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China’s industrial real estate market to bounce back

KUALA LUMPUR: China’s industrial real estate market has begun to return to pre-financial crisis levels of growth, said investment director of Industrial at Colliers International, Jeremy Chapman.

The growth has been particularly apparent in the domestic logistics market, where government stimulus during the economic downturn helped buoy domestic demand for consumer goods, along with increased government spending in infrastructure and other related sectors, he said in a statement on June 2.

The industrial property market in China is now seen as a viable investment platform for investment by multiple investor classes, he said.

Chapman however pointed out that the availability of stabilised income-producing properties is somewhat limited, especially for this year.

“Therein lies the opportunity for a seller with a stabilised asset. By taking advantage of current market conditions, sellers can find numerous investors looking to source products to add to their portfolios,” he said.

Chapman said the industrial real estate sector experienced a sudden funding vacuum in late 2008, with a significant short fall of capital as the financial crisis took hold.

He said this trend continued through most of 2009 and it was only since late 2009 that China’s industrial market has seen renewed vigour and appetite by investors, particularly for logistics real estate investment and development.

“This demand comes on the back of an increased interest in the sector, as the product becomes a greater part of the overall China real estate sector,” he said.

He added: “The continued Central Government support, in order to reduce the total logistics cost to the economy [reflected as a percentage of GDP], has helped the industry emerge as a desirable investment product to investors and developers.”

Chapman noted that from a rent and capital value perspective, during the market downturn, there was some downward pressure on values. The overall industrial real estate sector however, has fared rather well, especially domestically related logistics real estate.

Before the financial crisis, gross and net operating income yields (gross yield less business and real estate taxes) ranged between 9% and 11% gross, or 7.5% and 9% net, depending on product, location, rental stabilisation and other related factors.

Although there was an expectation that yields would decompress during 2009, there were few transactions to support this theory. The most recent transaction has been in the Beijing market, for a 41,000 sq m design-built facility for an international online retailer. The facility was purchased in January 2010 by an international investor of logistics warehousing, for approximately RMB145 million (RM70.1 million), or a gross yield of approximately 8.75%, or a net yield of 7.25%.

The largest transaction to occur in recent years was in 4Q2009, with the sale of four stabilised logistics properties in Shanghai with a total area of 270,000 sq m, for an estimated net yield of just under 7%. This transaction is the most comparable and substantial sale in the market to date.

“The entry of off-shore funds, and considerable competition within China, has meant that there is an expectation that yields will have returned to their pre-financial crisis levels,” he said, adding that the only potential spanner in the works will be the risk associated with the ability of developers and investors to raise debt, both overseas and locally.

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