Hong Kong industrial rents to drop by up to 10% in 2020

Blame it on shrinking demand for prime warehouse space.

According to JLL, the ongoing COVID-19 pandemic and US-China trade tensions continued to negatively affect trade through Hong Kong, causing industrial tenants to consider downsizing. The aggregate trade value dropped by 7.7% y-o-y in April-May 2020, with imports declining by 9.6% and total exports falling by 5.6%. Trading activity with major trading partners, such as China, the US, India and Japan, all showed decreases when compared with the previous year.

Occupier demand for prime warehouses weakened as the escalating COVID-19 pandemic led trade volumes and retail sales to dwindle. Some warehouse occupiers decided to downsize while others adopted a wait-and-see approach. Notably, Hong Kong-based logistics company Ever Gain Co Ltd vacated 1 floor at Mapletree Logistics Hub – Tsing Yi, reducing its footprint by 144,200 sq ft.

Here's more from JLL:

New supply to come online in the medium term

No new supply was completed during the quarter.

Goodman’s modern logistics building in Area 49 in Tuen Mun (852,000 sq ft) is expected to be completed in 2022. The premium logistics centre in Kwo Lo Wan in the South Cargo Precinct of Hong Kong International Airport (4 million sq ft) is anticipated to be completed in 2023.

COVID-19 outbreak exacerbates rental and capital value decline

Net effective rents dropped by 4.5% q-o-q in 2Q20 to an average HKD 12.6 per sq ft per month. The rental decline was mainly attributable to the longer rent-free periods provided by landlords.

No significant prime warehouse sales transactions were recorded during the quarter. Yields were estimated to be broadly stable across the warehouse sector. Hence, capital values dropped in line with rents, down 4.5% q-o-q in 2Q20.

Outlook: Rents and capital values to continue to fall

Rents are forecast to drop in the range of 5-10% in 2020 and 0-5% in 2021. This is mainly a result of the shrinking demand for prime warehouse space as the external trading environment and domestic retail sector remain sluggish in the midst and aftermath of the COVID-19 pandemic.

Despite only limited prime warehouse transactions recorded recently, yields are predicted to stay broadly stable with slight expansion at the margin. Capital values are hence forecast to decline largely in line with rents in 2020 and 2021.