Hong kong special report retailers expose the lack of warehouse facilities august 2014
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Transcript of Hong kong special report retailers expose the lack of warehouse facilities august 2014
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RETAILERS EXPOSE THE LACK OF
WAREHOUSE FACILITIES
HONG KONG LOGISTICS:
CBRE GLOBAL
RESEARCH AND
CONSULTING
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Contents
Contents
3 Hong Kong logistics: retailers expose the lack of warehouse facilities
5 Logistics – a forgotten pillar of the Hong Kong economy
10 Supply-demand imbalance exposed
13 Retailers as a rising source of demand for logistics facilities
14 Implications of low warehouse vacancy environment
16 What is needed to facilitate sustainable development of the Hong Kong logistics sector?
19 The way forward – prepare for the metamorphosis
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3 CBRE GLOBAL RESEARCH AND CONSULTING © CBRE Ltd. 2014
HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
Hong Kong – the financial center and shopping paradise of Asia – was originally founded on less
glamorous activities when the city’s economy was dominated by the manufacturing sector, particularly
the garment, electronic and toy industries. Whilst most of this manufacturing has shifted across to the
Mainland, Hong Kong has retained its role as a key regional hub, creating significant demand for the
city’s trading and logistics services. These two service sectors account for a quarter of Hong Kong’s
GDP and employ around one-fifth of the city’s working population.
Financial services and tourism are the two other irreplaceable sectors for Hong Kong. They combined
to account for 20% of GDP and take up about 13% of the city’s labour force. The last decade has
seen phenomenal growth in Hong Kong’s retail and tourism sectors which has not only led to sky-
rocketing rents for retail shops but also that of warehouse rentals as the demand for space, much from
retailers directly and indirectly, has far outstripped the supply. Research and industry views on the future
development of the city’s logistics industry have estimated that 70 hectares of land is needed to support
growth over the next 15 years. Unless the border with the mainland is removed completely, replacing
significant amounts of warehouse space in Hong Kong with China to ease the current supply crunch
appears unlikely.
From a government policy perspective, industrial land sales for warehousing have been scarce, which
has led to little new supply in the past decade. In addition, vast amounts of current industrial stock is
being rezoned or revitalized to facilitate residential and commercial developments, further depleting the
available options for industrial occupiers. While the government has been proactive in recent times to
replenish domestic and commercial land supply, the industrial market has been largely left out of the
equation to the detriment of the land community.
The recent slowdown in tourism and retail sales growth does not stop CBRE from believing that Hong
Kong will remain one of the world’s leading shopping destinations in the future. In order to maintain
momentum to further develop Hong Kong’s tourism and retail sectors, the government needs to be
more proactive in facilitating logistics sector growth.
In this paper, we will demonstrate the growing relationship between the retail sector and the logistics
market in Hong Kong over recent years. The warehouse market is currently running on close to full
occupancy with a clear imbalance between occupier demand and supply. It is important to maintain
long-term housing market stability by allocating land resources for residential development. It is also
crucial to upkeep Hong Kong’s financial sector strength by facilitating the development of new office
clusters; however, it will handicap the growth of our retail and logistics sectors – two key pillars of the
Hong Kong economy – if we fail to address the storage needs of the retailers in the city for both their
local and regional distribution needs.
The rise of the Mainland ports and the growing availability of cross-border infrastructure networks may
eventually take further market share from Hong Kong in percentage terms but Hong Kong – a city of
seven million plus people and growing and on the doorstep of the emerging consumption powerhouse
of China – will have a long lasting presence as a regional trading and logistics hub.
Hong Kong logistics:
retailers expose the lack of
warehouse facilities
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CBRE GLOBAL RESEARCH AND CONSULTING
This report was prepared by CBRE Hong Kong Research Team, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and
consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate.
© CBRE Ltd. 2014 Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy,
we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness.
This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior
written permission of CBRE.
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5 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
The success of Hong Kong’s banking and finance sector has created an illusion that there is more office
than industrial space. In fact, the opposite is true. According to the Rating and Valuation Department,
Hong Kong has approximately 260 mil sq ft of industrial space (internal floor area) as at the end of
2013, more than double the size of the office stock (118 mil sq ft).
The history of being a manufacturing hub between the 1960’s and 1980’s has left Hong Kong with a
large array of flatted factories, which now accounts for over 70% of the city’s industrial stock. These
former light manufacturing buildings are now primarily used either as offices for many small-to-medium
enterprises or storage, with only a limited stock still bearing production functions. As an example, the
last cotton mill in Hong Kong, Tai Hing Cotton Mill in Tuen Mun, has recently closed and it’s 500,000
sq ft of space was swiftly taken up for storage and distribution use. The second largest category of
industrial stock is warehouse (15%) with the balance being filled by specialized factories (12%) and
industrial/office (often referred as ‘I/O’) buildings (2%).
Logistics – a forgotten pillar
of the Hong Kong economy
Chart 1: Hong Kong industrial property stock
Source: Rating and Valuation Department, HKSAR Government,
April 2014.
71%
15%
12%
2%
Flatted Factories Warehouse
Specialized Factories Industrial/Office
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6 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
In an attempt to fast track the transformation of old industrial areas into new office clusters, the
government started to launch a series of policy measures in 2010 to encourage redevelopment and
wholesale conversion of industrial buildings for commercial usage. A total of 126 applications have
been received thus far with 96 approved cases. The initiative has been crucial for facilitating more
commercial space for Hong Kong’s services sector development, however, it has led to a serious
reduction of industrial floor space and helped tighten vacancy rates to their current low levels. The
policy, while fast-tracking the gentrification of older industrial districts, has caused hardship for some
small-to-medium sized tenants who have been occupying these industrial buildings. In many cases, they
have been forced to relocate, to make way for the change of use, into buildings where the rentals are
significantly higher. The changing nature of the usage in these older areas has also led, to a certain
extent, significant additional traffic flow causing congestion and pollution problems.
Table 1: Implementation progress of revitalization measures for industrial buildings
Source: Development Bureau, HKSAR Government, June 2014.
Applications received Wholesale
conversion Redevelopment Total
TOTAL APPLICATIONS 109 17 126
Approved 81 15 96
Executed 55 7 62
Pending execution 7 4 11
Withdraw by applicants after approval 19 4 23
Under processing 12 2 14
Withdraw by applicants during processing 11 0 11
Rejected due to not meeting the eligibility
criteria
5 0 5
The industrial revitalization
policy has led to a serious
reduction of industrial floor
space and helped tighten
vacancy rates to their
current low levels.
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7 © CBRE Ltd. 2014 CBRE GLOBAL RESEARCH AND CONSULTING
HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
Policy initiative Building
age Zoning Other conditions
Change of use of
specific unit(s)
within industrial
buildings -
Temporary waiver
N/A • Proposed use must be
always permitted in the
respective zones or planning
permission is obtained
• Standard rates will be charged
for upper floor industrial units
for conversion into office uses,
other than residential and
hotel purposes
• Waiver fee will be charged for
G/F industrial units for
conversion into other uses
subject to individual
assessment
Wholesale
conversion of
industrial
buildings
special waiver -
Nil waiver fees
15 years
or above
• “Industrial”, “Commercial”
and “Other Specified Uses
(Business)” (OU(B)) zones
• Proposed use must be
always permitted in the
respective zones or planning
permission is obtained
• Joint application by all owners
• Change of use for the lifetime
of the building or the current
lease period, whichever is
earlier
• No increase in building bulk,
height or GFA of the building
after conversion
• Undertake not to revert to
original industrial use
permitted on the lease during
the waiver period
• Complete conversion works
within 3 years
Compulsory sale
for redevelopment
of industrial
buildings -
May apply under
the Land
Ordinance for
compulsory sale
of the lot
30 years
or above
• Non-industrial zones (e.g.
“OU(B)“, “Residential”,
“Commercial”,
“Comprehensive
Development Area” (CDA))
• Eligible buildings: about 580
• Applicants should own at least
80% of the undivided shares of
the lot
• The lot must be redeveloped
(not for wholesale conversion)
Lease
modification for
redevelopment of
industrial
buildings -
“Pay for what you
build” in respect
of premium for
lease modification
N/A • Non-industrial zones (e.g.
“OU(B)”, “Residential”,
“Commercial”, “CDA”)
• Proposed use must be
always permitted in the
respective zones or planning
permission is obtained
• Eligible buildings: about
1,000
• Premium assessed on the basis
of optimal use and the
proposed development
intensity (i.e. GFA)
• Redevelopment to be
completed within 5 years
Source: Development Bureau, HKSAR Government; CBRE, August 2014.
Table 2: Key industrial revitalization policies
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ENTERPRISING
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
At the end of 2013, CBRE’s warehouse vacancy rate was 1.1% (decreasing further to 0.4% as of June
2014) although the government number stood at a slightly higher level of 4.6%. The discrepancy
reflects a difference in research methodologies and is also partly due to different stock baskets. The
government also reports a 5.8% vacancy rate for flatted factories at the end of 2013 but CBRE and
many other market participants believe that this figure is very much on the high side. A major reason for
the differential would appear to be the counting of properties which have been left vacant pending a
change of use wherein the tenants have already relocated. Either way, these numbers share a clear and
common fact that the industrial property sector is currently running on a stretched vacancy environment
which is a barrier for the development of Hong Kong’s logistics and retail sectors.
Chart 2: Hong Kong industrial properties vacancy rates
0%
2%
4%
6%
8%
10%
12%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Rating & Valuation Department Warehouse Vacancy Rate Rating & Valuation Department Flatted Factory Vacancy rate
CBRE Warehouse Vacancy Rate
Source: Rating and Valuation Department, HKSAR Government; CBRE, August 2014.
Indeed, stock withdrawal for revitalization is only a recent trend and a small driving force behind the low
vacancy rates. Warehouse stock has only increased from about 36.5 mil sq ft (internal floor area) at
end-2004 to 38.3 mil sq ft at end-2013, growing only by 5% in ten years or a CAGR of 0.5%.
Compared with the already low growth rate of 16% (1.5% CAGR) for retail space and 12% (1.2%
CAGR) for office space, there seems to be a huge lack of land policy support for warehouse
development. The same period saw flatted factories stock reduced from 188 mil sq ft to 184 mil sq ft, a
logical trend given the reduced demand for manufacturing and production plants in Hong Kong. It is
also to be noted that, in recent years, although there has been some ‘new’ industrial properties being
developed on industrial land, these schemes are usually built to Grade B office standards and occupiers
therein are using them for office purposes, masking the amount of new supply from official figures that
is useable for industrialists.
QUOTE:
“At the end of 2013, CBRE’s warehouse vacancy rate was 1.1%, decreasing further to
0.4% as of June 2014”
At the end of 2013, CBRE’s warehouse vacancy rate was
1.1%, decreasing further to 0.4% as of June 2014.
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
0
20
40
60
80
100
120
Residential Commercial Hotel & Mixed-Use Industrial
A major reason behind the slow growth in warehouse stock has been the lack of government land
tender sales for logistics usage. The last decade has seen only seen four industrial sites being sold by
the government, providing a mere 3.7 mil sq ft of logistics GFA, and represents only 6.2% of the
maximum GFA of all government land being auctioned or tendered (140 sites, excluding petrol filing
stations) during the period. This is not even enough to backfill the 6.8 mil sq ft of industrial stock
(factories and warehouses combined) that has been demolished during the period, effectively reducing
options for industrialist occupiers.
Chart 3: Hong Kong real estate stock growth by sector (2004-2013)
Source: Rating and Valuation Department, HKSAR Government; CBRE, August 2014.
Source: Lands Department, HKSAR Government, CBRE estimates 2013.
Chart 4: Hong Kong government land sales by usage (2004-2013)
Source: Lands Department, HKSAR Government; CBRE, August
2014.
No. of sites
4
Table 2: Hong Kong government industrial land sale (2004-2013)
Year District Lot No. Max GFA (sq ft) Purchaser
2008 Kwai Chung KCTL 507 694,272 New World Development
2010 Tsing Yi TYTL 180 1,046,245 Goodear
2012 Tsing Yi TYTL 181 1,033,344 China Merchants Holdings
2013 Tsing Yi TYTL 185 914,940 Mapletree
12 14
110
RETAIL
16%
OFFICE
12%
INDUSTRIAL
5%
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
The shortage in logistics/warehouse supply is in big contrast with the surge in occupier demand in
recent years, which has mainly been driven by Hong Kong’s overwhelming growth in its retail and trade
sectors.
A traditional shopping paradise for tourists from around the world, Hong Kong has long been a key
market for international retailers for the depth and breadth of its consumer market, particularly with the
fast development of its inbound tourism market in recent years. The city started to enjoy a phenomenal
tourist arrival growth when the Individual Visit Scheme (IVS) was first launched in 2003.
Supply-demand imbalance
exposed
Since then, tourist arrivals in Hong Kong have increased from about 15.5 mil a year prior to the
introduction of the Scheme to close to 55 mil last year, representing a CAGR of 13% per annum
between 2003 and 2013. Arrivals from mainland China have seen a particular strong growth of 17%
on a CAGR basis. Today, about 75% of the tourists in Hong Kong are from mainland China, a 1.3-
billion population market that nearly all consumer goods manufacturers and retailers would like to have
a share of.
-10%
0%
10%
20%
30%
40%
50%
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD May
2014
Number of tourists (LHS) Year-on-year growth (RHS)
Chart 5: Hong Kong total tourist arrivals (2000-2014)
Source: Hong Kong Tourism Board; CBRE, August 2014.
No. of tourists (million) Y-o-y growth (%)
About individual visitor scheme (IVS)
The scheme was first introduced in four Guangdong cities on 28 July 2003 as a liberalization measure
under the Closer Economic Partnership Arrangement. Since the implementation, the scheme has
expanded to a total of 49 cities, including Beijing, Shanghai, Shenzhen, and Chengdu. The Scheme
allows residents of the selected cities to visit Hong Kong in their individual capacity, valid for three
months or one year and good for one or two visits to Hong Kong. Eligible applicants may apply for a
new endorsement once the current one has expired or has been used up. There is no quota on the
number of endorsements to be issued.
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
Chart 6: Breakdown of tourist arrivals in Hong Kong by source market - 2013
Source: Hong Kong Tourism Board, Dec 2013.
In the eyes of many mainland Chinese, Hong Kong is an advanced and stylish city. While the expansion
pace of retailers in China has been remarkable in recent years, the city remains an attractive place for
shopping mainly for its lower prices (due to tax and currency advantages), wide product varieties and
the blend-in experience from traveling outside of the mainland without being too far away from home.
As such, international retailers see Hong Kong as a springboard to China, wanting to establish their
brands and test the market there before growing their footprints in the mainland. Even with the recent
slowdown in tourist arrival and retail sales growths, there were still 43 new retailers entered into Hong
Kong in 2013, according to a survey done by CBRE, the majority of which originated from Europe and
the US.
The strong influx of mainland Chinese tourists has contributed significant growth to Hong Kong’s total
retail sales. In the last ten years, total retail sales in Hong Kong has increased by 186% to reach HKD
494 billion in 2013, averaging 11% per annum compared with the 4.7% average annual growth for
the city’s GDP. To many international retailers, this represents unparalleled opportunities over the
sluggish business environment in the West; London, New York and Paris, for instance, have registered
total retail sales growth of 24%, 20% and 27%, respectively over the same period of time.
Chart 7: Total retail sales growth comparison (2000-2013)
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
London (y-o-y growth) Paris (y-o-y growth) New York (y-o-y growth) Hong Kong (y-o-y growth)
Source: Oxford Economics; Census and Statistics Departments, HKSAR Government; CBRE, August 2014.
Start of IVS
MAINLAND CHINA
75%
SOUTHEAST ASIA
6%
TAIWAN
4%
EUROPE
2%
USA & CANADA
3%
AUSTRALIA & NEW ZEALAND
1%
JAPAN
2%
OTHERS
7%
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
The rising presence of international brands in Hong Kong coupled with the organic growth of local
retailers combined to boost retail space demand, resulting in sky-high rents and capital values on the
back of stretched vacancy levels. This has helped to make Hong Kong the most expensive retail market
in the world, according to CBRE’s Global Retail View report. Average rents for high street shops in Tsim
Sha Tsui and Causeway Bay, two of Hong Kong’s most prominent tourist shopping districts, went up
92% and 76%, respectively between end-2008 and end-2013. These growth rates are the strongest
amongst all commercial property sectors.
Chart 8: Hong Kong prime street shops rental index
50
100
150
200
250
300
2008 2009 2010 2011 2012 2013 2014
Overall Tsim Sha Tsui Causeway Bay
Source: CBRE, Q2 2014.
Index (1996=100)
The public has raised serious concerns over rising retail rents as many community and mom & pop
retailers were forced to decentralize and give way to more tourist-oriented trades, thereby affecting
some of their daily consumption patterns and eroding the charm and convenience of traditional
shopfronts, ‘dai pai dongs’ and local shopping malls. While it has captured the attention of both the
government and the media, there is not much the government has done (or can do under a free market
mechanism!) other than imposing heavier stamp duty levies on investment transactions of retail
properties and other commercial real estate assets. However, logistics as a supporting sector hiding
behind Hong Kong’s retail market success has always been left out in the cold. Indeed, many retailers
are frustrated by the insufficient warehouse real estate in Hong Kong for not just their in-store
requirements but also their rapidly growing on-line sales requirements, which to a certain extent has
made warehouses become a secondary retail outlet. The recent take-up of over 100,000 sf of space in
Hong Kong by an international online retailer laid testament to this trend.
Strong retail sales growth has led to a surge in retained imports in Hong Kong, which effectively created
an enormous level of demand for warehouse facilities. In particular, consumer goods retained imports
doubled in terms of value between 2009 and 2013, which far outpaced the average retained import
growth of 59%. The share of retained imports also changed, with consumer goods growing from 20%
to 29% while foodstuffs (which is also a type of consumer good) also saw its share rising by 3
percentage points to 77% over this five-year period. The other categories shrank. In the 10 years to
2013, Hong Kong’s retained imports have increased by a CAGR of 8.7% compared with the 0.5%
growth in warehouse stock. As mentioned earlier in this paper, the Hong Kong warehouse market has
been running on high occupancy levels in recent years with vacancy falling from a year-end average of
5.3% between 2001 and 2006 to 1.4% between 2009 and 2013, and further down to 0.4% as at mid-
2014.
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
66%
16%
5%
4%
2% 7% Logistics
Manufacturing
Retail-related
Information
Technology
Services
Others
55%
4%
14%
15%
3%
9% Logistics
Manufacturing
Retail-related
Information
Technology
Services
Others
While tourist arrivals and retail sales growth have been robust, it is perhaps not as simple to conclude
that the retail sector is by far the most important standalone source of demand for warehouse or
logistics space in Hong Kong. While there are retailers running their own logistics operations and
leasing or owner-occupying warehouse space, many others are choosing to outsource their distribution
requirements to third-party logistics (3PL) operators, thereby providing indirect contributions to
warehouse demand. Nevertheless, warehouse landlords share the view that retailers are becoming an
increasingly important source of demand for space in recent years.
About 60% of the total warehouse stock is taken up by the logistics sector with the balance broadly
occupied by manufacturing, information technology, services, and retail-related sector tenants. With
approximately half of the 3PL business coming from retailers including fashion, electronics, F&B,
cosmetics, the effective contribution of warehouse demand from the retail sector is significant and
growing. From occupying around one-third of the warehousing market in the last decade, retailers have
been expanding rapidly. In 2013, retail sector tenants have grown to directly and indirectly take up
about half of the warehousing space in Hong Kong, showcasing the strength of the retail market. In
fact, retail is the only sector that has registered a positive net take-up in recent years. This is a trend
experienced not only in Hong Kong but also regionally, in line with the urbanization and income and
wealth growth in the emerging economies around Asia, most notably in China.
Retailers as a rising source
of demand for logistics
facilities
Chart 9: Hong Kong warehouse occupancy structure by sector (2009 vs 2013)
Source: CBRE, Q4 2013.
2013 2009
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
The tight vacancy environment in Hong Kong’s warehouse market has caused some retailers to start
over-leasing space and subletting excessive space to other users by offering short and flexible lease
terms. This is one of the retailers’ strategies to avoid being handicapped by insufficient warehouse
space in order to cope with their fast business expansion needs. From a corporate real estate strategy
point of view, this is not ideal as it implies that retailers will have to bear the risks as if they were both
landlords and tenants.
Unlike the retail landscape in China where e-commerce has experienced huge growth compared to
traditional offline sales, Hong Kong’s brick and mortar retailers seems to be less vulnerable in that
regard given the small geographical footprint of the market and the consumption patterns of Hong
Kong residents.
Hong Kong is such a small city that people can easily travel between many places in within 30 minutes.
The major shopping districts are usually attached to the key business districts; Central, Causeway Bay,
Tsim Sha Tsui and Mong Kok which combined to have a working population of around 330,000
persons. To these workers, some of the largest shopping malls in town are just a 5-10 minute walk from
their offices. All shopping malls in Hong Kong have long opening hours, typically 10 a.m. to 10 p.m.,
Monday to Sunday; shopping after business hours is therefore highly feasible and popular in Hong
Kong. There are also plenty of neighbourhood and regional malls built as podiums to many big
residential estates; residents generally have access to daily necessities again within a 5-10 minute
walking distance. This convenience and closeness is in contrast to many Chinese cities and other
overseas markets where the geographical footprint is huge and where opening hours of shops are
typically shorter, making online consumption much more popular.
The fact that Hong Kong is small and focused highlights the importance of brick and mortar sales in this
unique consumption market. There is certainly room for e-commerce to grow in Hong Kong but the
convenience of shopping physically in the city and the high intangible marketing value of maintaining a
presence on street front suggests that traditional offline sales will remain as the key mode of retail
transactions in Hong Kong.
As a result, retailers will make-up a growing share of the warehouse occupier market as more new
brands establish their presence in Hong Kong. Interestingly, while there has been a slowdown in retail
sales and visitor arrival growths in recent times, Hong Kong still managed to attract 43 new retailers
into the market in 2013, making it the third most targeted city globally after Paris and Tokyo. As the
number of brands and stock keeping units (SKU’s) grows, the amount of back-end warehouse space
should increase in tandem. However, this has not been the case for Hong Kong, straining the logistics
capacity in the city.
In the next five years, there will continue to be an imbalanced level of supply between retail shops and
warehouses in Hong Kong. CBRE forecasts a total of 4.7 mil sq ft of prime shopping centre space to be
completed between 2014 and 2018, averaging at 0.95 mil sq ft per annum. In contrast, only 3 mil sq ft
of prime warehouse space is scheduled for completion over the same period of time, averaging at only
0.60 mil sq ft per annum. The persistent shortage of new warehouse supply in an already low-vacancy
environment is set to push warehouse rents higher, a concern for Hong Kong’s long-term
competitiveness as a regional logistics hub.
Implications of low warehouse vacancy environment
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
0
1
2
3
2014 2015 2016 2017 2018
Shopping Centre Warehouse
Chart 10: Future shopping centre and warehouse supply
Source: CBRE, Q2 2014.
GFA mil (sq ft)
Prime warehouse rents in Hong Kong have climbed 136% between 2003 and 2013, of which the
growth was very much back loaded. In the three years to 2013, rents increased 32% to reach an
average of HKD 9.2 per sq ft per month. The growth rate on its own is perhaps not as problematic
when compared with other commercial property sectors; however, the rental levels are already causing
mounting pressure to many low-margin logistics operators.
50
70
90
110
130
150
170
190
210
230
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Chart 11: Hong Kong warehouse rental index
Source: CBRE, Q2 2014.
Index (Q1 2000 = 100)
Over the years, CBRE has seen some low margin tenants unable to secure proper warehouse premises.
Many are forced into flatted factories, not purpose-built for storage, due mainly to rental affordability
reasons. There were also instances where tenants chose to decentralize away from the more expensive
locations or downsize but maintain operations in their original warehouse premise. In some cases,
tenants have even taken the risk of using temporary warehousing on agricultural lands in the New
Territories. Even this option may no longer be feasible as some of these temporary facilities, including
container back-up lands, are earmarked to be part of the new townships as part of the huge
development planned for the North East New Territories.
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
There are many reasons for Hong Kong to retain its status as one of Asia’s most prosperous
logistics/warehouse markets. The import/export sector on its own, with its numerous strengths attached
to Hong Kong’s trading landscape, is set to provide solid fundamental support to the city’s logistics
market. The strong retail market, as discussed throughout this paper, has proved to be and is expected
to remain a key demand driver for warehouse space in Hong Kong; the recent slowdown in growth
momentum will unlikely leave a permanent dent on long-term warehouse demand. Indeed, according
to the Commerce and Economic Development Bureau, Hong Kong is forecasted to receive 70 million
tourists by 2017 and 100 million by 2023 using conservative growth estimates. These numbers sound
reasonable to CBRE as the underlying growth rates are less than half the historical tourist arrival growth
rates between 2003 and 2013. Increasing tourist arrivals should drive retail sales and therefore give
increasing importance for retailers to establish or expand their logistic footprints in Hong Kong. The city
needs more logistics space to support this future growth.
How to facilitate sustainable
development of the Hong
Kong logistics sector?
Table 3: Hong Kong industrial / trade market strengths
Source: CBRE, Q2 2014.
Strengths Why?
Free port No taxes are applied on goods entering the city.
Location & access Convenient linkage with Asia’s emerging markets as well as Southern
China, including road, sea and air freights.
Political stability Despite recent minor social and political tensions, the overall environment
has been much more stable than neighboring countries, including those
in South East Asia.
International standard Sophisticated legal framework to help streamline operations and
safeguard intellectual properties.
Safe land Besides occasional typhoons, Hong Kong enjoys a low risk of
catastrophic natural disasters.
Large retail market Hong Kong retail market is large, making it logical for retailers to elect
the city to host their main APAC operations
While the past has been bleak in terms of industrial land sales, one would hope the future may be
brighter. However, this is not the case, at least in the short-term future. There is not even one industrial
site for auction/tender on the 2014/2015 Land Application List. This is unfortunate as there are options
available for release particularly around Tsing Yi, already a logistics hub, which could be fast-tracked.
Longer term, the Hong Kong government has outlined 10 hectares of industrial land in Tuen Mun West,
which can provide up to three mil sq ft GFA of industrial space. However, the Planning and Engineering
Study is currently in progress and will not be completed until May 2015. As such, any new supply from
the area will struggle to come anytime sooner than the end of this decade. Furthermore, the New
Development Area of Hung Shui Kiu and Lantau Logistics Park are the main areas of interests in terms
of new industrial land supply. However, only 7.5% (62 ha) of the future development land in Hung Shui
Kiu is expected to be allocated for industrial-related use, which is a small fraction of the current
industrial land (190 ha) in the area and hence a negative impact rather than a positive. The Lantau
Logistics Park in Siu Ho Wan has been mentioned since the early 2000’s. However, the latest mandate
ALL GRAPHS to keep to same height and width. W6.11 x H2.26”
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
from the government regarding the Lantau Logistics Park is to continue to “identify suitable sites” and
“examine feasibility”. In the other words, nothing is happening for the area and government support for
the logistics market continues to be weak. The development timelines for both Hung Shui Kiu and Siu
Ho Wan are unclear and space from these areas will likely come past this decade.
The need for more warehouses is critical not only to contain spiraling costs but also to ensure that new
supply delivered is of a better quality to keep pace with modern logistics requirements, especially for
high turn-over products and high-value products. As highlighted earlier in this paper, only 3.7 mil sq ft
of logistics/warehouse space in Hong Kong was completed after 2003; the rest of stock was all over
ten years of age with 61% having a building age of over 20 years old. Some of these older buildings
are simply out of the competition, specifications of which are not fit enough for many of today’s modern
logistics operations. To this end, CBRE has recently seen an international e-retailer unable to apply their
modern logistics system due to the smaller floorplate and high-rise nature of the warehouse buildings in
Hong Kong.
In recent years, many sophisticated global logistics developers have been gaining experience by
growing their portfolios across mainland China but all find it very difficult to build new and high-
specification warehouses in Hong Kong due to a lack of land resources and the high cost of
development if land does become available. This has left Hong Kong behind many Chinese cities in
terms of logistics hardware availability. Goodman, for instance, has developed over 13 million sq ft of
new logistics space across mainland China over the last ten years but only managed to build just one
new development in Hong Kong, fetching 2.4 mil sq ft of new space. Interestingly, this was also their
most successful development globally with 99% occupancy on completion, owing to the depth of
demand for new, modern space. Similarly, Mapletree has grown their portfolio size in mainland China
by 13.5 mil sq ft over the same past decade but have only been able to secure one new development
site in Hong Kong, contributing a mere, but badly needed 1.5 mil sq ft to Hong Kong’s logistics stock
when delivered in 2016. The release of more logistics/warehouse sites for sale by the government will
enable these specialized global developers to build and operate more high-specification modern
warehouses here, thereby up keeping Hong Kong’s competitiveness in the global logistics market.
3%
27%
61%
9%
Chart 12: Hong Kong warehouse stock distribution by building age
Source: CBRE, Q2 2014.
<10 years old
10-20 years old
21-30 years old
>30 years old
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
The most typical development model in Hong Kong – build to tallest and build to maximize - also
applies to the logistics/warehouse sector. In order to maximize land values, warehouses in Hong Kong
have been traditionally built upwards rather than outwards. A typical floor-plate for a Hong Kong
warehouse is around 50,000 sq ft, compared to some 200,000 sq ft in mainland China and in Hong
Kong they tend to be 10 plus floors whereas in the mainland they are often single-floor or two-floor
design. A major drawback in high-rise warehouses is the need to provide either cargo lifts or ramp
access, either of which will affect floor efficiency in some already small floorplate development schemes.
Combined with low ceiling heights (some warehouse buildings in Hong Kong have ceiling heights as
low as 3.5 metres against the 9 metres standard in China), warehousing in Hong Kong is costly, when
efficiency and extra charges are factored in.
At present rental rates in Shenzhen are typically around 1/3 of that in Hong Kong on a per sq ft basis,
this differential is generally not enough to encourage occupiers to go across the border for local
distribution taking into account the challenging yet improving customs procedures. However, if space
availability in Hong Kong is going to stay limited, retailers and logistics operators will be left with no
choice but to take options outside of Hong Kong.
The strong retail market has
proved to be and is
expected to remain a key
demand driver for
warehouse space in Hong
Kong; the recent slowdown
in growth momentum will
unlikely leave a permanent
dent on long-term
warehouse demand.
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HONG KONG LOGISTICS: RETAILERS EXPOSE THE LACK OF WAREHOUSE FACILITIES
The next decade will see Hong Kong emerging to become a very important trade and tourism node
within the Greater Pearl River Delta mega-metropolis – a region that has a population of over 65
million inhabitants. There are numerous cross-border infrastructure projects currently under construction
or planning in within this region. Once built, this infrastructure will significantly improve the people and
trade flows between Hong Kong and the leading Pearl River Delta cities including but not limited to
Macau, Zhuhai and Shenzhen. These cities do not lack world-class ports and have no shortage of high-
specification warehouse space. The need for trade-related logistics operators to rely on Hong Kong
facilities is lessening but it does not mean that the city deserves no additional logistics/warehouse space
to maintain its competitiveness while facilitating further growth of its retail consumption market.
Hong Kong should leverage well on the upcoming metamorphosis of the Pearl River Delta economy.
The process will see Hong Kong becoming a centric city connecting tourists from worldwide to various
tourism nodes within the Delta, which is set to become one of Asia’s hot vacation destinations.
Stronger demand for Hong Kong’s hospitality and retail services is therefore expected. Hong Kong
needs to have more shopping malls and hotels but equally important, the city also needs a better
blueprint for its future logistics sector development to complement the growth of its hospitality and retail
industries.
The way forward – prepare
for the metamorphosis
Map 1: Future cross-border and related infrastructure projects
Source: CBRE
HKIA 3rd
Runway
2023+
HKZMB
2016
HK-BCF
2016
TM-CLKL
2018
TM-Western Bypass
2018
GZ-SZ-HK XRL
2017
Kai Tak Cruise Terminal
2013/2014
To
Macau/Zhuhai
To Shenzhen
Infrastructure Projects Cross-border Point Expected
Completion Year
Kai Tak Cruise Terminal (second berth) Worldwide 2014
Hong Kong – Boundary Crossing Facility (HK-BCF) Macau/Zhuhai 2016
Hong Kong – Zhuhai – Macau Bridge (HKZMB) Macau/Zhuhai 2016
Guangzhou – Shenzhen – Hong Kong Express Rail Link (GZ-SZ-HK- XRL) Shenzhen 2017
Tuen Mun – Chek Lap Kok Link (TM-CLKL) N.A. 2018
Tuen Mun – Western Bypass (TM-Western Bypass) N.A. 2018
Hong Kong International Airport – Third Runway (HKIA- 3rd Runway) Worldwide 2023+
Future cross-border and related infrastructure Source: CBRE, August 2014.
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For more information about this SPECIAL report, please contact:
RESEARCH
Marcos Chan
Head of Research, Hong Kong,
Macau and Taiwan
+852 2820 2886
INDUSTRIAL & LOGISTICS SERVICES
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Executive Director
Industrial & Logistics Services
+852 2989 5173
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Retail Services
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