High, stable yields in logistics sector draw investors

Falling investment returns from mainland residential and commercial properties spur fund flows to rising grade-A warehouse market

PUBLISHED : Wednesday, 22 May, 2013, 12:00am
UPDATED : Wednesday, 22 May, 2013, 3:51am

Investment yields on residential and commercial properties on the mainland are declining, turning investors' attention to the logistics market.

Logistic properties - which include mainly grade-A warehouse facilities - currently offer high and stable rental yields as growing demand is outstripping supply, a Colliers International report says.

"Going back three to four years there was only a small group of investors in the sector," said Peter Garrison, an associate director of industrial services at the property consultancy. "But now it is growing more popular and is attracting many institutional investors."

He said Beijing's curbs to cool the housing market and declining yields of residential and commercial property investments had drawn investors to the expanding logistics sector.

Rentals of grade-A warehouses on the mainland had risen at an annual rate of five to 10 per cent over the past few years, Jeremy Chapman, senior director of industrial services at Colliers, noted in the report.

The capitalisation rate - the ratio between the net operating income of an asset and its capital cost - is presently at six to eight per cent. Since rental contracts tend to be for periods of three to five years, such properties offer a stable return.

Chapman said the rapid growth of domestic consumption, e-commerce and urbanisation had driven demand for logistic facilities.

Although Beijing has highlighted the need to develop a modern logistics system and lower costs, land acquisition remains the biggest challenge to the sector, as local governments might prefer granting land to other businesses that could generate more tax revenue and boost employment.

"Demand has outstripped supply to the point that in certain markets developers have been seen to forgo pre-leasing in recent months in favour of building on speculation," said Chapman.

Logistic facilities on the mainland are concentrated mainly in and around first-tier and coastal cities such as Shanghai, Guangdong and Beijing.

Grade-A warehouses in good locations in Shanghai and Beijing carry price tags of 4,500 yuan (HK$5,630) to more than 6,500 yuan per square metre, though few are available for sale.

Chapman said he expected rents to rise by about seven per cent a year on average over the next two years in Shanghai.

According to property consultancy DTZ, take-up in the newly completed Blogis Songjiang Logistics Park (Phase II) in Shanghai has been strong.

With a total leasable area of 80,000 square metres, the entire space has been fully pre-leased to tenants including the Haier Group before the completion date.