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Reeves Yan

Institutional investors are always ahead of market cycles. They have a strong sense when the market is about to turn and what asset classes are going to make them a fortune. Recently, they have been grabbing Hong Kong’s industrial blocks.
In line with global trends, fund managers ticked industrial property as their most-favoured sector in Hong Kong, with 11 of 14 deals done so far this year involving factories and warehouses.
Property funds have been particularly active in the Hong Kong investment market since late last year. Market-wide investment reached HK$35 billion (US$4.5 billion) in the first half this year, for deals priced at US$10 million each or more. While this is still the second slowest start to a year in the past decade, the volume marks a 150 per cent jump from a year earlier.
Strong occupier demand backed by low vacancy and tight future supply has made industrial a hot sector. About 37 per cent of the proceeds this year went to industrial assets, the most across all commercial property sectors.


Investors were not only buying small strata-titled units but also spending billions on en bloc acquisitions. Five of the top 10 investment deals so far this year were for industrial buildings worth HK$9 billion, accounting for 60 per cent of all industrial properties transacted during the period.
Emerging industries have been driving very strong occupier demand growth for Hong Kong’s factory and warehouse buildings. They include technology and telecommunications firms, food and drinks operators, e-commerce portals, pharmaceutical firms, to name a few.
As a group, they contributed almost half of the total space leased in the first half of 2021. Similar trends are expected to remain in place given the structural change in consumer behaviours and the phenomenal growth in data consumption.
On top of sustained occupier demand, government policies to spur the redevelopment or rejuvenation of old industrial blocks have also helped drive industrial vacancy rate to low single digits, despite the economic turbulence.
Investors and developers have taken away 5 million square feet of floor space in some 39 industrial premises over the past 30 months. This is against 2.3 million sq ft of new supply in the same period, making industrial property the only commercial sector with negative stock growth.
How the pandemic is turning cold-storage logistics into a hot niche industry
Resilience is also another factor to back industrial investments. Capital values for industrial properties have only slipped 0.3 per cent from the peak in 2018. In contrast, the city’s office blocks lost one-third of their value while high-street shops tumbled 42 per cent.
Besides, there have also been more willing sellers despite the relative dearth of distressed assets during the pandemic. Many businesses and asset owners have been re-evaluating their real estate portfolios to favour “asset-light” models. This promotes sale-and-leaseback deals, which allow enterprises to reinvest capital into their core businesses.
Such deals typically come with long and stable covenants with rental escalation structured in the lease. This offers the new owners not only immediate income streams and high tenure security but also more importantly, a solid hedge against future market risks.
Many of the said assets sit on strategic locations with long-term redevelopment or repositioning potentials and have rarely (sometimes even never) been traded in the market.
Interestingly, sale-and-leaseback opportunities usually exist in the industrial market, more than other commercial sectors. Many industrial premises are owned by industrialists and small and medium-sized entrepreneurs, who are more flexible about disposing them off for working capital.

Demand-supply imbalance will almost guarantee local and international investors continue to look for buying opportunities in the industrial property market as the Greater Bay Area concept matures to tap into the country’s ‘dual circulation’ strategy. Mainland Chinese investors are expected to become increasingly proactive in securing strategic assets in Hong Kong. China Mobile’s investment in Sha Tin and GDS’s foray in Kwai Chung are two examples backing this trend.
Hong Kong is seeing the light at the end of the tunnel. Recent patterns in the economy and property investment market suggest a sharp uptick in investment momentum in the next six to 12 months. While the outlook for office and retail shops is still clouded, factories and warehouses are probably in the best position to capture investors’ attention.
Reeves Yan is executive director, head of capital markets at CBRE Hong Kong


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Business

Property

Hong Kong & China


Fund managers pick industrial as their most-favoured sector in Hong Kong, with 11 of 14 deals in 2021 involving factories and warehouses
Strong occupier demand, emerging industries, government policies, price resilience, willing sellers and supply deficit are major appeals



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Warehousing

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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Concrete Analysis