4Q 212 market overview research & forecast report hong kong industrial market Industrial Property Transactions Nearly Doubled In 4Q 212 market indicators ForEcast overall performance New supply Tenant Demand Incentives rents capital values yields The sustained rent increases and low interest rate environment continued to attract end-users, especially small to medium-size companies and investors acquiring industrial premises for owneroccupation and investment purposes. In view of the dollar peg, the unveiling of a third round of quantitative easing measures (QE3) by the US Federal Reserve in mid-september 212 has induced a gradual inflow of capital to Hong Kong, which in turn stimulated the Hong Kong property market. In late October 212, the introduction of Buyer s Stamp Duty and extension of the Special Stamp Duty on residential property transactions prompted a group of investors to search for real estate investment opportunities in non-residential premises, giving a further boost to industrial sales market activity. The strata-titled transaction volume in 4Q 212 reached a new high since 1999. During the threemonth period ending in November 212, the total value of strata-titled transactions surged 98.9% QoQ to HK$18,552 million and the number of strata-titled transactions jumped 9.% to 3,598. In 213, a more stable, yet pallid, global trade environment with sustained headwinds is expected. As the euro-zone continues to muddle through the debt crisis, the world economy should only expand at a tempered pace. The Hong Kong Trade Development Council forecast Hong Kong exports to grow moderately by 4% in 213, edging up from about 2% growth in 212. In addition, according to the various forecasting agencies, the pace of local economic growth is expected to pick up in 213. It is our prediction that rents of factory and I-O buildings will increase by 8% over the next 12 months. Meanwhile, in view of no new supply in 213 and sustained demand from end-users, warehouse rents are anticipated to see double-digit growth during the year. In view of the dollar peg and implementation of QE3 in the US, the interest cost for acquiring industrial properties is anticipated to stay at a low level. As the investors are diversifying their investment portfolios to include commercial and industrial properties, investment demand for industrial premises will continue to grow. In addition, the sustained rent growth and low interest rate environment will continue to lure end-users to acquire industrial properties for owner-occupation. Industrial yield is expected to continue its downward trend in 213, declining 1 basis points over the next 12 months. Prices for factory and I-O buildings are expected to increase by 11% over the next 12 months while warehouse price growth is expected to outperform that of factory and I-O buildings. www.colliers.com/hongkong
External Trade Performance Improved The changes in economic performance of Hong Kong s major trading partners over the past months, including mainland China, the US and the Eurozone, led to volatility in Hong Kong s external trade performance. Nevertheless, the Hong Kong external trade performance improved during the threemonth period ending in November 212. The total value of re-exports increased by 7.4% year-on-year (YoY) to HK$93 billion, compared to a YoY decline of 2.4% recorded during June - August 212. In addition to external trade performance, local consumption also plays an important role in demand for industrial premises. The change in retail sales performance reflects the local consumption demand. During the three-month period ending in November 212, the total value of retail sales increased 7.5% YoY to HK$16 billion, compared to growth of 6.3% YoY in the preceding three-month period. FACTORY RENT CHANGE Vs RE-EXPORTS VOLUME CHANGE 3% % Dec-22 Jun-23 Dec-23 Jun-24 Dec-24 Jun-25 Dec-25 Jun-26 Dec-26 Jun-27 Dec-27 Jun-28 Dec-28 Jun-29 Dec-29 Jun-21 Dec-21 Jun-211 Dec-211 Jun-212 - - -3% Factory Rent (Year-on-Year Change) Re-export (Year-on-Year Change, 12-month Moving Average) Source: Colliers; Census and Statistics Department, HKSAR Government FACTORY RENT CHANGE Vs RETAIL SALES VOLUME CHANGE 3% % Dec-22 Jun-23 Dec-23 Jun-24 Dec-24 Jun-25 Dec-25 Jun-26 Dec-26 Jun-27 Dec-27 Jun-28 Dec-28 Jun-29 Dec-29 Jun-21 Dec-21 Jun-211 Dec-211 Jun-212 - - -3% Factory Rent (Year-on-Year Change) Retail Sales Volume Index (Year-on-Year Change, 12-month Moving Average) Source: Colliers; Census and Statistics Department, HKSAR Government p. 2 Colliers International
Leasing Demand Industrial Rentals (By sub-markets) Sub-market 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 QoQ Change (HK$ / sq ft / MONTH) 3Q 12 4Q 12 Factory 8.72 8.85 8.96 9.12 9.41 1.8 3.2 Cargo Lift Access Warehouse 7.14 7.45 7.71 8.6 8.48 4.6 5.2 Ramp Access Warehouse 1.34 1.83 11.26 11.8 12.44 4.8 5.4 I-O Building 13.21 13.41 13.57 13.82 14.24 1.8 3. Source: Colliers CONTINUED DEMAND FOR QUALITY WAREHOUSES Similar to past quarters, the sustained local retail sales growth continued to support the warehouse sector. The outsourcing activities from some major corporations continued to attract a group of third-party logistics companies searching for quality warehousing premises to capture the demand growth for logistics services. According to our research, this group of tenants is looking for highquality warehouse premises with sizes in the range of 3, to 5, sq ft. On the factory market front, more landlords opted to convert the whole block of their industrial buildings to other uses in anticipation of potential rent growth after conversion. These property owners plan to empty their buildings in order to carry out the conversion work. Similar to the previous quarter, the tenants in these buildings are looking for suitable premises with sizes similar to their existing addresses for relocation, which in turn stimulates industrial leasing market activity. RENT GROWTH ACCELERATED Similar to the previous quarter, limited availability of quality stock and sustained demand from thirdparty logistics companies continued to underpin the rental performance in the warehouses market, especially those with the physical provision of ramp access. Warehouse rent growth accelerated to 5.2-5.4% QoQ in 4Q 212 from 4.6-4.8% QoQ in the previous quarter. The relocation activity due to wholesale conversion of industrial buildings continued stimulating leasing market activity and the rental performance in 4Q 212. In addition, the positive spill-over effect from the sustained rent growth in decentralised office premises continued to support I-O building rent performance. Rent growth of factory and I-O buildings accelerated to 3. - 3.2% QoQ in 4Q 212 from 1.8% QoQ in the pervious quarter. FACTORY RENTAL INDEX I-O BUILDING RENTAL INDEX 2 2 15 1 5-5 -1-15 Jan- Jul- 15% 5% % -5% - -15% 15 1 5-5 -1-15 Jan- Jul- 15% 5% % -5% - -15% -2 - -2 - : Jan-2 = 1 : Jan-2 = 1 CARGO LIFT ACCESS WAREHOUSE RENTAL INDEX RAMP ACCESS WAREHOUSE RENTAL INDEX 2 15 1 5-5 -1 Jan- Jul- -15-2 : Jan-2 = 1 15% 5% % -5% - -15% - 2 15 1 5-5 -1 Jan- Jul- -15-2 : Jan-2 = 1 15% 5% % -5% - -15% - Source: Colliers Colliers International p. 3
Sales Market Industrial prices (By sub-markets) Sub-market 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 QoQ Change (HK$ / sq ft) 3Q 12 4Q 12 Factory 2,319 2,355 2,538 2,729 2,984 7.5 9.4 Cargo Lift Access Warehouse 2,64 2,716 2,863 3,92 3,39 8. 7. Ramp Access Warehouse 2,74 2,869 3,1 3,32 3,632 6.5 1. I-O Building 3,45 3,456 3,595 3,856 4,186 7.3 8.6 Source: Colliers SURGE IN TRANSACTION VOLUME Similar to the last quarter, the sustained rent increase and low interest rate environment continued to attract end-users, especially small to medium-size companies and investors acquiring industrial premises for owner-occupation and investment purposes. In view of the dollar peg, the unveiling of a third round of quantitative easing measures (QE3) by the US Federal Reserve in mid-september 212 has induced a gradual inflow of capital to Hong Kong, which in turn stimulated the Hong Kong property market. In late October 212, the introduction of Buyer s Stamp Duty and extension of the Special Stamp Duty on residential property transactions prompted a group of investors to search for real estate investment opportunities in non-residential premises, giving a further boost to industrial sales market activity. In view of the growing acquisition demand from end-users and investors for industrial premises, the developers have offered industrial schemes for pre-sale. For example, Billion Development offered Billion Square in Tsuen Wan and 43-413 Castle Peak Road in Kwai Chung for pre-sale. Scheduled for completion in 213, Billion Square will add about 874,8 sq ft to the market. In addition, 43-413 Castle Peak Road project will add 215,8 sq ft to the market upon its completion in 214. The strata-titled transaction volume in 4Q 212 reached a new high since 1999. During the threemonth period ending in November 212, the total value of strata-titled transactions surged 98.9% QoQ to HK$18,552 million and the number of strata-titled transactions jumped 9.% to 3,598. STRATA-TITLED INDUSTRIAL PROPERTY TRANSACTION VOLUME 4, 2, 3,5 17,5 3, 2,5 2, 1,5 1, 5 15, 12,5 1, 7,5 5, 2,5 Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 No. of Transactions Nov-12 Total Turnover (HK$ million) * Three-month ended Total Turnover (HK$ million) No. of transactions Source: EPRC p. 4 Colliers International
PRICES INCREASE FURTHER Industrial property prices increased further in 4Q 212, thanks to the sustained demand from both end-users and investors. During the period from September to November 212, industrial property prices increased by 7. - 1.% QoQ, compared to 6.5-8.% QoQ in the preceding three-month period. WHOLE-BLOCK SALES MARKET ACTIVITY IMPROVED The whole-block sales market activity improved in 4Q 212 after a consolidation period in the previous quarter. During the period from September to November 212, six whole-block sales transactions were recorded, up from one transaction in the preceding three-month period. In November, a local contractor acquired the whole block of Yeu Shing Industrial Building in Tuen Mun from a local investor for HK$5 million. Based on a total floor area of 23, sq ft, the average price was HK$2,174 per sq ft. The government approved the vendor s plan for converting the existing building for commercial uses including nine floors for office and five floors for retail uses. YIELD EDGED DOWN FURTHER According to government statistics, the private flatted factory yield saw further compression during the review period. The yield decreased from 3.6% in April 212 to 3.4% in July 212 and then further downward to 3.1% in October 212. Looking ahead, in view of the QE3 in the US and the dollar peg, Hong Kong interest rates are expected to stay at low levels. We anticipate industrial property yield will be compressed by 1 basis points in 213, supporting further price increases in coming quarters. PRIVATE FLATTED FACTORY YIELDS TREND 16.% 14.% 12.% 1.% Yield 8.% 6.% 4.% 2.%.% Source: Rating and Valuation Department, HKSAR Government FACTORY AND I-O BUILDING RENTAL YIELDS 16.% 14.% 12.% 1.% Yield 8.% 6.% 4.% 2.%.% Factory Yield I-O Building Yield WAREHOUSE RENTAL YIELDS 16.% 14.% 12.% 1.% Yield 8.% 6.% 4.% 2.%.% Cargo Lift Access Warehouse Ramp Access Warehouse Source: Colliers Colliers International p. 5
Revitalising Industrial Buildings Executed special waiver cases Execution Number of Building Size Location Building Name User Date Storeys (sq ft) 24 Aug 12 164 Wai Wip Street, Candy Novelty House Hotel 21 69,6 Kwun Tong 14 Sep 12 213 Wai Yip Street, Pioneer Building Eating place, Office, Private 1 245,7 Kwun Tong club, Shop and Services 19 Sep 12 6 Shing Yip Street, Kwun Tong Prosperity Place Office and other uses 27 24, 22 Oct 12 16 Hung To Road, Kwun Tong 22 Oct 12 16-18 Yip Shing Street, Tsuen Wan Houtex Industrial Building Office and Eating place 15 Information not available Water Textiles Bleaching & Shop and Services 5 44,7 Dyeing Mill Source: Lands Department; Colliers Five more executed special waiver cases recorded More owners are looking into the potential of their single-owned industrial buildings, which are eligible for wholesale conversion to other uses or redevelopment under the revitalised industrial building scheme. As of the end of November 212, 88 applications had been received by the Lands Department since the launch of the new measures, including 74 applications for conversion and 14 for redevelopment. Two-thirds of executed cases located in Kowloon East Of these applications, 27 special waiver (wholesale conversion) cases have been executed, while five of the cases were recorded during the period from September to November 212. The owners plan to convert their buildings to office, retail, hotel and other uses. The ongoing transformation of Kowloon East into a business district continued attracting owners to convert their industrial buildings in the district to other uses. Among the five special waiver (wholesale conversion) cases executed during the review period, four of them are located in Kowloon East. In addition, since the implementation of revitalising industrial building policy in April 21, 18 buildings or two-thirds of the executed cases are located in the district. p. 6 Colliers International
New Industrial Building Supply New industrial buildings to be completed in 213 and 214 District Development Gross floor area (sq ft) Building type Developer Status Kwun Tong 35 Hung To Road 126,4 Industrial First Group Under construction Tsuen Wan Billion Square, 3 Hoi Shing Road 874,8 Industrial Billion Development Under construction Tsuen Wan 2-6 Fui Yiu Kok Street 93,6 Industrial HKR International Under construction Kwai Chung 43-413 Castle Peak Road 215,8 Industrial Billion Development Under construction Source: Buildings Department, HKSAR Government; Colliers PRIVATE FLATTED FACTORY NEW SUPPLY 7. 6. 5. 4. 3. 2. 1.. 1991-1995: 4.1 milliom sq ft 1996-2: 1. milliom sq ft 21-25:.1 milliom sq ft 26-21:.5 milliom sq ft 211-212:.5 milliom sq ft 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 E Floor Area (million sq ft) 213 F 214 F 1991-1995 Average 1996-2 Average 21-25 Average 26-21 Average 211-212 Average Source: Rating and valuation Department, HKSAR Government (1991-211); Colliers (212-214) There were no new industrial buildings completed during the review period. Looking forward, four industrial buildings are expected to be completed in 213 and 214, adding 1.3 million sq ft to the market upon their completions. The increase in demand from end-users and investors for industrial premises has stimulated individual developers to redevelop the old industrial buildings. During the period from 26 to 212, the average new supply of private industrial buildings was about.5 million sq ft per year. Although the level of new supply will increase in the coming two years, its impact on the overall vacancy level is anticipated to be mild as the existing private industrial building stock is about 185 million sq ft. Warehouse supply gap in 213 No new warehouse developments will be completed in 213. In addition, the revitalising industrial building policy will have an impact on warehouse supply. As more landlords opt for converting or redeveloping their buildings for other uses, the floor space available for warehouse use, including cargo lift warehouses on upper floors and those on ground level, will diminish. Moreover, the demand from data centre operators for high-ceiling industrial premises has intensified the competition for high- quality warehouse premises. Over the past two years, about 2.1 million sq ft of warehouse premises were removed from the market. Major warehouse premises removed from the market in 211 / 212 Warehouse Owner / Developer Floor area involved (sq ft) Owner / Developer s plan Kowloon Godown, Kowloon Bay Wharf 1,923, To be redeveloped for residential / commercial uses Portion of Kerry Godown, Tsuen Wan Kerry Properties 15, Conversion for data centre use Source: Colliers Colliers International p. 7
Tenant strategies The lack of new warehouse supply in 213 will pose difficulties for the logistics operators seeking expansion as the prime quality warehouses, especially the ramp access warehouses, are virtually fully-occupied. For those logistics companies with leases expiring in 213, some of the operators are seeking early negotiations with their landlords about lease renewal and possible expansion options in the same building. Alternatively, some operators will choose to split their operations between a couple of quality warehouses in different locations in order to rationalise their rent costs. New warehouse supply in Tsing Yi in the near term Going beyond 213, the next major new warehouse supply will be the two logistics centres in Tsing Yi at TYTL 18 and TYTL 181. In anticipation of their completions in 214-215, the two logistics centres will add about 2 million sq ft of prime quality premises to the market. According to the latest statistics, the existing warehouse stock, as of the end of 212, was about 38 million sq ft. The future supply at TYTL 18 and TYTL 181 will increase the warehouse stock by about 5%, which will help relieve the prevailing tight supply situation upon their completions. Moreover, the government plans to offer a 2-hectare plot in Tsing Yi, which will be restricted to logistics centre development, for public tender in early 213. The size of the future logistics centre is expected to be about 86, sq ft if the plot ratio of the site will be similar to that of TYTL 18 and TYTL 181. Tuen Mun West Potential location for future logistics centre development Tuen Mun West is expected to be more attractive for the development of the logistics industry with the future completion of Hong Kong Zhuhai Macao Bridge (HZMB), Tuen Mun-Chek Lap Kok Link (TM-CLKL) and Tuen Mun Western Bypass (TMWB). Tuen Mun-Chek Lap Kok Link will be a dual two-lane carriageway approximately 9 km long, including a 5-km sub-sea tunnel, connecting TMWB in the north with the proposed HZMB Hong Kong Boundary Crossing Facilities, the Airport and North Lantau in the south. The southern connection of TM-CLKL is expected to open to traffic by the end of 216, while the northern connection is expected to open in 218. The travelling time between Tuen Mun and the Airport will be significantly reduced to about 1 minutes with the commission of TM-CLKL. The Transport and Housing Department is conducting a traffic impact assessment and an ecological assessment for a site of about 3.8 hectares in Tuen Mun West to ascertain its suitability for the construction of a modern logistics centre. In the long run, the government will explore other land options in new development areas such as Hung Shiu Kiu and Northeast New Territories and the reclaimed areas for modern logistics developments. proposed "tuen mun - chek lap kok link" and " tuen mun western bypass" KONG SHAM WESTERN HIGHWAY YUEN LONG HIGHWAY Proposed Tuen Mun Western Bypass New Territories Proposed Tuen Mun - Chek Lap Kok Link TUEN MUN ROAD ROUTE 3 (COUNTRY PARK SECTION) TING KAU BRIDGE Proposed Hong Kong - Zhuhai - Macau Bridge Hong Kong Link Road Proposed Hong Kong - Zhuhai - Macau Bridge Hong Kong Boundary Crossing Facilities Hong Kong International Airport NORTH LANTAU HIGHWAY LANTAU LINK ROUTE 8 Lantau Island Source: Highways Department, HKSAR Government p. 8 Colliers International
Market Outlook There has been more positive economic data in the US and signs of re-acceleration in the mainland economy in the more recent months. However, the external trading environment is still subject to uncertainty as the euro-zone economy is back in recession. In 213, a more stable, yet pallid, global trade environment with sustained headwinds is expected. As the euro-zone continues to muddle through the debt crisis, the world economy should only expand at a tempered pace. The Hong Kong Trade Development Council forecast Hong Kong exports to grow moderately by 4% in 213, edging up from about 2% growth in 212. In addition, according to the various forecasting agencies, the pace of local economic growth is expected to pick up in 213. It is our prediction that rents of factory and I-O buildings will increase by 8% over the next 12 months. Meanwhile, in view of no new supply in 213 and sustained demand from end-users, warehouse rents are anticipated to see double-digit growth during the year. In view of the dollar peg and implementation of QE3 in the US, the interest cost for acquiring industrial properties is anticipated to stay at a low level. As the investors are diversifying their investment portfolios to include commercial and industrial properties, investment demand for industrial premises will continue to grow. In addition, the sustained rent growth and low interest rate environment will continue to lure end-users to acquire industrial properties for owner-occupation. Industrial yield is expected to continue its downward trend in 213, declining 1 basis points over the next 12 months. Prices for factory and I-O buildings are expected to increase by 11% over the next 12 months while warehouse price growth is expected to outperform that of factory and I-O buildings. Colliers International p. 9
hong kong 4q 212 INDUSTRIAL 522 offices in 62 countries on 6 continents United States: 147 Canada: 37 Latin America: 19 Asia Pacific: 21 EMEA: 118 $1.8 billion in annual revenue in 211 1,25 million square feet under management Over 12,3 professionals Colliers International (Hong Kong) Limited Suite 571 Central Plaza 18 Harbour Road Wanchai Hong Kong tel +852 2828 9888 FAX +852 2828 9899 Company Licence No: C-652 Richard Kirke Managing Director Hong Kong tel +852 2822 699 FAX +852 217 647 Email richard.kirke@colliers.com Individual Licence: E-279867 Simon Lo Executive Director Research & Advisory Asia tel +852 2822 511 FAX +852 2868 5275 Email simon.lo@colliers.com Copyright 213 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. You are receiving this collateral because you either subscribed for it or expressed your interest to receive it at some point to Colliers International. If you do not wish to receive future communications from us, please contact Colliers International by email at unsubscribe.hongkong@colliers.com with your name and item to unsubscribe Accelerating success. www.colliers.com