Fund Ups Stake in Chinese Warehouse Space

Fund Ups Stake in Chinese Warehouse Space

Commercial News » Asia Pacific Commercial News Edition | By Alex Frew McMillan | July 23, 2013 8:55 AM ET

Despite increasingly clear signs of stress in the Chinese economy, one of the largest pension funds in the world is bulking up its stake in warehouse space in the country by 50 percent, betting China's emerging middle class will lead to higher domestic consumption and demand for logistics operators.

The Canadian Pension Plan Investment Board has agreed to boost the size of Goodman China Logistics Holdings, its joint venture with the Australian warehouse developer Goodman Group, by US$500 million, bringing its total size to US$1.5 billion. The Canadian fund is contributing US$400 million of the equity, with Goodman chipping in the remaining US$100 million, the same ratio to their stakes in the original joint venture.

The money will be used to expand the joint venture's presence from its current base in and around Shanghai on China's central coast, and in the Beijing-Tianjin corridor in the north. It is now targeting Chongqing, Chengdu, Wuhan, Xian and Hefei -- all capitals of different Chinese provinces and regional trade hubs.

"Manufacturers have been forced to move west," Philip Pearce, the managing director for greater China at Goodman, told WPC News. "Originally it was a policy-led move west, but in recent years, with import costs and the cost of land and labor in the major coastal cities, the market is pushing companies to the west."

China's economic growth slowed to 7.5 percent in the second quarter, according to data released on July 15, its lowest level in four years. While that was in line with expectations, it has prompted many economists to lower their forecasts for next year. For instance, Nomura slashed its expectations for 2014 to 6.9 percent, from 7.5 percent, which is also the pace it expects for the whole of this year.

"We are conscious of the slowdown in China and we are keeping an eye on it," Pearce said. "We are not going to be stupid about things."

The Australian-Canadian joint venture builds out warehouses from scratch. Whereas Goodman focuses on one or two very large and high-value warehouses per year in Japan, exclusively in Osaka and Tokyo, it builds many more lower-dollar-value facilities in China, at an increasingly wide range of locations. Goodman sells the bulk of the warehouses it builds in China into the joint venture, although it occasionally sells one on the open market if the CPPIB does not want to acquire it.

"The key to our strategy in China is our development capability," Pearce said. "It's very, very difficult to go out and buy existing product. Hence our strategy is all centered around development."

The CPPIB, which oversees the national pension plan for Canadian citizens, has C$183 billion (US$176 billion) under management, making it the largest single-purpose fund in Canada and one of the 10-largest pension funds in the world. It invests 11 percent of its assets in real estate.

Goodman and the CPPIB first teamed up to invest in Chinese warehouses in 2009. The joint venture is coming close to having committed the full US$1 billion of the original allocation, and owns 17 warehouses comprising 790,000 square meters of space. Another seven warehouses and 500,000 square meters of space are being built, at a cost of US$250 million.

The fresh injection of funds will boost the amount of space under development to 800,000 square meters, at a cost of US$400 million, a pace the partners hope to sustain each year.

The spread of factories and jobs away from the coast and into western China is booting employment and wages there, leading to increasing demand for consumer goods. The joint venture has signed clothing retailer the GAP as a tenant for 15,000 square meters of space in a warehouse in Kunshan, just outside of Shanghai, with an option for another 10,000 square meters. GAP has 200 stores in China and plans to boost that to 2,000 over the next five years.

Goodman has also inked deals with luxury goods retailer Richemont and consumer staples giant Johnson & Johnson, as well as a variety of e-commerce companies. It is close to signing a tenancy with a major international car manufacturer that it does not want to identify because the deal is not yet finalized.

"We are not focused on exports - we are seeing demand from domestic demand," Pearce said. Rents in secondary cities like Kunshan and Chongqing have risen from around 0.7 yuan per square meter per day to about 1 yuan per day over the last three or so years, an increase of more than 40 percent.

Still, China "has likely entered a prolonged period of deleveraging, which will last well into 2014," Nomura economists Zhiwei Zhang and Wendy Chen believe. They also note that China's working-age population actually fell in 2012 for the first time in 20 years, a trend that's likely to continue. Combined with the commitment of new president Xi Jinping and his administration to a tricky structural reform of the economy, those trends likely spell an unusually tough period for the country's normally robust growth.

"There is more warehousing being developed in China than there ever has been," Pearce said. "We do have to be conscious and keep an eye out for oversupply in the market."


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