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Is China facing a warehouse bubble?

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Real estate oversupply has long been a problem in China’s residential, office and retail sectors. Now, a not-so-glamorous industry segment that had previously held promise – logistics – is starting to display similar signs.

Since 2013, warehouses have been a preferred vehicle for Chinese property investors, following a downturn in the country’s housing and commercial property segment. The lack of land for such warehouses – an unpopular zoning choice for local governments because they yield less tax revenue — as well as a boom in e-commerce had made logistics property a popular way to park money.

But as history shows with real estate trends in China , when everyone wants a piece of what’s hot, a supply glut often ensues.

Some initial signs of excess inventory are popping up around the country, as more residential property developers try their hand at building warehouses amid a sluggish housing market.

China Vanke Co.000002.SZ +1.94% Ltd, one of the nation’s biggest property developers, for instance, has said it is looking into building logistics property to diversify from the residential sector.

“It used to be a market that was undersupplied. Now we’re seeing in some market pockets, oversupply,” said Philip Pearce, Goodman Group GMG.AU -0.54%’s managing director for greater China. Australia-listed logistics property developer Goodman Group has a total of $1.5 billion in assets under management in mainland China, with 22 properties across cities like Beijing, Shanghai, Tianjin, Chongqing, Chengdu and Wuhan.

He said that north China’s Tianjin and Southwest China’s Chengdu are showing signs of a glut.

“While we see strong demand in some markets, we see supply running ahead of demand. Everyone is jumping on the bandwagon. The question is, would these people stay in the market?” said Mr. Pearce. Goodman, which plans to develop 800,000 square meters of logistics property in China annually, is more inclined to pick cities where it is harder to secure land, he said.

While there’s a temporary oversupply emerging in some locations, there is still inadequate stock of modern warehouses, property consultancy JLL said in a recent report. In the high-end-segment, there are less than 30 million square meters of Grade-A logistics property in China.

That’s just one-fifth of the stock available across major markets in the U.S., said JLL.

To be sure, the supply situation in the warehouse segment is nowhere as dire as the ballooning inventories of apartments and malls in smaller Chinese cities.

And as government policies try to help the growth of e-commerce businesses across different cities, the logistics property sector still has potential, said Colliers International, another property consultancy. Local authorities’ speedy roll-out of more free-trade zones, for instance, is helping aid the growth of online purchases, a trend closely eyed by tenants and landlords.

2016-06-24

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