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Next Gold Rush: Manufacturing Properties

Based on our observations, China is still one of the hottest destinations for yield-hungry institutional investment, not least because of its ongoing economic growth. While logistics... 


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Park Place / 越洋广场

District: Jingan Dist
1601 West Nanjing Road
Proximity to Metro Line: Line 2 & 7
Approximate Rental: 13-14RMB
Built In: 2008
 

Plaza 66 / 恒隆广场 I

District: Jingan Dist
1266 Nanjing Road (west)
Proximity to Metro Line: Line 2
Approximate Rental: 13-14RMB
Built In: 2001
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Next Gold Rush: Manufacturing Properties

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Based on our observations, China is still one of the hottest destinations for yield-hungry institutional investment, not least because of its ongoing economic growth. While logistics operations have been the focus for savvy international investors for the past five years, manufacturing properties are on the rise, for several reasons.

When yields for office properties declined to around 3%, pension funds and other money managers moved toward logistics warehouses, which offered returns of about 8%. Now, with too much money chasing this property segment, yields for these properties are declining, and tend to be around 6-8%. Manufacturing properties, however, can still achieve returns of 7-9% in major cities – and in more remote areas, returns can be even higher.

While the logistics sector continues to benefit from booming e-commerce, the manufacturing sector is expanding for foreign investors. The government continues to encourage greater direct foreign investment and, more importantly, has recently reduced the list of restricted industries (industries from which foreign firms are banned in China) from 190 to only 40.

Another consideration is policy. In the well-developed cities along China’s East Coast, local governments have strict requirements for land use – specifically in how land designated for industrial purposes generates tax revenue per square meter. This means that property investors need to look to higher efficiency tenants, such as R&D or manufacturing ventures, rather than warehouses.

Simple availability of properties is also a factor. In many of the more developed Chinese cities there is little new industrial land available through government auctions. Therefore, both end-users and capital investors need to buy what becomes available on the open market, pushing land costs higher. These higher costs, combined with the requirements for taxes mentioned above, make manufacturing properties more attractive. Taking Shanghai as an example: Of 56 industrial land plots auctioned off by the government since the beginning of 2019, only four have received permission to be used for logistics operations. 

When investing in industrial property in mainland China, the key is to focus on tier 1 and tier 2 cities, so that in addition to attractive rental income one can also sell assets quickly should the need arise. In the past, institutional investors tended to shy away from  industrial premises out of fear of potential prolonged periods of vacancy. But this is less of a concern where property generates money through both rent and capital appreciation, and can also be sold easily, as demand for premises tends to outweigh supply in tier 1 and tier 2 cities.

Among other property investment options in China, retail properties are facing declining rental rates due to e-commerce and market uncertainties, making such investments risky. Returns on logistics properties have become diluted due to an overwhelming amount of capital pursuing the sector. This makes manufacturing properties an attractive investment choice for the foreseeable future.

Market Notes

As in previous years, more international companies are arriving in China than are leaving. However, the total number of new businesses arriving has decreased in 2019, compared to previous years. This means that newly completed office buildings coming to market need to focus on attracting tenants already operating in Shanghai who may want to move: to facilitate business growth, to occupy space in a newer building, or to save costs on rent.

With the development of 5G, artificial intelligence (AI), and other IT-related technologies, many districts in Shanghai are trying to position themselves to occupy related niches. Regions like Xuhui, Binjiang, Zhangjiang and Lingang are becoming AI hotspots, while Jinqiao, Caohejing and other areas are focusing on technology-related manufacturing and related services.

Lingang New Zone is building a free trade zone distinct from Zhangjiang, Jinqiao and other established areas, aiming to cater mainly to businesses in biomedicine and artificial intelligence. Lingang New Zone has committed to providing as much support as possible, including special development funds, beneficial tax policies, cross-border finance support, and support in recruiting talent, among others.

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