E-commerce surge boosts logistics deals

Private equity firms are buying up space in China because warehousing provides better returns in a real estate market reeling from government price curbs and oversupply. Competition and demand have led to more diversified and sophisticated transactions, but global expertise is needed for the local logistics industry to mature.

“The cost of logistics in China is much higher than that in developed countries,” said Paul Hastings real estate partner Wayne Ma. “This is mainly due to a lack of experience, so foreign expertise will really aid the industry's development,” he added.

Global Logistics Properties (GLP), the largest foreign builder of logistics facilities in China, predicted investment of as much as US$2.5 trillion may be needed to buy land and construct warehouses over the next 15 years. GLP and industry builders have calculated that less than 20% of China's warehouses are modern, with most lacking fully-computerised tracking systems and the latest in retail technology. Many do not even have loading bays with automated belts, and trucks are loaded and unloaded using manual labour.

The potential in logistics and warehousing will continue to attract more foreign investment. “Private equity firms typically look for a local partner to help secure properties in these sectors,” said Alex Wang, a partner of Dentons. The complexity and creativity in deals executed by the big players may pave the way for future transactions and for more global involvement.

The deal-making begins

The Carlyle Group, advised by Paul Hastings, reflected this trend by entering into a US$400 million joint venture with Shanghai Yupei Group to develop and operate warehouses in logistics hubs across China, including the first-tier cities of Shanghai, Beijing and Guangzhou, and various second-tier cities including Shenyang, Tianjin and Chongqing. The strategic partnership aims to develop a nationwide logistics warehouse network with more than 1.8 million m2.

GLP reorganised its US$8.5 billion of China assets to prepare for an investment by Hopu Investment Management, marking the largest China real estate-related restructuring in the past year. The capital injection in February by Hopu and its consortium, advised by Weil Gotshal & Manges, was a landmark deal that involved sovereign and pension funds. GLP also formed the world's largest China-focused logistics infrastructure fund in November last year with US$3 billion, aimed at developing, owning and managing a diversified portfolio of related facilities in the PRC. Morrison & Foerster advised GLP on both transactions.

GLP also plans to buy a 15.3% stake in China's largest state-owned warehouse logistics firm, China Materials Storage and Transportation Development Company, for Rmb2 billion (US$324 million), and the two will form a joint venture worth Rmb3.6 billion (US$583 million) to develop 1.3 million m2 of buildable area across China.

More cutting-edge deals are in the pipeline this year, with e-commerce companies teaming up with logistics companies. For example, Paul Weiss advised Tencent in a US$195 million investment in China South City Holdings, a Shenzhen-based operator of trade and logistics centres. The deal was completed in January.

“All these transactions create an economic case for the government to push the sector forward,” one industry expert told China Law & Practice, adding that “It's like a giant infrastructure project on a national level.”

Mezzanine financing

The two main types of financing for these transactions are joint ventures and mezzanine debt using existing funds or borrowings from financial institutions.

Mezzanine financing is becoming more common due to the participation of private equity firms. Industry players tend to be less leveraged, pour more equity into a project and have fewer connections with lenders (banks and financial institutions). Private equity firms, however, use more leveraged and creative structures in their financing.

“Once global private equity firms get involved in logistics, they can bring on board their connections and experience working with international lenders to do mezzanine financing using offshore platforms,” said Wang.

Less scrutiny

Foreign investors are drawn also by the relatively fewer restrictions and shorter time needed for regulatory approval when compared with commercial, residential or mixed-use properties.

“Logistics generally face lower government scrutiny, while warehouses face even less,” said Paul Hastings' Ma. The two are considered encouraged industries in the Foreign Investment Industrial Guidance Catalogue (Amended in 2011) 外商投资产业指导目录（2011年修订）.

Ministry of Commerce approvals for commercial properties can take up to six months, while some “transactions we've done for logistics companies didn't require clearance at all,” said Ma.


By Katherine Jo