Hong Kong Industrial MarketView Q3 214 CBRE Global Research and Consulting WAREHOUSE Rent WAREHOUSE Capital Value FACTORIES Rent FACTORIES Capital Value I/O Rent I/O Capital Value INDUSTRIAL SALES MARKET REIGNITES; OWNER-OCCUPIERS CONTEMPLATE CASHING OUT Hot Topics The industrial sales market has shown increased activity in Q3 214 as some owner-occupiers chose to cash out by selling their properties on a sale-andleaseback basis. Industrial assets suitable for revitalisation remained sought after by opportunistic investors. Tenants currently sitting in buildings with strong revitalisation potential took precautionary steps to secure alternative premises. The trade sector continued to show improvement in Q3, supporting leasing demand for warehouse space in Hong Kong. There were also cost-sensitive tenants looking to downsize or relocate to less expensive locations. Warehouse vacancy stayed at a very low level,.5%, as at the end of Q3. Warehouse and factory rents continued to climb in Q3, but by a lesser q-o-q magnitude compared with Q2. The government announced to sell an industrial site in Kwai Chung in Q4, although the development scale is considered small. Sales market reignited The industrial sales market had a strong performance with five en-bloc transactions recorded in Q3 214. Total consideration for the sale and purchase of industrial properties totaled HKD 3.2 bil, up 35% y-o-y. In view of the improved investment market sentiment, some owneroccupiers are contemplating selling their properties to unlock the value in their assets. In Fanling, Mineron has sold their warehouse Mineron Centre on a sale-and-leaseback basis to a local investor for HKD 515 mil. There were also instances where assets were sold for revitalisation purposes; properties in Kwun Tong and Wong Chuk Hang were particularly sought after. Indeed, three of the five en-bloc transactions in Q3 214 were registered in Kwun Tong where stock for potential revitalisation is ample. Capital values and rents for industrial properties continued to edge up in Q3 214. Chart 1: Economic trade volumes HK$ Bn 4 35 3 25 Re-Export (Rolling 3 Month Avg) Total-exports (Rolling 3-Month Avg) Import (Rolling 3-Month Avg) Trade continued to improve Trade continued to improve in Q3 214 with total exports rising 6.6% y-oy in July and August combined. After some negative re-export growth in the earlier part of the year, re-exports to mainland China have grown for the past four months. In addition, retained imports increased 3.7% y-o-y in Q2 214 with growth in foodstuffs (+15.6% y-o-y) and consumer goods (+5.% y-o-y) helping to fuel warehousing demand. The strong retained imports growth highlights the growing need for space, particularly by mid-market fashion and food & beverage trades. These trades were active in looking for space in the retail property market. As tourists from mainland China spend less on luxury goods in Hong Kong, retailers targeting mid-market products have become increasingly active. In addition, expanding trade volumes should also translate into stronger demand for trade-port facilities. 1 15 1 3 4 5 6 7 8 9 21 211 212 213 214 Source: CBRE, Census and Statistics Department, Aug 214..
Q3 214 Hong Kong Industrial MarketView MARKET TREND OCCUPIERS HAVE LIMITED OPTIONS AS SPACE REMAINS TIGHT Steady demand but tenants are cost-sensitive The warehouse leasing market continued to be fueled by strong leasing demand for quality industrial space. In Shatin, a 22, sq ft unit in Evergain Centre, a warehouse building with direct ramp access, was swiftly leased for a favourable rental after only three weeks on the market. Although high quality assets were sought after, premises with premium asking rentals are experiencing lower inquiry levels. There were also cost sensitive and/or underperforming tenants downsizing or relocating, with one individual occupier giving back some 8, sq ft of space before lease expiry. However, with 1.6 mil sq ft gross of expansion demand as of Q3 214, we expect this space to be backfilled easily. The changing development landscape is also helping to drive leasing demand for industrial premises. The many revitalisation projects planned in areas like Wong Chuk Hang, Ap Lei Chau, and Kwun Tong have provided the impetus for some industrial tenants to move elsewhere. For example, an international automotive brand recently secured a large space in Sheung Shui as a precautionary measure as their existing workshop in Ap Lei Chau may undergo redevelopment into retail use. Revitalisation works in Island South and Kowloon East will further increase pressure for occupiers to find replacements for their industrial space elsewhere. Chart 2: Container and air cargo throughput Container Throughput (' TEUs) 2,5 2, 1,5 1, 5 Index (Q1 =1) 6 5 4 3 1 Rent Index Capital Value Index Container Throughput (Rolling 3 Mth Avg) (LHS) Air Cargo Throughput (Rolling 3 Mth Avg) (RHS) Air Cargo Throughput (' Tonnes) 2 3 4 5 6 7 8 9 21 211 212 213 214 Source: CBRE, Marine Department, Civil Aviation Department, Aug 214. Chart 3: Warehouse rent and capital value 1 2 3 4 5 6 7 8 9 21 211 212 213 214 5 4 3 1-2 New supply further down the road The warehouse project owned by SF Express in Tsing Yi is expected to be completed at the end of 214, where SF Express will self-occupy around 3% of the building. As this is the only new development on the market for this year, and on the back of a persistent tight vacancy environment, tenants with large space requirements will likely show keen interest in the building. While short-term supply continues to be tight, there is some respite if occupiers can wait until 216/17. The Mapletree (scheduled for 216) and China Merchants (scheduled for 217) developments, which has recently started construction, combined will provide the market with 2.3 mil sq ft of modern logistics space in Tsing Yi. Further down the road, Goodman is planning to redevelop the Central Textiles factory in Tsuen Wan into a modern logistics facility. In spite of the expected arrivals of these new developments, the longer-term supply of quality industrial space in Hong Kong is still considered insufficient. In view of this, the government announced the sale of a new industrial site in Kwai Chung in Q4 214. The site (KCTL 487), however, is small in scale with an estimated GFA of 129, sq ft. Given the limited size, it is likely to be utilized for modern industrial purposes with ancillary offices attached to it. KCTL 487 will be the first industrial site to be sold by the government since September, although a logistics site in Tsing Yi was sold to Mapletree in May 213. Chart 4: Factory rent and capital value Index (Q1 =1) 8 6 4 1 2 3 4 5 6 7 8 9 21 211 212 213 214 Index (Q1 =1) 5 Rental Index Capital Value Index 4 3 1 Rental Index Capital Value Index Chart 5: I/O rental and capital value indices 1 2 3 4 5 6 7 8 9 21 211 212 213 214
3 TRANSACTIONS AND OUTLOOK HIGH RENTS REMAINED A PERSISTENT THREAT TO THE MARKET Chart 6: En-bloc sales transactions Total Considerations (HK$ Million) 5, 4, 3, 2, 1, Compounded Annual Growth Rate (%) 3.% 2.% 1.%.% 6 7 1-Year 3-Year 5-Year 8 9 21 Chart 7: Yield by sub-sector Yield (%) 12% 9% 6% Warehouse yield Flatted factories yield I/O yield Chart 8: Capital value growth 211 212 213 Warehouse I/O Flatted Factories 214 3% 5 6 7 8 9 21 211 212 213 214 Chart 9: Yield change Yield Change (Percentage Points) 4% 1-Year 3-Year 5-Year 2% % -2% -4% Warehouse I/O Flatted factories Climbing rents in a low-vacancy environment Steady demand and low vacancy continued to drive rents upwards in Q3 214, growing by 1.6%, 1.4%, and 1.9% q- o-q for warehouses, flatted factories, and I/O, respectively. The majority of landlords are still confident to raise rental levels as vacancy at the end of Q3 is still very low at.5%. The scheduled completion of the SF Express development in Q4 214 coupled with the availability of circa 1, sq ft of surrender space will likely slow rental growth slightly in the near-term. However, the soon-to-be completed SF Express building is geared for higher-end logistics operators and surrender deals are usually more difficult to transact. As such, the amount of cost effective industrial space is set to remain limited. Likewise, the chance of falling rents remains low. Tenants thinking out of the box The tight vacancy environment has pushed warehouse rents up for 21 consecutive quarters, which has tempted occupiers to consider cost-effective options not only just in Hong Kong, but also within the Asia Pacific region. An international apparel brand, for instance, is looking to relocate their logistics hub outside of Hong Kong into Southeast Asia where both land and labour costs are lower. Indeed, the future will see more feasible schemes available in the Pearl River Delta, some of which have a close proximity to Hong Kong. In Shenzhen, China Merchants Bonded Logistics plans to expand its high quality, modern logistic centre in Qianhai only a short drive across the Shenzhen Bay Bridge offering up to one million sq ft (GFA) of space to occupiers. Outlook In an environment where aggregate trade is gradually rising, import/export sector tenants are expected to provide steady leasing demand for warehouse space in Hong Kong. The recent slowdown in retail sales growth in Hong Kong should have limited negative impact on the city s warehouse demand as the reduction in sales is mainly confined to the watch and jewellery sector, which typically uses less logistics space. The strong performance of the mid-range fashion and food & beverage trades, which have both grown for five consecutive months will continue to offset some of the negative effects. However, should the Occupy Central protests, which commenced at the end of September, last for an extended period of time, there will be a broader impact on Hong Kong s retail market and hence knock-on effects on logistics space demand. The competition for revitalisable industrial properties will continue to post threats to certain tenants who have leased space in such buildings. While this is a favourable exit opportunity for some owners, it is also going to reduce the amount of leasable stock in the market. Financially-viable end-user tenants may choose to become owner-occupiers while the others will have to look for replacement premises in the leasing market. The leasing and sales markets are therefore set to remain active in the foreseeable future. Q3 214 Hong Kong Industrial MarketView 3
Q3 214 Hong Kong Industrial MarketView TRANSACTION TABLE AT A GLANCE SELECTED LEASING AND SALES TRANSACTIONS Table 1: Selected leasing transactions in Q3 214 Property Location Type Size (GFA sf) Gross rental (HK$ psf/month) Tenants Unit A 6/F, Ever Gain Centre Shatin Warehouse 22,951 14 Logistics G/F, Jumbo Plaza Sheung Shui Industrial 62,12 15 Car repair 1/F, Jumbo Plaza Sheung Shui Warehouse 12, 1 Logistics 6/F, Block A, Kong Nam Industrial Building Tsuen Wan Industrial 26,41 8* Industrial user 19/F, Block A, Kong Nam Industrial Building Tsuen Wan Industrial 26,41 8.5* Industrial user G/F, Ko Fai Industrial Building Yau Tong Industrial 19,5 22-23 Industrial user Whole block of Mantex Industrial Building Tsuen Wan Industrial 45, 6* Industrial user * All inclusive rent Table 2: Selected sales transactions in Q3 214 Property Floor Location Type Size (GFA sf) Price (HK$ million) Price per sq ft Mineron Centre En-Bloc Fanling Warehouse 152,773 515 3,371 Tungtex Building En-Bloc Kwun Tong Warehouse 15,833 485 4,583 11 On Cheun Street En-Bloc Fanling Warehouse 129,239 45 3,134 43-45 Tsun Yip Street En-Bloc Kwun Tong Factories 11,28 (developable area) 328 2,981 Galaxy Publishing House En-Bloc Kwun Tong Factories 39,5 21 5,316 4 Knapwood Industrial Building En-Bloc Kwun Tong Factories 42,12 4,748
MAJOR INDUSTRIAL DISTRICTS IN HONG KONG DISTRIBUTION OF EXISTING INDUSTRIAL SUPPLY Map of major Hong Kong industrial areas Q3 214 Hong Kong Industrial MarketView 5 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 (36.9%) given the industrial cum commercial nature. The area is also home to about 7.9% of the total warehouse space and 19.2% of the factory stock in Hong Kong. Kwai Tsing/Tsuen Wan As the area is in close 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, over 52% of Hong Kong s warehouse space is found in the Kwai Tsing and Tsuen Wan districts. In addition, about 18.3% of Hong Kong s I/O space and 32.2% 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 4.2% of Hong Kong s warehouse space while some 8.1% 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 3.4% 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 7, 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 13.3% of Hong Kong s warehouse stock, 6.3% 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 5
Q3 214 Hong Kong Industrial MarketView 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 8% of the stock is located in the New Territories, with Kwai Tsing/Tsuen Wan alone accounting for over 52%. 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 7% of the total floor space. CONTACTS 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 6% of the total supply. All monetary values are presented in Hong Kong dollars unless otherwise specified. For more information about this MarketView, please contact: Hong Kong Research Marcos Chan Head of Research Hong Kong Research CBRE Suite 124-6 (Main Reception), 3/F & 4/F, Three Exchange Square Central, Hong Kong t: +852 282 2886 e: marcos.chan@cbre.com.hk + FOLLOW US Jason Fong Analyst Hong Kong Research CBRE Suite 124-6 (Main Reception), 3/F & 4/F, Three Exchange Square Central, Hong Kong t: +852 282 2867 e: jason.fong@cbre.com.hk Industrial & Logistics Services Darren Benson Executive Director Hong Kong Industrial & Logistics Services CBRE Suites 121-3 & 14, 12/F, Tower 6 The Gateway, 9 Canton Road Tsim Sha Tsui, Kowloon, Hong Kong t: +852 2989 5173 e: darren.benson@cbre.com.hk Global Research and Consulting This report was prepared by the CBRE Hong Kong Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. 6 Disclaimer All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only, exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorised publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication.