The industrial leasing market remained active in the fourth quarter of 2021 with availability shrinking and landlords preparing to raise rents further, according to Savills in its Market in Minutes - Hong Kong Industrial Sales and Leasing report for Q4 2021.
- In Q4 2021, logistics operators were keen to either renew or expand on the face of the continued recovery of the trading and retail sectors
- Overall and modern warehouse rents continued to rebound by 1.4% and 2.7% in Q4 respectively, while both overall and modern warehouse vacancy rates fell to 3.1% and 2.6% over the same quarter
- Investment sentiment dipped in Q4 as changing Mainland policies, and a turbulent stock market have turned most investors cautious. Nevertheless, the rental prospects of logistics assets and the redevelopment potential of industrial premises have continued to attract foreign funds and local investors to the industrial segment
- While industrial investment sentiment paused in the last quarter of 2021, funds and investors remain keen on this niche segment, which is comfortably the highest yielding sector in Hong Kong. With the US Fed indicating a possible rate hike to tackle inflation, the rise in the cost of capital may test investment interest in 2022
- The latest outbreak of Omicron and a possible lockdown of several major economies may bring along a new round of global supply chain disruption, which may be felt mostly by the sea freight segment. Nevertheless, the gradual take-up of the Goodman Westlink in Tuen Mun has removed a major market overhang in 2022.
Local logistics is well supported by reviving trading and retail sectors
The local trading and retail sectors, which saw total merchandise trade and retail sales rebounding by 26.0% and 8.5% respectively over the first ten months of 2021, have helped to propel the performance of the local logistics sector, in particular aviation logistics. With air cargo movements least affected by border restrictions, local air cargo throughputs rebounded significantly by 13.0% from January to November 2021 YoY, while container throughput also stabilized over the same period.
Faced with improving business prospects, many logistics operators, in particular those involved in aviation logistics and local retailers, were keen to renew their leases, for example in several ramp-access warehouses in the Kwai Tsing area. Other logistics operators, which saw their business growing in the buoyant market conditions, decided to expand and relocate. Notable examples include Kerry Logistics leasing the 158,000-sq ft Sunhing HungKai Tuen Mun Godown for consolidation and expansion, and Hi-Speed Logistics leasing the enbloc of Mineron Centre in Fanling (150,000 sq ft).
As such, overall and modern warehouse rents continued to rebound by 1.4% and 2.7% in Q4/2021 respectively, while both overall and modern warehouse vacancy rates declined to 3.1% and 2.6% over the same quarter.
Investment sentiment cautious due to external uncertainties
Investment sentiment dipped in Q4 as changing Mainland policies, and a turbulent stock market turned most investors cautious. Nevertheless, the rental prospects of logistics assets and the redevelopment potential of industrial premises have continued to attract foreign funds and local investors to the industrial segment. The most significant deals were the acquisition of two 4S (Sales, Service, Spare parts and Surveys) premises in Hung Hom and Chai Wan, both leased to Zung Fu, by the Link REIT for a combined HK$5.82 billion, which provided a stable 3.3% yield.
Less optimistic investment sentiment has translated into transaction volumes, with industrial transactions over October and November recording 486 deals, 22.5% lower than the 627 deals completed in July and August. Flatted factory prices were stable in Q4/2021 as a result, while warehouse prices rose more modestly by 1.8% over the same period.
Outlook for 2022 amid latest Omicron outbreak and possible rate hikes
The latest outbreak of Omicron and a possible lockdown of several major economies may bring along a new round of global supply chain disruption, which would be mostly felt by the sea freight segment. Nevertheless, the gradual take-up of the Goodman Westlink in Tuen Mun by tenants such as DHL and Zuellig Pharma which pre-committed to 1.5 million sq ft of space in this brand-new modern warehouse, has removed a major market overhang in 2022. As such, we expect warehouse landlords to continue to have the upper hand in negotiations and will be able to raise rents by 5% to 6% in 2022.
While industrial investment sentiment paused in the last quarter of 2021, funds and investors remain keen on this niche segment, which is still the highest yielding sector in Hong Kong. However, given the outlook is marred by new rounds of outbreak and possible rate hikes in the US, we are therefore more cautious about industrial and warehouse price growth, which may slow to 3% to 5% in 2022.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The gradual take-up of upcoming logistics space in Tuen Mun has removed a major short-term market overhang, and with logistics demand looking set to grow further, warehouse rents are well supported in 2022."
Mr. James Siu, Deputy Managing Director, Head of Kowloon said: "Despite funds and investors remaining keen on the yield prospects of industrial properties, with the US Fed indicating a possible rate hike in early 2022 to tackle inflation, the rise in the cost of capital may test investment interest this year."