hong kong industrial colliers international | HonG KonG market · 5/16/2012 · year (YoY) to hk$778 billion during the period from december 2011 to February 2012, compared to the

c o ll i e r s i n t e r n at i o n a l | H o n G Ko n G

www.colliers.com/hongkong

hong kong industrialmarket

research & forecast report

1Q 2012 | IndustrIal

market indicators forecast

overall performance

new supply

tenant demand

incentives

rents

capital values

yields

Source: Colliers

(hk$ / sq ft / month) (% QoQ)(hk$ / sq ft / month)

industrial rentals (By suB-markets)

suB-market 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 1Q 2012(% QoQ)

Factory 7.31 7.76 8.17 8.56 8.72 1.8%

Cargo lift access Warehouse 5.83 6.16 6.49 6.82 7.14 4.7%

ramp access Warehouse 8.32 8.80 9.28 9.81 10.34 5.4%

i-o Building 11.39 11.96 12.44 12.93 13.21 2.2%

(hk$ / sq ft / month)

Benefitting from the better-than-expected us economic performance, hong kong exports growth showed signs of improvement. in external trade, the value of re-exports increased 4.1% year-on-year (YoY) to hk$778 billion during the period from december 2011 to February 2012, compared to the growth rate of 3.9% YoY in the preceding three-month period.

signs of improvement were shown on the cargo throughput front. during the period from december 2011 to February 2012, air cargo throughput declined 3.1% YoY to 907,600 tonnes, compared to a negative growth of 7.0% YoY in the preceding three-month period. Container throughput edged up 0.7% YoY to 5.7 million teus, compared to a negative growth of 0.2% YoY in the preceding three-month period.

the strong local retail sales performance continued to support the warehouse sub-sector. the demand from third-party logistics companies for warehouse premises remained steady in 1Q 2012. some major corporations are seeking to outsource their logistics functions. a group of third-party logistics companies are searching for quality warehousing premises in order to capture the demand growth for logistics services from the outsourcing activity. according to our research, this group of tenants is looking for ramp access warehouse premises with sizes in the range of 50,000 to 100,000 sq ft.

on the industrial property market front, more end-users are on tight budgets for their business addresses in view of the uncertain exports performance in coming quarters. looking ahead, industrial rents are predicted to decline 4% over the next twelve months. meanwhile, warehouse rental performance is expected to be more resilient in view of limited stock availability in the marketplace.

the interest cost for acquiring industrial properties is expected to increase as the mortgage interest rates are predicted to increase to their normal levels. it is anticipated that industrial yield will increase amid a rising interest rate trend. in anticipation of a rent decline of 4% over the next 12 months, industrial prices are expected to decline 6% during the period.

a rebound or recovery?

p. 2 | colliers international

hong kong | 1q 2012 | IndustrIal

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Source: Census and Statistics Department, HKSAR Government

Source: Civil Aviation Department, HKSAR Government

Source: Marine Department, HKSAR Government

improvement in external trade?

Benefitting from the better-than-expected us economic performance, hong kong exports growth showed signs of improvement. on the re-exports trade front, the total value increased 4.1% YoY to hk$778 billion during the period from december 2011 to February 2012, compared to the growth rate of 3.9% YoY in the preceding three-month period.

signs of improvement were shown on the cargo throughput front. during the period from december 2011 to February 2012, air cargo throughput declined 3.1% YoY to 907,600 tonnes, compared to a negative growth of 7.0% YoY in the preceding three-month period. Container throughput edged up 0.7% YoY to 5.7 million teus, compared to a negative growth of 0.2% YoY in the preceding three-month period.


colliers international | p. 3

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Source: Census and Statistics Department, HKSAR Government

leasing Demandsustained demand For QualitY Warehousesthe strong local retail sales performance continued to support the warehouse sub-sector. the demand from third-party logistics companies for warehouse premises remained steady in 1Q 2012. some major corporations are seeking to outsource their logistics functions. a group of third-party logistics companies has been searching for quality warehousing premises in order to capture the demand growth for logistics services from the outsourcing activity. according to our research, these third party logistics companies are looking for ramp access warehouse premises with sizes in the range of 50,000 to 100,000 sq ft. interlink, a new logistics warehouse development in tsing Yi, which officially opened in march 2012, is fully occupied. our research shows some of the tenants of interlink will relocate their operations to the new facility while releasing portions of their existing warehouse premises back to the marketplace. in view of the current high occupancy level in prime quality warehouse premises, some logistics operators have pre-committed to these yet to be vacated warehouse premises. there are no existing ramp access warehouses of 50,000 sq ft or above available in the marketplace.

on the factory market front, more landlords opted to convert the whole block of their industrial buildings for other uses. these property owners plan to vacate their buildings in order to carry out the conversion works. as such, the tenants in those buildings are looking for suitable premises for relocation, stimulating the industrial leasing market activity. however, this group of occupiers are seeking premises with sizes similar to their existing addresses.



Source: Buildings Department, HKSAR Government

completed new Buildings for which occupation permits have Been issued

district addressgross floor area

(sq ft)Building type applicant

tsing Yi 39 tsing Yi road 1,525,058 Warehouse goodman interlink ltd

new Buildings for which consent to commence work has Been given

district addressgross floor area

(sq ft)Building type applicant

kwun tong 35 hung to road 126,355 industrial First group

tsuen Wan 6-28 Chai Wan kok street 874,784 industrial Billion development

tsing Yi 52-62 tsing Yi road 32,755 godown the tien Chu (hong kong) Co ltd

Source: Buildings Department, HKSAR Government

supply

interlink completedthe occupation Permit of interlink at 39 tsing Yi road, tsing Yi was issued in January 2012. due to strong demand from the tenants, all of the space was pre-committed prior to its physical completion.

construction of three developments startedduring the period from november 2011 to January 2012, construction work commenced on three industrial developments. among these developments, the warehouse project at 52-62 tsing Yi road will be retained by tien Chu for owner-occupation.

more logistics development proJects in tsing yiin addition to the interlink, more logistics warehouses have been planned in tsing Yi. the plot at tsing Yi hong Wan road (tYtl 180), designated for logistics development, was awarded to goodear development limited in december 2010. in January 2012, the Buildings department approved the building plan for developing the site into a 15-storey over one basement level building, providing a total gross floor area of about 1.1 million sq ft. in February 2012, a second plot for logistics development at tsing Yi hong Wan road (tYtl 181) was awarded to China merchants holdings. upon completion, the size of the future logistics warehouse on the plot will be approximately 1 million sq ft. China merchants holdings plan to retain the development for owner-occupation. according to government figures, the stock of warehouse premises as of the end of 2010 was about 37 million sq ft with 40% of the total or 15 million sq ft located in the kwai tsing district. the completion of interlink and the two future logistics warehouse projects at tsing Yi hong Wan road will further strengthen kwai tsing as the logistics hub of hong kong.



Source: Colliers

Source: Colliers

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(hk$ / sq ft / month) (% QoQ)(hk$ / sq ft / month)

industrial rentals (By suB-markets)


Factory 7.76 8.17 8.56 8.72 8.85 1.5

Cargo lift access Warehouse 6.16 6.49 6.82 7.14 7.45 4.3

ramp access Warehouse 8.80 9.28 9.81 10.34 10.83 4.7

i-o Building 11.96 12.44 12.93 13.21 13.41 1.5

(hk$ / sq ft / month)

rental growth sloweduncertainties in the global economic outlook continued to hinder the industrial rental performance in 1Q 2012. in view of the uncertain external environment, industrial tenants are taking a wait and see approach to the industrial market. meanwhile, the rental performance of ramp access warehouse premises continued to outperform other sub-sectors due to limited stock availability and sustained demand from logistics operators.

as of the end of February 2012, the average rent of ramp access warehouses increased 4.7% quarter-on-quarter (QoQ) to hk$10.83 per sq ft per month, compared to the 5.4% QoQ recorded during the period from september to november 2011. the average rent of cargo lift access warehouses increased 4.3% QoQ to hk$7.45 per sq ft per month, compared to 4.7% QoQ in the preceding three-month period. the average rent in the factory sector increased 1.5% QoQ to hk$8.85 per sq ft per month, compared to the growth of 1.8% QoQ recorded in the preceding three-month period. the average rent in the industrial office (i-o) sector increased 1.5% QoQ to hk$13.41 per sq ft per month, compared to the 2.2% growth recorded during the period from september to november 2011.

rentals



Source: Colliers

industrial prices (By suB-markets)


Factory 1,960 2,174 2,278 2,319 2,355 1.5

Cargo lift access Warehouse 2,138 2,375 2,488 2,604 2,716 4.3

ramp access Warehouse 2,255 2,480 2,600 2,740 2,869 4.7

i-o Building 3,002 3,214 3,332 3,405 3,456 1.5

(hk$ / sq ft)

Source: EPRC

sales Market

prices edged upduring the period from december 2011 to February 2012, industrial property prices increased further while the pace of growth in capital values continued to slow. as of the end of February, the average price of factories increased 1.5% QoQ to hk$2,355 per sq ft. the average price of ramp access warehouses increased 4.7% QoQ to hk$2,869 per sq ft, while that for cargo lift access warehouses increased 4.3% QoQ to hk$2,716 per sq ft. meanwhile, the average price of i-o buildings increased 1.5% QoQ to hk$3,456 per sq ft.

total value of transactions increasedsimilar to past quarters, the interest cost for vendors holding industrial premises remains low. in view of sustained occupational demand from tenants, property owners will enjoy stable rental income from their premises. as a result, most of the vendors remained firm on their asking prices. on the prospective buyer front, the banks are more willing to offer financing support for acquiring industrial premises, which helped boost the transaction volume in value terms.

during the three-month period ending in February 2012, the total value of strata-titled transactions surged 19.2% QoQ to hk$4,888 million. on the number of transactions front, strata-titled transactions edged down 2.7% QoQ to 976. looking more closely, the number of strata-titled transactions declined from 371 in november 2011 to 326 in december 2011 and 222 in January 2012. in February 2012, the banks became more willing to offer loans to prospective property buyers. the number of transactions increased to 428 during the month. according to our research, the buyers include end-users and cash-rich investors who are looking for bargains in the marketplace.

whole-Block sales marketon the whole-block sales front, cash-rich buyers have snapped up buildings offered at reasonable prices. Five transactions were recorded from december 2011 to February 2012, up from two transactions recorded in the preceding three-month period. meanwhile, the total value of transactions increased one fold to hk$1,165 million during the three-month period ending in February 2012, from hk$583 million in the preceding three-month period.

among the five en bloc transactions, a local investor acquired the Joyce Building at 38 Wong Chuk hang road in Wong Chuk hang from hkr international for a total of hk$615 million with the intention of redeveloping the premises into a brand new office building with a total floor area of 163,494 sq ft. it is anticipated that the scheduled completion of the mtr south island line (east) by 2015 will enhance the connectivity between Wong Chuk hang and the office districts on hong kong island, leading to the subsequent transformation of the district into another business hub. given the likely catch-up of the office leasing demand in Wong Chuk hang, it is expected that more developers and investors will make investments in this district.��

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Source: Rating and Valuation Department, HKSAR Government

Source: Colliers

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yield stood at low levelaccording to government statistics, the industrial property yield stood at around 3.7% - 3.8% during the period from december 2011 to February 2012, which is the lowest level since the early 1990s. looking ahead, the risk premium for acquiring industrial premises is expected to expand in view of economic uncertainties in coming quarters, which in turn will push up the industrial property yield level.

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executed special waiver cases

execution date location user numBer of floors

2 dec 11 71 hoi Yuen road, kwun tong office, eating Place, shop and services 14

7 dec 11 31 - 35 lam tin street, kwai Chung office 12

19 Jan 12 13 au Pui Wan street, Fo tan educational institution 4

2 Feb 12 135-137 tung Chau street, tai kok tsui office, shop and services 14

Source: Lands Department; Colliers

revitalising industrial Buildings

planning permission for hotel conversion proJects approved in decemBer 2011 - feBruary 2012

district existing Building userexisting gfa

(sq ft approx)proposed numBer

of hotel rooms

kwai Chung Central industrial Building 57 - 61 ta Chuen Ping street 155,366 299

kwai Chung Ban thong Building 15 - 19 Chun Pin street 115,949 160

kwai Chung the general garment Building no. 100 - 110 kwai Cheong road 278,065 598

Wong Chuk hang Perfectech Centre 64 Wong Chuk hang road 77,347 not exceeding 162

san Po kong Winning Centre 29 tai Yau street 132,323 399

Source: Town Planning BoardNote: In addition to obtaining planning permission from the Town Planning Board, the owners should also follow the relevant provisions of the Buildings Ordinance and the Hotel and Guesthouse Accommodation Ordinance

four more special waiver cases recordedthe package of measures to revitalise industrial buildings continued to attract some owners to look into the potential of their single-owned industrial buildings, which are eligible for wholesale conversion to other uses or redevelopment under the scheme. as of the end of February 2012, 69 applications had been received by the lands department since the launch of the new measures, including 57 applications for conversion and 12 for redevelopment.

of these applications, seventeen special waiver (wholesale conversion) cases have been executed, while four of the cases were recorded during the period from december 2011 to February 2012. among the four latest executed cases, tao heung group plans to convert its logistics centre at 13 au Pui Wan street, Fo tan into the campus of VtC – tao miao institute of Professional development for the Catering industry. the institute of Vocational education (iVe), the hong kong Quality assurance agency and the occupational safety & health Council will operate the college, with enrolment to commence this year.

wholesale conversion for hotel usethe demand for hotel rooms has been growing on the back of a sustained increase in visitor arrivals. moreover, the scheduled completion of the first berth of the new cruise terminal in 2013 is expected to give a further boost to the tourism industry. in view of the substantial rent difference between hotel and industrial premises and growing demand for hotel rooms, individual industrial building owners are attracted to applying for a nil waiver fee for converting their eligible industrial buildings to hotel use.

one of the latest proposed hotel conversion schemes involves the Big orange – kwai Chung at 119 Wo Yi hop road. Far east Consortium and kosmopolito hotels jointly acquired the en bloc of Big orange – kwai Chung, which includes a total gross floor area of 157,066 sq ft, in February 2012 for a total of hk$210 million. the consortium plans to convert the existing industrial building into a 427-room hotel, with an estimated total cost of conversion at hk$100 - 150 million.

during the period from december 2011 to February 2012, the town Planning Board approved planning permission for five hotel conversion projects.



Data centre Development in Hong Kong

a data centre is a facility used to house computer systems and associated components. data centres constitute an important part of the infrastructure in a knowledge-based economy. they support the sustainable growth of hong kong’s traditional pillar industries like financial services, trading and logistics. in addition, the development of internet applications and new technologies has brought changes to business operations and daily life. the demand for data centres has been growing amid wider implementation of the new technologies.

the telecommunications industry association, a leading trade association representing the global information and communications technology industry, published “telecommunications infrastructure standard for data Centres” which defined four levels of data centres in a thorough, quantifiable manner. according to the document, on the real estate front, the minimum clear height in the computer room of data centres should be 8.5 ft. the minimum distributed floor loading capacity should be 150 lbs / sq ft while the recommended distributed floor loading capacity is 250 lbs / sq ft.

in hong kong, most of the existing industrial buildings meet or exceed the minimum floor loading capacity requirement for data centres. there are established government policy support measures to encourage the conversion of existing industrial buildings to other uses. these can facilitate the development of mid-tier data centres. For low-tier data centres, the requirements are less stringent and the demand can be met in the open market.

high-tier data centres in industrial estatesaccording to a study on data centres which the office of the government Chief information officer commissioned in may 2010, one of the key constraints faced by the data centre sector is the availability of suitable plots for constructing large high-tier data centres. Currently the industrial estates managed by the hong kong science and technology Parks Corporation are an important source of sites for developing high-tier data centres. one of the latest cases is google’s high-tier data centre project in tseung kwan o industrial estate, which occupies a site with an area of 2.7 hectares.



proposed measures to facilitate data centre developmentin the short to medium term, land supply will remain a constraint for high-tier data centre development in hong kong. in view of this, the financial secretary announced in the 2012 - 13 budget two measures to facilitate the development of data centres by making better use of existing industrial buildings or industrial sites.

(1) the government would exempt the waiver fees for changing portions of eligible industrial buildings to data centre use. this measure applies to all tiers of data centres;

(2) For the development of high-tier data centres involving lease modification of industrial sites (e.g. redeveloping existing industrial buildings into high-tier data centres), the premium will be assessed on the basis of actual development intensity and high-tier data centre use. if the redevelopment comprises non-data centre portions, the premium for those portions would be assessed according to established practice.

the two measures are time-limited and the application period will end on 31 march 2016. the government is working out the implementation details with a view to commencing the scheme as early as mid-2012.

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general distriBution of data centre operators

Source: Office of the Government Chief Information Officer, HKSAR Government



Market outlooklooking ahead, while the us economy has fared better than expected and the eurozone sovereign debt crisis has stabilised somewhat lately, the still weak recovery of these advanced economies will continue to weigh on their import demand. in view of the above developments, hong kong’s export outlook remains uncertain in the near term.

on the industrial property market front, more end-users are on a tighter budget in respect to their business accommodation costs in view of the uncertain economic performance in coming quarters. industrial rents are anticipated to decline 4% over the next twelve months. in 2013, industrial rents are expected to resume positive growth if the global economy improves.

the interest cost for acquiring industrial properties is anticipated to increase as mortgage interest rates returned to normal levels. it is anticipated that industrial yields will increase amid a rising interest rate trend and expectations for a rental decline of 4% over the next 12 months are projected. Furthermore industrial prices are expected to decline 6% during the period. in 2013, industrial prices are expected to stay flat if yield levels increase further.

nowadays, e-commerce has been gaining popularity as an additional trading channel. the expansion of e-commerce will introduce new demand for logistics services, which in turn will translate into additional demand for warehousing premises, especially those quality premises suitable for handling fast-moving cargo. on the property market front, the next major logistics warehouse supply will be the two projects located along tsing Yi hong Wan road in tsing Yi. in view of the prevailing supply-demand imbalance, warehouse rental performance is expected to be more resilient when compared with the factory and i-o sectors.

colliers international (hong kong) limited

suite 5701 Central Plaza18 harbour road Wanchaihong kongtel +852 2828 9888fax +852 2828 9899Company licence no: C-006052

simon loexecutive director | research & advisory | asiatel +852 2822 0511fax +852 2868 5275email [email protected]

522 offices in 62 countries on 6 continentsunited states: 147Canada: 37latin america: 19asia Pacific: 201emea: 118

• $1.8 billion in annual revenue in 2011

• 1,250 million square feet under management

• over 12,300 professionals

Copyright © 2012 Colliers international.

the information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. no responsibility is assumed for any inaccuracies. readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.


richard kirkemanaging director | hong kongtel +852 2822 0699fax +852 2107 6047email [email protected] licence: e-279867

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hong kong industrial colliers international | HonG KonG market · 5/16/2012 · year (YoY) to hk$778 billion during the period from december 2011 to February 2012, compared to the