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Hong Kong property

Warehouses offer best bet for investors looking at the Hong Kong property market

The sector has been among the most under-supplied in the city over the past 10 years.

PUBLISHED : Tuesday, 07 June, 2016, 4:26pm
UPDATED : Tuesday, 07 June, 2016, 4:26pm

After playing second fiddle to the city’s commercial property markets for much of the past decade, Hong Kong’s warehouse market is increasingly being viewed by many investors as the best bet to place money.

NWS Kwai Chung Logistics Centre just recently closed the tender for NWS Kwai Chung Logistics Centre with some pundits pricing it at as much as HK$4.5 billion. If sold at this price, it would easily be the single largest warehouse transaction ever in the city, eclipsing the HK$3.49 billion (US$450 million) paid by Goodman to acquire a 25 per cent stake in ATL Logistics Centre (along with other port assets) in 2013.

For investors, the Hong Kong warehouse market provides a compelling proposition; a supply constrained market with the potential for a significant demand uplift upon the completion of new transport infrastructure in the not too distant future.

The sector has been among the most under-supplied in the city over the past 10 years. According to data from the Rating & Valuation Department, private warehousing stock increased by just 7 per cent from 2006-2015. In comparison, total office and commercial stock increased by 15 per cent each, over the same 10-year period. Even within the sector, investors and developers have opted to build quasi-office buildings when redeveloping older industrial sites instead of warehouses.

The rezoning of industrial land for non-industrial use along with the redevelopment and revitalisation of older industrial buildings for commercial uses has further reduced availability. The government’s industrial building revitalisation policies, which only ended in March this year, has already reduced industrial stock by over 5 million square feet with the potential to reach close to 10 million square feet if all approved applications are ultimately executed.

As a result, vacancy rates have fallen to their lowest levels on record, standing at just 1.7 per cent at the end of 2015.

The constraints on supply, however, are only part of the equation. Demand for warehousing space is only likely to intensify in the coming years. Although merchandise trade volumes are currently in decline the completion of new infrastructure projects may boost demand for warehouses in the coming years.

At the heart of the expected jump in demand is the expansion of Hong Kong International Airport (HKIA). Already the world’s busiest airport for cargo, the completion of a third runway by 2020 is estimated to increase cargo volumes by an average of 4.2 per cent per annum.

By our estimations, the projected increase in cargo volumes at HKIA will likely translate into an additional 300,000 square feet per of warehousing demand per annum. The completion of the Hong Kong-Macau-Zhuhai Bridge and Tuen Mun-Chek Lap Kok Link will also help boost demand, allowing goods to be moved in and out of the city from the Pearl River Delta more easily.

Questions have been raised as to whether these new road links will serve to help move demand outside of the city where bonded warehouse rents, on average, are less than half the amount paid in Hong Kong. Given that most of the goods being shipped out of the Pearl River Delta are increasingly of higher value-added, product margins should be sufficient to ensure that goods destined for global markets will still be moved through Hong Kong.

Moreover, for logistics operators leveraging on the advantages of HKIA to deliver Just-In-Time logistics solutions, utilising bonded warehouses outside of Hong Kong will not be feasible given the time required to clear customs and costs in transporting goods into Hong Kong.

Recent changes to China’s cross border e-commerce regulations, which have raised taxes on certain goods, also have the potential to help increase warehouse demand with e-commerce platforms operating from outside of China —which includes Hong Kong — exempt from the new regulations. Identifying potential areas for logistics development including Hung Shui Kiu and Lantau Island, land supply for warehouses will remain limited over the near-to-medium-term.

The resilience of the sector’s rental market over the past 12 months, even as key demand drivers have slid, has only strengthened the resolve of investors. Prime warehouse rents increased by 7.1 per cent in 2015 and have posted the strongest cumulative growth among all property sectors in the city since the global financial crisis.

Denis Ma is head of research at JLL

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