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China’s warehousing sector – in recent years one of the bright spots in its struggling economy – now appears to be another piece of the mosaic on the downturn: vacancies have jumped, sending rents down and wiping out frothy predictions of growth.

According to commercial real estate services firm Cushman & Wakefield, vacancy rates are flirting with the 20% threshold. In the east and north of China, the rate hit 19.2% in the first quarter.

Nationwide Cushman & Wakefield sees a vacancy rate of 16.5%, supported by stronger demand in the south of the country. Business parks in the nation’s capital fared worse, showing a combined vacancy rate of 20.5% for the first three months.

This slump is in stark contrast with growth projections that painted the sector as a bulwark of growth, even as the economy began to show strains from the collapse in the housing market, stratospheric local government debt and rising unemployment. Several market observers were predicting compound annual growth rates north of 7%.

The prospect of juicy returns drew many large international real estate players into the market. According to Bloomberg, international investors poured more than $100bn into Chinese warehouses, industrial buildings, business parks and office towers over the past decade.

The slump in the market has hurt valuations of international real estate investment trusts (REITs) that own commercial properties in China. Shares in one Asian REIT with commercial holdings in China have dropped 27% this year, so far.

Customers have taken advantage of the rising vacancy rates to negotiate lower rents and shorter-term contracts. Cushman & Wakefiled, which tracks facilities in 20 urban areas in China, reported a 13% drop in rents from Q4 23 to the first quarter of this year. Beijing rents sank 4.2%, while in the southern manufacturing hub of Shenzhen, they slid 3.9%.

The downturn of the previously booming market is a reflection of the slowdown in the Chinese economy. Consumption has hit the brakes (also reflected in declining imports), as consumers have become frugal, faced with a sharp contraction in their wealth (residential property values – the primary vehicle of investment over the past two decades – are down about 20% so far) and a rising tide of layoffs increasing worries about unemployment.

The migration of manufacturing to locations outside China has not helped demand for warehousing capacity.

But despite the shift of some production to other countries, exports have been a bright spot for the Chinese economy in recent months, but mounting worries over worsening trade conflict with the US and the European Union are casting shadows over prospects of strong exports.

Worst of all for warehouse operators and investors in the sector, there is still a lot of new capacity in the pipeline to exacerbate the capacity glut. Cushman & Wakefield registered 33 million sq metres of new warehouse space scheduled to come onstream before the end of 2026.

REITs invested in China are bracing themselves for a bumpy ride. In an earnings call in April, Ng Kiat, CEO of REIT Mapletree Logistics Trust, warned that the Chinese market would remain volatile and uncertain for the next 12 months.

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