Insight

Striking gold in Chinese real estate with data centres and logistics

Gold

As 2021 drew to a close, China saw the dawn of a new future for its real estate industry with the news that its government had approved plans for four mega clusters of data centres to be set up in the north and west of the country, aimed at supporting the information needs of Beijing and major coastal centres. This development, paired with the logistics opportunities brought by China’s hosting of the Olympic Games in February 2022, brings both data centres and logistics further to the fore of an already-hot property market attracting attention from across the globe.

In this article, we examine the rise of data centres and logistics as highly attractive asset classes within the Chinese real estate market.

Data centres in high demand

In its 2022 Asia-Pacific outlook report, JLL notes that data centres are likely to see a huge uptick in demand from both investors and occupiers, particularly in the more established Asian markets. With regard to China, the report asserts that, together with the other populous markets of India and Indonesia, data centres have already emerged as a hot asset class and are only likely to entrench their hold in the minds and portfolios of real estate investors.

Similarly, CBRE recently reported expanding appetites for data centres. With the Asia-Pacific region transacting a total of $1.8 billion in direct data centre investments in the first half of 2021 alone, mainland China notably accounted for the majority of noteworthy deals in this space. Providing context for this demand, CBRE’s report highlighted that widespread construction of onshore data storage facilities has been triggered by rising levels of digitalisation following the Covid-19 pandemic as well as tightening data protection laws requiring onshoring of data (with specific focus on China’s Data Security Law, which took effect in September 2021).

With the future pointing to ‘cloud nine’ for data centre operators, it is important to understand that the underlying rationale for growth in data centres is the corresponding rise in data consumption. The 48th China Statistical Report on Internet Development notes that the number of internet users in China totalled 1.01 billion in June 2021, while internet penetration reached 71.6%. If such a pace of expansion is sustained, the sky would indeed be the limit for data consumption and, by extension, the centres hosting such data.

Logistics moving forward in China

If data centres are top of the pack, logistics don't seem to be far behind in the real estate pecking order, with China having emerged as the largest marketplace for new logistics constructions.

Not only does the populous country have a huge and rapidly growing market for logistics, the demand for new facilities is complemented by the need to renovate existing facilities. DWS highlights that, currently, just 5% of logistics stock in China can be considered Grade A quality.

Unsurprisingly in this context, the China Federation of Logistics and Purchasing reported that China's logistics demand maintained its track record of rapid growth throughout the first three quarters of 2021. What is even more commendable is that such growth was achieved despite the challenges of Covid-19, extreme weather conditions and power cuts. In fact, during this period, the total value of goods in the logistics sector was ¥234.5 trillion (approx. US$36.69 trillion), representing a year-on-year rise of 11.4%.

At IQ-EQ, we've seen China’s logistics sector evolve with a fund manager of note, Forest Logistics, undertaking a $1.2 billion co-investment opportunity in this space.

"Logistics centres are considered as infrastructure investments, which are strongly supported by the government and various parties. We are very happy to see how our platform has been growing rapidly and currently manages 18 centres with 2 million sq. m. GFA," commented Hank Hsu, Forest Logistics’ co-founder and CEO. He added that they recently achieved LEED Gold Certification for the Forest Beijing Airport Logistics Park, a modern, three-story, 71,000 sq. m., ramp-access logistics facility, which excitingly served as the main logistics centre for the 2022 Beijing Olympics.

Data centres and logistics building strong foundations for Chinese real estate

China has unveiled grand plans to expand its big data industry into an almost ¥3 trillion ($470 billion) sector by 2025 through the building of several clusters of data centres, in keeping with the 2021-2025 plan from the Ministry of Industry and Information Technology that was released in November.

On the logistics front, demand recovered faster than expected in 2021, supported by structural growth and a cyclical upturn. According to CBRE analysis published in January 2021, while 7 million sq. m. of recent supply would come on stream (a rise of 30% year-on-year), net absorption was expected to extend by 30-50% year-on-year. The year has also been an ideal period for brand new leases and expansion, CBRE noted, as landlords looked to fill vacant space while providing opportunities for occupiers to upgrade to Grade A warehouses to boost efficiency or agree longer leases at attractive rates.

Overall, as major domestic and international players like GDS, Microsoft and Amazon continue to expand their data centres in China, and as the recent Beijing Olympics spurs investments in logistics to an unprecedented level, it's clear that the only way for real estate in China is up.