SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q Shanghai s New. Free Trade Zone. What it means for Waigaoqiao and Lingang. p.

Transcription

1 SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q 2013 Shanghai s New Free Trade Zone What it means for Waigaoqiao and Lingang p. 1

2 SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q 2013 INTRODUCTION Shanghai officially launched the China (Shanghai) Pilot Free Trade Zone at the end of September 2013, bringing together its four bonded areas under one administration. The new zone exists primarily on paper, and will serve as a testing ground for national policy reform as well as a boost to Shanghai s service sector. A framework plan has been released, though details about implementation remain vague at this point. Specific rules are expected to be rolled out over the next year in phases. The most hotly anticipated and debated reforms are those aimed at the financial sector, which will allow the convertibility of the yuan and interest-rate liberalisation. The extent of these reforms, much less the actual methods of their implementation, is still unclear. More details are expected following the Third Party Plenum in Beijing in November Though vague on the details, the government s direction is clear: a major policy upgrade for four of Shanghai s major industrial zones. The industrial real estate property markets in these four zones Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Bonded Port and the Pudong Airport Free Trade Zone are already undergoing significant changes and upgrades. The additional stimulus from the Free Trade Zone plan will only speed up their development and evolution. This paper looks at the potential impact on Shanghai s industrial property market. YANGTZE RIVER Hongqiao Transportation Hub Hongqiao Airport DOWNTOWN Lujiazui Waigaoqiao Bonded Logistics Zone Waigaoqiao Bonded Zone Pudong Airport Free Trade Zone Pudong Airport Yangshan Bonded Port (Land) EAST CHINA SEA HANGZHOU BAY Yangshan Bonded Port (Harbor) Source: Shanghai Waigaoqiao Free Trade Zone United Development, Colliers International Research, Shanghai p. 2

3 THE FREE TRADE ZONE EFFECT What effect will the new Free Trade Zone have on Shanghai? At the most general level, it s safe to say that the creation will spur growth in Shanghai s services sector. As of 2012, the service sector accounted for approximately 60% of Shanghai s GDP; in Hong Kong, this figure is around 90%. The opening up of several industries to foreign investors, as well streamlined customs policies and an easier-to-navigate financial system, are all in line with plans to increase the contribution of Shanghai s service sector towards its economy. It is still too early to predict specific effects on the real estate market in the Free Trade Zone, which will depend on specific implementation details that have yet to be released. That said, through Colliers s meetings with government officials and analysis of market trends in the existing zones, it s reasonable to expect the following two possible effects: Waigaoqiao Industrial assets in Waigaoqiao are likely to increase in value as service industries create new demand, leading to opportunities for sellers and increased potential for repositioning existing assets Lingang The Lingang area, an industrial and logistics zone primarily serving the off-shore Yangshan port, is likely to absorb demand from companies relocating from Waigaoqiao, creating opportunities for landlords p. 3

4 SHANGHAI s NEW NEW FREE FREE TRADE ZONE ZONE WHITE WHITE PAPER PAPER 3Q 3Q FREE TRADE ZONE POLICY At the highest level, the new Shanghai Free Trade Zone will integrate Shanghai s current bonded areas under one 28 sq km administration: Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Zone, Pudong International Airport Free Trade Zone and Yangshan Bonded Port (also referred to as Lingang s non-bonded and free port areas). On a local level, the policy reform is meant to place Shanghai on par with the world s major financial centres New York, London, and Hong Kong and further promote its already relatively advanced service sector. In practice, many contend that the Waigaoqiao area will function in a similar way to Hong Kong in terms of financial policies, and that the airport and Lingang will have a similar orientation to Singapore s Free Trade Zone with regard to logistics and international trade. One major expected change will be the unification of customs policies across all four zones. Each zone now has its own customs policy, making compliance a complex and significant challenge for companies operating in more than one zone. The State Council released a circular in late September known as Guo Fa [2013] No. 38. This circular lays out a policy framework for what is now officially known as the China (Shanghai) Pilot Free Trade Zone. While specific in certain areas, such as permission for the production of video game consoles, it does not provide a detailed plan for major financial changes instead, it promises to explore reforms in RMB convertibility and other areas. This can be read as the government s first and tentative announcement, and the initial step in what is likely to be a gradual release of operating guidelines. Kuai Zhenxian, the chief economist of the Shanghai Waigaoqiao Free Trade Zone Development Co, has been quoted in China Daily as saying that details will be rolled out by the end of 2013 or early Chen Bo, an academic from Shanghai University of Finance and Economics, was quoted in the same article as saying that the zone will have 98 pilot programs, with implementation coming in two phases. Details of financial reform will be included in the second phase. One notable change was the introduction of the negative list management approach. Essentially, this replaces the previous management method, which was based on a list of explicitly approved industries, with a model that allows foreign companies to invest in any industry that has not been explicitly banned. The Free Trade Zone will open up a number of industries to foreign investors with enterprises registered within the zone. The following industries were specifically addressed in the September circular: Financial services Banking Specialised health and medical insurance Financial leasing Transportation services Ocean transportation International ship management Commerce and Trade services Value-added telecommunications (including call centres, data processing and storage, and internet information service) Entertainment and gaming consoles sales and service Professional services Law services Credit inquiries Tourism companies Human resources Investment management Engineering design Construction Cultural services Entertainment and artist agencies Entertainment facilities Public services Education and training, vocational skill training Medical service (including general and specialised hospitals and out-patient departments) p. 4

5 WAIGAOQIAO Waigaoqiao must redevelop, but how? Waigaoqiao will likely see the largest impact from the Free Trade Zone policies, given its relative maturity, proximity to downtown, transport network and existing amenities. In particular, financial services companies are expected to concentrate in Waigaoqiao. (The Bonded Logistics Zone will continue to be a base for high-end logistics.) In the last five to eight years, a number of major micro-electronics manufacturers have moved their facilities out of Waigaoqiao, freeing up high-quality, often air-conditioned space that can be easily transformed into data centres, back offices and storage for high-value products such as wine. The zone has already reinvented itself three times in its 20+ year history from a base for importing raw materials, to a centre of advanced manufacturing and then on to a staging area for exports. Activity there in the past year suggests it is now entering a fourth stage as Shanghai s economy is upgrading. The timing, coming in the midst of the FTZ plan, will no doubt create opportunities, but raises one important question: which market participants will benefit the most? Market conditions in Waigaoqiao are currently characterized by an extremely limited stock of available land. The few available sites are expensive. Simultaneously, as micro-electronics manufacturers have vacated formerly high-quality facilities, their businesses have consolidated and/or relocated to cities such as Chengdu and Suzhou. Figure 1: Selected Transactions in Waigaoqiao Free Trade Zone Former Owner Former Use New Owner New Use Transaction Date International electronics manufacturer Advanced manufacturing Local investor High-end logistics / Potential back offices 2013 Intel Advanced manufacturing GLP Warehouse / Office 2012 Celestica Advanced manufacturing Local investor Warehouse for high-end items (inc. wine storage) 2010 Hewlett Packard Advanced manufacturing Waigaoqiao Development Company Logistics / R&D 2005 Domestic and international investors have purchased several of these facilities and repurposed them as storage for high-value commodities. This is in accordance with the growth (30-40% in the past year) of imports of items such as auto parts, medicine, and medical devices. (See Figure 2.) Data centres and the back office departments of financial companies have also been attracted to these facilities. In the past two years, Waigaoqiao has witnessed more than 600,000 sqm of real estate transactions. However, while this is a large headline number, it represents a fraction of Waigaoqiao s total stock, and many other buildings, constructed in earlier periods of growth, lack basic specifications that would make them suitable for repositioning. p. 5

6 SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q 2013 Clearly, Waigaoqiao needs to redevelop in order to revitalise its tax base, following the relocation of major manufacturers. There is a clear and present opportunity available in Waigaoqiao to upgrade older, existing buildings to meet the expected demand stemming from the new FTZ plans. If the FTZ regulations require companies to operate within the FTZ to enjoy its benefits, as opposed to just registering the company within the zone, a spike in demand for suitable property is likely. Officials at Waigaoqiao have reported a rush of interest from both private companies, and even individuals, following the zone s official launch. While many international banks have decided to wait for more detailed guidelines, 11 financial institutions and 25 companies registered on the first day of operation. At the moment, the zone s existing facilities are incapable of absorbing this expected future demand. Going forward, who will drive the change in Waigaoqiao s real estate market? The government or the market? The Agricultural Bank of China s RMB250 billion credit facility granted to Shanghai Municipality in August, explicitly for the development of the Free Trade Zone, is a strong suggestion that the government will drive the process. How the Free Trade Zone policy will balance this redevelopment between the government and the private sector is unclear, but will ultimately determine what opportunities exist for sellers and buyers. Figure 2: Annual Growth Rate of Imports in Waigaoqiao FTZ, 2012 Source: Shanghai Waigaoqiao Free Trade Zone United Development, p. 6

7 The expected policy changes in the FTZ will have a significant impact on the logistics industry in Shanghai. Several major changes have been either mentioned in the official circular or are anticipated by those in the industry: Companies will be able to hold goods in inventory within the FTZ without paying duty. They will only have to pay duty if and when those goods enter the domestic market. The foreign partner in logistics joint-ventures will be allowed to hold a majority stake. The previous regulations limited the foreign partner to a 49% stake. LINGANG The FTZ plan is expected to push many companies from Waigaoqiao to Lingang Changes at Lingang are likely to come from three main sources: overspill from Waigaoqiao, a shift in the use of Yangshan port, and the London Metal Exchange s possible entry to the Mainland China market. As Waigaoqiao upgrades to accommodate the service sector, Lingang stands to benefit. Land prices in Waigaoqiao have already eclipsed levels that most logistics companies can absorb, and prices are expected to rise. In Lingang, by contrast, average land prices are approximately two-thirds those of at Waigaoqiao. While these prices may have risen, they are still potentially more attractive to third-party logistics companies (3PLs), commodity traders, and the auto industry, who all require greater cost efficiencies than Waigaoqiao will offer. In the following chart, the land prices for Waigaoqiao are based on actual transactions, though this data is partially skewed due to government purchases of land in the area. Figure 3: Average Land Price in Lingang and Waigaoqiao Cargo going to other ports can be transferred and consolidated within the zone. Foreign vessels will be allowed to ship between the FTZ and domestic ports. These routes were previously restricted to Chinese vessels. p. 7

8 SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q 2013 This is happening against the backdrop of both Lingang and the Yangshan Port Area having both become mature shipping destinations. Since launching in 2005, Yangshan Port s throughput has grown to 14.2 million TEU (2012). The port continues to grow, and will receive another boost in capacity when its fourth phase is completed in 2015/2016. Figure 4: Throughput of Yangshan and Waigaoqiao Ports The nature of Yangshan s shipping industry has changed as well. Lingang is taking a larger role in regional trans-shipment, as well as becoming a key destination for intercontinental routes. Growing demand from domestic consumers has fuelled an increase in the imports of high-value and luxury goods through Yangshan, as in Waigaoqiao. Imports of automotive parts have also increased, and logistics and shipping companies have begun to establish supply chain management and distribution centres in Lingang, driving a major increase in the take-up of industrial real estate. In the last two years, net absorption in Lingang has grown from close to zero to more than 100,000 sqm. p. 8

9 The London Metal Exchange There is widespread speculation in the market that the London Metal Exchange will enter Mainland China, via the Shanghai Free Trade Zone, following Hong Kong Exchanges and Clearance purchase of the exchange in December Eliminating the need for commodities traders to pay business tax on each trade is a key component to bringing the LME to China and would support Shanghai s development as a global hub for trading base metals. The third factor in Lingang s growth could be the London Metal Exchange s entry into Mainland China for the first time. Several major companies have already purchased land and constructed warehouses, in anticipation of both increased domestic demand and the LME s entry; the growth in metal storage in the zone is noticeable. The gap in storage tariffs between Shanghai s current metal warehousing and LME-licensed warehouses in Singapore, Korean and Taiwan could mean a considerable upside for both property developers and investors should the LME enter China. Already, a number of companies have purchased land and/or constructed facilities for metal storage, including Maike, C Steinweg and GKE. Figure 5: Warehouse Storage Tariff by Region How it works The London Metal Exchange is the world s biggest marketplace for base metals, and licenses (but does not operate) hundreds of warehouses in more than a dozen countries. Despite China consuming more than 40% of the world s four base metals, there are no LME-licensed warehouses in Mainland China, meaning traders and manufacturers must pay added costs for delivery from Busan (South Korea), Singapore or Kaohsiung (Taiwan). Allowing the LME into the country would streamline the delivery process for both traders and manufacturers, cut down on transport and logistics costs and allow both banks and end-users to warehouse base metals in Mainland China. The Shanghai Futures Exchange, which has its own warehouses, currently dominates the domestic market. The commodity industry ties neatly into the finance industry, and nearly of all of the world s investment banks maintain commodity warehouses to hedge against or complement their investments. Many banks purchase warehouses and lease them to exchanges, which also provide them with valuable data for their own trading operations. Figure 6: Land Purchases by Metal-Related Companies in Lingang Company Maike Domestic Metal Company Zhongchu HTL Logistic C-Steinweg GKE Year of Purchase Land Area (sqm) 136, ,000 36,000 45,000 15,000 23,333 Permitted GFA (sqm) 190,022 TBC 18,000 57,000 6,000 27,709 Use Metal Distribution Centre TBC Self-use Metal Storage Metal Storage and Trading Operations Metal and Chemical Storage Self-use Metal Storage Status Scheduled for completion in 4Q13 Proposed In operation In operation In operation Under Construction p. 9

10 SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q 2013 The Pudong Airport Free Trade Zone The Pudong Airport Free Trade Zone is Shanghai s most recently instituted bonded zone. It opened in 2010 and mainly serves as warehousing for high-value or perishable goods, and goods with strict delivery timeframes. The future plans for the airport area and its integration into the overall Free Trade Zone are opaque, though the area s real estate market has strong fundamentals. Pudong Airport had the third highest cargo throughput in the world in 2012, and airport authorities have set a goal of climbing to the number one position by In the first five months of 2013, the bonded zone s total cargo value had climbed 55% y-o-y to USD950 million. The government s September circular encourages an increase in the number of flights for cargo transition though no further details are given. Figure 7: Top Five Global Airports by Cargo Throughput, 2012 This area also offers one major resource that is extremely limited in Waigaoqiao: available land. The Pudong Airport zone covers a total of 3.6 sq km, though only 1.6 sq km has been developed to date. For companies who require back offices linked to the airport, or those who need dedicated logistics facilities related to air services, the potential to acquire their own land in a bonded area is highly attractive. DHL, FedEx and UPS have all established major hubs here in the last three years. Airport authorities have announced that as of June 2013, the bonded zone had attracted 220 enterprises, representing USD262 million in contracted foreign capital and RMB4.5 billion in contracted domestic capital. Figure 8: Top Five Asian Airports by Cargo Throughput, p. 10

11 Figure 9: Average Rent in Shanghai s Free Trade Zones SUMMARY Despite the lack of clarity surrounding implementation to date, anticipation of the zone s impact on Shanghai s economy and industrial real estate market is high. The new plan will provide a boost to the areas evolution. It will undoubtedly create business opportunities for those who understand the current state of Waigaoqiao, Lingang and the airport s property markets, and how the implications of the FTZ will drive change in those areas. p. 11

12 SHANGHAI s NEW FREE TRADE ZONE WHITE PAPER 3Q 2013 For further information, please contact: Lina Wong MRICS, CCIM Managing Director East and Southwest China Investment Services, China Tel lina.wong@colliers.com Carlby Xie MSc, MRICS Director Research China Tel carlby.xie@colliers.com Jeremy Chapman Senior Director Industrial Services Investment and Advisory Tel jeremy.chapman@colliers.com Colliers International 16F Hong Kong New World Tower, 300 Huai Hai Zhong Road Shanghai PRC This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensor(s) All rights reserved. p. 12