The third quarter saw a continued drift in the city’s trading and retail performance due to a rebound virus cases and increasing US / China tensions, with both imports and total exports declining by 4.5% and 2.7% y-o-y respectively in July and August, while retail sales dropped by a more moderate 23.1% y-o-y in July compared with previous months.
The third quarter saw a continued drift in the city’s trading and retail performance due to a rebound virus cases and increasing US / China tensions, with both imports and total exports declining by 4.5% and 2.7% y-o-y respectively in July and August, while retail sales dropped by a more moderate 23.1% y-o-y in July compared with previous months.
Nevertheless, local logistics demand was given a boost by escalating demand for necessities and online retailing. With reasonable deal flow overall and modern warehouse vacancies stabilized at 3.3% and 2.8% respectively in Q3/2020.
While the number of industrial leases declined significantly from 94 in Q2 to 57 in Q3, we saw an increasing number of renewals and consolidations in modern warehouses as landlords became more flexible in rental negotiations. Both overall and modern warehouse rents declined more moderately by 2.0% and 1.5% respectively in Q3/2020.
After months of redevelopment sites dominating the sales headlines, significantly more income-producing assets changed hands in Q3, as the relatively high and stable yields from industrial properties attracted long-term investors. The 3.5% to 4% yields on offer for this kind of asset are high enough (compared to sub-3% in other commercial sectors) to lure long-term investors back to this segment.
Industrial sales volumes continued to rebound with 336 transactions registered in July and August, already 15% higher than those registered in Q2. Again, nearly 85% of the transactions in the first eight months of 2020 (771 out of 908) were priced at HK$10 million or below, indicating that stratified sales are still dominant in the market. Flatted factories, industrial / office and warehouse prices declined more moderately by 0.2%, 0.1% and 3.1% respectively in Q3/2020 alongside reviving investment sentiment.
Looking ahead, while the virus situation is likely to remain volatile, the steady logistics demand from necessities should help stabilize the warehouse market, with the gradual resumption of sea and road freight providing some upside in the near term. Air freight volumes may take longer than expected to recover not due to sluggish demand but more to capacity constraints: according to the International Air Transport Association, global cargo capacity available aboard passenger flights in July 2020 was 71% below July 2019 levels, leading to an overall air cargo capacity decline of 31% over the same period. Until a meaningful recovery in passenger flights and thus air cargo capacity, we may not see an imminent recovery in air freight in the near future.
With investment interest shifting to income-producing assets, we expect more focus on yields and cost of capital (which is expected to remain low until 2023). We believe that the ability of industrial landlords to finally raise rents will dictate whether long-term investors will continue to take an interest in this segment over the next few months.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “Deal volumes increased in Q3 with more long-term investors entering the market. Looking ahead, while the virus situation may remain volatile, steady logistics demand from necessities should help stabilize the warehouse market, with a gradual resumption of sea and road freight providing some upside in the near term.”
Mr. James Siu, Deputy Managing Director & Head of Kowloon Industrial said: “The industrial sector’s resilience has been widely reported and it is encouraging to see long term investors re-entering the market chasing some of the highest yields available among all real estate asset classes.”