Hong Kong industrial investments breach the HK$6b mark in Q2

Warehouse assets offering stable yields lured investors in.

According to a report by Savills, the industrial leasing market was very active with 75 transactions recorded over the quarter, a marked improvement from the 47 deals completed in Q1 (a 60% QoQ increase). 8/F of China Merchants Logistics Centre was leased to a cold store operator (rumoured to be Brilliant Cold Storage or related parties, who already operate a cold store in the same building) for a 10-year lease tenure. 

Given the fast-growing e-commerce market, Savills adds that HKTVMall also expanded and took up one more adjacent floor in Mapletree Logistics Hub Tsing Yi. Following its aggressive retail expansion in the territory, Don Don Donki leased another floor (26,000 sq ft) in Goodman Kwai Chung Logistics Centre, doubling their logistics handling capacity. Elsewhere H&M renewed their logistics space in ATL for another three years for a total monthly rent of HK$1.5 million. 

“The reviving logistics market, on the other hand, also meant that inventory previously stuck in warehouses (mainly traditional ones) was finally shipped, creating more temporary vacancy. As an example a large scale traditional warehouse released over 100,000 sq ft of space due to the shipment of most retained cargoes over the past few months. Overall vacancy increased from 3.1% to 3.7% in Q2, while modern warehouses saw a much milder increase from 2.7% to 3.0% over the same period.”

Here’s more from Savills:

Q2/2021 continued to see strong investment interest in industrial assets, with nine major (over HK$100 million) industrial transactions registered, representing a total consideration surpassing the HK$6 billion mark. The reviving logistics prospects attracted investment funds to warehouse assets given the stable yields on offer. Taking the Kai Bo deal as an example, the seller leased back the property with a 10-year lease (4+3+3 renewable lease term), offering rental returns of 4.8% to 6.3% to the purchasing investment fund over the long run.

​​Industrial sales volumes continued to surge in April and May (699), a 20%-increase when compared to January and February of this year (579), given strong investment interest from funds and end users. Nearly 82% of the transactions in April and May (576 out of 699) were priced at HK$10 million or below, indicating that stratified sales are still dominant with many small investors continuing to look for opportunities in the industrial sector given it’s improving prospects. Flatted factory and warehouse prices increased by 1.7% and 3.8% respectively in Q2/2021 as a result.

OUTLOOK 

With logistics prospects looking set to improve further, most warehouse landlords will act fast to raise rents, which may slow leasing transactions in the coming months even for modern warehouses. Traditional warehouses, which have benefited from broken supply chains with stockpiled inventory over the past few months, may face further upward pressure of vacancy. With the vacancy gap looking set to widen between traditional and modern warehouses, rental growth in the two sub sectors may diverge in the coming months. 

Investment sentiment has been robust for both industrial and warehouse assets in 1H/2021, with reasonably priced stock being quickly snapped up. While abundant capital is still likely to be available, it will chase a diminishing pool of stock, no matter for investment or redevelopment, and prices are therefore likely to increase further, in the order of 3% to 5% over the next three to six months.