Industrial market stages rebound

• Both local trading conditions and the retail market rebounded in Q1 given gradual containment of the virus locally as well as a rebound in major regional economies.
• The leasing market was active over the quarter with a number of major relocations and renewals recorded, with warehouse vacancies falling heavily to 3.1% as a result.  Modern warehouse landlords again reacted fastest with some rental increments seen as available space was quickly snapped up.
• Investment sentiment turned positive in Q1 with a few major deals concluded worth over HK$2 billion.  Strata-title industrial transactions also increased by 40% q-o-q as investors sought out this high-yielding asset class at various price points.
• The warehouse leasing market should continue to benefit from a recovering trading and retail performance as well as sustainable growth in e-commerce, both in the local market and cross-border. We expect the business prospects of both freight forwarders and 3PLs to improve in the coming months, benefiting all types of warehouse.
• Looking into 2021, favourable government policies supporting redevelopment, as well as the high yields on offer should continue to attract developer and investor interest throughout the rest of the year.

Hong Kong – 15 Apr 2021 – With the local virus situation under control, together with positive GDP growth in some regional economies thanks to their relative success in managing COVID-19, the local trading performance rebounded strongly over the first two months of 2021 by 32.5%. Air cargo throughput was the first to benefit and recorded a 17.5% increase in January and February this year, while container throughput only declined moderately by 2.4% over the same period.

With the macro environment stabilizing, major leasing deals seen in Q1 included JST renewing another floor (around 60,000 sq ft) in Global Gateway for around HK$16 per sq ft, and Kerry Logistics expanding their space in ATL by 50,000 to 60,000 sq ft to serve the expanding logistics requirements of Razer. Goodman Interlink recorded new leases with the three vacant units on 1/F leased to three different new logistics tenants, while 15/F was leased to Tesla for expansion; both floors were around 140,000 sq ft each. In the general warehouse market, Bossini Logistics Centre (around 140,000 sq ft) was leased to a relocating tenant. As such, warehouse vacancy fell heavily, with overall vacancy dropping from 4.1% in Q4/2020 to 3.1% in Q1/2021, while modern warehouse vacancies also declined from 2.8% to 2.7% over the period.

The Goodman Westlink in Tuen Mun, which is still under construction, saw its first lease registered by WPG Electronics, Asia's largest electronics distributor, taking up unit 2B of the project. It is reported that the prospective tenant is relocating out from its existing premises (around 200,000 sq ft) in another industrial building in Tuen Mun, which was approved for revitalization last year.

With logistics operators active in looking for relocation and expansion space again given reviving logistics demand, warehouse landlords are now cautiously optimistic and both rents in the overall and modern warehouse markets rose by 0.5% and 2.4% over the first quarter of the year as a result.

Both investors and developers active in the sales market

Q1/2021 enjoyed a strong start with seven major (over HK$100 million) industrial transactions registered, representing a total consideration surpassing the HK$2 billion mark. While there was one building bought for redevelopment, all others were purchased for investment. Industrial sales volumes in Q1/2021 (809) increased dramatically when compared to Q4/2020 (576) given renewed investment and redevelopment interest. Nearly 85% of the transactions in Q1 were priced at HK$10 million or below, indicating that stratified sales are still dominant with many small investors shifting their purchases from other asset classes (such as office and retail) to industrial. Flatted factory and I/O prices remained stable while godown prices increased by 1.8% in Q1/2021 alongside reviving investment sentiment, with particular interest in warehouses and cold stores.

Outlook

Besides strong support from a recovering economy, the logistics sector is also backed by the growing e-commerce segment. We expect business prospects for both freight forwarders, who traditionally serve import / export demand, and 3PLs, who mainly work for local and regional retail distribution as well as e-commerce fulfilment, to improve in the coming months, benefiting all types of warehouses. With no new warehouse supply in 2021 and the only major new warehouse supply in 2022 (Goodman Westlink) starting to be pre-leased, we expect both overall and modern warehouse rents to continue to increase by up to 5% over the remainder of the year.

Favourable government policies supporting redevelopment (with over 6 million sq ft of industrial space approved for a 20% plot ratio relaxation so far), as well as the high yielding nature of the sector (2.9% and 3.5% for industrial and warehouse premises in Q1/2021 respectively) should result in continued developer and investor interest. With more capital chasing a diminishing pool of industrial assets, we expect industrial and warehouse prices to increase by 5% to 7% over the next six to nine months.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: “Investment sentiment remained positive with a few major deals concluded in Q1/2021, and prices have stabilized after months of decline. Looking ahead, favourable government policies supporting redevelopment, as well as the high yields on offer should continue to attract developer and investor interest throughout the rest of the year.”

Mr. James Siu, Deputy Managing Director, Head of Kowloon said: “Industrial transactions saw a diverse range of buyers in Q1, including investment funds, local developers, local investors and quasi-government bodies, reflecting the overwhelming interest in this niche segment.”