How China's tech firms are reshaping its real estate markets
Tech companies growing at a rapid pace are helping transform offices, logistics and data centers
Technology firms in China are growing so fast that they are having a real impact on the country’s real estate markets.
For instance, offices: five of the biggest Chinese tech firms – Alibaba, Tencent, JD, ByteDance and video sharing app Kuaishou – employ more than 500,000 employees that require 6 million square metres of office space. Next year they are expected to hire about 320,000 more employees if employment growth remains at an average of 74 percent like in the last two years.
In the logistics sector, three e-commerce giants – Alibaba, JD and Suning – own about 38 million square meters of warehouses, according to these firms’ annual reports. In comparison, GLP, one of the biggest logistics operators in the country, holds an estimated 40 millions square meters.
Then there’s data centers, which these companies are pouring tens of billions of dollars into over the next few years.
"The rate of growth of these Chinese tech firms this year has been phenomenal,” says Sigrid Zhou, Director of Capital Markets Research, JLL China. “And to think that they were already in expansion mode in terms of their manpower and real estate requirements over the last two years."
Need for office space
While the pandemic might have slowed factories and the manufacturing industry earlier in the year, Chinese tech firms continued to grow as people took to the Internet for shopping and entertainment.
For instance, at the end of June, Alibaba’s total sales reached US$1 trillion, about 18% of total retail sales in China.
Amid rapid growth, “we had been witnessing these tech firms taking up more office space in key cities,” says Zhou.
This includes buying whole buildings, not just leasing space. Bytedance recently announced that it will spend US$1.6 billion for a new office in Beijing to accommodate its growing number of employees, which is projected to reach 100,000 this year. It bought the Fangheng Fashion Centre in the city’s tech district last year.
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Ecommerce company JD.com acquired the Beijing Jade Palace Hotel last year for US$422 million so it can turn the building into an R&D facility.
In a difference to Western peers that tend to lease space, “Chinese tech firms have a desire to own their own office buildings to manage how they can use it for their needs, which spans everything from research to distribution of their goods,” Zhou says.
Alibaba also inked an agreement with the city of Shanghai in October to have its own Alibaba eco-system of Ali Shanghai R&D Centre, Ali New Retail Centre and Ant Technology Centre as part of its “digital development” for the next two decades.
Getting a move on
Logistics and data centers are two other real estate sectors closely linked to the successes of tech companies, and seeing a big change this year.
Like with offices, it’s not just about renting more warehouse space. Tech firms are rather aiming to be involved in operating the platforms.
“In recent years, more firms have spun off logistics platforms into standalone business units to offer logistics services and supply chain solutions for the e-commerce industry,” says Darren Xia, Head of International Capital, JLL China, citing how Alibaba established Cainiao in 2013 while JD Logistics was formed in April 2017.
These newly formed companies have equally pressing needs for space.
“Logistics is now a core business for many tech firms. And warehouses are an asset they are aggressively eyeing to invest in so they could also adopt the sale-and-leaseback model,” Xia says. One example of this is how JD and Singapore’s sovereign wealth fund GIC have co-operated to establish two funds focused on China logistics properties and start-ups with respective capital commitments of US$756 million dollars and US$725 million.
Data centres have similarly become hot commodities. The surge for online services resulted in a spike in cloud computing adoption. China’s cloud infrastructure spending in the first quarter of 2020 to hit US$3.9 billion, up 67 percent from last year. And it hit US$4.3 billion in the second quarter.
“For a sense of the scale, China’s tech firms alone accounted for nearly 80% of total spend in cloud computing this year,” says Xia.
Chinese tech firms rushed to build more data centres to cope with demand. Alibaba Cloud has recently completed the construction of three super data centers in Hangzhou, Nantong, and Ulanqab – offering enough storage to host one million additional servers. And it is intending to spend another US$28 billion over the next three years.
Not to be outdone, JD announced its partnership with Cloudflare to expand its network to an additional 150 data centers across China within next three years, while Tencent revealed it is investing US$70 billion dollars over the next five years in areas from cloud computing to artificial intelligence.
“These investment numbers might sound ambitious, but there is no doubt that China’s tech firms are charging ahead in data centres, on top of their needs for warehouses and offices,” says Xia. “With these moves, tech firms will soon turn into owner, operator and service providers in real estate. It is not an understatement that they are changing the course of China’s real estate and will be in a position to undertake joint ventures or even mergers and acquisitions with traditional property players and investors.”
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