Industrial strength

What a difference 12 months make. The industrial zones market in China has gone from speeding ahead full throttle to halting close to a dead stop, and now it is once again showing signs of life. The global downturn, the effects of which first appeared in October 2008, has sent the sector on a turbulent ride.

The term "industrial zones sector" has broadened over the years. Originally imported from the West by real estate research groups and market commentators in the early 1990s, it referred to the trends in China’s then burgeoning manufacturing field that was predominantly centered around the Pearl River Delta, and to a lesser degree, the Yangtze River Delta. The country was fast becoming a place of interest for industrialists and retailers from around the world and very little information on this sector was available.

 The term now has a wider meaning. Today, it includes the relatively new international grade logistics sector, which has evolved quickly since China became a WTO member; the business parks sector that developed strongly on the back of higher and better uses of industrial zoned land in suburban locations; the traditional prime manufacturing sector that has expanded throughout China’s coastal cities and begun moving inland; and finally, the industrial investment market which captures sales data and tracks yields in the aforementioned areas.

Mid-term report

At the mid-point of 2010, these sub-categories of the industrial zone sector are at different stages of the recovery cycle for various reasons.

After four straight quarters of declining rents in the logistics market across China, demand began to pick up nine months ago – producing three quarters of modest rental growth and recouping 40% of the initial decrease.

Rental rates are expected to continue to increase at an accelerated rate over the coming year for two reasons: First, demand for space has increased now that exports and internal consumption are up.  Second, the supply of available buildings is expected to dry up in 2011. Very few new facilities have been built since mid-2008 and a delay of six to nine months is required to build new space.

 The business parks market has remained reasonably stable during the past 20 months. This has been helped by continued demand from the R&D sector – particularly from pharmaceuticals, bio-technology, health and IT industries. At the same time, many companies have been relocating some or all of their operations from higher-rent downtown locations to business parks.

A growing number of multinationals are now setting up regional headquarters in China as well, with Shanghai a particularly popular destination. The forecast for this sector is positive, as demand is expected to continue increasing as the global economy improves.

Staying positive

Demand in the manufacturing sector, and associated rent prices for industrial property, fell for most of 2008 and 2009, as global market uncertainty lead to the closure and down-sizing of numerous facilities.

Fortunately, the increase in domestic consumption and a more buoyant export market is helping this sector. Outlook is solid, especially given the rapid pace of urbanization in China, which will see 325 million rural dwellers move to cities in the next 20 years or so. Many market watchers expect this phenomenon to aid China’s transition from an economic model reliant on exports to one driven by domestic consumption.

Lastly, the industrial investment market is slowly coming back to life, after hibernating for much of the last two years. During the global financial crisis, there was simply no demand for investment products and yields blew out to an indefinable point before the stimulus packages started to have an impact. Subsequently, interest in industrial investments is improving, particularly in the logistics area, followed by business parks and then manufacturing.

The versatile nature of logistics facilities – in which they can be leased to a wide variety of tenants – means the category is heavily favored by investors compared with often purpose-built manufacturing facilities. It’s likely that buyers and sellers will continue to find agreeable middle ground on purchase prices and therefore yields will continue to firm up in the near future.