In this episode of China Money Podcast, Goodman Group‘s Hong Kong-based managing director, Philip Pearce, discusses opportunities in China’s logistics property market, and why his firm is expanding investments in China ten-fold in the next five years.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: Where is China’s logistics property market compared to other places?
A: It’s not as developed a market as the developed countries around the world. The percentage of outsourcing is very low. A lot of manufacturers, for example, have their small warehouses tagged onto their manufacturing facilities. But we have seen significant growth in the market, and there is significant demand.
We are seeing that outsourcing in China is accelerating. And a lot companies are looking at outsourcing their logistics and warehousing to companies that focus and specialize in that area. As a result, we are seeing very strong demand for our warehouse facilities.
The other trend that is going on in China is that traditionally, it’s been a very much export-focused market. Over the last two or three years, what has been really driving the market is domestic distribution. We see that segment of the market growing very rapidly over the last few years, as urbanization continues at a high rate in China and the middle class’ disposable income increases.
Q: What are the key drivers for the logistics property market in China?
A: Another driver for the market is e-commerce. It’s not just in China. It’s a global phenomenon. As an organization, we serve companies like Amazon in Europe. We’ve done about five or six (warehouses) for them over the last four or five years. We’ve done a few (e-commerce warehouses) in China. We recently announced a build-to-suit project for a company called Moonbasa.com. We have recently signed another local e-commerce company called VIPSHOP.com, which is a NASDAQ listed e-commerce company.
We look at our portfolios all around the world, typically in each country, you’ll see consistent names. In Australia, DHL is a big customer. They are also a big customer in Hong Kong, China and in Europe. But amongst that, you will see large local companies. In China, for example, our largest customer is Sinotrans, a local freight dealer.
Q: In the midst of an economic slowdown, why is Goodman expanding investments in China ten-fold to US$2.5 billion during the next five years?
A: I think we can only go (ahead) as what we are seeing in the market. We are very confident despite the slowdown we are seeing out there. But our segment of the market is under-supplied. You are seeing the residential property market, which is obviously very high profile and quite highly publicized, has slowed. That is in some extent overbuilt, so there is an excess of supply.
Our segment of the market is very under-supplied, because of the domestic economy and because of e-commerce. I’m seeing demand for (our) product at the moment in our China portfolio the strongest I have ever seen. So well, yes, the export side is slowing down, (but) we are seeing retail side growing – not as high as what the (government) would like, but still growing at 14%, which is pretty strong growth, and the pie (is bigger) at a high base.
Q: What is the underlying economic growth rate you are factoring in?
A: I would say 7 or 8 percent. We are definitely not going for 9 or 10 percent. That is just not sustainable.
Q: What are the biggest challenges for warehouse developers like you going forward?
A: Obviously, we are looking at Europe and the U.S. closely. That would be a substantial external challenge. Secondly, securing land in China would become more difficult as the government controls the amount of farmland that can be turned into industrial land. Lastly, human resources. We will expand our team in China to 80 from the current 50, and we have to constantly look out for good people.
About Philip Pearce:
Philip Pearce is a managing director at the Goodman Group, a Sydney-headquartered logistics property developer and manager with US$2.5 billion under management in Asia. Based in Hong Kong, Pearce is responsible for Goodman Group’s investments in Greater China. Before joining Goodman in 2002, Pearce was at Ascendas-MGM Funds Management and AMP Henderson Global Investors.