Imagine the world in 10 years in time. With the benefit of hindsight, what will economists, manufacturers and policymakers recall as the defining geopolitical issue of 2018? Rising rates, and volatile equity markets maybe, but chances are the trade relationship between China and the United States would feature prominently in medium-term memories.  

Rising trade tensions between China and the US had been simmering well before 2018. However, last year will long be remembered as when the relationship soured sharply, and the introduction of tariffs became a supercharged economic and political issue in not only China and the US, but in other global markets with close commercial ties to the world’s two largest economics. 

Take Taiwan, for instance. Taiwan maintains exceptionally close economic ties to both countries and thus, was inevitably going to be influenced by any trade dispute between Beijing and Washington. And for good reason. 

Taiwan has been a substantial contributor in China’s rise as the world’s largest trading nation. Starting over 30 years ago, Taiwan Inc. offshored factories or ploughed foreign direct investment into the reforming economy of mainland China. 

The move was largely driven by two reason, labor and land. Because of rising domestic wages and rising industrial real estate prices, many Taiwanese businesses looked across the straits and shifted operations. In 2017, over 100,000 Taiwanese entrepreneurs with US$140 billion in projects continue to operate in the mainland, according to the Investor Services Department estimates. 

But in 2018, the winds of trade changed, and Taiwan policymakers saw the China-US conflict as a chance to restore manufacturing businesses domestically. Thinking beyond the China-US trade escalation, the transfer of capital from mainland China would also serve as part of a broader strategy to ignite Taiwan's relatively stagnant, albeit sizable economy. 

Transforming words into actions, Taiwanese policymakers have made their most ambitious attempt to lure businesses back to the island. Authorities recently unveiled a three-year program designed to assist China-based Taiwanese manufacturers restore production back to their domestic market. The primary reason – to help Taiwanese firms avoid punitive tariffs resulting from the China-US trade conflict.
 
The program, which will commence in 2019, will provide a range of incentives related to land, manpower, tax, utilities and capital services. Specific measures include two years’ free rent in industrial parks.
 
The big question many are asking is who will benefit? According to policymakers, Taiwanese manufacturers operating in several industries are eligible for the program. But it comes with a catch, they must be able to provide they are affected by the China-US trade conflict. Additionally, eligible corporations must have been operating in China for more than two years. And perhaps most significantly, these targeted corporations must demonstrate they intend to include high-value/intelligent production in the operations they reshore.
 
After fulfilling the requirements, Taiwanese policymakers will pledge their support to address the two issues that pushed many businesses out in the first place: land and labour. The recently unveiled series of land supply and labour related measures are solely intended to support the manufacturing sector. Policies include the right to utilize idle industrial land, but with caveats. Primarily, owners who fail to build factories within three years of purchasing lots in industrial parks will be fined and then eventually forced to sell the land at auction.

With a time-limit placed on reshoring by policymakers, there are major implications for Taiwan industrial real estate. Although domestic industrial land sales have declined since their 2016 peak, the market turned a corner as trade tensions rose. In 2018 alone, transaction volume for industrial properties, including factories and I/O buildings, increased to NT$55.0 billion this year, marking growth of 77.1% y-o-y.

The market is poised to soar further because of the government initiatives and industrial land owners have been busy fielding offers from potential tenants. Anticipating future growth in manufacturing operations, Taiwanese owner-occupiers have displayed solid demand for industrial properties over the course of 2018, accounting for 84% of transaction volume.

In 2018, one deal involving manufacturers relocating production from China stood out and is perhaps indicative of future transactions  Quanta Computer, one of Apple’s major suppliers, purchase a 29,000 sq. m. vacant factory in Taoyuan for NT$ 4.28 billion. Quanta plans to relocate high-end production from China to the new factory and will also house an artificial intelligence laboratory on the same site.

The $140 billion question Is whether this a flash in the plan? We don’t believe so. CBRE expects demand for industrial land and properties to increase in the short-to-medium term as more China-based Taiwanese manufacturers take advantage of the government’s reshoring initiative and reduce their exposure to trade conflict-related risk. 
 
Industrial land and properties located in Northern Taiwan, particularly in Taipei, New Taipei and Taoyuan, will be keenly sought after, as will those in Kaohsiung, which remains a key manufacturing hub.

Given how unpredictable the trade conflict but China and the US continues to be, Taiwan corporations with mainland manufacturing operations are likely watching the new incentives with great interest. Land owners, particularly in the industrial sector, will also play a key role in the reshoring initiative and will jump at the chance to see further growth in the market. However, to gauge the full extent of the program and its impact on the Taiwanese economy, industrial real estate market and its place in the global supply chain, we will need to ask those same economists, manufacturers and politicians ten years from now. 

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