South China Morning Post
Advertisement
Advertisement
A delivery man passes by barriers set up to lock down a community in Shanghai, China, on March 30. Residents of Shanghai have struggled to buy food supplies under anti-coronavirus controls that have confined most of its 25 million people in their homes, as the government tries to contain a spreading outbreak. Photo: AP
Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro

Shanghai’s brutal lockdown a defining moment for China’s logistics sector

  • Botched handling of Shanghai’s lockdown shines spotlight on last-mile fulfilment facilities and same-day delivery, which need high-quality warehouses in urban centres
  • Fresh food has been key battleground in online grocery market, and lockdown disruption is fuelling demand for more sophisticated cold-storage facilities
Nicholas Spiro
Nicholas Spiro
Why you can trust SCMP
Ever since the Covid-19 pandemic erupted, logistics real estate has been all the rage. Having accounted for just over 10 per cent of global commercial property transactions in 2016, industrial and logistics assets were responsible for 21 per cent of investment activity last year, and as much as 29 per cent in the Asia-Pacific region, data from CBRE shows.
Trends that were apparent long before the virus struck – the exponential growth of e-commerce, the adoption of technologies that help companies improve their efficiency, and structural shifts in asset allocation favouring logistics real estate – have become much more pronounced over the past two years.
The unprecedented disruption wrought by the pandemic pushed more consumers online, forcing companies to rethink their operations, particularly the management of their supply chains. The biggest challenge has been to increase the resilience of distribution networks, especially the final segment of a product’s journey from manufacturer to end consumer, or “last mile”, in urban centres.

05:59

How Covid shut down Shanghai

How Covid shut down Shanghai

While retailers and logistics providers the world over have had to quickly find new ways to get goods to their destinations within ever tighter time frames, nowhere has last-mile delivery been under more scrutiny this year than in China.

Beijing’s determination to maintain its zero-Covid policy, which includes draconian lockdowns to crush even the smallest of outbreaks, is testing the resilience of last-mile logistics in ways that were unthinkable only a few months ago.
The protracted lockdown of Shanghai, China’s financial and commercial hub, has confined most of the city’s 25 million residents to their homes for weeks and, more worryingly, upended grocery delivery operations, making it difficult for many residents to obtain food and other daily necessities, and even forcing some to resort to bartering.

Not only has this come as a shock to a country that is at the cutting edge of e-commerce, with the world’s highest online retail penetration rate, but it has also accentuated the scale and severity of the disruption caused by the government’s increasingly contentious zero-tolerance approach to the virus.

A report published by Nomura on April 11 noted that 40.3 per cent of China’s gross domestic product is currently under full or partial lockdown, roughly twice the share at the beginning of this month.

A resident picks up a bag of vegetables delivered by the government during a citywide lockdown due to Covid-19 in Shanghai on April 3. Photo: Bloomberg
The sudden imposition of a sweeping lockdown in China’s biggest city, coupled with tough restrictions that left delivery workers caught in a web of quarantine controls, were bound to wreak havoc.

But the fact that this happened in a country that is home to e-commerce leaders such as Alibaba Group Holding (the owner of the Post), Meituan and JD.com is a salutary lesson for retailers worldwide.

The botched handling of Shanghai’s lockdown, in particular the difficulties faced by logistics operators, has shone a spotlight on last-mile fulfilment facilities and same-day delivery, which require high-quality warehouses in urban centres that help expedite deliveries and keep fresh and frozen goods in prime condition.

In a webinar on China’s retail market hosted by Bain & Company in March last year, the consultant noted that fresh food was the key battleground in the online segment of the grocery market. While the online penetration rate for apparel and consumer electronics in China is between 40 and 60 per cent, fresh produce is still less than 10 per cent despite the fact that customers order food far more frequently.

Shanghai to resume some production, reports more than 24,000 new cases

This creates huge opportunities in logistics real estate. While China is best placed to cope with digital disruption given that it is in the vanguard of e-commerce, modern logistics space per head in urban areas stands at 0.28 square metres (3.01 square feet), a third of the amount in Greater Tokyo and one-seventh of the level in Singapore, data from CBRE shows.

Demand has surged since the pandemic erupted, with net absorption reaching a record high last year, driven by strong take-up from third-party logistics operators and e-commerce retailers. New supply has also increased sharply, reaching 6.8 million square metres (73.2 square feet) in 2021, a record high, according to CBRE.

Both occupiers and investors are competing fiercely for a limited number of new, speculatively built and sustainable urban warehouses that can be partly or fully automated and which allow for efficient and speedy delivery of goods to end consumers.

Staff members work at a vegetable warehouse in Shanghai on April 1. Photo: Xinhua
While logistics and industrial assets are already the most sought after commercial properties in China, underpinned by the successful launch of a market for infrastructure-focused real estate investment trusts (Reits), lockdown-induced disruption is fuelling demand for more sophisticated cold storage facilities.

Crucial to maintaining the quality and shelf life of perishable and temperature-sensitive goods, and an increasingly important part of the e-commerce-driven restructuring of supply chains, cold storage warehouses are on the cusp of a new wave of investment in China’s logistics property sector.

Indeed, the greater the disruption caused by Beijing’s zero-Covid policy, the clearer the necessity for high-quality logistics real estate. China has been one of the biggest beneficiaries of the sharp increase in the amount of money raised by logistics property funds in the Asia-Pacific region over the past two years.

While Shanghai’s brutal lockdown is exacerbating concerns about the world’s second largest economy, it is a defining moment for China’s logistics real estate sector that will propel leasing and investment activity to new highs.

Nicholas Spiro is a partner at Lauressa Advisory

Post