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Private Equity Props Up HK Industrial Market Amid Slowing Rental Growth

Private Equity Props Up HK Industrial Market Amid Slowing Rental Growth

8 Tsing Tim St Tsing Yi

GLP made its first Hong Kong logistics investment, picking up 8-12 Tsing Tim Street from Swire Properties

Private equity investors remain keen on Hong Kong’s industrial market even as prolonged external uncertainties and strict quarantine measures have begun to infiltrate the logistics segment, according to Savills.

The city’s merchandise trade fell by 2.4 percent in the first eight months of 2022, while air cargo and container throughputs tumbled 11.2 percent and 4.4 percent respectively over the same period on a year-on-year basis, the property consultancy said in its industrial sales and leasing report.

As logistics demand dwindled, overall and modern warehouse rents recorded weak third-quarter growth of 0.8 percent and -0.1 percent respectively, while both overall and modern warehouse vacancy rates rebounded slightly to 2.1 percent and 1.4 percent in the same quarter.

“The escalating cost of funds as well as slowing rental growth may test investor appetite for logistics assets with positive yield carry quickly diminishing over the coming months,” said James Siu, deputy managing director and head of Kowloon industrial development and investment at Savills.

Funds Swoop on Assets

The dire outlook failed to deter regional fund managers in the third quarter, with several familiar names snapping up industrial assets in the New Territories.

james siu savills

James Siu of Savills

Singapore-based GLP made its first logistics investment in Hong Kong with the purchase of a warehouse at 8-12 Tsing Tim Street in Tsing Yi from Swire Properties for HK$1.08 billion ($137.5 million). The 186,000 square foot (17,279 square metre) building, known as the DSL Warehouse, is leased to logistics provider DB Schenker at a monthly rent of HK$3 million, according to sources who spoke with Mingtiandi this month.

Other key deals included Aussie property group Goodman’s acquisition of a 72 percent share of the Chuan Kei Factory Building in Kwai Chung from the family of late “Shop King” Tang Shing-bor for HK$380 million, as well as Kailong’s purchase of a 90 percent share of Wing Shing Industrial Building in Kwai Chung from the Tang clan for HK$433 million, possibly with a view to its redevelopment potential.

In July, GLP rival ESR acquired its second-ever project in Hong Kong, shouldering aside two competing bids to secure a logistics site at Kwai Chung container port for nearly HK$5.26 billion.

“Fund investors are still keen on logistics assets despite a relatively quiet third quarter,” said Simon Smith, regional head of research and consultancy for Asia Pacific at Savills. “Looking ahead, while new supply has been gradually taken up, uncertain business prospects may prompt operators to become more conservative when making relocation and expansion decisions.”

Shadow of the Beast

Looking ahead, uncertain business prospects are causing logistics operators to become more conservative when making relocation and expansion decisions, Savills said.

As Alibaba’s 5.3 million square foot Cainiao Smart Gateway nears completion within one year, many modern warehouse landlords are likely to make retaining their larger tenants a top priority over the next six to 12 months.

“With fewer applications for the 20 percent additional GFA for industrial redevelopment, we may see redevelopment-related industrial transactions quieten, leaving end users as the only active party pursuing industrial and logistics assets over the remainder of the year,” Siu said.

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