Development and expansion in manufacturing, including the construction and improvement of major industrial parks and logistics facilities, along with the migration of multinational corporations (MNCs) to second-tier cities, have become key factors driving sustained demand for China’s industrial property.
As China’s industrialization spreads, related properties such as industrial parks, factories and warehouses are anticipated to grow accordingly. The country’s booming manufacturing industry has already spurred on the industrial property market, however, causing it to overheat.
To help regulate this issue, the government introduced a Land Appreciation Tax in February 2007. Greater control will narrow the profit margins of property developers and limit price volatility. These are welcome additions for the industrial market, which is still forecast to experience substantial growth. China’s manufacturing base currently accounts for 7% of the global total, and will take at least another decade to realize full industrial modernization.
Since 2003, industrial land has become increasingly open to market controls as a result of Beijing’s efforts to bring industrial land prices to proper market value. Policies governing the procedure for land transfers promulgated in 2007 require that industrial land go through the process of listing, bidding and auctioning in an attempt to do away with the practice of price fixing. As industrial land moves towards marketization, land prices will better reflect specific market demand and supply.
From an investment angle, the government’s decision to unpeg the yuan, allowing it to appreciate against the US dollar, has increased the attractiveness of China’s industrial property market. Competitive prices, together with the potential for huge increases in value and profit from currency appreciation, will help industrial property become an investment hot spot.
Opportunities are also being created by government programs to encourage investment in western China. This also has a positive impact on the logistics industry, further supporting growth in the investment property market.
With the trend of migrating west, logistics companies have the potential to expand considerably. A limiting factor, however, is the historically poor quality and design of warehouse facilities; these were mostly multi-story, low-clearance buildings serviced by goods elevators.
As MNCs and third-party logistics companies coming to China are seeking high-end international-standard logistics buildings, the logistics industry will need to catch up. To date, the industry has undergone changes in warehousing standards, which have helped enormously in making China’s logistics industry more competitive.
Yet as “Go West” initiatives have created new opportunities for logistics players, other policies are pinching industrial parks themselves, where the bulk of industrial property is congregated.
National macro policies are gradually causing large portions of manufacturing areas to functionally reform into high-tech or tertiary industrial parks. For example, high labor costs and rising rent and land costs in first-tier cities have prompted some industries involved in low-margin manufacturing – such as textiles, clothing and footwear – to consider moving to more affordable locations inland.
The central government’s current Five-Year Plan includes incentives to encourage companies to relocate to central Chinese cities such as Chengdu and Chongqing in the same way investment in Pudong was encouraged in the 1990’s.
These relocations are allowing for the redevelopment of the sites they leave behind in the east. Given today’s economic conditions and improving infrastructure, many of these old sites are better suited for high-tech or commercial uses, and in some cases residential redevelopment.
But despite newly reclaimed land, industrial parks are going to face a scarcity of land – and thus higher land prices – which could become a barrier to further development in due course.
Andrew Hatherley is executive director of industrial and logistics services at CB Richard Ellis. He is responsible for the industrial and logistics services business line throughout Greater China.