Hong Kong’s industrial capital values to grow by up to 10% this year

Market yields are expected to see further compression for the remainder of the year.

According to a recent JLL report, the favourable external environment and local demand continued to provide impetus to Hong Kong’s merchandise trade. Aggregate trade value registered a steady YTD increase of 25.3% (Jan – May 2021), with imports and total exports rising by 26.5% and 24.8%, respectively, indicating a strong recovery on the trade front.

“We have noticed a boost in confidence from occupiers, supported by robust local demand and an improved trade environment. The leasing market for warehouses picked up some momentum in the latter part of this quarter with a modest rise in expansions to accommodate business needs from occupiers such as logistics and supply chain operators.”

Here’s more from JLL:

Vacancy continues to drop despite notable marketable space

No new supply was completed during the quarter. Vacancy continued to drop to approximately 1.12 million sq ft (2.1%) in 2Q21. However, with about 1 million sq ft of marketable space expected to return to the market before year-end, vacancy may rise if backfilling does not keep up.

Rents increased slightly while yields compressed

Net effective rents edged up 0.8% q-o-q to HKD 12.2 per sq ft per month; landlords generally took a firmer stance on asking rents as occupier demand picked up. On the other hand, market yield tightened this quarter given the prevailing low interest rate environment and strong capital inflow to the sector. Therefore, yield compression drove capital values of warehouses to rise 6.1% q-o-q.

During the quarter, one notable warehouse transaction was recorded. Following the acquisition of one strata warehouse unit in the Sunshine Kowloon Bay Cargo Centre in Kowloon Bay in 1Q21, Goodman Asia made another purchase of a whole floor unit in the same building for HKD 368 million (5,280 per sq ft).

Outlook: Rents to grow further while yields retrace

In view of the recent downtick in overall vacancy and the potential boost in local demand driven by the launch of the Consumption Voucher Scheme, we expect rents to continue the current upward trajectory. As a result, rents are expected to grow in the range of 0-5% in 2021.

We expect the market yield to face further compression this year, driven by robust demand tailwinds for industrial assets. Therefore, capital values are predicted to rise in the range of 5-10% in 2021.

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