China's commercial property not delivering

Investors’ 135b bet on sector sours as warehouses, other buildings empty out

In many parts of China, the warehouses and industrial parks that used to be a magnet for international investors are grappling with a surprising slowdown in business activity.

Logistics hubs that were built in anticipation of a long-lasting boom in e-commerce, manufacturing and food storage are losing tenants, forcing building owners to slash rents and shorten lease terms.

Shares of real estate investment trusts (Reits) that own China logistics properties have plummeted, and some of their managers expect their rental income to fall further.

Average vacancy rates at logistics properties in east and north China are approaching 20 per cent, the highest in years, according to real estate consultancies.

More warehouses are being built, which is making the problem worse. “We are looking at a supply glut in logistics and industrial properties in China,” said Mr Xavier Lee, an equity analyst at Morningstar who covers the property sector.

The deterioration has been disappointing for property owners that were counting on an economic rebound in China in 2024.

Global institutions have collectively invested over US$100 billion (S$135 billion) in warehouses, industrial buildings, office towers and other Chinese commercial real estate over the past decade, data from MSCI Real Capital Analytics shows. The foreign investors include Singapore’s GIC, CapitaLand Group, Blackstone, Prudential Financial’s PGIM, and many others.

A few institutions are contemplating divestments of their worst-performing assets before rents fall further. Others intend to wait out the downturn and expect to make money in the long run.

“The best locations are still resilient,” said Mr Hank Hsu, CEO and co-founder of Forest Logistics Properties which owns warehouses and distribution centres at major transportation hubs such as Beijing, Shanghai and Wuhan.