Cold storage, a sub-sector of industrial properties to store, pack, and distribute temperature-sensitive and perishable products, has recently emerged as one of the most appealing niche asset classes in Hong Kong. COVID-19 has triggered rising frozen food consumption and the related e-commerce demand in the city. Hong Kong’s retained imported frozen food has increased by 49% over the last three years, from 1.1 billion kilograms in 2018 to 1.6 billion kilograms in 20201 with growth accelerating over the last two years, recording 25% YOY growth in 2019 and 20% YOY growth in 2020.
Cold storage’s edge in Hong Kong – rental and yield premium
Traditional warehouses in Hong Kong generally fetch unit rents in a range of HK$10-16 per sq. ft. on GFA per month, varying based on the location, vertical access (ramp/lift access), floor loading and ceiling height. The rental premium for cold storage is differentiated from traditional warehouses, typically due to their enhanced building specifications, such as higher floor loading and ceiling height and the relatively limited supply making the rental premium about 20%-25% higher than traditional warehouses. This premium is likely to be sustained by the limited cold storage supply, which creates competition among end-users.
Apart from their rental level, cold storage has a premium in capitalisation rate over traditional warehouses. The limited pool of cold storage operators equally covers a small pool of market participants and thus, would be deemed riskier as it is difficult to seek suitable tenants for replacement.
How can investor enter the market?
Investors who are interested in entering the cold storage market in Hong Kong can explore three options:
- development of built-to-suit cold storages,
- acquire existing owner-occupied cold storages with sale-and-leaseback opportunities, and
- conversion from existing industrial assets. Limited new industrial land supply from the government renders the development of new built-to-suit cold storage difficult.
An efficient way to invest in cold storage in Hong Kong is to look for existing owner-occupied cold storages and propose a sale-and-leaseback deal. Investors should also look out for cold storage units operating under food factory licences, as this type of shadow supply can be seen as potential stocks for investment.
Apart from sale-and-leaseback opportunities, which are constrained by availability, investors should also explore industrial assets with potential for conversion or refurbishment, especially those assets with good locations and building specifications suitable for cold storage operations.
Latest cold storage transactions
There were two major en bloc cold storage transactions in Hong Kong since March 2021- Kai Bo Group Centre and Brilliant Cold Storage Tower 2. Kai Bo Group Centre was a sale-and-leaseback transaction sold by Kai Bo Group to institutional fund Angelo Gordon. It was transacted at a record high initial yield of 4.8%, highly likely due to the sale-and-leaseback nature of the deal where the seller raised the committed rent to attract buyers in the market. Meanwhile, Brilliant Cold Storage Tower 2 was acquired by ESR Cayman as their first asset in Hong Kong. According to their announcement, ESR intends to convert the cold storage building to a 40MW data centre. Upon completion of conversion, it will be an example of how cold storage investment can use date centre options as an exit investment exit strategy in Hong Kong. This is made possible by the similar building specification requirements between the two assets, making conversion not only possible but relatively easy.
If you would like to know more about cold storage in Hong Kong, you can download the latest Colliers Radar: Cold storage’s edge over traditional industrial assets offers investor opportunity. Or, to see what could be and how you can leverage this niche opportunity, contact one of our experts Hannah Jeong, Pureanae Jang, Chelsea Yip and John Davies.
Note1: Census and Statistics Department
