China Industrial Real Estate: Occupier Options

- CresaPartners

Occupier Options in China

The options that occupiers now have with regard to their industrial real estate requirements in China are much greater than they were even three to five years ago. The market, which was solely the domain of development zones, has now expanding to include private developers and investors from both China and abroad. There are many options, but the following are the most common:

• Rent or buy from a development zone
• Rent from a private local developer or investor
• Rent from a foreign developer or investor
• Buy land and build a facility

Rent or buy from a development zone

Development zones in China are almost always set up as a development company owned by the government. Most development zones view the real estate aspect of their business as secondary to the tax collection aspect. They are primarily interested in whether the occupier will register their China entity in the zone, and if so, the level of registered capital. As such, they generally offer facilities for sale or rent at good to reasonable prices with the hopes of securing Multi-National Company (MNC) manufacturers who will invest and pay taxes in their zone.

Zones do not hold a large stock of speculative industrial buildings. They often build a compound with one to ten buildings at a time for smaller occupiers or as temporary facilities for companies who are having a large one built in the zone. The buildings can be single- or multiple-floors and have various size floor plates and specifications. They are normally rented on a 2-year to 5-year term. Once a compound is close to full occupancy, a new one is erected, as space permits, to meet future demand.

Office space in zones is limited. Due to their nature however, Free Trade Zones and Hi-Tech Parks tend to have a larger, but not abundant supply of offices. Free Trade Zones supply office space for trading companies, while ‘offices’ in Hi-Tech Parks are often large, low quality office towers or increasingly, 3 to 5 storey, stand-alone office buildings in a business /office park environment.

Rent from a local developer
An increasing number of private local developers are now building industrial parks and/or providing build to suit programs around China. Many of the park developers are local manufacturing companies who purchased land for their own use and decided to develop industrial parks to take advantage of China’s economic growth. The other group is Chinese investors with excess capital looking for better returns than those offered by banks and more stability than the stock market. These investors provide financing and often construct build to suit facilities for both Chinese and MNCs.

These developers normally focus on the real estate aspect more than development zones, but may negotiate with the government to share the taxes paid by their clients. Local developers and investors can also take advantage of creative but legal, accounting methods to be more profitable than foreign companies. For these two reasons, they tend to be relatively inexpensive options. The quality of the facilities they provide however can vary drastically.

Rent from a Foreign Investor
There has recently been quite a bit of activity from foreign investors in Chinese real estate. The main areas of interest are logistics parks (dominated by a few big players), with a secondary interest in industrial space (primarily Asian investors).

Buy Land and Build a Facility
Occupiers also have the option of purchasing Land Use Rights and having a facility built to their specifications. The first step is to buy the Land Use Rights. Clients have a choice of using an agent or going directly to the development zone. By going directly however, our experience is that clients miss options and often do not have the power of negotiation they would with an agent. Agents have often built up relationships with the zones after having introduced a number of clients to their park. Once the land is purchased, agents usually also continue to stay involved in the project to help the client deal with contractors, etc. Clients have a range of options with regards to constructing a facility, including:

• Hire an architect and a local contractor directly
• Hire a steel-frame building company to design, supply and erect a facility
• Appoint an international advisory firm to provide project management services. The firm normally manages on behalf of theclient, by finding and managing the most appropriate solution
• Appoint a consulting firm to provide engineering, procurement and construction management. The firm acts as a consultant and provides the client with supplier options
• Appoint a consulting firm to provide construction or project management services. The firm will usually provide a bid price and will be responsible for choosing the suppliers

To Rent or Own?
There has been a definite trend in terms of occupier ownership policy. To ensure quality, security, etc., manufacturers who entered the China market early were usually required to buy land and build their own facilities. The current trend is toward renting for the following reasons:

• Manufacturing companies are not specialists in real estate
• Manufacturers get higher returns from manufacturing than from real estate
• Renting requires lower capital expenditures
• By taking real estate “off the books”, public companies can improve some of the metrics by which investors judge their companies

The decision whether to rent or own in China is driven by a number of factors:

• Is the company asset-based?
• If the facility is highly specialized or a large investment, developers and investors may not be interested
• It is very difficult to dispose of secondary industrial properties in the market
• Parent company guarantees can put the facility right back on the books
• It is difficult (if not illegal) for most owners/occupiers to rent out their facility after they move out. Renting is not part of the local entity’s Scope of Business
• Land appreciation will be difficult unless the site is hit by urban sprawl

CresaPartners is an international corporate real estate advisory firm that exclusively represents tenants/space users and specializes in the delivery of fully integrated real estate services. For more information, go to our website at www.cresapartners.com.