Industrial vacancies dropped to 1.7% amidst weaker leasing momentum in Q2

Warehouse rents edged up 0.5% QoQ despite the downbeat trading outlook.

Hong Kong’s industrial leasing momentum weakened in Q2 with forced relocations rather than expansion-driving activity, a report by CBRE revealed. Despite this, vacancy remained at ultra low levels, slipping 0.4 pp QoQ to 1.7%, the tightest the market has seen since Q3 2014.

Major leasing deals included third-partly logistics (3PL) logistics firm Getz Bros. & Co. leasing 114,000 sqft in Hutchison Logistics Centre in Kwai Chung after having to return its existing space back to its landlord, which reportedly wants to utilise it for self-use. Elsewhere, Sankyu Eastern International relocated for similar reasons to a 53,600-sqft space in ATL Logistics Centre in Kwai Chung.

“Other active sectors included daily necessity-related trades. HKTV mall took 110,000 sqft in 1 Kin Fung Circuit in Tuen Mun for business expansion purposes, whilst a cold chain logistics operator took 294,000 sqft in Brilliant Cold Storage Tower 2 in Kwai Chung,” CBRE said.

Despite the downbeat outlook, overall warehouse rents edged up 0.5% QoQ in Q2, with rents for ramp access buildings and cargo-lift access buildings rising 0.5% and 0.6% QoQ, respectively. The report’s authors note that limited space and ongoing forced-relocation demand ensured landlords retained strong bargaining power.

Meanwhile, there continued to be strong demand from data centres, the report added. During the quarter, an unnamed Japanese data centre operator pre-leased 170,000 sqft in Sino Land’s Wing Kei Road (KCTL 524) project in Kwai Chung for its fifth facility in Hong Kong. Elsewhere, Goodman reportedly paid a land premium to build a 360,000 sqft data centre at its Tuen Wan West project.

“A building plan for a 238,000 sqft block of data centres on the same site was also approved this quarter,” CBRE said.

The report also added that alternative sectors remained in expansion mode, with self-storage operator The Store House expanding by 32,000 sqft at Ap Lei Chau, whilst testing and certification company S.G.S. committed to 7,000 sqft in Kwun Tong. Flatted factory rents inched up 0.4% QoQ, which is said to be the slowest rate of growth since Q3 2017.

According to CBRE, despite the uncertain trading environment expected to persist in H2 2019, space availability will remain limited, with no signs of any shadow space becoming available.

“Sectors with less exposure to the trade conflict will outperform. Companies providing daily necessities, especially food, beverages and healthcare products, are expected to drive demand for cold chain logistics,” the firm explained.

In addition, growth in data traffic along with the advent of 5G networks will prompt further upgrading of industrial buildings to accommodate robust demand for data centre space, although the resulting reduction in space will limit options for genuine logistics occupiers, the report’s authors added.