Hong Kong's prime warehouse vacancy rates hit 2.9%

This translates to approximately 1.65 million square feet of vacant space.

Thanks to the revival of trade in China, Hong Kong’s merchandise trade showed signs of recovery in 4Q20. According to JLL, aggregate trade value increased by 2.6% y-o-y in Oct-Nov 2020, with total imports and exports rising by 2.9% and 2.3%, respectively.

Due to further surrender and downsizing activities from struggling retailers and logistics operators, net absorption remained in negative territory. More occupiers opted for renewal or in-house downsizing with shorter leases (6-24 months) as their lease expiries approached.

No new supply delivered in 4Q20

No new supply was completed in the quarter.

Vacancies in the prime warehouse market continued to rise during the quarter, increasing to approximately 1.65 million sq ft (vacancy rate: 2.9%) in 4Q20. In addition, there is an estimated 1.1 million sq ft of marketable space, potentially adding more rental pressure on the sector.

Rents and capital values decline amid a market downturn

With demand for prime warehouses staying soft, landlords were more willing to lower rents or provide higher incentives to entice tenants. Net effective rents fell to HKD 12.0 per sq ft per month, or -4.0% q-o-q.

During the quarter, no significant prime warehouse sales transactions were reported. Yields were expected to remain relatively stable in the warehouse sector. Therefore, in line with the rental decline, capital values fell 4.0% q-o-q in 4Q20.

Outlook: Rents and capital values to further decline as vacancy rises

While expecting a less tumultuous year in 2021, uncertainties in the trade sector and the ongoing pandemic are likely to erode occupier demand. A considerable amount of marketable space is expected to add pressure on the rental front. Net effective rents are forecast to drop in the range of 0-5% in 2021.

Going forward, yields are predicted to stay broadly stable with a slight decompression within a confined range. Hence, capital values are expected to move in line with the rental decline in the year ahead.

Note: Hong Kong Industrial refers to Hong Kong's industrial warehouse market.