Logistics market sentiment has remained buoyant with sustained demand and extremely low levels of availability, according to Savills in its Market in Minutes - Hong Kong Industrial Sales and Leasing report for Q2 2022.
- Logistics demand remained strong despite economic uncertainties, but leasing deals were rare in Q2/2022 with warehouse availability declining to extremely low levels
- Overall and modern warehouse rents continued to rise by 1.9% and 2.7% in Q2 respectively, while both overall and modern warehouse vacancy rates fell to 1.9% and 1.1% over the same quarter
- The extremely low warehouse vacancy pushed some cash-rich operators into the sales market to secure operational space, while investors continued to hunt for high-yielding industrial assets
- Looking ahead, while new supply may put some short-term pressure on rents, displacement demand from brownfield site resumption in the New Territories may provide some support in the near-term
- While a potential increase in available warehouse space may slow owner-occupiers’ appetite to purchase in the short term, the high yields on offer mean industrial premises are still on top of the wish list of many yield-hungry investors.
Local logistics continued to thrill amidst uncertain economic environment
The local economy was hard hit by the 5th COVID outbreak as well as stock market turbulence with most economic indicators heading firmly south in the first few months of 2022. Nevertheless, against such a backdrop, logistics demand remained strong over the second quarter with the outbreak gradually contained and the retail sector regained some momentum alongside a strong performance from e-commerce.
The number of leasing deals, especially new lettings, subsided compared to Q1, though, as more operators chose to renew rather than relocate due to extremely low availability. Overall warehouse vacancy declined to 1.9% in Q2, while modern warehouses saw availability shrinking to a mere 1.1% of total stock, effectively putting off any near-term relocation plans of modern operators.
Given the sustained local demand, overall and modern warehouse rents continued to rebound by 1.9% and 2.7% in Q2/2022 respectively, as landlords had the upper hand in rental negotiations with such low levels of vacancy. Nevertheless, with plenty of uncertainties clouding local and external markets, landlords are wary of making further aggressive rental adjustments.
Robust investment sentiment underpinned by low availability
Extremely low warehouse vacancy is pushing some cash-rich operators into the sales market to secure operational spaces, with China Resources Logistics the largest purchaser over Q2 purchasing two en-bloc godowns from Kerry Properties in Shatin and Chai Wan for a combined HK$4.62 billion for potential owner-occupation. The firm also spent another HK$264 million on a strata-title transaction in Kwai Chung. Meanwhile investment funds and local investors continued their hunt for high-yielding industrial assets in Q2, including Nuveen buying the converted data centre in Cargo Consolidation Complex for HK$2.88 billion for long-term investment, and Brookfield Asset Management buying a floor in Shatin Industrial Centre for HK$211 million.
The investment transaction volume of stratified industrial premises rebounded slightly in April and May alongside reviving sentiment, but the subsequent stock market slump and consecutive rate hikes in the US deterred potential investors in June, and the entire second quarter recorded 616 industrial transactions, a 4% QoQ decline. Both flatted factory and warehouse prices were stable over the quarter as a result.
Displacement demand from brownfield site resumption to support rental trend
Looking ahead, displacement demand from brownfield site resumption in the New Territories may provide some support to rents. New projects in the pipeline such as Goodman Westlink and Cingleot Premium Logistics Centre are both reported to have around 50% to 60% of their space pre-committed. The remaining space available for lease (around three million sq ft) will inevitably put some pressure on warehouse rents over the next 12 to 18 months.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Low warehouse vacancy has pushed some cash-rich operators into the sales market to secure operational spaces, while investors continue to hunt for high-yielding industrial assets. Looking ahead, while new supply may put some short-term pressure on rents, displacement demand from brownfield site resumption may provide some support in the near-term."
Mr. James Siu, Deputy Managing Director, Head of Kowloon, Industrial Development & Investment of Savills said: "While the potential increase in available warehouse space may slow owner-occupiers' appetite to purchase in the short term, the high yields on offer mean industrial premises are still on top of the wish list of many yield-hungry investors. Interest rate hikes remain a key risk factor for the industrial price rally though."