Hong Kong Industrial MarketView Q2 213 CBRE Global Research and Consulting WAREHOUSE Rent WAREHOUSE Capital Value FACTORIES Rent FACTORIES Capital Value I/O Rent I/O Capital Value OCCUPIER FOCUS ON COST-CONTAINMENT Hot Topics Industrial demand has eased slightly and is focused on more cost-effective space across submarkets as occupiers start to become more cost-conscious. However, the current low vacancy rate has presented challenges for occupiers, especially those with large space requirements, as available options are very limited. Singapore based, Mapletree Investment acquired the latest Tsing Yi logistics site in a competitive tender at a premium of around 5% to the previous site transacted in early 212, reflecting their confidence in the future leasing market. Average rents for industrial space remained on an upward trend in Q2 despite slowing leasing momentum. Rental growth is expected to moderate further throughout 213 as tenants facing high rentals start to seek downsizing or cost-saving options Sales activity plummeted due to the introduction of cooling measures by the Hong Kong government. However, en-bloc buildings are still attracting some mid-to-long term investors who are looking to purchase assets with value-add opportunities Slowing cargo volumes convey less positive signs The pace of container throughput in Hong Kong has been slowing substantially since February. The relative slowdown of global trade with the mainland has cast a shadow on trade in Hong Kong, as one of China s more active export hubs. According to government data, container throughput in Hong Kong was down by double digits from February to May 213 when compared to the corresponding month in 212. Cost-effective demand Despite demand being relatively resilient for industrial space at the start of 213, there are signs of a slowdown in activity in Q2 due to uncertain markets, slowing cargo volumes and high rents. Occupiers are becoming more cost-conscious and are increasingly seeking to reduce space and consolidate. This is particularly the case for warehouse tenants in the logistic sector. This sector normally Economic trade volumes HK$ Bn 35 3 25 Re-Export (Rolling 3 Month Avg) Total-exports (Rolling 3-Month Avg) Import (Rolling 3-Month Avg) leases large areas of space, but is now exposed to high rents and falling trade volumes. Forced relocations due to revitalizations remain a main driver of activity in the market. Those forced to move have been mostly in the1k-2k sq ft range and budget conscious. However, tenants relocating, either from revitalization or through a landlord not renewing their tenancy, continue to find alternatives hard to come by despite a slight improvement in available stock. Rents to stabilize Looking ahead, we expect to see vacancy rates to remain relatively stable due to supply side constraints. However, landlords could become more flexible in negotiations as higher rents become harder to achieve given the weaker business environment. We expect moderate industrial rental growth through the next quarter. However, given current market uncertainty and trade volumes, the rental trend could flatten out towards the end of the year. 1 2 15 1 23 24 25 26 27 28 29 21 211 212 213, Census and Statistics Department
Q2 213 Hong Kong Industrial MarketView MARKET TREND MOMENTUM SLOWING AMID UNCERTAIN MARKET Weaker occupier demand Activity in the industrial market eased slightly towards the end of Q2 on the back of disappointing trade figures in Hong Kong. The declining pace of trade flow growth and uncertain market outlook triggered some logistics players to become more cautious on cost and operating margins. Cost-driven relocation and consolidation requirements from a wide base of occupiers and operators became characteristic of industrial demand over the quarter. Demand remains most focused on flatted factories and I/Os with size requirements between 5k to 2k sq ft in Kowloon East, where ongoing revitalization is taking place. However, tenants who are being asked to relocate often find it very challenging to find compatible space given the limited availability of cost effective alternatives. Developers are still keen to secure sites Developers are still optimistic about the future of logistics in Hong Kong while large contiguous spaces are very rare and limited. This could also be reflected in recent land sale results. In May, a new logistic site in Tsing Yi was transacted through the government s land sale programme, 15 months since the last industrial plot was tendered in Feb 212. Mapletree Investment outbid 3 other developers, including SHKP, New World and Goodman, for the GFA 226,42 sq ft land parcel at HKD 1.7 billion or an average price of HKD 1,85 psf. This is the highest price paid amongst the 3 industrial sites in that area, and was above market estimates. Leasing interest is likely to be strong for the future development with all floors to be direct access and in excess of 1, sq ft per floor. Tenants can expect to pay a sizeable premium to current rates to secure space within the facility for occupation in 216. Rents were up but slowing Container and air cargo throughput Container Throughput (' TEUs) 2,5 2, 1,5 1, 5 Index (Q1 2=1) 6 5 3 2 1 21 22 23 24 25 26 27 28 29 21 211 212 213 Index (Q1 2=1) 8 6 Rental Index Rental Index Container Throughput (Rolling 3 Mth Avg) (LHS) Air Cargo Throughput (Rolling 3 Mth Avg)(RHS) 22 23 24 25 26 27 28 29 21 211 212 213 Capital Value Index Capital Value Index Air Cargo Throughput (' Tonnes), Marine Department, Civil Aviation Department Warehouse rental and capital value indices Factory rental and capital value indices 5 3 2 1-2 Despite the relatively slow leasing market, average rents for industrial facilities still held up well on the back of tight vacancy rates. Rental values for warehouses, flatted factories and industrial/office increased 2.6% q-o-q, 2.1% q-o-q and.5% q-o-q to average HK$8.8 psf, HK$9.5 psf and HK$14.2 psf respectively. Landlords are still asking for high rents, and thus making tenants face relatively steep renewal rents. Rents have already increased 3%-5% over the last three years and we see some occupiers of high rent industrial premises seeking to sublease or reduce space. Looking ahead, the persisted tight supply will continue to support rental levels. As such, we expect industrial rents to remain positive but the growth rate will slow throughout the remainder of 213. 2 21 22 23 24 25 26 27 28 29 21 211 212 213 I/O rental and capital value indices Index (Q1 2=1) 5 Rental Index Capital Value Index 3 2 1 21 22 23 24 25 26 27 28 29 21 211 212 213
26 27 28 29 21 211 212 213 TRANSACTIONS AND OUTLOOK STAMP DUTY LOWERS MARKET SENTIMENT En Bloc Transaction Total Considerations (HK$ Million) 4, 3, 2, 1, Yield by sub-sector Yield (%) 12% 9% 6% Warehouse yield Flatted factories yield I/O yield Transactions driven by revitalization Revitalization has clearly been the main driver for leasing activity through Q2. For instance, the owner of CAC building in Kwun Tong started to revitalize the building during the quarter and has asked the existing tenants to relocate. As a result, a garment accessories manufacturer tenant leased a 1k sq ft place in Bamboo Centre, while another tenant, a UK automobile company, relocated to space in Shui Hing Center and Chevlier Commercial Centre. The sales market on the other hand has struggled since the imposition of cooling measures in Feb 213. Volumes are only 1-2% of the peak in November 212, with some cases of speculators initially committed to buy becoming reluctant to complete transactions on assets they had initially planned to flip. Buyers left in the strata market are genuine occupiers, mostly renting at the moment, who are trying to escape the rental cycle through ownership. Investors & experienced developers are also looking for en-bloc assets to add value through asset enhancement programs, most notably industrial to office conversion via the revitalization scheme. Q2 213 Hong Kong Industrial MarketView 3% 25 26 27 28 29 21 211 212 213 Capital Value Growth Growth (%) 2% 1-Year 3-Year 5-Year Despite the slower pace of transactions, en bloc industrial premises still look attractive for medium-to-long term investors. 5 en-bloc transactions took place over the quarter, the same as the number recorded in Q1. As mentioned previously, revitalization is a key driver of industrial demand. For example, Cheung Fai Industrial Building was sold to Gaw Capital and Kian Dai Industrial Buildin was purchased by Pamfleet. Both investors plan on upgrading the buildings through the revitalization process, and the two buildings are expected to provide space for office usage upon completion. 15% Moderate price growth 3 1% 5% % Warehouse I/O Flatted Factories Yield Change Yield Change (Percentage Points) 2% 1-Year 3-Year 5-Year % -2% -4% -6% Warehouse I/O Flatted factories Capital values for industrial premises maintained an upward trend despite reduced sales volumes although owners are showing more of a willingness to reduce asking prices to secure the sale. The price growth slowed in comparison with Q1. The average price for warehouses increased 2.7% q-oq, while prices for flatted factories and I/O space rose 1.9% q-o-q and.1% respectively. This compares with the 9.3%, 8.5% and 9.3% recorded in last quarter. In view of the similar pace for rental and price growth in Q2, the yield stayed relatively stable at 4.%, 3.8% and 4.2% for warehouse, flatted factories and I/O respectively. Looking ahead, transaction volumes are expected to stay weak, unless the government relaxes cooling measures on purchasing commercial properties. As such, we do not expect to see growth in the industrial sector at the fast pace experienced over the last two years, but rather to stay relatively flat going through to 214. We anticipate a more stable price and rental movement, and industrial yields are also expected to hold over the coming months. 3
Q2 213 Hong Kong Industrial MarketView TRANSACTION TABLE AT A GLANCE SELECTED LEASING AND SALES TRANSACTIONS Selected leasing transactions in Q2 213 Property Location Type Size (GFA sf) Gross rental (HK$ psf/month) Tenants Hutchison Logistic Centre Kwai Chung Warehouse 33, 11.5 Logistics company Goodman Shatin Logistics Centre Shatin Warehouse 31, 8.5 Logistics company Goldlion Holdings Centre Shatin Warehouse 2, 12.5 Asian Electronics manufacturer Citic Telecom Tower Kwai Chung Warehouse 19, 8.5 Logistics company Roxy Industrial Centre Kwai Chung Warehouse 1, 7.5 European retail chain Selected sales transactions in Q2 213 Property Floor Location Type Size (GFA sf) Price (HK$ million) Price per sq ft Kian Dai Industrial Building En-Bloc Kwun Tong Flatted Factory 26,255 98 4,751 Wai Tak Industrial Building En-Bloc Cheung Sha Wan Flatted Factory 2, 65 3,25 Wayland I&C Building; 8% stake of Lee Wan Building; and 3% stake of Kam Teem Industrial Building En-Bloc Western Flatted Factory 71,45 (developable) 448 6,31 Reliance Manufactory Building 5/F-6/F Wong Chuk Hang Flatted Factory 34,25 23 6,715 1 Hung To Rd 22/F Kwun Tong I/O 22,8 148 6,49 Wing Lok Centre En-Bloc Kwai Chung Flatted Factory 36,129 148 4,1 Reliance Manufactory Building 1/F, Units A/B Wong Chuk Hang Flatted Factory 18,97 133 7,11 4 9 Dai Fu St En-Bloc Tai Po Warehouse 3,455 131 4,31 Kingsford Industrial Building Phase 1, G/F, Unit A/B Kwai Chung Flatted Factory 17,244 91 5,28
Q2 213 Hong Kong Industrial MarketView MAJOR INDUSTRIAL DISTRICTS IN HONG KONG DISTRIBUTION OF EXISTING INDUSTRIAL SUPPLY Map of major Hong Kong industrial areas 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 27, 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
Q2 213 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. 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. CONTACTS For more information about this MarketView, please contact: Hong Kong Research Edward Farrelly Director Hong Kong Research CBRE 4/F Three Exchange Square 8 Connaught Place Central, Hong Kong t: +852 282 2886 e: edward.farrelly@cbre.com.hk Rosanna Tang Associate Director Hong Kong Research CBRE 4/F Three Exchange Square 8 Connaught Place Central, Hong Kong t: +852 282 286 e: rosanna.tang@cbre.com.hk Industrial & Logistic Services Darren Benson Senior Director Hong Kong Industrial & Logisctics 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 + FOLLOW US GOOGLE+ FACEBOOK TWITTER 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 213 CBRE Limited. CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their 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.