchandise Volume (GMV) decreased by 7% compared to the same period last year, amounting to 743 billion RMB ($102 billion), marking the first decline in sales.
Geopolitical tensions have prompted some companies to shift some manufacturing operations overseas, coupled with a slowdown in cross-border trade, impacting China’s export-led industrial activities. According to data released by China’s National Bureau of Statistics, the Purchasing Managers’ Index (PMI) for the industrial sector was 49.5 in May, indicating a contraction in manufacturing activities, compared to 50.4 in April. Demand for warehouses in mainland China is also decreasing.
Statistics from Cushman & Wakefield show that the vacancy rate in warehouses in the East China region, where many logistics properties are concentrated, rose to 19.2% in the first quarter, exceeding the national average of 16.5%. In the 20 major cities tracked by Cushman & Wakefield, logistics rents declined quarter-on-quarter in 13 cities in the first quarter, with Beijing and Shenzhen experiencing the largest drops of 4.2% and 3.9%, respectively.
Chinese industrial parks are also facing the issue of companies, both multinational and domestic, relocating operations abroad. Data from Gaoli International shows that the overall vacancy rate in Beijing’s industrial parks in the first quarter was 20.5%, higher than the national average. In Guangzhou, some multinational companies are closing factories and changing business strategies due to the lackluster economic recovery post-pandemic.
Swiss healthcare manufacturing company Longsha Group announced earlier this year that it would close a drug manufacturing plant following a strategic review.
Data released by Chinese authorities on June 21st showed that the indicator measuring Foreign Direct Investment (FDI) in terms of the actual use of foreign capital has been declining for 12 consecutive months, indicating that China is becoming less attractive to foreign investors. While foreign companies have not completely withdrawn their investments from China, the figure has been shrinking.
Humbert Pang, China’s regional CEO of Gaw Capital Partners, stated that everyone is now cutting costs, and even if companies are occupying logistics properties, rent increases are not expected.
“There is intense competition among tenants at present,” said Luke Li, Managing Director of ESR Group Ltd., during an online conference on the logistics industry in mid-June.
The Hong Kong-based property asset management company operates e-commerce distribution centers, cold chain warehousing facilities, and manufacturing industrial parks in China and other countries. Li added that landlords have been offering flexible rental terms, improved amenities, and other incentives to tenants to keep warehouses occupied.
According to ESR’s latest financial report, revenue in the Greater China region dropped by 20% in 2023, mainly due to weakening consumer confidence and declining leasing demands.
Ng Kiat, President of Mapletree REIT, stated during an April earnings call that the Chinese environment would remain uncertain in the next 12 months. The focus now is on retaining tenants and selling underperforming assets in China.