Investment Interest Softens in Industrial Sector

• The first eleven months of 2022 saw both local air freight and container throughputs continue to decline, with local 3PLs bearing the brunt
• With most operators struggling, landlords were more flexible in rental negotiations, leading to overall and modern warehouse rental declines of 1.0% and 1.5% in Q4/2022 respectively
• Both overall and modern warehouse vacancy rates remained largely stable at 1.9% and 1.3% over Q4
• Investment interest softened with continued interest rate hikes, though experienced investors and end users are still purchasing selectively
• With interest rate hikes likely to ease, the new norm of a high cost of capital (5%+ for commercial loans) and changing government policies will likely alter the purchaser profile for industrial assets in 2023.

Local 3PLs bear the brunt of logistics market downturn

With Hong Kong getting through most of 2022 with strict quarantine controls, coupled with prolonged regional supply chain disruption, the first eleven months saw both local air freight and container throughputs decline by 15.4% and 6.9% respectively. 

Unlike international 3PLs which had the ability to re-route their throughputs to other regional airports/ports and were thus least affected by the restrictions in Hong Kong, local 3PLs, who are much more dependent on local supply chains and logistics operations, bore the brunt of the local market downturn, and many saw their 2021 profits wiped out and were thus forced into contraction mode.

Mild drop for rents while vacancy rates remain stable

With most operators struggling, landlords were more flexible in rental negotiations, leading to overall and modern warehouse rental declines of 1.0% and 1.5% in Q4/2022 respectively, while both overall and modern warehouse vacancy rates remained largely stable at 1.9% and 1.3% over the same quarter.

End users more active in leasing

End users focusing on daily necessities still saw business growth and expansion needs in the final quarter: Japan Home Centre relocated and took up 83,194 square feet in ATL Logistics Centre for six years. In another new lease, Logilink Warehouse & Logistics also took up about 83,000 square feet in Goodman Westlink for five years.

Investment interest softens

Investment interest softened with continued rate hikes, though experienced investors and end users were still purchasing selectively. The largest deal of the quarter was the purchase of the en-bloc Novel Industrial Building in Cheung Sha Wan by the JV of Blackstone and Storefriendly for HK$850 million, with the view to Storefriendly utilizing the space for their operations. Another self-storage operator, StorHub, also made their move to buy a further three floors in Precious Industrial Centre for HK$164.265 million, expanding their holding in the building after they bought around 70,000 square feet of space in January last year. Meanwhile, Goodman continued their quest in the stratified market by purchasing a basement floor of Sunshine Kowloon Bay Cargo Centre for HK$111 million.

The investment transaction volume of stratified industrial premises continued to decline due to the rising cost of funds and declining rental returns, with the entire Q4 recording 285 industrial transactions, down 37.5% from Q3 and a 66% year-on-year decline. Flatted factory and warehouse prices registered 0.9% and 2.4% declines over the quarter.

Market to bottom out from 2024

Amid the mixed picture of border reopening, supply chain recovery and supply overhang in 2023, we expect warehouse rents to decline in the order of 5% to 10% this year, with the market likely to bottom out from 2024 onwards when new warehouse completions are gradually taken up. 

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Investment interest has softened alongside rate hikes, though experienced investors and end users are still purchasing selectively.  Looking ahead, the timing and nature of the border reopening and the speed of supply chain recovery will be key to a logistics demand revival, while a supply overhang could blunt a 2023 recovery."

Mr. James Siu, Deputy Managing Director, Head of Kowloon, Industrial Development & Investment of Savills said: " With interest rate hikes likely to ease, the high cost of capital (5%+ for commercial loans) and changing government policies will likely alter the purchaser profile for industrial assets in 2023. We expect end users will most likely be the key purchasers while investment funds with deep pockets and overseas funding may also enter the frame."