June 2017

China Logistics Demand

2 JLL ｜China Logistics Demand

JLL ｜China Logistics Demand 3

Macro DemandChina’s growing consumer class is the driving engine behind the growing demand for high-quality logistics distribution space. The country’s household consumption has risen alongside average disposable incomes for the past two decades. Increasing incomes in turn are driving retail sales across a range of product categories, including fast fashion, durable goods, food and beverage, household items, personal automobiles, and more.

China’s middle class and retail market are both growing geographically more diverse. Wealth and spending in the first twenty years of the country’s reform period were concentrated in the Tier 1 cities like Beijing and Shanghai. Those cities have continued to become more financially advanced, but in recent years a growing population in Tier 2, Tier 3, and even Tier 4 cities has entered the consumer class, willing and able to spend money on branded goods. In 2000, only 3 cities in China had annual retail sales greater than RMB 100 billion (USD 14.5 billion). By 2015, there were 76.

The logistics sector continues to offer exceptional long-term opportunities as China builds its supply chain infrastructure. The inland relocation of manufacturing capacity - combined with the rise of the middle class throughout the country - is creating demand for prime warehouse space. Continued growth in demand is virtually guaranteed thanks to the expanding domestic consumer market and the rise of e-commerce. Manufacturers and retailers are striving to streamline their supply chains, creating demand for the replacement of aging facilities with Grade-A, high-specification developments. China’s substantial investment in transportation infrastructure is also enabling businesses to expand their distribution networks.

In 2016, the Global Supply Chain Council (GSCC), with the support of JLL, conducted an online survey to gain deeper insights into trends affecting China’s warehouse market. An infographic that summarizes the results of the survey has been attached to the end of this report.

E-Commerce China is the world’s largest e-commerce market. Online retail sales in China accounted for 43% of the world’s USD$1.55 trillion e-commerce market in 2015, and that share is expected to rise to 59% by 2020. China’s retail sales have grown 10-20% annually since 2008, but over the same period online sales have risen at a CAGR of 62.1%. As a result, e-commerce’s share of China’s retail sales grew from 1.1% in 2008 to 12.7% in 2015. Hundreds of millions of Chinese have yet to even begin shopping online, indicating the share will continue to rise.

Global e-Commerce Annual Sales Comparison

China USA Rest of the World

USD 1.55trillion

USD

4.06trillion

43%35%

22%59%

24%

17%

2015

2020 Forecast

4 JLL ｜China Logistics Demand

Key Demand Drivers

Source: eMarketer

Third Party Logistics (3PLs)While some consumer goods and e-commerce firms insource their logistics business, directly leasing warehouse space or building their own facilities, many others rely on third-party logistics operators (3PLs) to handle their distribution needs. 3PLs revenues in China have soared as companies increase their budget allocation for 3PL services (the share rose from 49% in 2009 to 65% in 2014).

3PLs have become the strongest demand driver for prime warehouse space in China. In 4Q16, they contributed over 40% of net absorption of high-quality non-bonded warehouses. Several major players, including Best Logistics, SF Express, ZTO, Yunda, and Deppon, have expressed interest in launching IPO’s to sustain their continued rapid growth.

Percentage of Logistics Expenditure on 3PL Services in China

0%

10%

20%

30%

40%

50%

60%

70%

2009 2010 2011 2012 2013 2014 2015

JLL ｜China Logistics Demand 5

Source: China Federation of Logistics & Purchasing

Case Study

GLPGLP is China’s largest prime warehouse developer by far and owns half of the country’s Grade-A logistics space. Its breakdown of leased area by tenant type is hence considered the most representative data available on China’s logistics demand.

According to GLP’s 2016 annual report, 90% of the company’s portfolio was occupied by businesses geared to domestic consumption, including retail/fast food, fast-moving consumer goods (FMCG), logistics services, electronics, and auto parts.

E-commerce accounts for a rapidly increasing share of GLP’s China portfolio, rising from 3% of leased space in 2009 to 26% in 2016. E-commerce firms have a specific need for high-quality warehouse space as they compete with each other in providing efficient, on-demand delivery.

Three of GLP’s top five tenants by leased area are JD.com, Vipshop, and Amazon, all e-commerce firms. The remaining two are Best Logistics and Deppon Logistics, both 3PLs.

GLP's Tenant Mix by Leased Area – April, 2017

6 JLL ｜China Logistics Demand

1%Machinery

2%Pharma/Medical Instruments

6%Others

10%Electronics/High-Tech

,

22%

10%Auto & Parts

28%Retail/Fast Food

21%General Logistics Services

FMCG

Source: GLP

Growing Trends

Multi-Storey Facilities Gaining Popularity China’s high-quality warehouse market traditionally has been dominated by single-storey warehouses, which compared to multi-storey warehouses are cheaper to build and generally preferred by tenants. This situation began to change in 2013, notably in primary hubs like Shanghai. Rising land prices have made single-storey projects less feasible, and local governments are pressuring developers to raise their investment density by adding one or even two additional floors.

So far, multi-storey projects are relatively less common in inland cities or secondary markets. Still, rising land prices across markets, combined with the growth of e-commerce tenants that tend to find multi-storey projects more acceptable, could lead to the multi-storey trend becoming more widespread over the next decade.

17.5%82.5%Multi - Storey Single - Storey

Type of Newly Built Warehouses in Shanghai during 2013 - 2016

JLL ｜China Logistics Demand 7

Source: JLL Research

The Rise of Satellite CitiesIn China’s most mature markets, there is a growing preference by tenants for regional distribution space as opposed to warehouses focused on serving a single urban center. This dynamic has contributed to the rise of satellite city markets outside of major cities.

For example, cities such as Kunshan, Taicang, and Jiaxing have easy access to Shanghai consumers while also enabling efficient distribution to the increasingly wealthy mid-size cities of the Yangtze River Delta. The more expensive space within Shanghai’s borders cater to tenants such as supermarket chains with more specialized needs for space very close to the city’s CBD areas.

Similar trends have been observed in the case of Langfang (located between Beijing and Tianjin), as well as Dongguan and Foshan outside of Guangzhou in the Pearl River Delta.

BEIJING

LANGFANG

TIANJIN

GUANGZHOU

FOSHAN DONGGUANSHENZHEN

SHANGHAISUZHOU

KUNSHAN

CHANGSHUTAICANG

JIAXING

Satellite Cities Clusters

8 JLL ｜China Logistics Demand

Bohai Bay Area Pearl River Delta

Yangtze River Delta

Source: JLL Research

2017 China Warehousing Trends Survey Results

To gain deeper insights into the current trends of China’s warehouse market, JLL

and the Global Supply Chain Council (GSCC) recently conducted an online survey

focusing on below issues:

- Where do warehouse users plan to increase/reduce the number or size of warehouses in China?- What are key bottlenecks when selecting or using warehouse facilities in China?- What are the main criteria when selecting a warehouse or developer?- How will e-commerce growth in China affect warehouse and distribution operations?

Over the next few pages, we will present the key findings of this survey and highlight

some emerging trends in China’s warehouse market.

A significant number of the respondents had senior positions with

41% being CEO’s, vice presidents, general managers, or directors.

Another 42% of the respondents held manager titles. Over 95% of the respondents were warehouse tenants, while less than 5% were warehouse developers or operators.

What industry/sector does your company belong to?

Respondents at a Glance

18%

39%3%

4%

4%

5%

7%8% 12%

Logistics

Other

Retail and Distribution

Industrial Equipment FMCG

High-tech

Automotive

Chemical

E-Commerce

10 2017 China Warehousing Trends Survey Results

In which cities do you currently have warehouses or distribution centers?

Which cities are your top destinations for future warehouse/DC development?

What is the current total size of your warehouse/DC facilities in China (in square meters)?

SuzhouShanghai

Beijing

Guangzhou

Hongkong

Chengdu

Shenyang

79%

51%

50%

38%

35%27%

28%

32%

Tianjin

Shanghai

Beijing

GuangzhouShenzhen

Chengdu43%

28%

31%23%

26%

Suzhou 29%

Over 40,000 sqm

Less than 5,000 sqm

5,000 - 10,000 sqm

10,000 - 20,000 sqm

20,000 - 40,000 sqm

42%

17%

11%

15%

15%

2017 China Warehousing Trends Survey Results 11

Over 20% of the respondents mentioned their

companies intend to reduce the number or size of

their warehouse space in China. Among all, Beijing

is the first city where companies intend to make cuts

with 26% of the response. Other cities mentioned

include Dalian, Ningbo, Shenyang, Chengdu, and

Chongqing.

81% 80% 63%

Location Price Quality & design of the facility

In 2017, do you plan to increase/reduce the number or size of warehouses in China? If you plan to reduce, in which cities are you considering reducing or moving out of?

What are key bottlenecks/requirements in your current warehouse facilities in China?

What are your top 3 criteria when selecting a warehouse?

Insufficient space for truck movement

Insufficient number of loading doors

Poor quality flooring

Lack of energy saving features

Column layout does not allow efficient usage of space

32%32% 24%

36% 28%

12 2017 China Warehousing Trends Survey Results

53% Current warehouses need to be redesigned to accommodate changing operation models

What are your main criteria for selecting a warehouse developer/landlord? (Total score: 5)

When sourcing a warehouse, how soon do you wish to move into the facility?

How will e-commerce growth in China affect your warehouse and distribution operations?

Quality and design 4

Competitive price 3.90

Service level 3.89Flexibility in

leasing terms 3.82

Strong local market experience 3.56

Warehouses in multiple locations

available 3.11

International reputation and experience 2.95

Move in within 6 months Move in within 18 months

70% 6%

Need to build new warehouses specifically for e-commerce 27%We will need fewer warehouses as stock will be outsourced to specialized operators/platforms

24%

2017 China Warehousing Trends Survey Results 13

19%

81%

Both general retail and e-commerce

Plan separate facilities for e-commerce operations

If your company has an e-commerce business and is seeking a new DC, what functions will it cater to?

Are you currently interested in expanding your warehouse facilities outside of China? If yes, which countries are you interested in?

Do you feel developers and agencies are doing enough to provide information on the available facilities and warehousing trends in other Asian countries?

Remain in China

Would like to explore other Asian countries such as

Thailand, Japan, Vietnam, South Korea, and Indonesia

64% 36%

49%

Definitely not enough

19%

Yes, plenty of information

32%

Not sure

14 2017 China Warehousing Trends Survey Results

Authors

Jasmine LingSenior Manager, IndustrialShanghai, JLL+86 21 6133 5858jasmine.ling@ap.jll.com

Stuart RossHead of IndustrialChina, JLL+86 21 6133 5757stuart.ross@ap.jll.com

Joe ZhouHead of ResearchChina, JLL+86 21 6133 5451joe.zhou@ap.jll.com

Warner Brown Associate Director, ResearchShanghai, JLL+86 21 6133 5345warner.brown@ap.jll.com