MARKETVIEW Hong Kong Industrial, Q3 2015 Industrial rents shrug off retail market slowdown to reach new high Warehouse +0.9% q-o-q Factories Flat q-o-q I/O +1.3% q-o-q External trade, container throughput and air cargo throughput volume both continued to decline in Q3 2015. Nevertheless, the warehouse leasing market was supported by steady demand from mid-range retailers, despite weak retail sales. Warehouse vacancy fell slightly over the quarter. for all industrial property types continued to hit record highs but growth momentum slowed. for cargo lift access buildings outperformed those for direct ramp access buildings and this trend will continue with significant new supply of direct ramp access coming in 2016 Investment demand for industrial assets weakened in Q3 2015 due to uncertainty amid the slowdown in the global economy. The industrial revitalisation scheme will be discontinued in March 2016. The period saw a number of new applications for industrial building conversions as the deadline for the scheme nears. The market is waiting to see if retail sales will stabilise. Should mid-range retailers continue to expand their footprint, warehouse rents will continue to increase, but at a mild pace. Datacentre sector expanding further to meet continued end-user demand with new building completions scheduled and existing operators studying expansion opportunities. External trade and retail sales decline further External trade slowed during Q3 2015, with aggregate trade falling 4.1% year-over-year (y-o-y) in July and August combined. Trade recorded negative growth for the sixth consecutive month and was down 1.5% year-to-date (y-t-d) on the back of decelerating global trade activity, particularly with mainland China. Container throughput and air cargo throughput volume also continued to decline, falling 9.6% y-o-y and 1.6% y-o-y respectively in July and August combined. The retail market slowed further this quarter, with total retail sales down 4.2% y-o-y in July and August combined. However, Food & Beverage consumption remained solid, rising 5.2% y-t-d over the same period. High-end brands remained very cautious as sales deteriorated further, but mid-range retailers filled the gap by leasing prime warehouse space for expansion and upgrading purposes. Investment demand for industrial assets continued to weaken, with just six transactions worth above US$10 million recorded in Q3 2015. Major deals included Sime Darby Motor Services purchasing an industrial site in Wo Hop Shek San Tsuen for HK$382 million for self-use. Q3 2015 CBRE Research 2015 CBRE, Inc. 1
Demand led by large occupiers Despite the weak retail market, leasing demand from retailers and other users remained relatively resilient in Q3 2015, with a number of relocation and consolidation requirements from large occupiers. Noteworthy leasing transactions included a fast fashion retailer securing 200,000 sq. ft. space at ATL Logistics Centre in Kwai Chung for a move within the next 6-months. Interestingly the move was tied to a desire to upgrade and expand from their existing low-rise facilities in the outer New Territories and whilst the headline rental rate is higher the efficiency benefits compensated. Retailers logistics operations in Hong Kong often serve the wider region and ensuring demand remains solid at a time when local retail market sentiment is subdued. Prime warehouse vacancy edged down 0.2 percentage points to 2.6% during the period. Industrial building conversions continue as revitalisation scheme nears expiry The government announced in August that it will end the industrial revitalisation scheme upon expiry of the three-year extended period on 31 March 2016. The decision could benefit industrial space occupiers as it will limit the withdrawal of industrial stock from the market and stabilise the supply of secondary space. In the interim owners are rushing to submit applications before the scheme ends with a total of ten applications made to the Town Planning Board made during the quarter. Industrial rents reach historical high Industrial rents hit new highs this quarter but momentum slowed. Warehouse rents rose by 0.9% q-o-q, compared to a decline of 0.3% q-o-q in Q2 2015. Demand continued to be skewed towards cargo lift access buildings, meaning that rents for ramp access buildings edged down slightly by 0.2% q-o-q, bringing the y-t-d decline to 1.3%. In contrast, cargo lift access buildings registered 0.7% q-o-q growth. for I/O buildings continued to outperform, benefiting from falling vacancy in the office market. Figure 1: Economic trade volumes Y-o-Y change (%) 60 50 40 30 20 10 0-10 Aggregate Trade (Total Exports+Imports) Retained Imports 2010 2011 2012 2013 2014 2015 (Jul-Aug) Source: CBRE Research, Census and Statistical Department, Aug 2015. Figure 2: Container and air cargo throughput Container ( 000 TEUs) 2,500 2,000 1,500 Container Throughput Air Cargo Throughput 1,000 2010 2011 2012 2013 2014 2015 Source: CBRE Research, Marine Department, Civil Aviation Department, Aug 2015. Figure 3: Rental Index 220 200 180 160 140 120 100 Air Cargo ( 000 Tonnes) Index (Q1 2000 = 100) 260 Warehouse Flatted Factories I/O 240 2010 2011 2012 2013 2014 2015 500 400 300 200 Q3 2015 CBRE Research 2015 CBRE, Inc. 2
Outlook Global demand and trade performance is unlikely to rebound in the foreseeable future. Aggregate trade, container throughput and air cargo throughput fell for the 6 th, 14 th and 6 th consecutive month respectively during Q3 2015. These key drivers of warehouse leasing market are expected to remain subdued. However, rental rates are expected to continue to be supported by the very low vacancy levels. While overall vacancy is set to remain low, Mapletree will provide close to 2 million sq. ft. of lettable direct access stock in Tsing Yi in Q1 2016. Despite rumored pre-commitment of circa 30%, this new stock will likely put downward pressure on direct access rentals owing to the weaker demand for this type of product amidst the slower macro conditions. Datacenter development remains a bright spot of activity in the industrial sector. NTT Data Centre Phase II is expected to be finished before yearend, while itech Tower 2 and China Unicom Data Centre will be ready for use in early 2016. Non-traditional industrial property types such as datacentres and self-storage are likely to be at the forefront of space demands in the coming years to supplement warehouse user requirements. The end of the industrial revitalisation scheme in March 2016 and the reversal of plans for more widespread re-zoning of industrial lands is bringing relief for occupiers impacted by the rapid conversion of industrial space to alternative uses witnessed in recent years. I/O buildings will continue to face competition from new officetype factories and upcoming revitalised industrial buildings, which could hinder rental growth in this segment of the market. Figure 4: Selected leasing transactions in Q3 2015 Property Location Type Size (GFA sq. ft.) Indicative Rental (HK$/sq. ft./mth) User ATL Logistics Centre Kwai Chung Warehouse 200,000 15 Retailer G/F, Safety Godown Kwai Chung Warehouse 98,776 10.7 Logistics 1/F, Western Plaza Tuen Mun Warehouse 79,400 9.5 Manufacturing 14/F, Ming Wah Industrial Building Tsuen Wan Flatted Factory 17,982 7 Retailer Unit B-E, 7/F, Kwai Tak Industrial Centre Block 1 Kwai Chung Flatted Factory 12,665 9.2 Manufacturing Unit 4, Goldlion Holdings Centre Sha Tin Flatted Factory 66,226 10.3 Logistics Figure 5: Selected sales transactions in Q3 2015 Property Location Type Floor Size (GFA sq. ft.) Price (HK$ mil) Price (per sq. ft.) Workshop on G/F & 7 Lorry CPs, Manning Industrial Building Kwun Tong Flatted factory Multiple floors 9,145 110 12,028 14/F, Sea View Estate Block C North Point Warehouse Whole-floor 12,815 85 6,660 Workshops 1-3, 5-12 & 15-16 On 10/F, CEO Tower Cheung Sha Wan Flatted factory Whole-floor 12,805 84 6,558 4/F, Yau Lee Centre Kwun Tong Flatted factory Whole-floor 14,980 81.1 5,414 Unit C-E, 10/F, Gemstar Tower Hung Hom Flatted factory Multiple floors 12,927 80 6,189 Q3 2015 CBRE Research 2015 CBRE, Inc. 3
Map of major Hong Kong industrial areas Kwun Tong A former industrial precinct gradually transforming into a decentralised office node, the area still holds a considerable share of Hong Kong s industrial stock, particularly in the I/O sector (39%) given the industrial cum commercial nature. The area is also home to about 7.3% of the total warehouse space and 19% of the factory stock in Hong Kong. Kwai Tsing/Tsuen Wan As the area is in proximity to the Container Terminals in Kwai Chung and Tsing Yi, as well as strategically linked to the Hong Kong International Airport by the Tsing Ma Bridge, many logistics players opt to cluster in the area to benefit from its convenient access to these facilities. As a result, nearly 55% of Hong Kong s warehouse space is found in the Kwai Tsing and Tsuen Wan districts. In addition, about 19% of I/O space and 33% of its factory stock are located in these districts. Tuen Mun As the River Trade Terminal is near the area, this traditional industrial district is also popular among Hong Kong s logistics players. Currently, the district holds about 4.0% of Hong Kong s warehouse space while some 8.6% of the SAR s factory stock is located in the area. This area shows strong growth potential. which will to a large extent be driven by the opening of the Stone Cutters Bridge. This location will benefit from further strengthening of ties between Hong Kong and the Pearl River Delta, and related opening up activities. Yuen Long Yuen Long s share of the industrial property stock within Hong Kong is limited to about 3.7% of the total warehouse stock and 1.2% of the total factory space. However, the area is gaining wider market acceptance from logistics users who value its easy access to the Hong Kong landing point of the Deep Bay Link. The Deep Bay Link, opened in July 2007, is the fourth vehicular access link connecting Hong Kong to Shenzhen within the Pearl River Delta. This location will benefit from further strengthening of HK-PRD related opening up. Sha Tin This area has traditionally been an important logistics hub in terms of rail-based cargo shipment in addition to its role as Hong Kong s major precinct for manufacturing activities. Currently, about 12.4% of Hong Kong s warehouse stock, 2.8% of its I/O stock and 6.5% of its factory stock are located in Sha Tin. It is also proving to be a popular location for users coming out of Kowloon East Q3 2015 CBRE Research 2015 CBRE, Inc. 4
Industrial property definitions Warehouse: This category comprises premises designed or adapted for use as godowns or cold stores and includes ancillary offices. Premises located within the container terminals are also included. About 81% of the stock is located in the New Territories, with Kwai Tsing/Tsuen Wan alone accounting for nearly 55%. Industrial/Office (I/O): This category comprises floor space in developments with planning permission and lease modification for industrial/office use and certified for occupation as such. The stock is distributed in 11 districts throughout the territory, with Kwun Tong, Shum Shui Po and Kwai Tsing, accounting for more than 76% of the total floor space. Factory: This category comprises flatted factories and ancillary office accommodations. It includes flatted factory space that has received planning permission for industrial/office use but has not yet completed the government lease modification. Also included in this category is strata-title floor space with temporary planning permission for industrial/office use and shortterm waivers of government lease restrictions. The majority of the stock is found in four districts of Hong Kong, namely Kwun Tong, Tsuen Wan, Kwai Tsing and Tuen Mun, which account for 60% of the total supply. All monetary values are presented in Hong Kong dollars unless otherwise specified. CONTACTS CBRE HONG KONG OFFICES Darren Benson Executive Director Asia Industrial & Logistics Services +852 2989 5173 darren.benson@cbre.com.hk Marcos Chan Head of Research, Hong Kong, Macau & Taiwan +852 2820 2886 marcos.chan@cbre.com.hk Hong Kong Office Suite 1204-06, 3/F & 4/F, Three Exchange Square 8 Connaught Place Central, Hong Kong Kowloon Office Suites 1201-03 & 14, 12/F, Tower 6, The Gateway 9 Canton Road, Tsim Sha Tsui Kowloon, Hong Kong Rosanna Tang Associate Director, Hong Kong, Macau & Taiwan +852 2820 2806 rosanna.tang@cbre.com.hk Peter Leung Analyst, Hong Kong, Macau & Taiwan +852 2820 1492 peter.leung@cbre.com.hk To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.