Investment Sentiment Softens as Local Logistics Demand Remains Unaffected

• The latest pandemic alongside external uncertainties has less impact on the local logistics scene with air freight and government logistics demand supporting the sector
• Government's intention to modify the use of brownfield sites in the New Territories means fewer basic warehouses, pushing these tenants back to the general warehouse market
• Overall and modern warehouse rents continued to rise by 0.3% and 0.5% in Q1/2022 respectively, while both overall and modern warehouse vacancy rates fell to 2.5% and 1.5% over the same quarter
• With investment prospects uncertain, the transaction volume nose-dived by 33% in Q1/2022 to reach 570 deals, including only two en-bloc industrial transactions. Strata-sales of new industrial buildings also slowed given weak business prospects for SMEs and smaller investors
• The Russia-Ukraine war, as well as the re-emergence of COVID infections in the Mainland will continue to cause global and regional supply chain disruption, and the local logistics sector may feel the heat from Q2 onwards. 

Local logistics unscathed by recent local and external uncertainties

Although local retail sales suffered amid the outbreak of Omicron, retail-related logistics demand remained as the slack of in-store retail logistics was more than taken up by increasing e-commerce demand. External uncertainties, such as Russia's invasion of Ukraine, as well as the re-emergence of COVID cases in mainland China, disrupted both global and regional supply chains. Nevertheless, the immediate impact of the above factors on the local logistics sector has so far been minimal.

The air freight segment has been the least affected in the current market as this has remained a viable way to move cargoes around regionally, with a number of renewals and expansions by air freight forwarders recorded in Q1/2022 in the Kwai Tsing and Tsuen Wan area. Government-related logistics demand was surprisingly active over Q1 with a few large warehouse floor plates reportedly leased to various government departments in Chai Wan and Tuen Mun. The COVID situation locally has induced logistics demand for medical equipment, virus-prevention materials as well as testing / protective items sourced from different countries and to be distributed locally in a timely manner.

Fewer brownfield sites available for logistics use pushes rents higher

Government's intention to convert more brownfield sites in the New Territories into residential and commercial uses means it will be increasingly difficult for the temporary logistics uses of brownfield sites in those areas to obtain renewals, depleting the number of basic warehouses, which amount to around 5 million sq ft by our best estimate. The potential reduction of this stock may push a number of 3PLs back to the general warehouse market, in particular modern warehouses with large floor plates, high ceilings and ramp access.

As such, overall and modern warehouse rents continued to rebound by 0.3% and 0.5% in Q1/2022 respectively (compared with 1.4% and 2.7% respectively in Q4 2021), while both overall and modern warehouse vacancy rates continued to decline to 2.6% and 1.5% over Q1 from 3.1% and 2.6% respectively over Q4 2021. With available modern warehouse space being snapped up quickly and tenants keen to renew to maintain their operations, landlords seem to have regained the upper hand in rental negotiations.

Investment sentiment continues to soften

Investment sentiment was dampened by the local COVID situation, recent stock market volatility and rising interest rates. The transaction volume nose-dived by 33% in Q1 to reach 570 deals, including only two en-bloc transactions. Of note, Storhub, a Singaporean self storage operator, bought multiple floors in two industrial buildings in Cheung Sha Wan and Hung Hom for a combined HK$700 million for their own operations adding their existing portfolio in Tsuen Wan and Chai Wan. Strata-sales of new industrial buildings also slowed given the weak business prospects of SMEs and smaller investors, but we still saw batches of units purchased by affluent investors in new projects such as Horizon East in San Po Kong. In terms of price, flatted factory prices were stable in Q1 as a result, while warehouse prices rose more modestly by 1.8% over the same period. 

Greater impact possible from Q2 onwards

The continuation of the Russia-Ukraine war, as well as the re-emergence of COVID infections in mainland China will continue to cause global and regional supply chain disruption, which may have an adverse effect on the local logistics scene from Q2 onwards.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Air freight and government logistics were the two most important demand drivers for the logistics sector in Q1, while investment activity paused. Looking ahead, logistics operators may start feeling the heat of global and regional supply chain disruption."

Mr. James Siu, Deputy Managing Director, Head of Kowloon, Industrial Development & Investment of Savills said: "With rate hikes likely throughout the rest of the year, the rising cost of capital should serve as a hurdle for industrial investment for both short and long-term investors. Nevertheless, redevelopment demand should remain intact with developers still keen on run-down industrial buildings/sites with redevelopment potential."