The second quarter saw a continued drift in the city’s trading and retail performance, with both imports and total exports declining by 9.6% and 5.6% YoY respectively in April and May.
While retail sales dropped by a whopping 34.4% y-o-y over the same period. It should come as no surprise then that logistics demand, particularly from end users, 3PLs and freight forwarders, was severely affected.
Market activity virtually ground to a halt over April and the first half of May as the virus outbreak peaked, gradually resuming towards the end of May and June with many operators looking for cheaper accommodation options given the challenging business conditions.
While some firms were looking to relocate to cut costs, other larger operators decided to downsize to reduce overheads, including some owner-occupied space held by both logistics operators and retailers in modern warehouses in the Kwai Tsing area, amounting to almost 300,000 sq ft. As a result, warehouse vacancy continued to increase to 3.3% in Q2/2020, with modern warehouse vacancy surging from 1.8% in Q1/2020 to 2.7% Q2/2020, the highest since 2016.
While downsizing and business closures have been commonplace among logistics operators, demand was in evidence from e-commerce logistics operators, food factories and mask manufacturers taking up warehouse and industrial space, though only in small parcels. With landlords being increasingly flexible, warehouse rents fell by 4.1% in Q2/2020, the highest q-o-q downward adjustment since the GFC in 2009.
Industrial sales volumes rebounded slightly from their first quarter low alongside reviving investment sentiment, with 293 transactions registered in Q2, a 4.3% rebound from Q1. Notably, nearly 85% of the transactions in the first half of 2020 (486 out of 574) were priced at HK$10 million or below, indicating that stratified sales are still dominant in the market. Both industrial and I/O prices declined more moderately by 0.8% and 1.1% respectively in Q2/2020, with warehouse prices dropping more steeply by 3.8% over the same period reflecting receding leasing demand.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “Developers continued to be keen to acquire industrial sites for redevelopment, with volumes revived amidst rebounding investment sentiment. Looking ahead, more vacancies are likely to be seen in the warehouse sector with landlords becoming more flexible in lease negotiations.”
Mr. James Siu, Deputy Managing Director & Head of Kowloon Industrial said: “Even though threats to the operating environment remain, global supply chains are gradually re-establishing themselves and life is returning to the local retail market, suggesting that the pace of recovery will dictate second half conditions in the investment market.”