Vacancy in Hong Kong's storage facilities, warehouses and logistics real estate may double as retailers end leases, slash stock

By Cheryl Arcibal cheryl.arcibal@scmp.com

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September 22, 2020 11:50 AM SGT

Vacancy among Hong Kong's warehouses, storage facilities and other logistics property is expected to double this year, as retailers hobbled by the city's worst recession in decades slash their inventory and give up their leases, according to a forecast by JLL.

An estimated 102,000 square metres (1.098 million square feet) of marketable space is set to return to the leasing market this year when their leases expire, taking the aggregate vacancy rate to more than 3 per cent by the end of this year, compared with 1.6 per cent in 2019, JLL said.

"Retailers as well as those engaged in the imports-and-exports business are set to reduce their logistics footprint," said JLL's head of Hong Kong industrial real estate Ricky Lau. "The vacancy rate is expected to tick upwards."

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The glut of storage space will further weigh on rental charges, which have already fallen between 4 per cent and 7 per cent in the first six months of the year, as Hong Kong's first-half economy shrank 9 per cent, putting the city on track for a full-year contraction of between 6 and 8 per cent.

Hong Kong's logistics industry has been particularly affected, as the city - traditionally the transshipment point between China and the world's consumer markets - struggled to cope with two years of a bruising trade war between the United States and China, as well as US sanctions including the forced relabelling of locally made products into dutiable Made-in-China goods.

Industrial rental markets in Beijing, Guangzhou, Shanghai, Shenzhen, Singapore, southern Vietnam, the Greater Osaka and Greater Tokyo regions are all likely to grow between 2 and 7 per cent this year, according to CBRE's midyear review of the Asia-Pacific real estate market.

"The rental level of the logistic sector has dropped by 4 per cent year-to-date in the first half," said Samuel Lai, CBRE Hong Kong's senior director of advisory and transaction services for the industrial sector. "We expect to see [up] to 5 per cent [decline] for the [remainder] of the year."

Declining rental charges will also weigh on valuations, causing the resale value of warehouses, storage facilities and other logistics real estate assets to stay flat, according to the Asia-Pacific Property Value Movement Report by Knight Frank.

The slump is not helped by Hong Kong's underdeveloped e-commerce industry, stymied by expensive courier charges and a densely populated urban landscape that makes it more convenient for residents to shop at bricks-and-mortar stores and supermarkets, instead of taking to online shopping. Even the lockdowns to contain the coronavirus outbreak, which has sickened nearly 5,000 people and claimed 101 lives in Hong Kong, have not turned city residents off visiting physical stores, further dimming the logistics sector's growth prospects.

"Local supply and demand played a major role in pricing performance," said Tammy Tang, managing director of China, Colliers International.

Still, analysts see a silver lining in the downbeat segment.

"On the flip side, there are no projects in the pipeline expected for completion before 2022," JLL's Lau said. "Growing demand for e-commerce, meanwhile, will create new demand in the market. We expect logistic facilities' rents to rebound slightly in the second half of next year."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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