Warehouse rents to retreat 0-5% in 2017

Rents climed 3.5% in 2016.

According to JLL, slowing Mainland economy and weak global trade markets continued to set a challenging backdrop for Hong Kong’s external trading sector with the total value of imports and exports declining by 2.9% y-o-y and 2.5% y-o-y, respectively, through the first 10 months of 2016.

Tempering demand from 3PLs in the warehouse leasing market was partially offset by an uptick in requirements from retailers and other end-users with the share of new lettings from this cohort increasing to 32% in 2016 compared to just 7% in 2015. Despite tightening in the second half, the overall vacancy rate for warehouses ended the year higher at 2.6% compared to 1.7% at the end of 2015.

Warehouse rents climbed 3.5% in 2016, driven by growth in the lower end of the market as tenants sought more cost-effective space. Average rent of warehouses now stands at HKD 13.2 per sq ft. In the broader industrial market, flatted factories rents rose 2.7% to HKD 12.3 sq ft, supported by demand from warehouse users looking for storage options against a limited supply of cargo lift access warehouses.

Meanwhile, competition from revitalised/refurbished industrial buildings and new Grade A office supply put pressure on I/O rents, which dropped 1.7% to HKD17.4 per sq ft per month. Although the government’s ‘nil waiver’ policy to promote the revitalisation of older industrial buildings ended in March, approved projects are still valid until March 2019. Moreover, the ‘nil waiver’ policy for data centre conversions remains in place. As a result, we expect this policy to continue to have an impact on the market over the near-term.

The outlook for the trading sector remains mixed though most economists agree that 2017 will improve from 2016 levels. Still, the lagged effects of the weak external trading environment and rising vacancy will continue to weigh on warehouse rents.

Ricky Lau, Head of Industrial at JLL, said: “With the completion of new supply and the build-up of marketable space, vacancy pressure in the warehouse market will steadily increase over the next 12-months. This will gradually exert more pressure on landlords to lower rents. As such, we expect warehouse rents to retreat 0-5% in 2017.”