In the latest Colliers Snippet, Industrial Services Director Andrew Armstrong says warehouse occupiers should adjust their strategy and Valuation & Advisory Services Associate Director Pureanae Jang explains why Chevalier’s Fanling Lot price has nothing to do with COVID-19.
Ramp-up warehouse occupiers need to rethink their use of space
In 2020 Hong Kong’s industrial and warehouse rental sector eased by 5% but rebounded with a 5.48% YoY increase in 2021. This year we expect to see a further 5% gain across this subsector of the real estate market, and landlords are poised to take full advantage of the changing dynamics.
Very little new stock in the pipeline
Over the next three years, projected warehousing developments are limited. In the ramp-up sector, we have Goodman Westlink (1,500,000 sq. ft.) due in Q1 2022 and CaiNiao Smart Gateway (3,800,000 sq. ft.) expected in Q3 2023. China Estates development in Tsuen Wan (223,000 sq. ft.), due in 2024, will bolster cargo-lift stock.
Of this, we understand only about 540,000 sq. ft. remains available at Goodman Westlink, and only 1,480,000 sq. ft. will be available to third party tenants at CaiNiao Smart Gateway, with CaiNiao themselves occupying the balance as part of the company’s global Smart Logistics Network.
The pandemic-induced increase in e-commerce and the modest recovery of traditional brick-and-mortar retailers have seen more robust occupier demand for efficient warehousing solutions. Accordingly, we have seen the vacancy rate for ramp-up warehousing drop to approximately 2.2%. Many third-party logistics companies (3PLs) have enjoyed record profits through their contract logistics work in 2020 and 2021. Those plump margins may not last when rents increase, and companies need to consider this when signing future contracts.
"3PLs need to consider using better specified cargo-lift space as alternative warehousing for cargo with a higher number of turnover days"
Any relief will be brief
Whilst the new supply will boost the vacancy level, any relief will be brief. Relentless demand from 3PLs focuses on ramp-up solutions because they offer a more efficient way to move cargo, even though it means less space for their money than the traditional cargo-lift access buildings.
We anticipate a widening gap between rents for ramp-up logistics stock versus cargo-lift access properties. But, the increased rent for ramp-ups will be a premium for those warehouses, rather than a discount for cargo-access space, which will be somewhat insulated, as more of these buildings are converted for alternative use, such as data centres.
Here’s what we recommend
3PLs need to consider using better specified cargo-lift space as alternative warehousing for cargo with a higher number of turnover days that requires less vehicular access while using the ramp-up storage for faster-moving goods. Occupiers in ramp up space have to take a longer-term view ahead of their lease expiring and focus on renewal rights and rent review clauses to protect business security in the medium term.
Chevalier’s bid for FSSTL No. 268 underscores bullish market sentiment
Last week, the Lands Department announced that Chevalier International won the tender for Fanling Sheung Shui Town Lot (FSSTL) No. 245, with the highest premium at HK$297,400,000. FSSTL No. 245 is along On Kui Street and has a maximum permissible gross floor area (GFA) of 87,796 sq. ft, implying an accommodation value (AV) of HK$3,387 per sq. ft. Only three developers put in bids for this lot.
It’s not about COVID-19
On 13 January 2021, the more hotly contested FSSTL No. 268, which is near 245, was awarded to Mapletree TM (HKSAR) Limited (parent company: Mapletree Investments Pte Ltd) for the highest premium of HK$812.9 million, reflecting an AV of HK$3,750 per sq. ft.
"We believe the tender results don’t have anything to do with COVID-19, and the difference is caused by the market reacting to sites with variable conditions and development restrictions"
With the industrial sector in hot demand, it’s easy to wonder why only three companies bid for FSSTL No. 268 this year with its lower AV, contrary to the fierce competition in 2021 with eight bidders driving up the AV. Comment in the media suggested this represents softened demand caused by the resurgence of the pandemic.
We believe the tender results don’t have anything to do with COVID-19, and the difference is caused by the market reacting to sites with variable conditions and development restrictions.
The sites are very different, and buyers know it
Both sites are in the Industrial Zone, which permits them to be used by the information technology and telecommunications sector, allowing for data centre developments. However, Chevalier’s lot only has a site area of 17,556 sq. ft, against Mapletree’s 43,357.03 sq. ft.
Chevalier’s lot size significantly lowers the potential efficiency for any data centre operation. Ideally, modern data centres will have a large floorplate of more than 12,000 sq. ft. or more to accommodate cooling infrastructure and transformer rooms, among other things.
Newer data centres in Hong Kong (for example, Cargo Consolidation Complex and Hon Kwok Data Centre) are usually developed with a GFA of at least 200,000 sq. ft. to reach an optimal scale of operation. Mapletree’s site has a maximum GFA of around 216,785 sq. ft, while Chevalier’s is only 87,796 sq. ft, which is not an ideal scale for data centre development.
Unlike FSSTL No. 268, where significant data centre investors/operators such as Mapletree Investments, Grand Ming and SUNeVision participated in the tender, FSSTL No. 245 attracted only non-data centre investors – Chevalier, K. Wah Properties (Holdings) Limited and Sino Land Company Limited.
Industrial offices may be on the cards
We understand that Chevalier intends to turn FSSTL No. 245 into a modern industrial office development. While the lot might have permission to be used for a data centre, it does not seem a feasible choice.
Currently, small-scale industrial buildings in Fanling/Sheung Shui trade at about HK$4,000/sq. ft. despite their age, and buyers are spared any development risk. Considering new industrial/office buildings can fetch about HK$8,000/sq. ft, we believe that the AV of Chevalier’s lot still represents a tight margin for the developers and indicates investors’ bullish sentiment on capital value in the industrial sector.
Hong Kong is still an attractive market for data centre investors/operators – in the past five years, it recorded the highest interconnection growth compared to Tokyo, Singapore and Sydney, at a compound annual growth rate of 55%. Considering the emerging demand in global cloud services, we expect investors/operators to continue looking for an opportunity to enter the data centre market. We recommend exploring value-added opportunities to enhance their investment returns, such as converting old industrial buildings to data centres.