Logistics leasing activity levels revived in Q3 with operators opting to renew leases, expand or relocate in order to minimize business disruption, while investors remained keen on purchasing industrial properties as the total number of major transactions and consideration surpassed that of Q2, according to Savills in its Market in Minutes - Hong Kong Industrial Sales and Leasing report for Q3 2021.
- Logistics operators were keen to renew leases to avoid business disruption, while those with expansion demand chose to relocate in Q3, with regard to the revival of the local trading and retail sectors
- Overall and modern warehouse rents continued to rebound by 2.1% and 2.5% QoQ respectively, while both overall and modern warehouse vacancy rates fell to 3.2% and 2.6% over the same quarter, after a small spike in Q2
- Investment sentiment continued to revive in Q3 with 17 major deals of over HK$100 million concluded worth a total of over HK$7.3 billion. While investment funds were still keen on the high yield logistics sector, there was more participation from logistics operators (for eventual owner-occupation) and developers (for redevelopment)
- A total of 7 million square feet of new warehouse space scheduled to come on stream over the next two years will test market resolve.
Firm local trading and retail market conditions supporting the logistics sector
Total merchandise trade and retail sales rebounding by 27.0% and 8.1% respectively over the first eight months of 2021 have helped to propel the performance of the local logistics sector, in particular aviation logistics. Local air cargo throughputs rebounded significantly by 12.6% from January to August 2021 YoY, while container throughput also stabilized over the same period.
Rents continued steady growth over an active market
With firmer business prospects, many logistics operators of modern and overal warehouses opted to renew leases in Q3/2021, normally 6 to 9 months ahead of expiry, to avoid any business disruption, as seen by a number of renewal cases in Kwai Tsing, Tsuen Wan and Tuen Mun. Some operators in need of expansion space meanwhile chose to relocate. Notable examples included a large local 3PL's relocation take-up of 230,000 square feet of an en-bloc warehouse in Tsuen Wan, Crown Worldwide (around 120,000 square feet) in Tuen Mun Distribution Centre, and 100 Storage Cold-Chain Logistics Services leasing around 120,000 square feet of Hutchison Logistics Centre in Kwai Chung.
As such, overall and modern warehouse rents continued to rebound by 2.1% and 2.5% in Q3 respectively, while both overall and modern warehouse vacancy rates declined to 3.2% and 2.6% over the same quarter, after seeing a small spike in Q2.
Both investors and developers active in the buoyant sales market
Investment sentiment continued to revive in Q3 with 17 major deals of over HK$100 million concluded, worth a total of over HK$7.3 billion, compared with 9 major deals amounting to more than HK$6 billion in Q2. While investment funds were still keen to dip into the high yield logistics sector, we saw more participation from logistics operators (for eventual owner-occupation) and developers (for redevelopment). Significant fund transactions included Silkroad's acquisition in Hang Wai Industrial Centre in Tuen Mun, AEW's purchase of share of Minico Building in Chai Wan, as well as Goodman acquiring a majority of floors in Hou Feng Industrial Building in Kwai Chung, all for investment purposes. Some deals initially for investment purpose, such as those made by CR Logistics in Tuen Mun and Fanling, might turn to owner occupation after existing leases expire. Lastly, Billion bought the entire Shui Hong Industrial Building in Kwai Chung for redevelopment.
While investment sentiment at the top end was robust with 30 transactions of over HK$50 million recorded in Q3, 43% higher than in Q2, the lower price bracket - below HK$50 million and mainly stratified units - totalled 789 deals in Q3, a 31% QoQ decline, reflecting a more cautious attitude among smaller investors given the recent stock market turbulence. Flatted factory prices dropped slightly by 0.3% in Q3 as a result, while warehouse prices rose by 3.2% over the same period.
Older industrial premises with redevelopment potential to be the new focus
Albeit with a sustainable short-term logistics demand, a total of 7 million square feet of new warehouse space is scheduled to come on stream over 2022 and 2023, so far with little pre-commitment, and this is expected to test market resolve when the supply launches.
With the Revitalization Policy 2.0 (allowing up to a 20% GFA concession for industrial redevelopment) proving to be popular with 57 cases approved (over 12.7 million square feet of redevelopment premises) over the past three years, the policy will now be extended for another three years to October 2024 according to the latest Policy Address. It is therefore expected industrial investment to refocus more on run-down industrial premises with redevelopment potential.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The buoyant warehouse rental performance supported ongoing investment interest, driving prices up and yields down. With Revitalization Policy 2.0 extended for another three years, we expect to see a refocus on more run-down industrial premises with redevelopment potential."
Mr. James Siu, Deputy Managing Director, Head of Kowloon of Savills said: "Robust investment sentiment for warehouse assets so far this year has already pushed prices up by 6.8% and yields down to 3.3%, an all-time low, indicating diminishing investment returns."