Private Equity Interest in Industrial Sector Persists Despite Slowing Rental Growth

• With global economic uncertainties and disruptions to global supply chains ongoing, local air freight and container throughputs declined in the first eight months of the year on a year-on-year basis
• As logistics demand dwindled, overall and modern warehouse rents registered 0.8% and -0.1% growth in Q3/2022 respectively, while both overall and modern warehouse vacancy rates rebounded slightly to 2.1% and 1.4% over the same quarter
• While interest rate rises have deterred local investors and developers, private equity was still keen to acquire en-bloc and whole floor warehouses for investment, although an escalating cost of funds as well as slowing rental growth may test investors’ appetite for logistics assets.

External uncertainties cloud the logistics sector

Ongoing external uncertainties are still causing global disruption to supply chains, and in turn adversely impacting the local logistics sector. While merchandise trade declined by 2.4% in the first eight months of 2022, both air cargo and container throughputs continued to drift by 11.2% and 4.4% respectively over the same period on a year-on-year basis.

Given such weak sentiment, the warehouse leasing market began to feel the heat, with many operators opting for renewal rather than relocation, and very few logistics players, except e-commerce operators, were in expansion mode. Deals that stood out in Q3 included DON DON DONKI took up around 88,000 sq ft on LG and UG/F of Goodman Dynamic Centre in Tsuen Wan, which was an expansion of around 30,000 sq ft. HKTV Mall meanwhile expanded to take up another floor (around 144,000 sq ft) in Mapletree Logistics Hub Tsing Yi.

Rental growth minimal

Overall warehouse vacancy rebounded to 2.1% in Q3, while modern warehouses also saw availability bouncing back to 1.4% of total stock. As logistics demand dwindled, overall and modern warehouse rents registered 0.8% and -0.1% growth in Q3 respectively, compared with 1.9% and 2.7% in Q2 respectively in Q2. In general landlords were eager to maintain occupancy rather than achieve above-average market rents.

Private equity keen on logistics assets

While a succession of rate hikes has deterred local investors and developers, private equity was still keen to acquire en-bloc and whole floor warehouses for investment.  GLP made their first logistics investment in Hong Kong by purchasing the warehouse at 8-12 Tsing Tim Street, Tsing Yi for slightly over HK$1 billion. Other important deals included Goodman's acquisition of a 72% share of Chuan Kei Factory Building in Kwai Chung for HK$380 million, and KaiLong's purchase of a 90% share of Wing Shing Industrial Building in Kwai Chung for HK$433 million, possibly with an eye to its redevelopment potential.

The investment transaction volume of stratified industrial premises continued to decline due to the COVID situation, a stock market tumble and interest rate rises, with the entire third quarter recording 456 industrial transactions, a 26% QoQ decline. Both flatted factory and warehouse prices were stable over the quarter as a result.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Fund investors are still keen on logistics assets despite a relatively quiet third quarter. Looking ahead, while new supply has been gradually taken up, uncertain business prospects may prompt operators to become more conservative when making relocation and expansion decisions."

Mr. James Siu, Deputy Managing Director, Head of Kowloon, Industrial Development & Investment of Savills said: "The escalating cost of funds as well as slowing rental growth may test investor appetite for logistics assets with positive yield carry quickly diminishing over the coming months. With fewer applications for the 20% additional GFA for industrial redevelopment, we may see redevelopment-related industrial transactions quieten, leaving end users as the only active party pursuing industrial and logistics assets over the remainder of the year."