Upgrading Of Domestic Consumption Drives Growth In Greater China
MLT’s China portfolio has recovered from localised lockdowns. Leasing activities have resumed and demand for logistics space is expected to pick up rapidly in 3Q22. Hong Kong suffers from undersupply. Rent for logistics space increased 4.8% in 1H22 and is projected to increase 0-5% in 2H22. MLT has embarked on the redevelopment of 51 Benoi Road in Singapore and its Subang Jaya site in Selangor, Malaysia. FY23 distribution yield has improved to 5.4%. Maintain BUY. Target price: S$2.08.
• Logistics infrastructure promotes domestic consumption through e-commerce in China. E-commerce platforms Alibaba, JD.com and Pinduoduo are competing head-on to reduce delivery time to within 24 hours. To achieve this feat, they must secure prime logistics space close to consumers, especially in Tier 1 and 1.5 cities. Based on China’s 14th five-year plan, online retail sales is projected to increase 44% from 2020 to 2025, driven by live broadcasting, online grocers, and cross-border e-commerce platforms. The projected growth must be supported by additional 70m sqm of logistics space. Online retail sales grew 5.6% yoy in 1H22. Online share of physical goods sales reached 25.9%, up 1.0ppt yoy.
• Weathered short-term disruptions from sporadic and localised lockdowns. Unlike office and retail properties, the logistics sector is resilient and relatively unaffected by COVID-19-related restrictions. The government has emphasised safeguarding logistics operations. There were localised outbreaks in Yangtze River Delta, Pearl River Delta and Northeast China but these regions resumed growth in May and June. Exports from Shanghai, which was the most affected, returned to growth in Jun 22.
• Growth centred on Tier 1 and satellite cities. Net absorption of logistics space increased 57% to 6.6m sqm in 2021, driven by e-commerce platforms and 3PL providers, which accounted for 80% of total annual leasing volume. Net absorption is expected to exceed 6m sqm for the second consecutive year in 2022. According to CBRE, supply of logistics space is projected to reach a record of 7m sqm in 2022, with the bulk coming from Tier 1 and satellite cities. Beijing, Shanghai, Guangzhou-Foshan and Shenzhen-Dongguan continue to register relatively low vacancies. Guangzhou and Shenzhen, in particular, are short on logistics space. On a nationwide basis, rents have increased 1.3% yoy in 2Q22. CBRE expects demand for logistics space to pick up rapidly in 3Q22.
• Logistics support the authorities’ emphasis on upgrading consumption. The Chinese government has introduced measures to support growth of the e-commerce sector, such as anti-monopoly rules to lower barriers to entry and laws to prevent industry consolidation via M&A. The government plans to develop the logistics sector with incentives, including lower value-added tax and cutting road tolls across provincial borders. The authorities also plan to establish 120 national transportation hubs and scale up development of cold chain logistics.